PART I.
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results, performance or achievements could differ materially from those projected in the forward-looking statements as a result of a number of risks, uncertainties, and other factors. For a discussion of important factors that could cause our results, performance, or achievements to differ materially from any future results, performance, or achievements expressed or implied by our forward-looking statements, please refer to Part I, Item 1A “Risk Factors” and Part I, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.
Our principal executive office is located at 100 North Point Center East, Suite 600, Alpharetta, Georgia 30022-8246 and our telephone number is (800) 514-0186. Our stock is traded on the New York Stock Exchange ("NYSE") under the symbol "SWM."MATV."
Additional information regarding "Segment Performance" is included in Part II, Item 7, Management's7. "Management's Discussion and Analysis of Financial Condition and Results of Operation.Operations". In addition, selected financial data for our segments is available in Note 22.21. Segment Information of the Notes to Consolidated Financial Statements and a discussion regarding the risks associated with foreign operations is available in Part I, Item 1A, Risk Factors, Market Risk.1A. "Risk Factors".
Financial information about foreign and domestic operations, contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation" appearingOperations" in Part II, Item 7 herein and in Notes 13, 14, 15, 1817 and 2221 ("Restructuring and Impairment Activities," "Debt," "Income Taxes"Taxes," and "Segment Information," respectively) to the Consolidated Financial Statements contained in "Financial Statements and Supplementary Data" in Part II, Item 8 herein, is incorporated by reference in this Item 1.
Paper production uses significant amounts of energy, primarily electricity, natural gas and fuel oil. We believe that energy supply is generally reliable throughout our manufacturing footprint, although prices can fluctuate significantly based on demand. We enter into agreements to procure a portion of our energy requirements for future periods in order to reduce the uncertainty of future energy costs.
Additional information regarding agreements for the supply of certain raw materials and energy is included in Note 21.20. Commitments and Contingencies, of the Notes to Consolidated Financial Statements.
Generally, sales of our paper and Recon products are subject to seasonal fluctuations due to periodic machine downtime and typically lower order volumes in the fourth quarter.
Research and Development
As of December 31, 20192022, we employ approximately 92140 research and development employees in research and laboratory facilities in France, Brazil, Poland,the United States, the United Kingdom, Germany, the Netherlands, Spain and the U.S.Mexico. We are dedicated to developing product innovations and improvements to meet the needs of individual customers. We believe that our research and product development capabilities have played an important role in establishing our reputation for high quality, superior products in both our AMSATM and EPFBS segments. Within AMS,ATM, we have a history of finding innovative design solutions, including developing products that improve the performance of customers' products and manufacturing operations. We believe that our commitment to research and development, coupled with our investment in new technology and equipment, has positioned us to take advantage of growth opportunities in many places around the world. Within EP,FBS, our research and development has enabled us to establish and sustain leading shares in various cigarette paper products, specifically LIP paper.shares. We also are working with customers to meet potential futureincreasing demand for reduced-harmreduced-risk tobacco products, as well as hemp-based products.
Patents and TrademarksIntellectual Property
AsPatents, trade secrets and trademarks are an important part of December 31, 2019, we owned 67Mativ’s intellectual property. Mativ’s products are sold around the world under various trademarks. Many of the processes used to make Mativ's products are kept as trade secrets. Mativ owns, or holds licenses to use, numerous U.S. and foreign patents. Mativ’s research and development activities generate a steady stream of inventions that are covered by new patents and had 54 pending patent applications in our AMS segment. While we consider our patents, and the protection thereof, to be important,or trade secrets. In general, no single patent or group of related patents is material to the conduct of our AMSMativ’s business segment.
In our AMS segment, as described in the branding initiative discussed above, SWM made a strategic decisionwhole or to transition away from certain legacyany of Mativ’s business trade names associated with our recent acquisitions in favor of a streamlined SWM enterprise branding approach. The Company will continue to market its products under the long-standing product-level brand names and trademarks such as "NALTEX®," "DELNET®," “ARGOGUARD®” and “ARGOTHANE®.”
As ofsegments. At December 31, 2019, we2022, Mativ owned 277about 1,100 patents and had 109 pending patent applications in our EP segment, covering a variety of cigarette papers, RTL, cigar wrapper and binder and other products and processes in the U.S., Western Europe and several other countries. We believe that our patents, together with our papermaking expertise and technical sales support, have been instrumental in establishing us as the leading worldwide supplier of cigarette papers. We believe that patents have contributed to our position as the world's leading independent producer of papers used for LIP cigarettes.
globally.
Management believes that in the EP segment, our "ALGINEX®" water-based technology trademark, our "GLUCIGEN
TM" trademark for use in banded papers for the production of LIP cigarettes, and the "SWM" logo and trade names have been important contributors to the marketing of our products. Further, we have developed, individually or in conjunction with customers, technologies to address the demand for cigarette paper for LIP cigarettes in the U.S., Canada, Australia and the E.U. We have licensed to others the right to use certain of our LIP intellectual property, excluding ALGINEX® related intellectual properties.
Management of a large portion of SWM'sMativ's research and development activities is provided from our Luxembourg City, Luxembourg operation ("SWM Luxembourg"). These activities are often performed at other SWMMativ locations under contract by SWM Luxembourg, and funded by SWM Luxembourg. SWM Luxembourg has the authority to initiate and manage research and development projects in areas such as, but not limited to, LIP paper, Recon for HnB materials, non-tobacco paper products, netting and other extruded resin products.across our businesses. This operation also provides global oversight and active management for much of the Company's intellectual property rights.
Human Capital
Employees
As of December 31, 2019,2022, we had approximately 3,400 regular,7,500 full-time active employees.
employees, of whom approximately 3,500 employees were located in North andAmerica, 3,300 employees were located in Europe, 450 employees were located in South America, Operationsand 250 employees were located in Asia Pacific.
The Company’s ambition is to be the global leader in specialty materials, solving complex challenges for our customers, creating value for our shareholders, and offering meaningful professional opportunities for our global employees.
.
Mativ’s talent strategy aligns closely with our core values – Prioritize Safety, Be Curious, Have a Voice, Win with Customers, Make It Happen – and focuses the organization on its goal of accelerating employee growth by fostering a culture of possibility and cultivating the right people in the right roles with the right skills at the right time. We are doing this by continually evolving how we attract, engage, grow, and reward our people.
Safety
The safety and well-being of our employees is very important to us. We strive to reflect this core value in everything we do and are in the process of launching our new continuous improvement process – IMPACT – designed to help deliver meaningful value, and most importantly, support robust safety systems for our employees. IMPACT, along with enhanced operator training, risk identification and proactive risk reduction strategies, is planned to be rolled out across manufacturing facilities starting in 2023.
Each of our facilities maintains safety management systems designed to continuously review and improve employee safety and regulatory compliance. This includes periodic workplace safety audits, employee participation in safety
meetings and training, and active safety committees. Additionally, employees are encouraged to identify and report workplace conditions that could lead to an injury.
Training and Development
Mativ recently launched MyPath, a platform that supports setting objectives, creating a culture of ongoing feedback, differentiating and rewarding individual performance, and creating global learning and development opportunities for our employees.
In 2023, the Company intends to launch Employee Resource Groups ("ERGs") to connect employees through shared identity or affinity. These groups will be designed to provide networking opportunities for employees and create direct lines of communication between the ERGs and leadership to help address concerns, mitigate risks, and solve challenges.
We are committed to building and developing a diverse workforce and have adopted policies designed to support equal employment opportunities to all qualified applicants, without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, age, protected veteran or disabled status, or genetic information.
Government Regulation
We are required to comply with numerous regulations that are normal and customary to businesses in the regions, industries, and markets in which we operate. These regulations include, but are not limited to, tax, employment, privacy, imports/exports, healthcare, environmental protection, antitrust, anti-corruption, marketing, fraud and abuse, product safety and efficacy, and other areas.
Governmental entities around the world have taken, or have proposed, actions that had, or are likely to have, the effect of reducing consumption of combustible and non-combustible tobacco products which, in turn, reduces demand for our products. These actions, including efforts to regulate, restrict or prohibit the sale, advertisement and promotion of these products and their components, to limit smoking in public places, to control or restrict additives that may be used in these products and to increase taxes on such products, are intended to discourage consumption.
Our facilities are subject to significant federal, state, local and foreign environmental protection laws with respect to air, water and emissions, as well as the disposal of solid waste. We believe we are operating in compliance with these laws and regularly incur capital and operating expenditures to achieve future compliance. Although we are not aware of any environmental conditions at any of our facilities that employee relationscould have a material adverse effect on our financial condition, results of operations and cash flows, we own facilities in France, the United States, and elsewhere that have been operated over the course of many decades. Should the Company make material changes in the operations at a facility, it is possible such changes could generate environmental obligations that might require remediation or other action, the nature, extent and cost of which are positive. Hourly employeesnot presently known. We may also face higher disposal and clean-up costs to replace equipment or facilities containing materials that were compliant when installed but are now considered contaminants. Additionally, as we sell closed or other facilities or materially alter operations at a facility, we may be required to perform additional environmental evaluations that could identify items that might require remediation or other action, the Spotswood, New Jersey, Ancram, New Yorknature, extent and Minneapolis, Minnesota plantscost of which are represented by localsnot presently known. We may also incur environmental liabilities in connection with assets or businesses we may purchase in the future.
The Company is subject to laws concerning our business operations and marketing activities in foreign countries where we conduct business. For example, the Company is subject to the U.S. Foreign Corrupt Practices Act, U.S. export control and trade sanction laws, and similar anti-corruption and international trade laws in certain foreign countries, such as the U.K. Bribery Act. Aspects of the United Steel Workers Union. The two-year collective bargaining agreement with hourly employees atCompany’s operations and businesses are also subject to privacy, data security, and data protection regulations, which impact the way we use and handle data and operate our Spotswood plant is effective through July 28, 2020. The three-year collective bargaining agreement with employees at our Ancram plant is effective through September 30, 2020. The three-year collective bargaining agreement with hourly employees at our Minneapolis facility is effective through October 31, 2020. We believe employeeproducts and union relations continue to be positive at the Spotswood, Ancram and Minneapolis operational facilities. Hourly employees at the Pirahy, Brazil plant are represented by a union. The one-year collective bargaining agreement with employees in Brazil is effective through May 31, 2020. We believe that employee relations are generally positive and comparable to those of other similarly situated Brazilian manufacturing operations. Our operations in Canada, South Carolina, Massachusetts, Delaware, Georgia, Virginia, California, North Carolina and Illinois are non-union.services.
The Company is not aware of any regulatory compliance matters that are expected to have a material adverse effect on the Company’s business, competitive position, financial position, results of operations, capital expenditures or cash flows.
Europe and Asia Operations.
We believe that employee relations are positive. Hourly employees at our Quimperlé, Spay, and Saint-Girons, France plants, and some hourly employees at Gilberdyke, England facility are union represented. Employees at our Genk, Belgium facility work in accordance with Belgium labor regulations. Employees at our Luxembourg office, Strykow, Poland facility, and Suzhou, China facility are non-union.
Environmental, Social and Governance
Environmental, social,Building long-term value for our customers, employees and governance issues are importantstockholders includes a focus on ensuring the long-term sustainability of our business, good corporate citizenship, and contributing to SWM, our employees, stockholders, customers, and the communities in which we operate.communities. Corporate responsibility is one of our core values and has long been part of the SWMMativ corporate mission. Acrossmission and is one of our company, we conduct business with environmental, social, ethical, and supply chain-related concerns in mind. As such, ourcore values.
Our manufacturing facilities and corporate office have a longstanding tradition of community engagement and reducing our impact on the environment. SWM recognizes that sustainability and profitability are not mutually exclusive,We maintain our Supplier Code of Conduct and our goal isSustainable Forestry Policy to improve the sustainability of our products and processes to create shared value for all of our stakeholders.
In 2018, the Operational Excellence and Sustainability department workedfurther align with key parties across SWM, including our Chief Executive Officer, to refresh our sustainability strategy, which was reviewed with the Board of Directors. We also updatedgoals. Our sustainability initiatives are further described on our supplier code, the SWM Code for Responsible Procurement, and our Transparency in Supply Chains Act statement.corporate website at www.mativ.com.
A fewSome of our key sustainability practicesenvironmental and community initiatives are highlighted below:
Environmental Initiatives
| |
• | Use of Cocoa PaperTM as packaging material: Cocoa PaperTM is made from botanical fibers and is an eco-efficient product. Cocoa PaperTM fibers are 100% carbon neutral, a first in our Engineered Papers portfolio. Sales of Cocoa PaperTM benefit the Jacundá Forestry REDD+ Project in Brazil through the purchase of carbon credits to offset the impact of projected product sales.
|
100% of the wood pulp that SWM uses
•Sustainable Packaging Material: The NEENAH ENVIRONMENT® Mailer is sourced from Forest Stewardship Council (FSC) and/or Programmedesigned for the Endorsementshipping or mailing of Forestnon-fragile soft goods, like clothing. The NEENAH ENVIRONMENT® Mailer is constructed from a proprietary, patent-pending, paper-based substrate developed to allow premium printability while providing superior water and puncture resistance. It is made with approximately 50% post-consumer waste and is blue-bin/curbside recyclable. In addition, it carries multiple 3rd party certifications, including FSC®, Green-e® and SmartWay™.
•Sustainable Innovation: Mativ developed RevonexTM membrane backing paper which improves reverse osmosis filtration efficiency by eliminating bleed-through. In addition, Mativ developed a biodegradable cigarette filter media that is designed to replace cellulose acetate which contributes to microplastics pollution (or similar debris) in the ocean.
•Filtration Products that Benefit Society: Mativ produces a diverse portfolio of products that make water and air cleaner and safer. Our HVAC air filtration media can reach removal efficiencies as high as 99.9% while our ASD netting can provide up to a 20% decrease in pressure drop during Reverse Osmosis filtration, decreasing energy costs and allowing customers to provide energy efficient water filtration solutions.
•Reducing Greenhouse Gas (GHG) Emissions and Supporting Air Quality: We recognize the importance of reducing our greenhouse gas (GHG) emissions and have prioritized actions to reduce our Scope 1 and Scope 2 emissions, such as the specific initiatives and equipment replacements intended to improve energy efficiency. We also currently have several renewable energy feasibility studies underway.
•Partnership with Planet Water Foundation: Mativ partners with Planet Water Foundation to support global efforts to improve access to clean, safe water. In 2022, through our support, the Foundation installed four AquaTower water systems in India, in the state of Tamil Nadu and three AquaHome systems in the Philippines. The four AquaTower systems in India are providing clean, safe drinking water for up to 7,224 people each day. The three AquaHome systems in the Philippines are providing families with solar powered electricity and drinking water at home.
•FSC® Certification (PEFC)-certified suppliers.: All unprocessed wood fiber and pulp and wood-based bioenergy consumed are sourced exclusively from suppliers maintaining FSC and/or PEFC Chain of Custody certification and/or have achieved FSC and/or PEFC Mix Credit or Controlled Wood certification. The packaging we use for our own business purposes (as opposed to the packaging we sell) is not necessarily certified or derived from certified suppliers, as we often purchase from small suppliers for whom certification is cost-prohibitive.
•Environmental Certification and Energy Efficiency: All 17 Mativ locations are certified to ISO 14001 for environmental management systems. Our mills in France are certified to the ISO 50001 energy management standard.
SWM•Biodiversity Support: Mativ has a history of supporting local biodiversity initiatives, such as the installation of salmon and eel runs in the Isole River near our EPFBS facility in Quimperlé, France, and the planting of native trees and rebuilding of natural habitat near our plant in Santanesia, Brazil.
•Recycling: Our U.S.-based ATM manufacturing sites have recycled more than 6 million pounds of plastic in 2022 with some of the recycled plastic being used in new products. Across the Company, more than 33
million pounds of cardboard and paper were recycled. Many other initiatives are in place involving the reuse of waste products and packaging materials.
Community Initiatives
•In addition to investing in area communities where our facilities are located by providing jobs and sourcing products, we support efforts to make our communities stronger through financial donations and volunteer participation. Most of our philanthropic efforts are locally directed, empowering our employees to contribute their time and expertise to organizations that matter to them and serve the unique needs of their communities. We donate to nonprofit or community organizations that support the communities where our plants are located.
SocialWe continue to look for ways to enhance the sustainability of our business and make a positive impact on the communities in which we live and serve.
SWM works in partnership with the Brazilian federal government to train young professionals for the job market. Every year, trainees are given an opportunity to work at SWM or industrial companies as mechanics, electricians, or administrative assistants.
Employees at our Gilberdyke, UK, location provide support and sponsor special programs for disadvantaged children in the area.
Our EP facility in Le Mans, France, launched a partnership with Handisport, a charitable organization that helps disabled children participate in sport activities.
Many other philanthropic activities are conducted at our locations around the world, for example SWM’s facility in Suzhou, China, held a fundraiser for UNICEF, and SWM’s AMS facility in Athens, Georgia, recently built raised garden beds for a senior care facility.
In April 2019, in recognition and celebration of the 49th Anniversary of Earth Month, 23 SWM manufacturing locations and the corporate office participated in Safety and Sustainability Week where sites engaged in activities involving safety, the environment, community engagement, and employee engagement. Activities included educating employees on a low-carbon lifestyle, recycling waste materials into art, picking up trash along roads, collecting book and canned food donations, bicycling challenges to promote a healthy lifestyle and raise funds for charities, fire extinguisher training and many others. Additionally, in 2019 we received an A- score for our CDP Climate Change response, as well as our third consecutive silver medal for Corporate Social Responsibility (CSR) recognition from EcoVadis, an organization that rates sustainability practices. Our sustainability initiatives are further described on our corporate website at https://www.swmintl.com/expertise/sustainability.
Governance
SWM
Mativ believes good corporate governance supports long-term value creation for our stockholders. The Governance section of the Investor Relations section of our website at www.swmintl.comwww.mativ.com includes our Code of Conduct, by-laws, corporate governance guidelines, Board of Directors committee charters, as well as disclosure of any amendment to or waivers of our Code of Conduct granted to any of the principal executive officer, principal financial officer or principal accounting officer. Information from our website is not incorporated by reference into this Annual Report on Form 10-K. Additional information about SWM'sMativ's governance can also be found in our proxy statement.
Capital Expenditures - Environmental
Capital expenditures for environmental controls to meet legal requirements and those relating to the protection of the environment at our facilities in the U.S., United Kingdom, France and Brazil were $1.2 million in 2019, no material amount of which was the result of environmental fines or settlements. We expect such expenditures to be $1.0 million or less in each of the next two years, of which no material amounts are expected to be the result of environmental fines or settlements. Should the Company make material changes in the operations at a facility, it is possible such changes could generate environmental obligations that might require remediation or other action, the nature, extent and cost of which are not presently known. These expenditures are not expected to have a material adverse effect on our financial condition, results of operations or competitive position; however, these estimates could be modified as a result of changes in our plans, changes in legal requirements or other factors.
Working Capital
We normally maintain approximately 50 to 90 days of inventories to support our operations. Our sales terms average between 15 and 60 days for payment by our customers, dependent upon the products and market segment served. With respect to our accounts payable, we typically carry approximately 15 to 40 days outstanding, in accordance with our purchasing terms, which vary by business location. The accounts payable balance varies in relation to changes in our manufacturing operations, particularly due to changes in prices of wood pulp, resins and purchased energy and the level and timing of capital expenditures related to projects in progress.
Executive Officers of the Registrant
The names and ages of our executive officers as of March 2, 2020,1, 2023, together with certain biographical information, are as follows:
|
| | | | | | | | | | | | | |
Name | | Age | | Position |
Dr. Jeffrey KramerJulie Schertell | | 5954 |
| | President and Chief Executive Officer |
R. Andrew Wamser | | 4649 |
| | Executive Vice President, Finance and Chief Financial Officer |
Omar HoekRicardo Nunez | | 5158 |
| | Executive Vice President, Engineered PapersChief Legal Officer, Secretary and Chief Compliance Officer |
Daniel ListerMike Rickheim | | 4748 |
| | Executive Vice President, Advanced Materials & StructuresChief Human Resources Officer and Chief Administrative Officer |
Ricardo NunezCheryl Allegri | | 5556 |
| | General Counsel and Corporate Secretary |
Michael Schmit | | 47 |
| | Corporate Controller and& Chief Accounting Officer |
There are no family relationships between any of the directors or any of our executive officers. None of our officers were selected pursuant to any arrangement or understanding between the officer and any person other than the Company. Our executive officers serve at the discretion of the Board of Directors and are elected annually by the Board.
Dr. Jeffrey Kramer Julie Schertellwas appointed President and Chief Executive Officer effective the date of the Merger and also serves as Director. She served in the same role at Neenah since May 2017, after serving as Co-Chief Executive Officer since March 2017.2020. Prior to joining SWM, Dr. Kramer served as Vice President, Lubricants of Brenntag AG, a distributor of chemicals, from January 2016. Dr. Kramer previously served asbecoming President and Chief Executive Officer of J.A.M. Distributing Company fromNeenah, Ms. Schertell served as Senior Vice President, Chief Operating Officer since January 20132020. Ms. Schertell joined Neenah in 2008 and served as Vice President of Sales and Marketing for the Fine Paper division through December 2015. J.A.M. Distributing Company is a distributor of high-performance lubricants and fuels. Dr. Kramer previously held various senior positions at Air Products and Chemicals, Inc., an industrial gases company, including2010, as Senior Vice President and Chief Technology Officer from June 2012President, Fine Paper and Packaging through December 2012September 2018, and as Senior Vice President and General Manager, Packaged Gases,President, Technical Products through December 2019. Ms. Schertell was previously employed by Georgia-Pacific Corporation in the Consumer Products Retail division, where she served as Vice President of Sales Strategy from 20052007 through June 2012.2008, and as Vice President of Customer Solutions from 2003 through 2007.
R. Andrew Wamserwas appointed Chief Financial Officer effective the date of the Merger. Mr. Wamser served as Co-Chief Financial Officer onsince February 5, 2018, and effective March 2, 2018, became the sole Executive Vice President, Finance and Chief Financial Officer and the Company's Principal Financial Officer.Officer since March 2, 2018. Prior to joining SWM,Mativ, Mr. Wamser served as Vice President, Finance; Investor Relations and Treasurer of AutoNation, Inc., the largest automotive retailer by revenue in the US.U.S. Prior to that, Mr. Wamser served as Managing Director, Investment Banking; Diversified Industrial Group of Barclays Capital Plc, now known as Barclays Investment Bank, the investment banking division of Barclays PLC. He also previously held other investment banking roles at Barclays Capital and UBS Investment Bank.
Omar Hoek was appointed Executive Vice President, Engineered Papers in January 2020. Mr. Hoek served as Executive Vice President in the Specialties Business Area and Group R&D of Ahlstrom-Munksjö (“Ahlstrom”), a global leader in fiber-based material from 2011 to 2019. He previously served as Vice President, Strategy in the Food and Medical Business Area and as Executive Vice President in the Specialties Business Area of Ahlstrom from 2011 until 2017. Before joining the Ahlstrom team, he worked at Newell Brands (NASDAQ: NWL) as a Business Director from 2010 to 2011 and at Avery Dennison (NYSE: AVY) from 1993 to 2010 in various capacities including Global Marketing and Strategy Director.
Daniel Lister was appointed Executive Vice President, Advanced Materials & Structures on July 5, 2016. Mr. Lister joined SWM from Greif, Inc., a global leader in industrial packaging and services, where he worked since 2005. From 2009 to 2016 Mr. Lister held key international roles including, Vice President, Middle East Development and Division President and CEO of Greif Flexible Products & Services, a Joint Venture with the Al Dabbagh Group. Prior to his international assignments, Mr. Lister led key businesses in North America. Mr. Lister worked for The Dow Chemical Company from 2001 to 2005 where he held several commercial strategy, business growth, and business management roles.
Ricardo Nunez was appointed Chief Legal Officer, Secretary and Chief Compliance Officer effective the date of the Merger. Mr. Nunez served as Senior Vice President, General Counsel and Corporate Secretary insince September 2017, after serving as Interim General Counsel since November 2016. Prior to joining SWM,Mativ, Mr. Nunez served as General Counsel for Vivex Biomedical, Inc., a Marietta, GA based biologics company from April 2015 to July 2016. Prior to that, he served as SVP, General Counsel and Corporate Secretary for HD Supply, Inc. a spinoff from The Home Depot,
Inc. from March 2007 to April 2015. Mr. Nunez's previous experience also includes senior legal responsibilities at The Home Depot, Inc., General Electric Company, and Esso Inter-America, Inc. (the Latin America affiliate of Exxon Corporation), as well as private practice.
Michael L. Schmit
Mike Rickheim was appointed Chief Human Resources Officer and Chief Administrative Officer effective the date of the Merger. Mr. Rickheim served in the same role at Neenah since April 2020. Prior to joining Neenah, Mr. Rickheim served as the Chief Human Resources Officer for Newell Brands, Inc., where he held various roles of increasing responsibility related to HR business partnership, talent acquisition, talent development, employee engagement, inclusion & diversity and communications.
Cheryl Allegri was appointed Corporate Controller and Chief Accounting Officer of the Company, effective as of April 22, 2019. Mr. Schmit served asMay 18, 2022. Prior to becoming Corporate Controller and Chief Accounting Officer, and Corporate Controller of Chart Industries, Inc. (NASDAQ:GTLS), a manufacturer of cryogenic equipment used in the production, storage and distribution of liquefied gases, from 2018 to 2019. Prior to that he served as Assistant Corporate Controller and then as Corporate Controller at Chart. From 2007 through 2017, he served in various finance and accounting leadership roles at Georgia-Pacific, LLC, including Controller of Corporate Accounting, Division Controller, Gypsum and Chemicals, and Director, Internal Audit, respectively. Prior to joining Georgia-Pacific Mr. SchmitMs. Allegri served as the Company's Assistant Controller since September 2018. She was previously employed at Halyard Health and Avanos Medical, Inc., serving as Assistant Controller Reporting and Control from September 2016 to September 2018. From October 1995 to August 2016, Ms. Allegri served the Company in several positions of increasing responsibility, including as Director of Financial Reporting at Arby’s Restaurant GroupAccounting and also servedControl. Ms. Allegri's other previous experience includes serving as a manager at ErnstAudit Manager with Deloitte & Young,Touche, LLP.
Item 1A. Risk Factors
Factors That May Affect Future Results
Many risk factors both within and outside of our control could have an adverse impact on our business, financial condition, results of operations and cash flows and on the market price of our common stock. While not an exhaustive list, the following important risk factors could affect our future results, including our actual results for 20192022 and thereafter and could also cause our actual results to differ materially from those expressed in any forward-looking statements we have made or may make.
Risk Factors Summary
Material risks that may affect our business, operating results and financial condition include, but are not necessarily limited to, those relating to:
•Our technological advantages are unlikely to continue indefinitely;
•Policing our intellectual property and patent rights is costly and may be unsuccessful;
•International geopolitical and other risks associated with our sales and operations outside of the United States, due to political unrest, terrorist acts, and national and international conflict, including Russia's invasion of Ukraine;
•Failure to comply with the U.S. Foreign Corrupt Practices Act ("FCPA") and other anti-corruption laws or trade control laws, as well as other laws governing our operations;
•The effect of foreign currency exchange rates;
•We could be subject to changes in our tax rates, the adoption of new U.S., or foreign tax legislation or exposure to additional tax liabilities;
•Competition from several established competitors and limited market transparency;
•Our FBS segment is dependent upon a small number of customers for a significant portion of its sales;
•Continued governmental actions relating to tobacco products, as well as decreased demand for traditional products or the impacts of new related technologies such as e-cigarettes and vaping, may adversely impact our business;
•The availability of credit and changes in interest rates;
•The replacement of LIBOR with SOFR;
•Our failure to comply with the covenants contained in our credit agreements and other debt instruments could result in an event of default that could cause acceleration of our indebtedness;
•Future dividends on our common stock may be restricted or eliminated;
•Risks related to our internal and external expansion plans and asset dispositions;
•The substantial costs related to the integration of Neenah;
•Our failure to realize some or all of the anticipated benefits of the Merger;
•A loss of customers, distributors, suppliers, vendors, landlords, joint venture partners and other business partners as a result of the Merger;
•Our future results may suffer if we do not effectively manage our expanded operations;
•We may not successfully integrate acquisitions into Mativ's operations;
•Our restructuring activities are time-consuming and expensive;
•The cost and availability of raw materials and energy;
•A failure of, or a security breach in, a key information technology system could compromise our information and expose us to liability;
•We rely on a limited number of key employees;
•We face various risks related to the COVID-19 pandemic and similar health-related outbreaks;
•Our business is subject to various environmental laws, regulations and related litigation that could impose substantial costs or other liabilities on us;
•Environmental, social and governance ("ESG") issues may have an adverse effect on our business, financial condition and results of operations, the desirability of our stock, and may damage our reputation;
•Increases in costs of pension benefits may reduce our profitability;
•We are subject to various legal actions and other claims;
•Any loss or interruption of the operations of our facilities;
•Fluctuations in construction and infrastructure spending; and
•We have historically experienced significant cost savings and productivity benefits relating to our ongoing operational excellence program.
New smoking technologies such as e-cigarette and vaping technologies provide an alternative to and may decrease demand for traditional cigarettes and cigars, which could result in a decrease in demand for our products and adversely affect our consolidated results of operations, financial position and cash flows.
New smoking technologies, including e-liquids, vapable oils and other vaping products, provide an alternative to traditional cigarettes and cigars, which could result in a decrease in demand for our products, including cigarette papers, reconstituted tobacco leaf ("RTL") and associated items. As of December 31, 2022, approximately 60% of FBS segment sales are to customers in the tobacco end-market, with the majority of tobacco sales comprised of cigarette papers. Future sales and any future profits from cigarette papers and reconstituted tobacco products are substantially dependent upon the continued use of traditional cigarettes and cigars. Growth in the use of, and interest in, e-liquids, vapable oils and other vaping products is likely to continue. While traditional tobacco products are well established and revenue from traditional cigarette sales represents a substantial majority of total industry revenue, new smoking technologies may become more widely adopted and the business, growth prospects and financial condition of our FBS segment may be adversely affected.
Our technological advantages are unlikely to continue indefinitely.
We consider our intellectual property and patents to be a material asset. We have been at the forefront of developing new products and technology within our industries and have patented several of our innovations, particularly with regard to cigarette paper used to produce LIP cigarettes. This has enhanced our ability to sell products and to provide added functionality and other value to the products we sell allowing them to command higher margins. This advantage has also enabled us to license certain of our patents and know-how to, and earn royalty income from, third parties. Ultimately, our various patents will expire and some may be held invalid in certain jurisdictions before their expiration dates. In addition to protecting certain of our technological advantages through patenting, we also protect a significant amount of our technological advantages as trade secrets, especially with regard to our ATM segment and our RTL products. As we expand our operations to more locations and countries, the risk of the loss of proprietary trade secrets will increase, and any significant loss would result in the loss of the competitive advantages provided by such trade secrets. While we cannot predict the impact or the timing of these trends and eventualities, they likely will reduce our sales and margins from the levels that we otherwise would have achieved.
Effectively policing our domestic and international intellectual property and patent rights is costly and may not be successful.
Our portfolio of granted patents varies by country, which could have an impact on any competitive advantage provided by patents in individual countries. We cannot guarantee that any U.S. or foreign patent, issued or pending, will provide us with any continued competitive advantage.
We rely on patent, trademark, and other intellectual property laws of the U.S. and other countries to protect our intellectual property rights. However, we cannot guarantee that one or more of our patents will not be challenged by third parties and/or ultimately held invalid by courts or patent agencies of competent jurisdiction, which could remove the legal barriers preventing competitors from practicing our LIP technology among others.
Further, there can be no assurances that we will be able, or that it will be economic for us, to prevent third parties from using our intellectual property or infringing our patents without our authorization, which may reduce any competitive advantage we have developed. In the event that we need to enforce certain of our patents against infringement through judicial or administrative actions, the litigation to protect these rights is often costly and time consuming and diverts management resources; moreover, there can be no assurance that our efforts to protect our
intellectual property will be successful, or that a defendant will not assert counterclaims against us or challenges to other intellectual property we may own.
Some of our patents have been the subject of opposition hearings. Like the actions we undertake to enforce our IP rights, oppositions filed against us in respect of our intellectual property are expensive and divert management time and resources.
Even when the Company is initially successful, there can be no assurance that the counterparty will not appeal, or that the appeal will not be successful. Even when successful at the appeal level, there can be no assurance that a patent will not be later successfully challenged in individual national court jurisdictions.
We do not believe that any of our products infringe the valid intellectual property rights of third parties. However, we may be unaware of intellectual property rights of others that may cover some of our products or services or a court or other governmental body may come to a different conclusion from ours. In that event, we may be subject to significant claims for damages or disruptions to our operations.
Because of the geographic diversity of our business, we are subject to a range of international risks.
Our operations are located in many countries around the world and operate, to a degree, in a decentralized manner. There are inherent control and fraud risks in such a structure. Moreover, we have manufacturing facilities in fourteen countries and two joint ventures in China and sell products in over 100 countries, many of which are emerging and undeveloped markets.
As a result, our manufacturing operations, sales and results, depending on their location, are subject to various international business risks, including, but not limited to, the following:
•Foreign countries can impose significant import, export, excise and income tax and other regulatory restrictions on our business, including limitations on repatriation of profits and proceeds of liquidated assets. While we attempt to manage our operations and international movements of cash from and amongst our foreign subsidiaries in a tax-efficient manner, unanticipated international movement of funds due to unexpected changes in our business or changes in tax and associated regulatory schemes could materially affect our financial position, results of operations and cash flows.
•We are exposed to global as well as regional macroeconomic and microeconomic factors, which can affect demand and pricing for our products, including unsettled political and economic conditions; expropriation; import and export tariffs; regulatory controls and restrictions; and inflationary and deflationary economies. Events occurring in countries having a large share of the global economy (such as China, Japan, or the EU) can have an impact on economies that are interdependent and thereby affect those in which the Company primarily operates. These factors together with risks inherent in international operations, including risks associated with any non-compliance with anti-corruption and anti-bribery laws, could adversely affect our financial condition, results of operations and cash flows.
•We participate in two joint ventures and have one manufacturing facility in China. The joint ventures sell our products primarily to Chinese tobacco companies. Operations in China entail a number of risks including international and domestic political risks, the need to obtain operating and other permits from the government, adverse changes in the policies or in our relations with government-owned or run customers and the uncertainty inherent in operating within an evolving legal and economic system. There are also risks inherent with 50% joint ventures, such as a lack of ability to control, and visibility with respect to operations, customer relations and compliance practice, among others.
•Changes or increases in international trade sanctions or quotas may restrict or prohibit us from transacting business with established customers or securing new ones, including as to Russia and the Ukraine, which are areas where the Company has offices and/or significant customers and as to which the applicable sanctions have changed unexpectedly on a number of occasions since 2014.
Changes in the laws and regulations described above, adverse interpretations or applications of such laws and regulations, and the outcome of various court and regulatory proceedings, including in Europe and Brazil, could adversely impact the Company's business in a variety of ways, including increasing expenses, increasing liabilities, decreasing sales, limiting its ability to repatriate funds and generally conduct business, all of which could adversely affect our financial condition, results of operations and cash flows.
We are subject to the U.S. Foreign Corrupt Practices Act and other anti-corruption laws or trade control laws, as well as other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, which could adversely affect our business, financial condition and results of operations.
We are subject to anti-corruption laws, including the FCPA, and other anti-corruption laws that apply in countries where we do business. The FCPA, the 2013 Brazilian Clean Companies Act, the U.K. Bribery Act of 2010, the 2013 Russian Law on Preventing Corruption and these other laws generally prohibit us, our employees, consultants and agents from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. We operate in a number of jurisdictions that pose a high risk of potential FCPA violations, and we participate in joint ventures and relationships with third parties whose actions could potentially subject us to liability under the FCPA or local anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.
We are also subject to other laws and regulations governing our international operations, including regulations administered by the U.S. Department of Commerce’s Bureau of Industry and Security, the U.S. Department of Treasury’s Office of Foreign Asset Control, and various non-U.S. government entities, including applicable export control regulations, economic sanctions on countries and persons, customs requirements, currency exchange regulations and transfer pricing regulations, or collectively, Trade Control laws. There is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the FCPA or other legal requirements, including Trade Control laws. If we are not in compliance with such laws or requirements, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the FCPA, other anti-corruption laws or Trade Control laws by U.S. or foreign authorities could also have an adverse impact on our reputation, business, financial condition and results of operations.
Fluctuations in foreign currency exchange rates could adversely impact our financial condition, results of operations and cash flows.
A significant portion of our revenues are generated from operations outside the U.S. In addition, we maintain significant operations and acquire or manufacture many of our products outside the U.S. The functional currency of our international subsidiaries is generally the local currency in which each subsidiary operates. In particular, a large portion of our commercial business is denominated in euros and British pounds. Since our consolidated financial statements are presented in U.S. dollars, we must translate revenues, expenses, assets and liabilities from functional currencies into U.S. dollars. As a result, our future revenues, costs, results of operations and earnings could be significantly affected by changes in foreign currency exchange rates, especially the euro to U.S. dollar exchange rate and the British pounds to U.S. dollar exchange rate.
In addition, some of our sale and purchase transactions are denominated in a currency other than the local currency of our operations. As a result, changes in exchange rates between the currencies in which the transaction is denominated versus the local currency of our operations into which the transaction is being recorded can impact the amount of local currency recorded for such transaction. This can result in more or less local currency revenue or cost related to such transaction and thus have an effect on our operating profit. We also hold a significant amount of our cash balances in euros and British pounds, thus any weakening of these currencies versus the U.S. dollar would reduce the amount of U.S. dollars for which such balances could be exchanged.
Changes in foreign currency exchange rates also impact the amount reported in Other income (expense), net.For instance, when a non-local currency receivable or payable is not settled in the period in which it is incurred, we are required to record a gain or loss, as applicable, to reflect the impact of any change in the exchange rate as of the end of the period.We also have to reflect the translation rate impact on the carrying value of our foreign assets and liabilities as of the end of each period, which is recorded as unrealized translation adjustment in Other comprehensive income (loss).
We utilize a variety of practices to manage this risk, including operating and financing activities and, where considered appropriate, derivative instruments.All derivative instruments we use are either exchange traded or entered into with major financial institutions in order to reduce credit risk and risk of nonperformance by third parties.Counterparty risk cannot be eliminated and there can be no assurance that our efforts will be successful.We generally hedge foreign currency transaction risk through the use of derivative instruments, including forward and swap contracts and, to a lesser extent, option contracts.The use of derivative instruments is intended to mitigate or reduce transactional level volatility in the results of foreign operations but does not completely eliminate volatility.If our future revenues, costs and results of operations are significantly affected by economic conditions abroad and/or we are unable to effectively hedge these risks, they could materially adversely affect our financial condition, results of operations and cash flows.
The Company could be subject to changes in its tax rates, the adoption of new U.S., or foreign tax legislation or exposure to additional tax liabilities.
The Company is subject to taxes in the U.S. and in foreign jurisdictions where a number of the Company’s subsidiaries are organized. The Company’s future effective tax rate could be affected by changes in the mix of earnings in countries with differing statutory tax rates or future changes in tax laws or new interpretations of existing tax laws. Recent developments, such as the European Commission’s investigations on illegal state aid, individual European countries implementation of Anti-Tax Avoidance Directives, continued regulatory development of the Tax Cuts and Jobs Act of 2017, and the Organization for Economic Cooperation and Development projects on base erosion and profit shifting may result in changes to long-standing tax principles or new challenges to our cross-border arrangements, which could materially affect our effective tax rate or could require potential restructuring of the foreign subsidiaries. If the Company’s effective tax rates were to increase, or if any ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s operating results, cash flows, and financial condition could be adversely affected.
We face competition from several established competitors and we have limited market transparency.
Four of our largest competitors for engineered papers in the FBS business are delfort group AG ("delfort"), Julius Glatz GmbH ("Glatz"), Miquel y Costas & Miquel S.A. ("Miquel y Costas") and PT BUKIT Muria Jaya ("BMJ"). All four primarily operate from modern and cost-effective plants in Western Europe and Asia and are capable and long-standing suppliers to the tobacco industry. Further, three such competitors, delfort, Glatz and BMJ, are privately held and the third, Miquel y Costas, is a closely held public company. Thus, their financial results and other business developments and strategies are not disclosed to the same extent as ours, which provides them some advantage in dealing with customers. Given the concentration of most of our competitors in Western Europe, which has seen declining demand for combustible products and has labor laws that make reducing capacity expensive and slow, excess capacity exists and therefore price competition is acute. We believe that all four competitors have good relationships with the multinational cigarette companies, as does the Company. The multinational cigarette companies have been known to use these close relationships to encourage the development of enhanced competition through supporting competitive products and facilities, especially when confronted with new, high-value technologies such as porous plug wrap in the past and LIP today. We believe our Engineered paper products compete primarily on product features, price, innovations and customer service. Due to many of the factors described above, we have a limited ability to predict trends in the industry and there may be a time lag before we become aware of developing trends in the industry.
Our ATM segment products compete to some degree against specialty products made by competitors such as Shaoxing Naite Plastics Co. Ltd., 3M Company, Covestro AG, ORAFOL Europe GmbH, Hollingsworth and Vose Company, Advanced Medical Solutions Group plc, Avery Dennison, Ahlstrom-Munksjo, Mondi plc, Loparex LLC, Monadnock Paper Mills, Inc., and Potsdam Specialty Paper, Inc. We believe our ATM products compete primarily on product features, innovations and customer service. Some of these competitors are larger than we are and have more resources, thus the actions of these competitors could have an impact on the results of our ATM segment operations.
Currently, fine papers used to produce cigarettes are only exported on a limited basis from available capacity in China and other Asian locations to western multinational cigarette companies due to government taxes and tariffs, which limit price competitiveness, as well as due to customer preferences. Should conditions change in this regard, capacity that currently is operating in China and elsewhere in Asia would present a risk to our competitive position outside Asia and place further pressure on our legacy paper production platforms. Similarly, we are starting to see increased competition for some of our ATM products from companies in China, which, we believe, may have lower operating costs than us, resulting in a potential price advantage for such companies.
Further, as a result of excess capacity in the combustibles papers industry and increased operating costs, competitive levels of selling prices for certain of the Company's products are not sufficient to cover those costs with a margin that the Company considers reasonable. Such competitive pressures have resulted, and could result in the future, in downtime of certain paper production machines and, in some cases, accelerated depreciation or impairment charges for certain equipment as well as employee severance expenses associated with downsizing or restructuring activities.
FBS segment is dependent upon a small number of customers for a significant portion of its sales; the loss of one or more of these customers could have a material adverse effect on the business.
Five FBS customers, together with their respective affiliates and designated converters, accounted for approximately 12% of our FBS net sales in 2022. The loss of one or more of these customers, or a significant reduction in their purchases, particularly those that impact our sales of LIP papers or Recon, could have a material adverse effect on our financial condition, results of operations and cash flows.
In addition, significant consolidation has occurred among our tobacco customers and may continue to occur, thereby increasing our dependence upon a fewer number of industry customers and increasing the negotiating leverage of those customers that remain. If any of our customers were to change suppliers, in-source production of combustible products, institute significant cost-cutting measures or experience financial difficulty, then these customers may substantially reduce their purchases from us, which could adversely impact our financial condition, results of operations and cash flows. In addition, adverse results in the negotiation of any of our significant customer contracts, the terms of which are typically negotiated every one to three years, could significantly impact our financial condition, results of operations and cash flows.
We expect our business to continue to be adversely impacted by governmental actions relating to tobacco products, as well as by decreased demand for tobacco products due to declining social acceptance of smoking, new smoking technologies such as e-cigarette and vaping technologies, and litigation in the U.S. and other countries.
In 2019,2022, approximately 53%20% of our net sales were from products used by the tobacco industry in making cigarettes or other tobacco products. Cigarette consumption outside of Asia has generally declined due to, among other things, the diminishing social acceptance of smoking, public reports with respect to the possible harmful effects of smoking, including effects of second-hand smoke, the use of other tobacco products, the development and use of new tobacco-related or substitute products or technologies, such as e-cigarettes, e-liquids, vapable oils and other vaping products, that do not use our products, and, particularly in the U.S., to litigation and actions on the part of private parties to restrict smoking. For instance, litigation is continuing against major U.S. manufacturers of consumer tobacco products seeking damages for health problems allegedly resulting from the use of tobacco in various forms. It is not possible to predict the outcome of such litigation or the effect adverse developments in pending and future litigation may have on the tobacco industry or its demand for our products, but in the past, litigation has adversely affected
demand for consumer tobacco products. These factors have led, and could lead, to certain merchants deciding not to sell tobacco products. As a result, the overall demand for conventional tobacco cigarettes outside of Asia has generally been declining in terms of volume of sales. These declines have had an adverse effect on demand for our products in these regions. We expect these trends to accelerate and thus to continue to reduce smoking levels and adversely affect demand for our products, which could have a material adverse impact on our future financial condition, results of operations and cash flows.
In recent years, governmental entities around the world, particularly in the U.S., Brazil, Russia, Australia and Western Europe, have taken, or have proposed, actions that had, or are likely to have, the effect of reducing consumption of tobacco products which, in turn, reduces demand for our products. These actions, including efforts to regulate, restrict or prohibit the sale, advertisement and promotion of tobacco products and their components, to limit smoking in public places, to control or restrict additives that may be used in tobacco products and to increase taxes on such products, are intended to discourage the consumption of cigarettes and other tobacco products. For example, in the U.S., the regulatory jurisdiction of the federal Food and Drug Administration was extended in 2009 to include tobacco products, and again in 2016 to include cigars and additional tobacco products. These products are now subject to product component disclosure regulations, new controls on ingredients and design changes, and additional restrictions relating to marketing and labeling. The federal Food and Drug Administration could promulgate additional regulations. In Brazil, regulations limit the use of additives to cigarettes. In the E.U., the Tobacco Products Directive regulates the content, effects, marketing and labeling of tobacco products, and both revisions to the Directive and the ongoing phase-in of the Registration, Evaluation, Authorization, and Restriction of Chemical Substances regulation ("REACH") may further restrict product ingredients. Additionally, the World Health Organization is actively promoting tobacco regulation, and other countries worldwide are in the process of adopting some or all of these restrictions. It is not possible to predict the additional legislation or regulations relating to tobacco products that may be instituted, or additional countries that may adopt such legislation or regulations, or the extent to which such legislation or regulations may impact the design or formulation of our customers' products. Such legislation or regulation may adversely impact the demand for traditional cigarettes and cigars, with corresponding impacts on our sales of cigarette papers, RTL and associated items, which could have a material adverse effect on our future financial condition, results of operations and cash flows.
Our joint ventures in China serve only the local market. Declines in Chinese cigarette consumption could have a material adverse effect on our future financial condition, results of operations and cash flows, including our China Tobacco Schweitzer (Yunnan) Reconstituted Tobacco Co. Ltd. (“CTS”) and China Tobacco Mauduit (Jiangmen) Paper Industry Ltd. (“CTM”) joint ventures.
New smoking technologies such as e-cigarette and vaping technologies provide an alternative to and may decrease demand for traditional cigarettes and cigars, which could result in a decrease in demand for our products and adversely affect our consolidated results of operations, financial position and cash flows.
New smoking technologies, including e-liquids, vapable oils and other vaping products, provide an alternative to traditional cigarettes and cigars, which could result in a decrease in demand for our products, including cigarette papers, RTL and associated items. Approximately 88% of EP segment sales are to customers in the tobacco end market, with the majority of tobacco sales comprised of cigarette papers. Future sales and any future profits from cigarette papers and reconstituted tobacco products are substantially dependent upon the continued use of traditional cigarettes and cigars. Growth in the use of, and interest in, e-liquids, vapable oils and other vaping products is likely to continue. While traditional tobacco products are well established and revenue from traditional cigarette sales represents a substantial majority of total industry revenue, new smoking technologies may become more widely adopted and the business, growth prospects and financial condition of our EP segment may be adversely affected.
Our technological advantages are unlikely to continue indefinitely.
We consider our intellectual property and patents to be a material asset. We have been at the forefront of developing new products and technology within our industries and have patented several of our innovations, particularly with regard to cigarette paper used to produce LIP cigarettes. This has enhanced our ability to sell products and to provide added functionality and other value to the products we sell allowing them to command higher margins. This advantage has also enabled us to license certain of our patents and know-how to, and earn royalty income from, third parties. Ultimately, our patents will expire (generally before 2023) and some may be held invalid in certain jurisdictions before their expiration dates. In addition to protecting certain of our technological advantages through patenting, we also protect a significant amount of our technological advantages as trade secrets, especially with regard to our AMS segment and our RTL products. As we expand our operations to more locations and countries, the risk of the loss of proprietary trade secrets will increase, and any significant loss would result in the loss of the competitive advantages provided by such trade secrets. While we cannot predict the impact or the timing of these trends and eventualities, they likely will reduce our sales and margins from the levels that we otherwise would have achieved.
Effectively policing our domestic and international intellectual property and patent rights is costly and may not be successful.
Our portfolio of granted patents varies by country, which could have an impact on any competitive advantage provided by patents in individual countries. We cannot guarantee that any U.S. or foreign patent, issued or pending, will provide us with any continued competitive advantage.
We rely on patent, trademark, and other intellectual property laws of the U.S. and other countries to protect our intellectual property rights. However, we cannot guarantee that one or more of our patents will not be challenged by third parties and/or ultimately held invalid by courts or patent agencies of competent jurisdiction, which could remove the legal barriers preventing competitors from practicing our LIP technology among others.
Further, there can be no assurances that we will be able, or that it will be economic for us, to prevent third parties from using our intellectual property or infringing our patents without our authorization, which may reduce any competitive advantage we have developed. In the event that we need to enforce certain of our patents against infringement through judicial or administrative actions, the litigation to protect these rights is often costly and time consuming and diverts management resources; moreover, there can be no assurance that our efforts to protect our intellectual property will be successful, or that a defendant will not assert counterclaims against us or challenges to other intellectual property we may own.
Some of our patents have been the subject of opposition hearings. Like the actions we undertake to enforce our IP rights, oppositions filed against us in respect of our intellectual property are expensive and divert management time and resources.
Even when the Company is initially successful, there can be no assurance that the counterparty will not appeal, or that the appeal will not be successful. Even when successful at the appeal level, as with respect to patents such as EP 1,482,815 (relating to a low-viscosity polymers to print LIP bands), there can be no assurance that a patent will not be later successfully challenged in individual national court jurisdictions.
We do not believe that any of our products infringe the valid intellectual property rights of third parties. However, we may be unaware of intellectual property rights of others that may cover some of our products or services or a court or other governmental body may come to a different conclusion from ours. In that event, we may be subject to significant claims for damages or disruptions to our operations.
Because of the geographic diversity of our business, we are subject to a range of international risks.
Our operations are located in many countries around the world and operate, to a degree, in a decentralized manner. There are inherent control and fraud risks in such a structure. Moreover, we have manufacturing facilities in eight countries and two joint ventures in China and sell products in over 90 countries, many of which are emerging and undeveloped markets.
As a result, our manufacturing operations, sales and results, depending on their location, are subject to various international business risks, including, but not limited to, the following:
Foreign countries can impose significant import, export, excise and income tax and other regulatory restrictions on our business, including limitations on repatriation of profits and proceeds of liquidated assets. While we attempt to manage our operations and international movements of cash from and amongst our foreign subsidiaries in a tax-efficient manner, unanticipated international movement of funds due to unexpected changes in our business or changes in tax and associated regulatory schemes could materially affect our financial position, results of operations and cash flows.
We are exposed to global as well as regional macroeconomic and microeconomic factors, which can affect demand and pricing for our products, including: unsettled political and economic conditions, including as they relate to Brazil, Russia and the Ukraine; expropriation; import and export tariffs; regulatory controls and restrictions; and inflationary and deflationary economies. Events occurring in countries having a large share of the global economy (such as China, Japan, or the EU) can have an impact on economies that are interdependent and thereby affect those in which the Company primarily operates. For example, the impact of a slowdown of the Chinese economy due to the outbreak of a virus there on the global economy and our future results is uncertain. These factors together with risks inherent in international operations, including risks associated with any non-compliance with the U.S. Foreign Corrupt Practices Act, the 2013 Brazilian Clean Companies Act, the U.K. Bribery Act of 2010, the 2013 Russian Law on Preventing Corruption and other non-U.S. anti-bribery law compliance, could adversely affect our financial condition, results of operations and cash flows.
We participate in two joint ventures and have one manufacturing facility in China. The joint ventures sell our products primarily to Chinese tobacco companies. Operations in China entail a number of risks including international and domestic political risks, the need to obtain operating and other permits from the government, adverse changes in the policies or in our relations with government-owned or run customers and the uncertainty inherent in operating within an evolving legal and economic system. There are also risks inherent with 50% joint ventures, such as a lack of ability to control, and visibility with respect to operations, customer relations and compliance practice, among others.
Changes or increases in international trade sanctions or quotas may restrict or prohibit us from transacting business with established customers or securing new ones, including as to Russia and the Ukraine, which are areas where the Company has offices and/or significant customers and as to which the applicable sanctions have changed unexpectedly on a number of occasions since 2014.
Changes in the laws and regulations described above, adverse interpretations or applications of such laws and regulations, and the outcome of various court and regulatory proceedings, including in Europe and Brazil, could adversely impact the Company's business in a variety of ways, including increasing expenses, increasing liabilities, decreasing sales, limiting its ability to repatriate funds and generally limiting its ability to conduct business, all of which could adversely affect our financial condition, results of operations and cash flows.
New tariffs and other trade measures could adversely affect our consolidated results of operations, financial position and cash flows.
In 2018, the Trump Administration imposed tariffs on steel and aluminum and a broad range of other products imported into the U.S. In response to the tariffs imposed by the U.S., the European Union, Canada, Mexico and China have announced tariffs on U.S. goods and services. The new tariffs, along with any additional tariffs or trade restrictions that may be implemented by the U.S. or retaliatory trade measures or tariffs implemented by other countries, could result in higher manufacturing costs and increased prices for our products, and we may not be able to pass the higher manufacturing costs and price increases on to our customers. Through our joint venture partners, we also manufacture certain EP products in China. While sales of our products manufactured in China are currently sold only in local markets, any exports of our products manufactured in China to the U.S. may also be impacted by the tariffs and other restrictions on trade between the U.S. and China. While tariffs and other retaliatory trade measures imposed by other countries on U.S. goods have not yet had a significant impact on our business or results of operations, we cannot predict further developments, and such existing or future tariffs could have a material adverse effect on our consolidated results of operations, financial position and cash flows.
We may be adversely affected by recent developments relating to the U.K.’s withdrawal from the European Union, particularly if the U.K. and the European Union are unable to reach a mutually satisfactory exit agreement.
On January 31, 2020, the United Kingdom formally withdrew from the European Union. This withdrawal is commonly referred to as “Brexit.” The U.K. and the European Union have given themselves until December 31, 2020 to negotiate the details terms of their relationship going forward. The effects of the Brexit and the perceptions as to the nature of the future relationship between the U.K. from the European Union (or the possibility of the absence of any formal agreement after December 31, 2020) may adversely affect business activity and economic and market conditions in the U.K., the Eurozone, and globally and could contribute to instability in global financial and foreign exchange markets, including volatility in the value of the pound sterling and the euro. For example, in the period after the referendum in 2016 on which Brexit was based and its implementation January 2020, the value of the pound sterling experienced significant fluctuations. If the value of the pound sterling continues to incur similar fluctuations, unfavorable exchange rate changes may negatively affect our operations located in the U.K., which may impact the revenue and earnings we report. In addition, if no formal agreement is made between the European Union and the U.K., continued deflation of the pound sterling could result. Brexit could also have an impact on tariff rates for raw materials imported into the UK or sourced from the UK and the resulting prices for such materials, the tariff rates on exports of products from our facility in Gilberdyke, and delays at the customs border between the UK and the EU that could adversely impact our operations or result in our customers imposing upon us penalties for delays in delivery. Any of these effects could have an adverse impact on the value of our assets in the U.K., as well as our business, financial condition, results of operations and cash flows.
We are subject to the U.S. Foreign Corrupt Practices Act and other anti-corruption laws or trade control laws, as well as other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, which could adversely affect our business, financial condition and results of operations.
We are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-corruption laws that apply in countries where we do business. The FCPA, the 2013 Brazilian Clean Companies Act, the U.K. Bribery Act of 2010, the 2013 Russian Law on Preventing Corruption and these other laws generally prohibit us, our employees, consultants and agents from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. We operate in a number of jurisdictions that pose a high risk of potential FCPA violations, and we participate in joint ventures and relationships with third parties whose actions could potentially subject us to liability under the FCPA or local anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.
We are also subject to other laws and regulations governing our international operations, including regulations administered by the U.S. Department of Commerce’s Bureau of Industry and Security, the U.S. Department of Treasury’s Office of Foreign Asset Control, and various non-U.S. government entities, including applicable export control regulations, economic sanctions on countries and persons, customs requirements, currency exchange regulations and transfer pricing regulations, or collectively, Trade Control laws.
However, there is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the FCPA or other legal requirements, including Trade Control laws. If we are not in compliance with the FCPA and other anti-corruption laws or Trade Control laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the FCPA other anti-corruption laws or Trade Control laws by U.S. or foreign authorities could also have an adverse impact on our reputation, business, financial condition and results of operations.
Fluctuations in foreign currency exchange rates could adversely impact our financial condition, results of operations and cash flows.
A significant portion of our revenues are generated from operations outside the U.S. In addition, we maintain significant operations and acquire or manufacture many of our products outside the U.S. The functional currency of our international subsidiaries is generally the local currency in which each subsidiary operates. In particular, a large portion of our commercial business is denominated in euros and Brazilian reals. Our consolidated financial statements are presented in U.S. dollars. Therefore, we must translate revenues, expenses, assets and liabilities from functional currencies into U.S. dollars at exchange rates in effect during, or at the end of, the reporting period. As a result, our future revenues, costs, results of operations and earnings could be significantly affected by changes in foreign currency exchange rates, especially the euro to U.S. dollar exchange rate and the Brazilian real to U.S. dollar exchange rate.
In addition, some of our sale and purchase transactions are denominated in a currency other than the local currency of our operations. As a result, changes in exchange rates between the currencies in which the transaction is denominated versus the local currency of our operation into which the transaction is being recorded can impact the amount of local currency recorded for such transaction. This can result in more or less local currency revenue or cost related to such transaction and thus have an effect on our operating profit. Our Brazilian and Polish operations are more fully exposed to currency transaction risk, especially as a result of U.S. dollar sales in Brazil and euro denominated sales in Poland. We also hold a significant amount of our cash balances in euros, thus any weakening of the euro versus the U.S. Dollar would reduce the amount of U.S. Dollars for which such balances could be exchanged.
Changes in foreign currency exchange rates also impact the amount reported in other income (expense), net. For instance, when a non-local currency receivable or payable is not settled in the period in which it is incurred, we are required to record a gain or loss, as applicable, to reflect the impact of any change in the exchange rate as of the end of the period. We also have to reflect the translation rate impact on the carrying value of our foreign assets and liabilities as of the end of each period, which is recorded as Unrealized Translation Adjustment in Other Comprehensive Income.
We utilize a variety of practices to manage this risk, including operating and financing activities and, where considered appropriate, derivative instruments. All derivative instruments we use are either exchange traded or entered into with major financial institutions in order to reduce credit risk and risk of nonperformance by third parties. Counterparty
risk cannot be eliminated and there can be no assurance that our efforts will be successful. We generally hedge foreign currency transaction risk primarily through the use of derivative instruments, including forward and swap contracts and, to a lesser extent, option contracts. The use of derivative instruments is intended to mitigate or reduce transactional level volatility in the results of foreign operations, but does not completely eliminate volatility. If our future revenues, costs and results of operations are significantly affected by economic conditions abroad and/or we are unable to effectively hedge these risks, they could materially adversely affect our financial condition, results of operations and cash flows.
The Company could be subject to changes in its tax rates, the adoption of new U.S., or foreign tax legislation or exposure to additional tax liabilities.
The Company is subject to taxes in the U.S. and in foreign jurisdictions where a number of the Company’s subsidiaries are organized. The Company’s future effective tax rate could be affected by changes in the mix of earnings in countries with differing statutory tax rates or future changes in tax laws or their interpretations as to the legality of tax advantages granted under various current and past corporate structures. Although none of the Company’s international tax arrangements are currently being challenged or threatened to be challenged, recent developments, such as the European Commission’s investigations on illegal state aid, individual European countries implementation of Anti Tax Avoidance Directives, continued regulatory development of the Tax Cuts and Jobs Act of 2017, and the Organization for Economic Cooperation and Development projects on base erosion and profit shifting may result in changes to long-standing tax principles or new challenges to our cross-border arrangements, which could materially affect our effective tax rate or require a restructuring of the holding of foreign subsidiaries. If the Company’s effective tax rates were to increase, or if any ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s operating results, cash flows, and financial condition could be adversely affected.
We face competition from several established competitors and we have limited market transparency.
Our four largest competitors for our EP business are delfortgroup AG ("delfort"), Julius Glatz GmbH ("Glatz"), Miquel y Costas & Miquel S.A. ("Miquel y Costas") and PT BUKIT Muria Jaya ("BMJ"). All four primarily operate from modern and cost-effective plants in Western Europe and Asia and are capable and long-standing suppliers to the tobacco industry. Further, three such competitors, delfort, Glatz and BMJ, are privately held and the third, Miquel y Costas, is a closely held public company. Thus, their financial results and other business developments and strategies are not disclosed to the same extent as ours, which provides them some advantage in dealing with customers. Given the concentration of most of our competitors in Western Europe, which has seen declining demand for tobacco products and has labor laws that make reducing capacity expensive and slow, excess capacity exists and therefore price competition is acute. We believe that all four competitors have good relationships with the multinational cigarette companies, as does the Company. The multinational cigarette companies have been known to use these close relationships to encourage the development of enhanced competition through supporting competitive products and facilities, especially when confronted with new, high-value technologies such as porous plug wrap in the past and LIP today. We believe our Engineered Paper products compete primarily on product features, price, innovations and customer service. Due to many of the factors described above, we have a limited ability to predict trends in the industry and there may be a time lag before we become aware of developing trends in the industry.
Our AMS segment products compete to some degree against specialty products made by Marshall Manufacturing Company, Johns Manville, a subsidiary of Berkshire Hathaway Inc., Shaoxing Naite Plastics Co. Ltd., 3M Company, Covestro AG, Nupro, Tenax Corporation, Intermas Group, and Hollingsworth and Vose Company. We believe our AMS products compete primarily on product features, innovations and customer service. Some of these competitors are larger than we are and have more resources, thus the actions of these competitors could have an impact on the results of our AMS segment operations.
As a result of the foregoing, the Company faces significant selling price, sales volume and new product risks from its competitors, especially during periods (often annually) in which the Company's contracts with its major customers are subject to renewal or renegotiation.
Currently, fine papers used to produce cigarettes are only exported on a limited basis from available capacity in China and other Asian locations to western multinational cigarette companies due to government taxes and tariffs, which limit price competitiveness, as well as due to customer preferences. Should conditions change in this regard, capacity that currently is operating in China and elsewhere in Asia would present a risk to our competitive position outside Asia and place further pressure on our legacy paper production platforms. Similarly, we are starting to see increased competition for some of our AMS products from companies in China, which, we believe, may have lower operating costs than us, resulting in a potential price advantage for such companies.
In the RTL end-market segment, demand is a function, among other things, of smoke delivery regulations, the cigarette manufacturer's desire for a uniform and consistent product, the taste profile sought by cigarette manufacturers, and the cost of recycling the tobacco by-product scraps and the utilization of internal capacity to produce materials that compete with our RTL products. These factors have resulted, and are likely to continue to result, in materially lower sales volumes for our RTL business, resulting in downtime of certain production machines and, in some cases, accelerated depreciation or impairment charges for certain equipment as well as employee severance expenses associated with downsizing or restructuring activities.
Further, as a result of excess capacity in the tobacco-related papers industry and increased operating costs, competitive levels of selling prices for certain of the Company's products are not sufficient to cover those costs with a margin that the Company considers reasonable. Such competitive pressures have resulted, and could result in the future, in downtime of certain paper production machines and, in some cases, accelerated depreciation or impairment charges for certain equipment as well as employee severance expenses associated with downsizing or restructuring activities.
We are dependent upon a small number of customers for a significant portion of our sales; the loss of one or more of these customers could have a material adverse effect on our business.
Four customers, together with their respective affiliates and designated converters, accounted for over 29% of our net sales in 2019. The loss of one or more of these customers, or a significant reduction in their purchases, particularly those that impact our sales of LIP papers or Recon, could have a material adverse effect on our financial condition, results of operations and cash flows.
In addition, significant consolidation has occurred among our tobacco customers and may continue to occur, thereby increasing our dependence upon a fewer number of tobacco industry customers and increasing the negotiating leverage of those customers that remain. If any of our customers were to change suppliers, in-source production of Recon or cigarette papers (including those used to produce LIP cigarettes), institute significant cost-cutting measures or experience financial difficulty, then these customers may substantially reduce their purchases from us, which could adversely impact our financial condition, results of operations and cash flows. In addition, adverse results in the negotiation of any of our significant customer contracts, the terms of which are typically negotiated every one to three years, could significantly impact our financial condition, results of operations and cash flows.
We are dependent upon the availability of credit, and changes in interest rates can impact our business.
We supplement operating cash flow with bank borrowings under a secured credit agreement with a syndicate of banks. Borrowings under this agreement will mature in September 20232027 and September 2025.2028. To date, we have been able to access credit when needed and on commercially reasonable terms. However, deterioration of credit markets, including an economic crisis in the U.S. or elsewhere, whether or not caused by the U.S. or European debt ceiling, deficits and budget issues, could have an adverse impact on our ability to negotiate new credit facilities or access or renew our existing one. Constraints on the availability of credit, or the unavailability of credit at reasonable interest rates, would negatively impact our business, including potentially impairing our ability to declare dividends, conduct share buy-backs and make acquisitions.
Our secured credit facility contains certain financial covenants. In the event of material unforeseen events that impact our financial performance, particularly during a time when we have material amounts of debt, a situation could arise where we are unable to fully draw from our existing credit facility notwithstanding that there is otherwise available capacity.
Our credit facilities are secured by substantially all of the personal property of the Company and its domestic subsidiaries. In the event of a default on these agreements, substantially all of the assets of the Company could be subject to foreclosure or liquidation by the secured creditors.
We may utilize a combination of variable and fixed-rate debt consisting of short-term and long-term instruments. We selectively hedge our exposure to interest rate increases on our variable rate long-term debt when we believe that it is practical to do so. We have utilized various forms of interest rate hedge agreements, including interest rate swap agreements, forward rate agreements and cross currency swaps. There are inherent risks associated with interest rate hedges, including those associated with the movement of interest rates, counterparty risk and unexpected need to refinance debt, thus there can be no certainty that our hedging activities will be successful or fully protect us from interest rate exposure. As of December 31, 2019,2022, the percentage of the Company’s fixed and floating interest rate debt was 64%20.8% and 36%79.2%, respectively. The Company has entered into a number of interest rate hedge transactions to convert floating rate debt to fixed. Including the impact of these transactions, as of December 31, 2019,2022, the percentage of the Company’s debt subject to fixed and floating rates of interest was 97%77.1% and 3%22.9%, respectively.
Our use of interest rate hedge agreements to manage risk associated with interest rate volatility may expose us to additional risks, including the risk that a counterparty to a hedge agreement may fail to honor its obligations. Developing an effective interest rate risk strategy is complex and no strategy can completely insulate us from risks associated with interest rate fluctuations. There can be no assurance that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. Termination of interest rate hedge agreements typically involves costs, such as transaction fees or breakage costs.
Changes in the method pursuant to which LIBOR rates are determined and potential phasing outThe replacement of LIBOR after 2021with SOFR may adversely affect our results of operations.
LIBORCertain of our interest rate derivatives and certain other “benchmarks”a portion of our indebtedness bear interest at variable interest rates, which are the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. In particular,primarily based on July 27, 2017, theLIBOR. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. It is unclear whether, at that time, LIBORand will cease publication of U.S. dollar ("USD") LIBOR as of June 30, 2023. The Federal Reserve Board (“FRB”), Federal Deposit Insurance Corporation (“FDIC”), and Office of the Comptroller of the Currency (“OCC”) have issued supervisory guidance encouraging banks to exist or ifcease entering into new methods of calculating LIBOR will be established. Any uncertainty regarding the continuedcontracts that use and reliability ofUSD LIBOR as a benchmark interest rate could adversely affect the performance of LIBOR relative to its historic values. If the methods of calculating LIBOR change from current methods for any reason, or if LIBOR ceases to perform as it has historically, our interest expense associated with the unhedged portion of our outstanding indebtedness or any future indebtedness we incur may increase. Further, if LIBOR ceases to exist, we may be forced to substitute an alternative reference rate such as a different benchmark interest rate or base rate borrowings,soon as practicable and in lieu of LIBOR under our current and future indebtedness and interest rate swaps. At this point, it is not clear what, if any alternative reference rate may be adopted to replace LIBOR, however, any such alternative reference rate may be calculated differently than LIBOR and may increase the interest expense associated with our existing or future indebtedness. In the United States, efforts to identify a set of alternative U.S. dollar reference interest rates include proposalsevent by theDecember 31, 2021. The Alternative Reference Rates Committee, ofwhich was convened by the Federal Reserve Board and the Federal Reserve Bank of New York. The Alternative Reference Rates CommitteeYork, has proposed the Secured Overnight Financing Rate ("SOFR")identified SOFR as its recommendedpreferred alternative tofor USD LIBOR. Because of inherent differences between LIBOR and the Federal Reserve Bank of New York began publishing SOFR, rates in April 2018. SOFR is intended to be a broad measure of the cost of borrowing cash overnight that is collateralized by U.S. Treasury securities. However, because SOFR is a broad U.S. Treasury repo financing rate that represents overnight secured funding transactions, it differs fundamentally from LIBOR. For example, SOFR is a secured overnight rate, while LIBOR is an unsecured rate that represents interbank funding over different maturities. In addition, because SOFR is a transaction-based rate, it is backward-looking, whereas LIBOR is forward-looking. Because of these and other differences, there is no assurance that SOFR will perform in the same way as LIBOR would have performed at any time, and there is no guarantee that it is a comparable substitute for LIBOR. SOFR may fail to gain market acceptance.
Finally,At this time, it is not possible to predict the effect the replacement or disappearance of LIBOR with SOFR will have on the Company. However, the Company’s borrowing costs may be adversely affectaffected by the valuereplacement of and return on our LIBOR-based obligations and the availability, pricing and terms of LIBOR-based interest rate swaps we use to hedge our interest rate
risk. Alternative reference rates or modifications to LIBOR may not align for our assets, liabilities, and hedging instruments, which could reduce the effectiveness of certain of our interest rate hedges, and could cause increased volatility in our earnings.with SOFR. We may also incur expenses to amend and adjust our indebtedness and swaps to eliminate any differences between SOFR and any alternative reference rates used by our interest rate hedges and our outstanding indebtedness.
Any of these occurrences could materially and adversely affect our borrowing costs, business and results of operations.
Our failure to comply with the covenants contained in our credit agreements and other debt instruments could result in an event of default that could cause acceleration of our indebtedness.
Our failure to comply with the covenants and other requirements contained in our credit agreements or our other debt instruments could cause an event of default under the relevant debt instrument. The occurrence of an event of default could trigger a default under our other debt instruments, prohibit us from accessing additional borrowings and permit the holders of the defaulted debt to declare amounts outstanding with respect to that debt to be immediately due and payable. Our assets or cash flows may not be sufficient to fully repay borrowings under our outstanding debt instruments, and we may be unable to refinance or restructure the payments on indebtedness on favorable terms, or at all.
Future dividends on our common stock may be restricted or eliminated.
Dividends are declared at the discretion of our Board of Directors, and future dividends will depend on our future earnings, cash flow, financial requirements and other factors. Our ability to pay cash dividends on our common stock may be limited under the terms of our credit agreements or other debt instruments. There can be no assurance that we will continue to pay dividends in the future.
Our internal and external expansion plans and asset dispositions entail different and additional risks relative to the rest of our business.
From time to time, we consider acquisitions either within the tobacco industry or outside the industry in connection with our diversification initiatives, such as our acquisitions of DelStar Technologies, Inc., Argotec LLC and Conwed Plastics LLC.initiatives. This acquisition activity could involve confidential negotiations that are not publicly announced unless and until those negotiations result in a definitive agreement. It is possible that an acquisition could adversely impact our results, credit ratings or the outlook of our business, due to, among other things, integration and employee retention challenges, contrasting company cultures and different information technology and reporting systems. Also, acquisition opportunities are limited and present risks of failing to achieve strategic objectives, smooth integrations or anticipated synergies or returns. There can be no assurance that we will be able to acquire attractive businesses on favorable terms, that we will realize the anticipated benefits or profits through acquisitions or that acquisitions will be accretive to our earnings. Changes in our portfolio of businesses, assets and products, whether through acquisition, (such as our acquisitions of DelStar, Argotec and Conwed), disposition or internal growth, present additional risks, including causing us to incur unknown or new types of liabilities, subjecting us to new regulatory frameworks and new market risks, and acquiring operations in new geographic regions with challenging labor, regulatory and tax regimes. The potential future expansion of our AMSATM business unit or other operations could cause these operations to face additional competition from larger and more established competitors than is currently the case.
Our ability to dispose of idled assets and the value that may be obtained relative to their book value can result in significant impairment charges. Building a new plant or other facility or relocating, rebuilding or otherwise modifying existing production machinery is a major undertaking and entails a number of risks, including the possibility that the contractors and sub-contractors who are expected to build the facility or rebuild the machine and supply the necessary equipment do not perform as expected, the possibility of cost overruns and delays, or that design defects or omissions cause the facility or machine to perform at less than projected efficiency or at less than projected capacity. In addition, commencement of production at a new site or at a rebuilt or relocated machine is time consuming and requires testing and acceptance by customers and potentially by regulators, of the facility and the products that are produced. Also, while we anticipate sufficient demand for the facility's or machine's output, there can be no assurances that the expected demand will materialize. For more information on our expansion plans, see Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operation" of this report.
We also expect to continue to expend resources to diversify and expand our product portfolio. Research and development and product diversification have inherent risks, including technical success, market acceptance, new regulations and potential liabilities. We cannot guarantee that such efforts will succeed, that we will not incur new or different liabilities or that we will achieve a satisfactory return on such expenditures.
Mativ will likely continue to incur substantial costs related to the integration of Neenah.
Mativ will likely continue to incur substantial integration costs in connection with the Merger. There are a large number of processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the Merger and the integration of the two companies’ businesses, including purchasing, accounting and finance, sales, payroll, pricing and benefits.
While Mativ has assumed that certain expenses would be incurred in connection with the Merger and the integration of the businesses, there are many factors beyond Mativ’s control that could affect the total amount or the timing of the integration expenses. Moreover, many of the costs that will be incurred are, by their nature, difficult to estimate accurately. Although Mativ expects that the elimination of duplicative costs and the realization of other economies
of scale-related efficiencies related to the integration of the businesses may offset incremental Merger-related and integration costs over time, any net benefit may not be achieved in the near term or at all. These integration costs may result in Mativ taking significant charges against earnings, and the amount and timing of such charges are uncertain at present.
Combining SWM and Neenah may be more difficult, costly or time consuming than expected, and Mativ may fail to realize some or all of the anticipated benefits of the Merger.
The success of the Merger will depend, in part, on the ability to realize the anticipated cost savings, operational synergies and other perceived benefits from combining the businesses of SWM and Neenah. To realize the cost savings, operational synergies and other perceived benefits from the Merger, Mativ must successfully integrate and combine the two businesses in a manner that permits those benefits to be realized. If Mativ is not able to achieve these objectives, the anticipated benefits of the Merger may not be realized fully or at all, or may take longer to realize than expected. For example, the actual cost savings, operational synergies and other perceived benefits of the Merger could be less than anticipated or take longer to realize than anticipated for a variety of reasons, including those set forth in these Risk Factors.
It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the companies’ ability to maintain relationships with employees, customers, suppliers or other business associates and constituencies or to achieve the anticipated benefits and cost savings of the Merger. Integration efforts between the two companies may also divert management attention and resources. These integration matters could have an adverse effect on Mativ during this transition period and for an undetermined period after completion of the Merger on the combined company.
The Merger may result in a loss of customers, distributors, suppliers, vendors, landlords, joint venture partners and other business partners and may result in the termination of existing contracts.
Due to the Merger, some of the customers, distributors, suppliers, vendors, landlords, joint venture partners and other business partners of Mativ may terminate or scale back their current or prospective business relationships with Mativ. Some customers may not wish to source a larger percentage of their needs from a single company or may feel that Mativ is too closely allied with one of their competitors. If relationships with customers, distributors, suppliers, vendors, landlords, joint venture partners and other business partners are adversely affected by the Merger, Mativ’s business and financial performance could suffer.
Mativ’s future results may suffer if it does not effectively manage its expanded operations following the Merger.
Following the completion of the Merger, the size of our business increased significantly. Mativ’s future success will depend, in part, upon its ability to manage this expanded business, which will pose substantial challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances that Mativ will be successful or that it will realize the expected operating efficiencies, cost savings, revenue enhancements or other benefits currently anticipated from the Merger.
We may not successfully integrate acquisitions or integrate other SWMinto Mativ's operations into AMS and we may be unable to achieve anticipated cost savings or other synergies.
The integration of the operations of acquired companies involves a number of risks and presents financial, managerial, reporting, legal and operational challenges. We may have difficulty, and may incur unanticipated expenses related to, integrating information systems, financial reporting activities, employee retention and integrating and retaining management and personnel from acquired companies. Among these risks are potential loss of consumer awareness and demand for the acquired companies’ products based on the rebranding of those products under the Company’s legacy brand names. Additionally, with respect to the acquisition of Conwed in early 2017, we may not be able to achieve anticipated cost savings or commercial or growth synergies for a number of reasons, including contractual constraints and obligations or an
inability to take advantage of expected commercial opportunities, inability to achieve
increased operating efficiencies or commercial expansion of key technologies. In the second half of 2015, we formed our AMS business unit comprised of these operations and certain other SWM resources. The future success of AMS depends, in part, on our ability to attract additional management, retain key employees, integrate new personnel, operating and reporting systems as well as execute AMS’ growth strategy. Failure to successfully integrate acquired companies into AMSMativ's operations may have an adverse effect on our business, financial condition, results of operations, and cash flows.
Our restructuring activities are time-consuming and expensive and could significantly disrupt our business.
We have initiated significant restructuring activities in recent years, including restructurings in 2014, 2015, 2016 and 2017 inBrazil, France, the Philippines and the U.S., during 2014 in Brazil and during 2012 in the Philippines, that have become part of an overall effort to improve an imbalance between demand for our products and our production capacity as well as improve our profitability and the quality of our products. We expect to continue these restructuring efforts from time to time. Restructuring of our existing operations, or as a result of acquisitions, involves issues that are complex, time-consuming and expensive and could significantly disrupt our business as well as garner review from regulatory authorities which could result in financial impacts to the Company.The challenges involved in executing the actions that are part of our ongoing and, potentially future, restructuring plans include:
•demonstrating to customers that the restructuring activities will not result in adverse changes in service standards or business focus;
•consolidating administrative infrastructure and manufacturing operations while maintaining adequate controls throughout the execution of the restructuring;
•preserving distribution, sales and other important relationships and resolving potential conflicts that may arise;
•estimating, managing and minimizing the cost of the restructuring activities;
•minimizing the diversion of management attention from ongoing business activities;
•maintaining employee morale, retaining key employees, maintaining reasonable collective bargaining agreements and avoiding strikes, work stoppages or other forms of labor unrest while implementing restructuring programs that often include reductions in the workforce;
•securing government approval of such plans, where necessary, and managing the litigation and associated liabilities that often are associated with restructuring actions;
•incurring costs associated with delays in restructuring activities caused by labor negotiations and/or governmental approvals;
•coordinating and combining operations, which may be subject to additional constraints imposed by collective bargaining agreements and local laws and regulations; and
•achieving the anticipated levels of net cost savings and efficiency as a result of the restructuring activities.
Our financial performance can be significantly impacted by the cost and availability of raw materials and energy and we may have limited ability to pass through increases in costs to our customers.
Raw materials are a significant component of the cost of the products that we manufacture. The cost of wood pulp, which is the largest component of the raw materials that we use in our EPFBS segment, and some resins used by our AMSATM segment are highly cyclical and can be more volatile than general consumer or producer inflationary changes in the general economy. Also, in that same time period, the cost of polypropylene has fluctuated significantly based on a number of factors, including changes in global oil markets. As we periodically enter into agreements with customers under which we agree to supply products at fixed prices, unanticipated increases in the costs of raw materials, or the lack of availability of such raw materials (due to force majeure or other reasons), can significantly impact our financial performance. Even where we do not have fixed-price agreements, we generally cannot pass through increases in raw material costs in a timely manner and in many instances are not able to pass through the entire increase to our customers. Further, some of the resins we use in our AMSATM segment are only available from a single supplier, or a limited number of suppliers. Consequently, such supplier(s) can control the availability and thus the cost of the resins we use, notwithstanding any changes in the cost of oil. It can be time consuming and costly, and occasionally impractical, to find replacement resins where such suppliers limit the availability or increase the cost of resins we use.
Our manufacturing operations, in particular paper manufacturing, is energy-intensive.In the UK,U.K., the European Union, China and in the U.S., availability of energy generally is reliable, although prices can fluctuate significantly based on variations in overall demand.Western Europe is becoming significantly dependent on energy supplies from the Commonwealth of Independent States, which in the past has demonstrated a willingness to restrict or cut off supplies of energy to certain customers.The volume of oil or gas flowing through pipeline systems that ultimately connect to Western Europe also has been cut off or restricted in the past, and such actions can adversely impact the supply of energy to Western Europe and, consequently, the cost and availability of electricity to our European operations.In Brazil, because production of electricity is heavily reliant upon hydroelectric plants, availability of electricity can be, and has been in the past, affected by rain variations.Electricity in Brazil is also heavily taxed.Due to the competitive pricing forof most of our products, we typically are unable to fully pass through higher energy costs to our customers. Periodically, when we believe it is advantageous to do so, we enter into agreements to procure a portion of our energy for future periods in order to reduce the uncertainty of future energy costs.However, in recent years this has only marginally slowed the increase in energy costs due to the volatile changes in energy prices we have experienced.
A failure of, or a security breach in, a key information technology system or process or other unusual events could compromise our information and expose us to liability, which could adversely affect our business; IT project delays and overruns are possible.
We rely extensively on information technology systems, some of which are managed by third-party service providers, to analyze, process and manage transactions and sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees. The secure processing and maintenance of this information is critical to our operations and business strategy and we rely heavily on the integrity of this data in managing our business. Insider or employee cyber and security threats are increasingly a concern for all companies, including ours. In addition, social engineering and phishing are a particular concern. We are continuously working to install new, and to upgrade our existing, information technology systems and to provide employee awareness training around phishing, malware and other cyber risks to ensure that we are protected, to the greatest extent possible, against cyber risks and security breaches.
Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or be breached due to employee or third partythird-party error, malfeasance or other disruptions. To date, we have not had a significant cyber breach or attack that has had a material impact on our business. However, anyAny such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims, proceedings, or regulatory penalties, including penalties under EU privacy laws, and could disrupt our operations. Although we are insured against cyber risks and security breaches up to an annual aggregate limit, our liability insurance may be inadequate and may not fully cover the costs of any claim or any damages we might be required to pay, and we may not be able to obtain adequate liability insurance in the future on commercially desirable or reasonable terms or at all. During the year ended December 31, 2022, the Company became aware of a cyber attack that had been made against certain systems within the Company's network environment. Refer to Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information.
There are further risks associated with the information systems of companies we acquire, both in terms of systems compatibility, level of security and functionality. It may cost us significant money and resources to address these risks and we may fail to address them successfully, adversely impacting our financial condition, results of operations and cash flows.
From time to time, we undertake significant information technology systems projects, including enterprise resource planning updates, modifications and roll-outs. These projects are subject to cost overruns and delays. Not only could these cost overruns and delays impact our financial statements but a delay in the completion of a needed IT project could adversely impact our ability to run our business and make fully informed decisions.
We rely on a limited number of key employees, have had significant personnel turnover and have had difficulty in attracting and hiring qualified new personnel in some areas of our business.employees.
The loss of any of our key employees, including our CEO and hisher direct reports, due to retirement, difference in culture with acquired businesses, the demands of our business, our tobacco-related operations or otherwise could adversely affect our business and thus our financial condition, results of operations and cash flows.Because a large part of our business is tied to the tobacco industry, we may also experience difficulty in retaining and hiring qualified executives and other personnel in our AMSATM segment, at corporate and/or in EP. ThisFBS.
We face various risks related to the COVID-19 pandemic and similar health-related outbreaks, which have had, and may be caused by the health and social issues associated with the tobacco industry. We not only compete for talent with consumer products and other companies that enjoy greater social acceptance but also with larger, more established companies within the tobacco industry.
As we diversify through acquisitions outside our tobacco-related operations, we run the risk of turnover of key personnel within the businesses we acquire as well as difficulty in finding and attracting first class talent in industry segments that are newcontinue to us. This could slow the growth of these businesses and impede our ability to find and complete synergistic acquisitions.
Our business is subject to seasonal or cyclical market and industry fluctuations which may result in reduced net sales and operating profits during certain periods.
Sales of our EP products in the U.S., Europe, China and Brazil are subject to seasonal fluctuations. In the U.S. and Europe, customer shutdowns typically occur in August and December and historically have, resulted in reduced net sales and operating profit during those two months. Likewise, the production of cigarettes in China for the Chinese market slows significantly before and during Chinese New Year, with a corresponding reduction in demand for our EP products. Additionally, our facilities occasionally shut down equipment to perform additional maintenance during these months or as a result of slow demand, resulting in higher product costs, higher maintenance expenses and reduced operating profit. In Brazil, customer orders are typically lower in December due to a holiday season during much of January and February. The oil & gas, mining and automotive industries are important to sales in our AMS segment and these and other industries tend to be cyclical, which could adversely impactmaterial adverse effects on our business, financial condition, results of operations and cash flows duringflows.
We face various risks related to the durationCOVID-19 pandemic and similar health-related outbreaks. Such risks include:
•Decreased demand and volatility in sales due to operational disruptions faced by some of their down cycles.our customers, and the threat of a sustained economic downturn driven by a global reaction to health-related outbreaks.
•Disruptions to our manufacturing sites and operations due to temporary closures of our facilities to comply with government-imposed restrictions and to address other health-related factors.
•Disruptions to our suppliers, and our inability to secure alternate sourcing quickly, which could adversely impact our production and cause us to alter production schedules or suspend production entirely.
•The inability of our employees to work in our offices or our facilities due to personal health concerns and/or government-imposed restrictions in response to the health-related outbreaks, such as mandatory business closures, limits on non-essential travel, “social or physical distancing” guidelines and “shelter-in-place” mandates.
The occurrence of the above risks could have a material adverse effect on our financial condition, results of operations and cash flows.
Our business depends upon good relations with our employees; workemployees. Work stoppages, slowdowns or legal action by our unionized employees may have a material adverse effect on our business, financial condition, results of operations and cash flows.
We employ approximately 3,4007,500 employees, including certain manufacturing employees represented by unions. Although we believe that employee and union relations are generally positive, there is no assurance that this will continue in the future. We may experience difficulties in maintaining appropriate relations with unionsfuture and employees in certain locations. Problemsproblems or changes affecting employees in certain locations may affect relations with our employees at other locations. The risk of labor disputes, work stoppages or other disruptions in production could adversely affect us, especially in conjunction with potential restructuring activities. If we cannot successfully negotiate or renegotiate collective bargaining agreements, or if negotiations take an excessive amount of time, there may be a heightened risk of work stoppages and we may be unable to achieve planned operational efficiencies. Work stoppages may be caused by the inability of national unions and the governments of countries in which we operate from reaching agreement and are outside of our control. Any work stoppage or failure to reach agreements with our unions could have a material adverse effect on our customer relations, our productivity, the profitability of a manufacturing facility, our ability to develop new products and on our operations as a whole, resulting in an adverse impact on our business, financial condition, results of operations and cash flows.
Our business is subject to various environmental laws, regulations and related litigation that could impose substantial costs or other liabilities on us.
Our facilities are subject to significant federal, state, local and foreign environmental protection laws with respect to air, water and emissions as well as the disposal of solid waste. We believe that we are operating in substantial compliance
with these laws and regularly incur capital and operating expenditures in order to achieve future compliance. However, these laws may change, which could require changes in our practices, additional capital expenditures or loss of carbon credits, and we may discover aspects of our business that are not in compliance. Violation of these laws can result in the imposition of significant fines and remediation costs. In France, we
presently have sufficient authorized capacity for our emissions of carbon dioxide through 2020.2025. However, this authorization must be renewed periodically. We cannot predict whether we will have sufficient authorized capacity to conduct our operations in France as presently conducted or to do so without having to make substantial capital expenditures in future years.
We are a member of a potentially responsible party group ("Global PRP Group") that entered into a settlement with the State of New Jersey in 1993 concerning the remediation of a landfill site in Middlesex County, New Jersey. The landfill remediation has been completed. We have established a reserve of approximately $0.3 million that we believe is adequate to cover our ongoing liability, but we remain exposed to post-closure operating costs over an extended period of years that cannot be fully known or estimated at this time.
Additionally, in recent years, assessments of the potential impacts of climate change have begun to influence governmental authorities, consumer behavior patterns and the general business environment of the European Union and the United States. The implementation of these policies may require us to invest additional capital in our properties or it may restrict the availability of land we are able to develop. These changes, or other changes in other environmental laws or the interpretation thereof, new enforcement of laws, the identification of new facts or the failure of other parties to perform remediation at our current or former facilities could lead to new or greater liabilities that could materially adversely affect our business, results of operations, cash flows or financial condition.
Although we are not aware of any environmental conditions at any of our facilities that could have a material adverse effect on our financial condition, results of operations and cash flows, we own facilities in France, the U.S. and elsewhere that have been operated over the course of many decades. Should the Company make material changes in the operations at a facility it is possible such changes could generate environmental obligations that might require remediation or other action, the nature, extent and cost of which are not presently known. We may also face higher disposal and clean-up costs to replace equipment or facilities containing materials that were compliant when installed but are now considered contaminants. Additionally, as we sell closed or other facilities or materially alter operations at a facility, we may be required to perform additional environmental evaluations that could identify items that might require remediation or other action, the nature, extent and cost of which are not presently known. We may also incur environmental liabilities in connection with assets or businesses we may purchase in the future.
ESG issues may have an adverse effect on our business, financial condition and results of operations, the desirability of our stock, and may damage our reputation.
Companies across all industries are facing increasing scrutiny relating to their ESG policies. If we are unable to meet our ESG goals or evolving investor, industry, or stakeholder expectations and standards, or if we are perceived to have not responded appropriately to the growing concern for ESG issues, customers and consumers may choose to stop purchasing our products or purchase products from another company or a competitor, and our reputation, the desirability of our stock to investors, and our business or financial condition may be adversely affected. Increased focus and activism on ESG topics may hinder our access to capital, as investors may reconsider their capital investment as a result of their assessment of our ESG practices. In particular, these constituencies are increasingly focusing on environmental issues, including climate change, water use, deforestation, waste, and other sustainability concerns. These demands could cause us to incur additional costs or to make changes to our operations to comply with such demands. In addition to environmental issues, these constituencies are also focused on social and other governance issues, including matters such as, but not limited to, human capital and social issues. Any failure to achieve our ESG goals or a perception (whether or not valid) of our failure to act responsibly with respect to the environmental, human capital, or social issues, or to effectively respond to new, or changes in, legal or regulatory requirements concerning environmental or other ESG matters, or increased operating or manufacturing costs due to increased regulation or environmental causes could adversely affect our business and reputation and increase risk of litigation.
Increases in costs of pension benefits may reduce our profitability.
Our results of operations may be negatively affected by expenses we record for our defined benefit pension plans. Generally accepted accounting principles in the U.S., ("GAAP"), require that we calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions about financial markets, longevity of our current and former employees and other economic conditions, which may change based on changes in key economic indicators and mortality tables. We are required to make an annual measurement of plan assets and liabilities, which may result in increased funding obligations or negative changes in our stockholderstockholders' equity. At the end of 2019,2022, the combined projected benefit obligation of our U.S. and French pension and other postretirement healthcare plans had a net underfunding of $26.3$26.8 million. For a discussion regarding
our pension obligations, seerefer to Note 19.18. Postretirement and Other Benefits of the Notes to Consolidated Financial Statements in Part II, Item 8 and "Other Factors Affecting Liquidity and Capital Resources" in Part II, Item 7. Although expense and pension funding contributions are not directly related, key economic factors that affect expense would also likely affect the amount of cash we would contribute to pension plans as required under the Employee Retirement Income Security Act ("ERISA") for U.S. plans. Failure to achieve expected returns on plan assets driven by various factors, which could include a continued environment of low interest rates or sustained market volatility, could also result in an increase to the amount of cash we would be required to contribute to pension plans.
We are subject to various legal actions and other claims.
We regularly are involved in legal actions and other claims arising in the ordinary course of business and otherwise. We are also subject to many laws and regulations around the world. Despite our efforts, we cannot guarantee that we are in compliance with every such law or regulation. Because of the complexity of Brazilian tax laws and court systems, legal actions are a particular risk that affects our Brazilian operations. Although we believe that our positions in pending disputes about state and federal taxes are correct and will ultimately be upheld by Brazilian courts, the outcome of legal proceedings is difficult to predict. An adverse result in one or more of these tax disputes could have a material adverse impact on our financial condition, results of operations and cash flows. We are also subject to other litigation in Brazil, including labor and workplace safety claims. Although we do not believe that any of the currently pending actions or claims against us will have a material adverse impact on our financial condition, results of operations and cash flows, we cannot provide any assurances in this regard. Information concerning some of these actions that currently are pending is contained in Note 21.20. Commitments and Contingencies, of the Notes to Consolidated Financial Statements and in Part I, Item 3, “Legal Proceedings” of this report. We also cannot give any assurances as to any litigation that might be filed against us in the future, including any claims relating to the alleged harmful effect of tobacco use on human health.
One portion of our business is dependent upon a single plant; further, we have limited cross redundancy across our facilities.
Sales of RTL products represent a substantial portion of our revenues and profits. We presently produce RTL at only one facility located in France and wrapper and binder products at only one facility located in Ancram, New York. In our AMS business, in order to enhance the protection of our trade secrets, critical proprietary dies used in a significant portion of our extruding operations are made with very limited personnel trained to manufacture them and very strict access to the equipment. Further, in order to achieve operational efficiencies, among other reasons, we have limited ability to shift production across our various facilities, thus the loss of production at one facility may not be able to be mitigated by increased production at another. Consequently, natural disasters, pandemics and other unusual events could cause the loss of, or interruption of operations for a significant length of time at, one or more of our facilities in six different countries, which could have a material adverse effect on our financial condition, results of operations and cash flows.
Any loss or interruption of the operations of our facilities may harm our operating performance.
Our revenues depend on the effective operation of our manufacturing facilities. The operation of our facilities involves risks, including the breakdown, failure, or substandard performance of equipment, power outages, the improper installation or operation of equipment, explosions, fires, natural disasters, failure to achieve or maintain safety or quality standards, work stoppages, supply or logistical outages, and the need to comply with environmental and other directives of governmental agencies. Moreover, natural disasters, political crises, public health crises (such as the ongoing COVID-19 pandemic and the measures put in place to reduce its spread) or other unforeseen catastrophic events in any of the countries in which we operate may negatively impact our facilities, our supply chain or customers. For example, in December 2019 and January 2020, a strain of Coronavirus was reported to have surfaced in China, and the Chinese government response aimed at limiting the spread of the virus included quarantines that restricted the conduct of manufacturing operations, including our facilities in Suzhou and the Chinese joint ventures in which we have an interest. Spread of the Coronavirus strain and its effects on related travel, as well as commercial or other restrictions could result in global supply chain disruptions. If we experience supply disruptions, we may not be able to develop alternate sourcing quickly. Any disruption of our production schedule caused by an unexpected shortage of components, raw materials or parts even for a relatively short period of time could cause us to alter production schedules or suspend production entirely, which would adversely affect our business and results of operations. The occurrence of material operational problems, including, but not limited to, the above events, could cause the loss of, or interruption of operations for a significant length of time, which could have a material adverse effect on our financial condition, results of operations and cash flows.
In addition, many of our operations require a reliable and abundant supply of water. Production facilities for our EPFBS segment rely on a local water body or water source for their water needs and, therefore, are particularly sensitive to drought conditions or other natural or man-made interruptions to water supplies. At various times and for differing
periods, we have had to modify operations at certain of our mills due to water shortages, water clarity, or low flow conditions in its principal water supplies. Any interruption or curtailment of operations at any of our production facilities due to drought or low flow conditions at the principal water source or another cause could materially and adversely affect our operating results and financial condition.
Fluctuations in construction and infrastructure spending can impact demand for certain of our products.
Demand for certain of our products depends on spending in the construction industry, both residential and non-residential, as well as infrastructure sectors. Spending in those sectors is impacted by numerous circumstances beyond our control including, but not limited to, interest rates, availability of financing, housing inventory, capital spending, corporate investment, local, federal and state regulations, as well as availability and commitment of public funds for municipal spending, capacity utilization and general economic conditions. Decreased spending in any of these sectors could have an adverse impact on our financial condition, results of operations, and cash flows during the duration of their down cycle.
Historically, we have experienced significant cost savings and productivity benefits relating to our ongoing operational excellence program; however, these benefits may not continue indefinitely or at the same levels.
Historically, we have experienced significant cost savings and productivity benefits relating to our ongoing operational excellence program as it relates toin our tobacco operations that have supported our margins during periods of significant attrition in the tobacco industry.FBS segment. We expect to continue to achieve significant savings and benefits from this program; however, in light of continued industry attrition, execution risks and other factors, we may be unable to continue in the future to obtain savings and benefits in line with historical achievements, and our profitability and financial results could be adversely affected.
Similarly, though we have initiated implementation of this program in our AMSATM business operations in order to achieve margin improvements, due to the different company cultures of the acquisitions that make up a significant part of AMSATM and our continuing integration of these acquisitions, we may not be able to achieve the desired margin improvements through our operational excellence program at AMS.ATM.
Our foreign sales and operations may be adversely affected by supply chain disruptions due to political unrest, terrorist acts, and national and international conflict, including Russia's invasion of Ukraine.
We conduct a portion of our sales and manufacturing outside the United States. Our foreign sales and operations are subject to a number of risks, including political and economic instability, which could have a material adverse impact on our ability to increase or maintain our international sales and operations. National and international conflicts such as war, border closures, civil disturbances and terrorist acts, including Russia's invasion of Ukraine, may increase the likelihood of already strained supply interruptions and further hinder our ability to access the materials and energy we need to manufacture our products. Additional supply chain disruptions will make it harder for us to find favorable pricing and reliable sources for the materials and energy we need. As a result, such disruptions will put upward pressure on our costs and increase the risk that we may be unable to acquire the materials and energy we need to continue to make certain products, in particular at our manufacturing facilities in Europe.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2019,2022, we operated a total of 2247 production facilities on four continents.
The following are the locations of ourOur principal production facilities as of December 31, 2019. Except as otherwise noted, we own the facilities listed2022 are summarized below:
| | | | | | | | | | | |
Geographic Region | ATM | | FBS |
U.S. | 17 | | 8 |
Europe1 | 11 | | 5 |
Asia/Pacific (including China)2 | 3 | | 0 |
Americas (excluding U.S.) | 2 | | 1 |
Total3 | 33 | | 14 |
|
| | | | | | | | |
Advanced Materials & Structures Segment Production Locations | | Approximate Square Footage of Buildings | | Engineered Papers Segment Production Locations | | Approximate Square Footage of Buildings |
Middletown Manufacturing Site | | | | Spotswood Plant | | |
Middletown, Delaware | | 142,000 |
| | Spotswood, New Jersey | | 399,000 |
|
| | | | | | |
Tubing Operations* | | | | Papeteries de Saint-Girons Plant | | |
Richland, Pennsylvania | | 35,000 |
| | Saint-Girons, France | | 214,000 |
|
| | | | | | |
Tubing Operations* | | | | PDM Industries Plant | | |
El Cajon, California | | 22,000 |
| | Quimperlé, France | | 592,000 |
|
| | | | | | |
Suzhou Manufacturing Site* | | | | Pirahy Plant | | |
Suzhou, China | | 108,000 |
| | Piraí, Brazil | | 1,098,000 |
|
| | | | | | |
Poland Manufacturing Site* | | | | Poland Plant* | | |
Strykow, Poland | | 42,000 |
| | Strykow, Poland | | 125,000 |
|
| | | | | | |
Gilberdyke Manufacturing Site | | | | Newberry Operation | | |
Gilberdyke, United Kingdom | | 67,000 |
| | Prosperity, South Carolina | | 50,000 |
|
| | | | | | |
Wilson Manufacturing Site* | | | | Fiber Operation | | |
Wilson, North Carolina | | 108,000 |
| | Manitoba, Canada | | 16,000 |
|
| | | | | | |
Argotec Manufacturing Operations* | | | | LTR Industries Plant | | |
Greenfield, Massachusetts | | 182,000 |
| | Spay, France | | 736,000 |
|
| | | | | | |
Minneapolis Manufacturing Site* | | | | Ancram Plant | | |
Minneapolis, Minnesota | | 144,000 |
| | Ancram, New York | | 116,000 |
|
| | | | | | |
Athens Manufacturing Site | | | | | | |
Athens, Georgia | | 200,000 |
| | | | |
| | | | | | |
Roanoke Manufacturing Site | | | | | | |
Roanoke, Virginia | | 40,000 |
| | | | |
| | | | | | |
Chicago Manufacturing Site* | | | | | | |
Chicago, Illinois | | 66,000 |
| | | | |
| | | | | | |
European Manufacturing Site | | | | | | |
Genk, Belgium | | 90,000 |
| | | | |
| | | | | | |
* Leased properties | | | | | | |
During 2017 we acquired five production locations(1) The manufacturing site in conjunction with our acquisition of Conwed.
We had approximately 152,000 metric tons of annual paper production capacity, dependent upon the production mix. Capacity utilization was 90% for EP products in 2019 compared with 80% in 2018. We also operate flax fiber processing operations in Canada and printing operations in France,Strykow, Poland and Quakertown, Pennsylvania serve both the U.S.ATM and FBS segments.
(2) Does not include two sites owned by the two Chinese joint-ventures in which we have a non-controlling investment.
We maintain administrative and/or sales offices in Alpharetta, Georgia; Quimperlé, France; Spay, France; Shanghai, China; Piraí, Brazil; Moscow, Russia; Strykow, Poland; Middletown, Delaware; Greenfield, Massachusetts; Luxembourg City, Luxembourg; and Minneapolis, Minnesota. Our world headquarters are located in Alpharetta, Georgia. All of these offices are owned except for those located in Alpharetta, Shanghai, Moscow, Strykow, Greenfield, Minneapolis, and Luxembourg City which are leased.(3) Includes leased sites as follows: United States - 7, Europe - 3, Asia/Pacific - 3, Americas - 1.
We consider all of our facilities to be well-maintained, suitable for conducting our operations and business, and adequately insured.
Item 3. Legal Proceedings
General
We are involved in various legal proceedings relating to contracts, commercial disputes, taxes, environmental issues, employment and workers' compensation claims, product liability and other matters. We periodically review the status of these proceedings with both inside and outside counsel. We believe that the ultimate disposition of these matters will not have a material effect on the results of operations in a given quarter or year, but no assurances can be given in this regard. Below is a summary of major outstanding litigation.
Litigation
Brazil
Imposto sobre Circulação de Mercadorias e Serviços ("ICMS"), a form of value-added tax in Brazil, was assessed to our legal entity in Brazil, Schweitzer-Mauduit do Brasil Indústria e Comércio de Papel Ltda., which owns EP segment's Brazilian plant, ("SWM-B") in December of 2000. SWM-BSWM-Brazil "SWM-B" received two assessments from the tax authorities of the State of Rio de Janeiro (the "State") for unpaid Imposto sobre Circulação de Mercadorias e Serviços ("ICMS") and Fundo Estadual de Combate à Pobreza ("FECP") value-added taxes on interstate purchases of electricity. The State issued four sets of assessments against SWM-B for periods from May 2006 through December 2017 (collectively, the "Electricity Assessments"). The first through fourth assessments were received in February 2008, June 2011, October 2013, and August 2018, respectively.
SWM-B challenged all Electricity Assessments in administrative proceedings before the State tax council (in the Junta de Revisão Fiscal “first-level administrative court” and the Conselho de Contribuintes “administrative appellate court”) based on Resolution 1.610/89, which defers these taxes on electricity purchased by an "electricity-intensive consumer." In 2014, a majority of the administrative appellate court sitting en banc ruled against SWM-B in each of the first and second Electricity Assessments ($11.0 million based on the foreign currency exchange rate at December 31, 2022), 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. In March 2020, the first-level judicial court ruled in favor of SWM-B in the second Electricity Assessment, a decision that is now on appeal. The third Electricity Assessment was dismissed on technical grounds in 2018. In August 2018, the State filed revised fourth Electricity Assessments for a combined amount of $9.0 million. SWM-B filed challenges to these
2018 assessments in the first-level administrative court on the same grounds as the older cases, receiving unfavorable rulings from the courts in 2019. Both 2019 decisions are being appealed. 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; as such so no loss has been accrued in our consolidated financial statements.
In December of 2000, SWM-B received two assessments from the tax authorities of 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-tobacconon-combustible 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,An adverse judgement was received during 2019 the second chamber of the Federal Supreme Court decided Assessment 2 against SWM-B in the amount of approximately $12 million. SWM-B, with assistance of outside counsel, is currently evaluating the decision and exploring its options and other defenses to partially satisfy or reduce the judgment and SWM-B plans to pursue these avenues vigorously. However, because the outcome of any reductions and defenses is uncertain, SWM-B recorded an expense sufficient to satisfy this amount in the second quarter of 2019. This judgment may be settled over the course of 60 months; however, we have requested that the Court clarify its decision. Until a decision is rendered on our request, we are not obligated to initiate payments. Interest and penalties will continue to accrue until a decision on our request is rendered.
The amounts recorded in the accompanying consolidated statement of income for the year ended December 31, 2019 related to the above two assessments consist of the following:
|
| | | |
| Year Ended December 31, 2019 |
Income Statement Classification | (Expense) Benefit |
Cost of products sold1 | $ | (1.5 | ) |
Operating profit1 | (1.5 | ) |
Other expense2 | (2.2 | ) |
Interest expense2 | (7.1 | ) |
Income from continuing operations before income taxes | (10.8 | ) |
Income tax benefit | 4.2 |
|
Net income | $ | (6.6 | ) |
1Cost of products sold reflects the net of $2.6 million of expense associated with the Raw Materials Assessment and $1.1 million benefit associated with separate litigation against the Brazilian Instituto Nacional do Seguro Social ("INSS"), the Brazilian Social Security Administration, regarding additional assessments of social security contributions charged to the Company in the early 1990s. This benefit is expected to be received in tax credits to be applied against future payments of social security taxes over the following ten to twelve months. Amounts are reflected in Engineered Papers reporting segment in segment disclosures.
2Other expense includes penalties and fees associated with the Raw Materials Assessment. Interest expense relates to the Raw Materials Assessment.
SWM-B received assessments from the tax authorities of the State for unpaid ICMS and Fundo Estadual de Combate à Pobreza ("FECP," a value-added tax similar to ICMS) taxes on interstate purchases of electricity. The State issued four sets of assessments against SWM-B, one for May 2006 - November 2007, a second for January 2008 - December 2010, a third for September 2011 - September 2013, which was replaced by a smaller assessment for January - June 2013, and a fourth for July 2013 - December 2017 (collectively the "Electricity Assessments"). SWM-B challenged all Electricity Assessments in administrative proceedings before the State tax council (in the first-level court Junta de Revisão Fiscal and the appellate court (the "Conselho de Contribuintes")) based on Resolution 1.610/89, which defers these taxes on electricity purchased by an "electricity-intensive consumer." In 2014, a majorityprovision of the Conselho de Contribuintes sitting en banc ruled against SWM-B in each of the first and second electricity assessments ($4$8.6 million and $7 million, respectively, based(based on the foreign currency exchange rate at DecemberMarch 31, 2019), and2021) was recorded in Other Liabilities. On April 9, 2021, SWM-B resolved the Raw Materials Assessment by paying $2.6 million (based on the foreign currency exchange rate at March 31, 2021) under a tax amnesty program which reduced the tax liability by approximately 70%. All litigation is now pursuing challenges to these assessmentsconcluded on this matter which is fully resolved. As the result of the favorable settlement, we recognized a total benefit of $6.1 million in the State judicial system. Different chambersfirst quarter of the judicial court granted SWM-B preliminary injunctions against enforcement2021, of these two assessmentswhich $4.6 million was in the State judicial system. The Conselho de Contribuintes unanimously upheld SWM-B's challenge to the third Electricity AssessmentInterest expense and dismissed this Electricity Assessment on technical grounds after the State admitted the tax did not apply as it had asserted. Instead,$1.6 million was in August 2018, the State filed a revised Electricity Assessment in the amount of $1 million for ICMS on electricity purchased during part of 2013. In August 2018, the State filed a fourth Electricity Assessment in the amount of $10 million pertaining to ICMS and FECP on electricity purchased from July 2013 to December 2017. SWM-B filed challenges to these recent assessments in the first-level administrative court on the same grounds as the older cases. Both the Junta de Revisão Fiscal and the Conselho de Contribuintes ruled against SWM-B in the last two Electricity Assessments. SWM-B plans to appeal these rulings to the full bench of the Conselho de Contribuintes. The State issued a new regulation effective January 1, 2018 that only specific industries are “electricity-intensive consumers,” a list that excludes paper manufacturers. SWM-B contends this regulation shows that paper manufacturers were electricity-intensive consumers eligible to defer ICMS before 2018.Other expense, net.
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 1482815EP1482815 against Glatz. The Company filed an action against Glatz in the German District Court to set the amount of damages for the infringement and Glatz has filed a counterclaim. Glatz filed an action in the German Patent Court to invalidate the German part of EP1482815. The trial on this invalidityGerman Patent Court held that some of the patent claims at issue were invalid and also that another claim at issue was valid. The Company has appealed the portion of the decision with respect to the claims held to be invalid. The German Supreme Court held that the claims of German counterpart of EP1482815 relevant to the Glatz infringement action were invalid. The ruling has not yet been scheduled.the effect of nullifying the infringement decision and injunction against Glatz and the Company's claim for damages against Glatz. Glatz's counterclaim against the Company is still pending and is scheduled for hearing in March 2023. 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.
The Company cannot determine the outcome of the patent infringement matters; as such, no loss has been accrued in our consolidated financial statements.
Environmental Matters
OurThe Company's operations are subject to various nations' federal, state and local laws, regulations and ordinances in various nations relating to environmental matters. The nature of ourthe Company's operations exposes usit to the risk of claims with respect to various environmental matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. While we havethe 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, we believeit believes that theits future cost of compliance with environmental laws, regulations and ordinances, ourand its exposure to liability for environmental claims and ourits obligation to participate in the remediation and monitoring of certain hazardous waste disposal sites, will not have a material effect on ourits 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 usthe 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 our financial condition or results of operations.
The Company incurs spending necessary to meet legal requirements and otherwise relating to the protection of the environment at its facilities in the U.S., France, Poland, Brazil, China, the United Kingdom and Canada. For these purposes, the Company incurred total capital expenditures of $1.2 million in 2019, and expects to incur less than $1.0 million in each of 2020 and 2021, of which no material amount is the result of environmental fines or settlements. Should the Company make material changes in the operations at a facility it is possible such changes could generate environmental obligations that might require remediation or other action, the nature, extent and cost of which are not presently known. The foregoing capital expenditures are not expected to reduce the Company's ability to invest in other appropriate and necessary capital projects and are not expected to have a material adverse effect on its financial condition or results of operations.
Indemnification Matters
In connection with our spin-off from Kimberly-Clark in 1995, we undertook to indemnify and hold Kimberly-Clark harmless from claims and liabilities related to the businesses transferred to us that were not identified as excluded liabilities in the related agreements. As of December 31, 2019,2022, there arewere no material claims pending under this indemnification.
Item 4. Mine Safety Disclosures
Not applicable.
PART II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information. Since November 30, 1995, ourOur common stock, $0.10 par value per share ("Common Stock") has been listedis trading on the New York Stock Exchange (NYSE") under the symbol "MATV." Prior to the Merger, our Common Stock was listed on the NYSE, trading under the symbol "SWM.""SWM" since November 30, 1995. On February 28, 2020,22, 2023, our stock closed at $33.72$25.70 per share.
Performance Graph. The following graph compares the total cumulative stockholder return on our Common Stock during the period from December 31, 20142017 through December 31, 2019,2022 with the comparable cumulative total returns of the Russell 2000, Index, the S&P SmallCap 600 Capped Materials Index and self-constructed peer group, both of which we consider to be reflective of the performance of the industries in which we operate. The peer group portfolio includes ten U.S. based materials companies including Berry Global Group Inc, Clearwater Paper Corp., Glatfelter Corp., Graphic Packing Holding Corp, Greif Inc., Deluxe Corp., Rayonier Advanced Materials Inc., Sealed Air Corp, Essentra Plc, and Eastman Chemical Co. In 2021, the peer group included Neenah Inc. and Intertape Polymer Group Inc., which were acquired during 2022 and are no longer peer group public entities. They were replaced with Deluxe Corp. and Eastman Chemical Co.
The graph assumes that the value of the investments in the Common Stock and each index were $100 on December 31, 20142017, and that all dividends were reinvested. The stock price performance shown on the graph below is not necessarily indicative of future price performance.
Comparison of Cumulative Five YearFive-Year Return
Holders. As of March 2, 2020,February 22, 2023, there were 1,6071,895 stockholders of record.
Dividends. We have declared and paid cash dividends on our Common Stock every fiscal quarter since the second quarter of 1996. In 2019, 20182022, 2021 and 2017,2020, we declared and paid cash dividends totaling $1.68, $1.76, per share, $1.73 per share and $1.69$1.76 per share, respectively. On February 20, 2020,22, 2023, we announced a cash dividend of $0.44$0.40 per share payable on March 20, 202024, 2023 to stockholders of record as of the close of business on March 4, 2020.7, 2023. Our credit agreement covenants require that we maintain certain financial ratios, as disclosed in Note 15.14. Debt of the Notes to Consolidated Financial Statements, none of which under normal business conditions materially limit our ability to pay such dividends. We
will continue to assess our dividend policy in light of our overall strategy, cash generation, debt levels and ongoing requirements for cash to fund operations and to pursue possible strategic opportunities.
Recent Sales of Unregistered Securities. We had no unregistered sales of equity securities during the fiscal year ended December 31, 2019.2022.
Repurchases of Equity Securities. The following table indicates the cost of and number of shares of our Common Stock we have repurchased during 20192022 and the remaining amount of share repurchases currently authorized by our Board of Directors as of December 31, 2019:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuer Purchases of Equity Securities |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Programs |
| | | | | | (# shares) | | (in millions) | | (in millions) |
January 1-March 31, 2022 | | 94,847 | | | $ | 30.96 | | | — | | | $ | — | | | $ | — | |
April 1-June 30, 2022 | | 1,387 | | | 27.50 | | | — | | | — | | | — | |
July 1-September 30, 2022 | | 158,428 | | | 21.65 | | | — | | | — | | | — | |
October 1-October 31, 2022 | | 13,244 | | | 23.90 | | | — | | | — | | | — | |
November 1-November 30, 2022 | | 3,926 | | | 23.49 | | | — | | | — | | | — | |
December 1-December 31, 2022 | | 1,195 | | | 20.35 | | | — | | | — | | | — | |
Total 2022 | | 273,027 | | | $ | 25.04 | | | — | | | $ | — | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | |
Issuer Purchases of Equity Securities |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Programs |
| | | | | | (# shares) | | ($ in millions) | | ($ in millions) |
January 1-March 31, 2019 | | 24,372 |
| | $ | 37.59 |
| | — |
| | $ | — |
| | $ | — |
|
April 1-June 30, 2019 | | 773 |
| | 34.84 |
| | — |
| | — |
| | — |
|
July 1-September 30, 2019 | | 152 |
| | 33.33 |
| | — |
| | — |
| | — |
|
October 1-October 31, 2019 | | — |
| | — |
| | — |
| | — |
| | — |
|
November 1-November 30, 2019 | | — |
| | — |
| | — |
| | — |
| | — |
|
December 1-December 31, 2019 | | — |
| | — |
| | — |
| | — |
| | — |
|
Total 2019 | | 25,297 |
| | $ | 37.48 |
| | — |
| | $ | — |
| | $ | — |
|
Transactions represent the purchase of vested restricted shares from employees to satisfy minimum tax withholding requirements upon vesting of stock-based awards. Refer to Note 19. Stockholder's Equity of the Notes to Consolidated Financial Statements.
We sometimes use corporate 10b5-1 plans to allow for share repurchases to be made at predetermined stock price levels, without restricting such repurchases to specific windows of time. Any future common stock repurchases will be dependent upon various factors, including the stock price of our Common Stock, strategic opportunities, strategic outlook and cash availability. From time-to-time, certain of our officers and directors may sell shares pursuant to personal 10b5-1 plans.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunctionDue to the significance of the merger with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations,"Neenah, Inc. and the consolidatedresulting change in our reportable segments, management deemed the historical selected information is not informative; and, therefore, it is intentionally omitted. Refer to the supplemental combined legacy financial statements and related notes within this Annualinformation in the Company's Current Report on Form 10-K. The results for 2017 and 2015 include results of operations of Conwed and Argotec from the date of their acquisitions of January 20, 2017 and October 28, 2015, respectively. All dollar amounts are in millions except per share amounts, statistical data and ratios.8-K filed on December 22, 2022.
|
| | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 (1) | | 2016 (1) | | 2015 (1) |
Results of Operations | | | | | | | | | |
Net sales | $ | 1,022.8 |
| | $ | 1,041.3 |
| | $ | 982.1 |
| | $ | 839.9 |
| | $ | 764.1 |
|
Cost of products sold | 732.8 |
| | 762.8 |
| | 698.7 |
| | 582.0 |
| | 538.3 |
|
Gross profit | 290.0 |
| | 278.5 |
| | 283.4 |
| | 257.9 |
| | 225.8 |
|
Nonmanufacturing expenses | 152.3 |
| | 141.8 |
| | 147.0 |
| | 122.3 |
| | 104.8 |
|
Restructuring & impairment expense | 3.7 |
| | 1.7 |
| | 8.1 |
| | 25.6 |
| | 14.6 |
|
Operating profit | 134.0 |
| | 135.0 |
| | 128.3 |
| | 110.0 |
| | 106.4 |
|
Income from continuing operations | 85.8 |
| | 94.8 |
| | 34.4 |
| | 82.8 |
| | 90.5 |
|
Income (loss) from discontinued operations | — |
| | (0.3 | ) | | 0.1 |
| | — |
| | (0.8 | ) |
Net income | $ | 85.8 |
| | $ | 94.5 |
| | $ | 34.5 |
| | $ | 82.8 |
| | $ | 89.7 |
|
| | | | | | | | | |
Net income (loss) per share - basic: | | | | | | | | | |
Income from continuing operations | $ | 2.78 |
| | $ | 3.08 |
| | $ | 1.12 |
| | $ | 2.71 |
| | $ | 2.97 |
|
(Loss) income from discontinued operations | — |
| | (0.01 | ) | | — |
| | — |
| | (0.02 | ) |
Net income per share - basic | $ | 2.78 |
| | $ | 3.07 |
| | $ | 1.12 |
| | $ | 2.71 |
| | $ | 2.95 |
|
| | | | | | | | | |
Net income (loss) per share - diluted: | | | | | | | | | |
Income from continuing operations | $ | 2.76 |
| | $ | 3.07 |
| | $ | 1.12 |
| | $ | 2.70 |
| | $ | 2.96 |
|
(Loss) income from discontinued operations | — |
| | (0.01 | ) | | — |
| | — |
| | (0.02 | ) |
Net income per share - diluted | $ | 2.76 |
| | $ | 3.06 |
| | $ | 1.12 |
| | $ | 2.70 |
| | $ | 2.94 |
|
| | | | | | | | | |
Cash dividends declared and paid per share | $ | 1.76 |
| | $ | 1.73 |
| | $ | 1.69 |
| | $ | 1.62 |
| | $ | 1.54 |
|
EBITDA from continuing operations(2) | $ | 195.1 |
| | $ | 193.9 |
| | $ | 192.4 |
| | $ | 157.6 |
| | $ | 162.8 |
|
Adjusted EBITDA from continuing operations (2) | $ | 197.2 |
| | $ | 196.9 |
| | $ | 197.9 |
| | $ | 178.4 |
| | $ | 162.0 |
|
Percent of Net Sales | | | | | | | | | |
Gross profit | 28.4 | % | | 26.7 | % | | 28.9 | % | | 30.7 | % | | 29.6 | % |
Nonmanufacturing expenses | 14.9 | % | | 13.6 | % | | 15.0 | % | | 14.6 | % | | 13.7 | % |
Financial Position | | | | | | | | | |
Capital spending | $ | 28.6 |
| | $ | 27.0 |
| | $ | 37.2 |
| | $ | 27.8 |
| | $ | 24.2 |
|
Depreciation and amortization | 57.7 |
| | 61.6 |
| | 59.5 |
| | 44.5 |
| | 41.0 |
|
Total assets | 1,471.7 |
| | 1,466.5 |
| | 1,542.5 |
| | 1,173.7 |
| | 1,290.0 |
|
Total debt | 542.7 |
| | 622.1 |
| | 684.2 |
| | 440.4 |
| | 571.5 |
|
Total debt to capital ratio | 47.6 | % | | 52.7 | % | | 55.6 | % | | 46.4 | % | | 55.0 | % |
| |
(1) | In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The amendment requires an employer to report the service cost component in the same line item or line items as other compensation costs arising from services rendered by the pertinent employees during the period. The other |
components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal from operations. The Company adopted this ASU effective January 1, 2018, utilizing the retrospective transition approach upon adoption. The adoption of this guidance resulted in a reclassification of the components of net periodic pension cost, other than service cost, from Cost of products sold and General expense to Other income (expense), net, in the Consolidated Statements of Income. The reclassification of these costs affects only the EP segment, as there are no pension costs associated with the AMS segment. For the years ended December 31, 2017, 2016 and 2015, respectively, $3.6 million, $3.9 million and $3.4 million in pension expense were reclassified from Operating profit to Other expense in the consolidated statement of income for the 2017, 2016 and 2015 comparative periods. The adoption of this guidance had no effect on Net income in the Consolidated Statements of Income and no effect on the other consolidated financial statements.
| |
(2) | Earnings before interest, taxes, depreciation and amortization ("EBITDA") from Continuing Operations is a non-GAAP financial measure that is calculated by adding interest expense, income tax provision and depreciation and amortization expense to income from continuing operations. Adjusted EBITDA from Continuing Operations is a non-GAAP financial measure that is calculated by adding restructuring and impairment expense, Loss (income) from equity affiliates and Other (income) expense, net to EBITDA from continuing operations. We caution investors that amounts presented in accordance with our definitions of EBITDA from Continuing Operations and Adjusted EBITDA from Continuing Operations may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate EBITDA from Continuing Operations and Adjusted EBITDA from Continuing Operations in the same manner. We present EBITDA from Continuing Operations and Adjusted EBITDA from Continuing Operations because we consider them to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Reconciliations to income from continuing operations are as follows ($ in millions): |
|
| | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Income from continuing operations | $ | 85.8 |
| | $ | 94.8 |
| | $ | 34.4 |
| | $ | 82.8 |
| | $ | 90.5 |
|
Plus: Interest expense | 36.1 |
| | 28.2 |
| | 26.9 |
| | 16.6 |
| | 9.7 |
|
Plus: Income tax provision | 15.2 |
| | 10.7 |
| | 69.6 |
| | 15.4 |
| | 21.6 |
|
Plus: Depreciation and amortization(1) | 58.0 |
| | 60.2 |
| | 61.5 |
| | 42.8 |
| | 41.0 |
|
EBITDA from continuing operations | 195.1 |
| | 193.9 |
| | 192.4 |
| | 157.6 |
| | 162.8 |
|
Plus: Restructuring and impairment expense | 3.7 |
| | 1.7 |
| | 8.1 |
| | 25.6 |
| | 14.6 |
|
Plus: Loss (income) from equity affiliates | (4.1 | ) | | 11.3 |
| | (2.5 | ) | | (4.8 | ) | | (6.6 | ) |
Plus: Other (income) expense, net | 1.0 |
| | (10.0 | ) | | (0.1 | ) | | — |
| | (8.8 | ) |
Plus: Litigation related expenses | 1.5 |
| | — |
| | — |
| | — |
| | — |
|
Adjusted EBITDA from continuing operations | $ | 197.2 |
| | $ | 196.9 |
| | $ | 197.9 |
| | $ | 178.4 |
| | $ | 162.0 |
|
| |
(1) | A total of ($0.3) million, $1.4 million, ($2.0) million, $1.7 million, and $0.0 million, primarily related to amortization of deferred debt issuance costs, amortization of bond discount, and amortization of gains from termination of interest rate swaps in 2019, 2018, 2017, 2016, and 2015, respectively, are excluded from the Depreciation and amortization in the table above. The deferred debt issuance costs, amortization of bond discount and amortization of gains from the termination of interest rate swaps are included in Interest expense. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of our financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K and the selected financial data included in Part II, Item 6, "Selected Financial Data" of this Annual Report on Form 10-K. The discussion of our financial condition and results of operations includes various forward-looking statements about our markets, the demand for our products and our future prospects. These statements are based on certain assumptions that we consider reasonable. For information about risks and exposures relating to us and our business, you should read the sections entitled "Factors That May Affect Future Results," in Part I, Item 1A of this Annual Report on Form 10-K and "Forward Looking Statements" at the end of this Item 7. Unless the context indicates otherwise, references to "SWM,"Mativ," the "Company," "we," "us," "our," or similar terms include Schweitzer-Mauduit International,Mativ Holdings, Inc. and our consolidated subsidiaries.
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our financial statements with an understanding of our recent performance, our financial condition and our prospects. The following will be discussed
Merger
On July 6, 2022, the Company completed its previously announced merger with Neenah, Inc. ("Neenah") under the terms of an Agreement and analyzed:
SUMMARY;
CRITICAL ACCOUNTING POLICIES AND ESTIMATES;
RECENT ACCOUNTING PRONOUNCEMENTS;
RESULTS OF OPERATIONS;
LIQUIDITY AND CAPITAL RESOURCES;
OTHER FACTORS AFFECTING LIQUIDITY AND CAPITAL RESOURCES;
OUTLOOK;Plan of Merger ("Merger Agreement"), pursuant to which a wholly-owned subsidiary merged with and
FORWARD-LOOKING STATEMENTS.
SUMMARY
In 2019, SWM reported net income into Neenah (the "Merger"), with Neenah surviving as a direct and wholly-owned subsidiary of $85.8 million on total net sales of $1,022.8 million. Comparedthe Company. Pursuant to the prior year, net sales decreased $18.5 million, however excluding negative currency impact, net sales would have increased $2.7 million due primarily to an increase in organic salesMerger Agreement, each share of Neenah common stock outstanding was exchanged for 1.358 shares of common stock in the AMS segment.
Net income decreased to $85.8 million in 2019 compared to $94.5 million in 2018. Outside of typical business drivers, several large one-time items affect the year-over-year comparison. In 2019, these items included $6.6 million (after- tax) of expenses related to Brazil tax assessments, and in 2018 includedCompany. As a $15.0 million (after-tax) impairmentresult of the Company’s interest in oneMerger, the Company issued approximately 22.8 million shares of its joint venturescommon stock to Neenah shareholders under the terms of the Merger Agreement. Based on our closing stock price on July 5, 2022, the total value of shares issued to Neenah shareholders was approximately $534.1 million.
Upon completion of the Merger, the Company changed its name to Mativ Holdings, Inc. Shares of the Company's common stock commenced trading on the New York Stock Exchange under the ticker symbol "MATV" as of market open on July 6, 2022. The Company's previous ticker symbol was "SWM". Refer to Note 5. Business Acquisitions in China, a $7.7 million (after-tax) favorable revaluation of a contingent consideration liabilitythe Notes to Consolidated Financial Statements for further information related to the Conwed acquisition, and a favorable $13.0 million tax adjustment relatedMerger.
Prior to the Tax Act. Business trendscompletion of the Merger, we operated in two reporting segments: Advanced Materials & Structures and Engineered Papers. Effective with the Merger, the reporting segments are: Advanced Technical Materials ("ATM") and Fiber-Based Solutions ("FBS"). ATM is comprised of the legacy SWM Advanced Materials & Structures segment and FBS is comprised of the legacy SWM Engineered Papers segment. As such, there were no changes to the historical results of these segments. The merged Neenah segments have been allocated to ATM and FBS based on performance, market focus, technologies, and reporting structure. Refer to Note 21. Segment Information in the Notes to Consolidated Financial Statements for further information on our segments.
This MD&A discusses the financial condition and results of operations of the Company as of and for the year ended December 31, 2022, which includes Neenah.
During the year ended December 31, 2022, the Company became aware of a cyber attack that were key drivershad been made against certain systems within the Company’s network environment. The attack temporarily affected operations and caused delays in execution of year-over-yearsales transactions at some locations. In addition, the Company incurred financial performance included sales growthcosts to investigate and remediate the incident, some of which are expected to be mitigated by insurance. During the incident, the attackers accessed and exfiltrated Company data, including some personally identifying information of certain Company employees. The Company believes it has contained the incident, which only affected certain systems, and it has restored operations and notified affected individuals. The Company has put in AMS, positive price/mix benefits in EP, cost reduction activities in both segments,place remediation measures designed to help prevent future similar attacks and an improved raw materials cost environment across the business.has proactively undertaken to implement certain other enhancements to its security system.
Cash provided by operations was $160.3 million in 2019 up from $139.1 million in 2018. Uses of cash during 2019 included $80.5 million in net debt repayments, $54.4 million in cash dividends paid to SWM stockholders and $28.6 million of capital spending.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We disclose those accounting policiesestimates that we consider to be significant in determining the amounts to be utilized for communicating our consolidated financial position, results of operations and cash flows in the first note to our consolidated financial statements included elsewhere herein. Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S., which require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported and disclosure of contingencies. Changes in these estimates could have a material impact on our financial position, results of operations, and cash flows. We discussed with the Audit Committee of the Board of Directors the estimates and judgments made for each of the following items and our accounting for and presentation of these items in the accompanying consolidated financial statements:
Accounting for Income Taxes
Our income tax expense (benefit), deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. The complexity of our global structure requires significant judgments and estimatestechnical expertise in determining the allocation of income to each of these jurisdictions and consolidated income tax expense.expense (benefit).
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Accounting Standards Codification Topic No. 740, Income Taxes ("ASC 740"), states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. We (1) record unrecognized tax benefits as liabilities in accordance with ASC 740 and (2) adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.
On December 22, 2017, the Tax Cut and Jobs Act (the “Tax Act”) was enacted into law effective January 1, 2018. The new legislation contains several key tax provisions that affected the Company, and include but are not limited to a one-time deemed repatriation tax on post-1986 accumulated earnings and profits of the foreign subsidiary undistributed earnings (“transition tax”), a reduction of the federal corporate income tax rate from 35% to 21%, a new deduction for Foreign-Derived Intangible Income ("FDII"), and a new provision designed to tax Global Intangible Low Taxed Income (“GILTI”) of foreign subsidiaries effective January 1, 2018. As a result of the GILTI provision, the FASB issued Staff Q&A Topic 740, No. 5 “Accounting for Global Intangible Low-Taxed Income” requiring an entity to make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for GILTI as a current period expense when incurred. Management makes certain judgments in interpreting the manner in which complex key provisions of the Tax Act should be applied and in the determination of income tax expense and liabilities.
Revenue Recognition
We have two main sources of revenue: product sales and materials conversion. We recognize product sales revenuesrevenue when control of a product is transferred to the customer. For the majority of product sales, transfer of control occursControl is transferred when the products are shipped from one of our manufacturing facilities to the customer. The cost of delivering finished goods to our customers is recorded as a component of cost of products sold. Those costs include the amounts paid to a third party to deliver the finished goods. Any freightFreight costs billed to and paid by a customer are included in net sales. We also provide services to customers through the conversion of customer-owned raw materials into processed finished goods. In these transactions, we generally recognize revenue as processing is completed.
Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied, which generally occurs when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Generally, we consider collectability of amounts due under a contract to be probable upon inception of a sale based on an evaluation of the credit worthiness of each customer. If collectability is not considered to be probable, we defer
recognition of revenue on satisfied performance obligations until the uncertainty is resolved. Any variable consideration, such as discounts or price concessions, is set forth in the terms of the contract at inception and is included in the assessment of the transaction price at the outset of the arrangement. We estimate these amounts at least quarterly based on the expected forecast quantities to be provided to customers and reduce revenues recognized accordingly. The transaction price is allocated to the individual performance obligations due under the contract based on the relative stand-alone fair value of the performance obligations identified in the contract. We typically use an observable price to determine the stand-alone selling price for separate performance obligations.
We do not typically include extended payment terms or significant financing components in our contracts with customers. Certain product sales contracts may include cash-based incentives (volume rebates or credits), which are accounted for as variable consideration. We estimate these amounts at least quarterly based on the expected forecast quantities to be provided to customers and reduce revenues recognized accordingly. Incidental items that are immaterial in the context of the contract are recognized as expense in the period incurred. We generally expense sales commissions when incurred because the amortization period is one year or less. These costs are recorded within sales and marketing expenses. We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. As a practical expedient, we treat shipping and handling activities that occur after control of the good transfers as fulfillment activities, and therefore, does not account for shipping and handling costs as a separate performance obligation.
Accounting for Contingencies
We accrue an estimated loss by taking a charge to income when the likelihood that a future event, such as a legal proceeding, will result in a loss or the incurrenceoccurrence of a liability is probable, and the amount of loss can be reasonably estimated. We disclose material contingencies if there is at least a reasonable possibility that a loss has been incurred. In determining whether a loss should be accrued, we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial condition, results of operations, and our cash flows.
For further information, please seerefer to "Litigation" in Part I, Item 3, "Legal Proceedings" and Note 21.20. Commitments and Contingencies of the Notes to Consolidated Financial Statements.
Property, Plant and Equipment Valuation
Certain of our manufacturing processes are capital intensive; as a result, we make substantial investments in property, plant and equipment which are recorded at cost. Net property, plant and equipment comprised 22%24% of our total assets as of December 31, 2019.2022. Property, plant and equipment is depreciated on the straight-line method over the estimated useful lives of the assets. Production machines and related equipment are not subject to substantial technological changes rendering them obsolete and are generally depreciated over estimated useful lives of 105 to 20 years. When indications of impairment exist, we assess the likelihood of recovering the cost of long-lived assets based on our expectation of future profitability and undiscounted cash flow of the related asset group. These factors, along with management's plans with respect to the operations, are considered in assessing the recoverability of property, plant and equipment. Changes in management's estimates and plans could significantly impact our financial condition, results of operations and cash flows.
As a result of excess capacity in the tobacco-related papers industryFBS end-markets and increased purchased material and operating costs experienced in the last several years, competitive selling prices for certain of our products are not sufficient to cover our costs with a reasonable margin. Such competitive pressures have resulted in downtime of certain paper machines and, in some cases, accelerated depreciation or impairment of certain equipment.equipment, and employee severance. We have also incurred restructuring costs in our AMSATM segment in pursuit of synergies from integrating our acquisitions. Over the past sixIn recent years, we have restructured our operations to improve our competitiveness and profitability. As a result, we incurred significant charges related to asset impairments, accelerated depreciation and employee severances.
In 2011, the Company revised its plans for RTL expansion in Asia and suspended the construction of the Philippine Greenfield site. In 2015, the Company made the decision to dispose of the facility and related equipment. The Company reviewed these assets at each reporting period and recognized an impairment charge for the excess of carrying value of the assets over the fair value less any costs to sell. During 2017, the Company recognized impairment charges of $4.0 million related to the RTL Philippines assets. The Company did not record any additional impairment charges during 2018 or 2019. The legal entity and its related assets were sold on December 18, 2019 for total consideration of $13.3 million, and the Company recorded a net gain of $0.3 million.
Management continues to evaluate how to operate our production facilities more effectively. Further restructuring actions are possible that might require additional impairments or accelerated depreciation of some equipment.
Business Combinations
Accounting for business combinations requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed ("net assets") at their acquisition date fair values. Goodwill is measured as the excess of consideration transferred over the net assets acquired at their respective fair values as of the acquisition date. The estimated fair values are based upon quoted market prices and widely accepted valuation techniques, which require significant estimates and assumptions including, but not limited to, estimating future cash flows and developing appropriate growth and discount rates. In particular, the estimated fair value of intangible assets acquired may consider available historical information along with expectations and assumptions about future performance. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. AsChanges in these assumptions may have a result, duringsignificant impact on the fair value of assets acquired and liabilities assumed. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding adjustment to goodwill, based on new information obtained about the facts and circumstances that existed as of the acquisition date. Upon the conclusion of the measurement period or final determination of the values of net assets acquired, whichever comes first, any subsequent adjustments are recorded to our consolidated financial statements. SeeRefer to Note 5. Business Acquisitions, of the Notes to Consolidated Financial Statements for additional information.
Investments in Equity Affiliates
Investments in companies which we do not control but over which we have the ability to exercise significant influence and that, in general, are at least 20 percent-owned by us, are stated at cost plus equity in undistributed net income. These investments are evaluated for impairment when warranted. An impairment loss would be recorded whenever a decline in value of an equity investment below its carrying amount is determined to be other than temporary. In judging "other than temporary," we consider the length of time and extent to which the fair value of the equity company investment has been less than the carrying amount, the near-term and longer-term operating and financial prospects of the equity company, and our longer-term intent of retaining the investment in the equity company. See Note 10. Joint Ventures, of the Notes to Consolidated Financial Statements for additional information.
Goodwill and Unamortized Intangible Assets
Goodwill is not subject to amortization and is tested for impairment annually, during the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset may be impaired. We first evaluate qualitative factors, such as macroeconomic conditions and our overall financial performance by reporting unit to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. Goodwill is measured as the excess of consideration transferred over the net assets acquired at their respective fair values as of the acquisition date. Goodwill is tested for impairment at the reporting unit level. FairWe then evaluate how significant each of the identified factors could be to the fair value or carrying amount of a reporting unit and weigh these factors in totality in forming a conclusion of whether or not it is more likely than not that the fair value of a reporting unit is less than its carrying amount (the “Step 0 Test”). Goodwill is not impaired if we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount. Otherwise, we would proceed to the goodwill impairment test. In the goodwill impairment test, fair value of a reporting unit is typically based upon estimated future cash flows discounted at a rate commensurate with the risk involved or market-based comparables. If the carrying amount of the reporting unit’s net assets exceeds its fair value, then an analysis will be performed to compare the implied fair value of goodwill with the carrying amount of goodwill. An impairment loss will be recognized in an amount equal to the excess of the carrying amount over its implied fair value. After an impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. The annual impairment tests performed on October 1, 20192022 and 20182021 did not indicate any impairment of goodwill.
Intangible assets with finite lives are amortized over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss would be indicated when estimated undiscounted future cash flows from the use of the asset are less than its carrying amount. An impairment loss would be measured as the difference between the fair value (based on discounted future cash flows) and the carrying amount of the asset. Estimated useful lives range from 1012 to 23 years for customer relationships and 4 to 20 years for developed technology, patents and other intangible assets. Certain trade names are estimated to have indefinite useful lives and as such are not amortized. Intangible assets with indefinite lives are reviewed for impairment following a method similar to the impairment testing for Goodwill. Testing of these assets is performed annually and whenever events and circumstances indicate that impairment may have occurred. The annual impairment tests performed in the year of 2019on October 1, 2022 and 20182021 did not indicate any impairment of intangible assets.
RECENT
The fair value estimates used in the assessment of impairment for both goodwill and intangible assets consider historical trends in addition to significant assumptions including projections of future performance. Changes in these assumptions can have a significant impact on the assessment of fair value.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
For a discussion regarding recentrecently adopted accounting pronouncements, see "Recentrefer to Recently adopted Accounting Pronouncements"Pronouncements included in Note 2. Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements.
SUMMARY
In 2022, Mativ reported net loss of $6.6 million on total net sales of $2,167.4 million. Compared to the prior year, net sales increased $727.4 million, or 50.5%. Sales reflected the addition of the Neenah operations, organic sales growth primarily from price increases across the product lines, and negative currency impacts. ATM segment net sales increased $465.5 million, or 50.0%, compared to prior year primarily driven by the addition of the Neenah operations, with strong growth in release liners, and protective solutions. FBS segment net sales increased $261.9 million, or 51.4% compared to prior year primarily due to the addition of the Neenah operations and strong gains in packaging and specialty papers. The Company has implemented price increases across the segments in response to higher input costs.
The Company had net loss of $6.6 million in 2022 compared to net income of $88.9 million in 2021. The Company incurred significant merger and divestiture expenses that impacted net income, which included $72.6 million of expenses related to the Neenah merger and associated integration, as well as $19.3 million of restructuring and impairment costs primarily related to the divestiture of a financially immaterial portion of the business that served the industrials end-market. In addition, the Company incurred an incremental $29.4 million of non-cash purchase accounting expenses related to the Neenah merger.
RESULTS OF OPERATIONS
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017(1) |
| ($ in millions, except per share amounts) |
Net sales | $ | 1,022.8 |
| | $ | 1,041.3 |
| | $ | 982.1 |
|
Cost of products sold | 732.8 |
| | 762.8 |
| | 698.7 |
|
Gross profit | 290.0 |
| | 278.5 |
| | 283.4 |
|
Selling expense | 33.7 |
| | 35.7 |
| | 33.3 |
|
Research expense | 13.5 |
| | 15.2 |
| | 17.8 |
|
General expense | 105.1 |
| | 90.9 |
| | 95.9 |
|
Total nonmanufacturing expenses | 152.3 |
| | 141.8 |
| | 147.0 |
|
Restructuring and impairment expense | 3.7 |
| | 1.7 |
| | 8.1 |
|
Operating profit | 134.0 |
| | 135.0 |
| | 128.3 |
|
Interest expense | 36.1 |
| | 28.2 |
| | 26.9 |
|
Other (expense) income, net | (1.0 | ) | | 10.0 |
| | 0.1 |
|
Income from continuing operations before income taxes and income from equity affiliates | 96.9 |
| | 116.8 |
| | 101.5 |
|
Provision for income taxes | 15.2 |
| | 10.7 |
| | 69.6 |
|
Income (loss) from equity affiliates, net of income taxes | 4.1 |
| | (11.3 | ) | | 2.5 |
|
Income from continuing operations | 85.8 |
| | 94.8 |
| | 34.4 |
|
(Loss) gain from discontinued operations | — |
| | (0.3 | ) | | 0.1 |
|
Net income | $ | 85.8 |
| | $ | 94.5 |
| | $ | 34.5 |
|
| | | | | |
Net income (loss) per share - basic: | | | | | |
Income per share from continuing operations | $ | 2.78 |
| | $ | 3.08 |
| | $ | 1.12 |
|
Loss per share from discontinued operations | — |
| | (0.01 | ) | | — |
|
Net income per share - basic | $ | 2.78 |
| | $ | 3.07 |
| | $ | 1.12 |
|
| | | | | |
Net income (loss) per share - diluted: | | | | | |
Income per share from continuing operations | $ | 2.76 |
| | $ | 3.07 |
| | $ | 1.12 |
|
Loss per share from discontinued operations | — |
| | (0.01 | ) | | — |
|
Net income per share - diluted | $ | 2.76 |
| | $ | 3.06 |
| | $ | 1.12 |
|
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 (1) | | 2021 (2) | | 2020 (3) |
| (in millions, except per share amounts) |
Net sales | $ | 2,167.4 | | | $ | 1,440.0 | | | $ | 1,074.4 | |
Cost of products sold | 1,729.8 | | | 1,109.7 | | | 766.1 | |
Gross profit | 437.6 | | | 330.3 | | | 308.3 | |
Selling expense | 74.2 | | | 46.7 | | | 36.9 | |
Research and development expense | 26.6 | | | 20.3 | | | 13.8 | |
General expense | 266.1 | | | 169.9 | | | 116.9 | |
Total nonmanufacturing expenses | 366.9 | | | 236.9 | | | 167.6 | |
| | | | | |
Restructuring and impairment expense | 19.3 | | | 10.1 | | | 11.9 | |
Operating profit | 51.4 | | | 83.3 | | | 128.8 | |
Interest expense | 86.1 | | | 46.1 | | | 30.5 | |
Other income (expense), net | 10.3 | | | 35.9 | | | (1.0) | |
Income (Loss) before income taxes and income from equity affiliates | (24.4) | | | 73.1 | | | 97.3 | |
| | | | | |
Income tax expense (benefit) | (12.6) | | | (9.4) | | | 18.4 | |
Income from equity affiliates, net of income taxes | 5.2 | | | 6.4 | | | 4.9 | |
| | | | | |
| | | | | |
Net income (loss) | $ | (6.6) | | | $ | 88.9 | | | $ | 83.8 | |
Dividends paid to Common Stockholders | (0.9) | | | (0.6) | | | (0.7) | |
Undistributed earnings available to Common Stockholders | — | | | (0.5) | | | (0.4) | |
Net income (loss) attributable to Common Stockholders | $ | (7.5) | | | $ | 87.8 | | | $ | 82.7 | |
| | | | | |
Net income (loss) per share | | | | | |
| | | | | |
| | | | | |
Basic | $ | (0.18) | | | $ | 2.83 | | | $ | 2.68 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Diluted | $ | (0.18) | | | $ | 2.80 | | | $ | 2.66 | |
(1) Results during the year ended December 31, 20172022 include ConwedNeenah from the January 20, 2017July 6, 2022 acquisition date to December 31, 2017.2022.
(2) In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The amendment requires an employer to report the service cost component in the same line item or line items as other compensation costs arising from services rendered by the pertinent employeesResults during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal from operations. The Company adopted this ASU effective January 1, 2018, utilizing the retrospective transition approach upon adoption. The adoption of this guidance resulted in a reclassification of the components of net periodic pension cost, other than service cost, from Cost of products sold and General expense to Other income (expense), net, in the Consolidated Statements of Income. The reclassification of these costs affects only the EP segment, as there are no pension costs associated with the AMS segment. For the year ended December 31, 2017, $3.6 million in pension expense was reclassified2021 include Scapa from Operating profitthe April 15, 2021 acquisition date to Other expense in the consolidated statement of income. The adoption of this guidance had no effect on Net income in the Consolidated Statements of Income and no effect on the other consolidated financial statements.
Year EndedDecember 31, 20192021.
(3) Compared withResults during the Year Endedyear ended December 31, 20182020 include Tekra from the March 13, 2020 acquisition date to December 31, 2020.
Comparison of the Years Ended December 31, 2022 and 2021
Net Sales
(dollars in
The following table presents net sales by segment (in millions):
|
| | | | | | | | | | | | | | |
| 2019 | | 2018 | | Change | | Percent Change |
Advanced Materials & Structures | $ | 477.2 |
| | $ | 467.9 |
| | $ | 9.3 |
| | 2.0 | % |
Engineered Papers | 545.6 |
| | 573.4 |
| | (27.8 | ) | | (4.8 | ) |
Total | $ | 1,022.8 |
| | $ | 1,041.3 |
| | $ | (18.5 | ) | | (1.8 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| 2022 | | 2021 | | Change | | Percent Change |
| | | | | | | |
Advanced Technical Materials | $ | 1,396.2 | | | $ | 930.7 | | | $ | 465.5 | | | 50.0 | % |
Fiber-Based Solutions | 771.2 | | | 509.3 | | | 261.9 | | | 51.4 | % |
Total | $ | 2,167.4 | | | $ | 1,440.0 | | | $ | 727.4 | | | 50.5 | % |
Net sales were $1,022.8of $2,167.4 million in 2019 compared with $1,041.3 million in 2018. The decrease in net sales consisted of the following (dollars in millions):
|
| | | | | | |
| Amount | | Percent |
Changes in currency exchange rates | $ | (21.2 | ) | | (2.1 | )% |
Changes in royalties | (0.3 | ) | | — |
|
Changes in product mix, selling prices and sales volumes, net | 3.0 |
| | 0.3 |
|
Total | $ | (18.5 | ) | | (1.8 | )% |
AMS segment net sales were$477.2 million for 2019 compared to $467.9 million during 2018. The increase of $9.3 million or 2.0% was due primarily to growth in filtration, particularly for RO water filtration products, transportation, driven by surface protection films, and gains in medical. Infrastructure and construction and industrial sales were lower versus prior year.
The EP segment net sales were $545.6 million for 2019 compared to $573.4 million during 2018. The decreased of $27.8 million, or 4.8%, was primarily the result of the unfavorable net foreign currency impacts of $18.9 million, mainly from a weaker euro and the $8.7 million combined net unfavorable impact of changes in volumes, mix of products sold and average selling prices, in each case compared to the prior year. The Company benefited from a more favorable mix of products sold as a result of strong performance of LIP and wrapper and binder papers and de-emphasizing and/or exiting significant volumes of certain low-margin non-tobacco papers.
Gross Profit
(dollars in millions)
|
| | | | | | | | | | | | | | | | | | | | |
| | | |
| | Percent Change | | Percent of Net Sales |
| 2019 | | 2018 | | Change | | | 2019 | | 2018 |
Net sales | $ | 1,022.8 |
| | $ | 1,041.3 |
| | $ | (18.5 | ) | | (1.8 | )% | | 100.0 | % | | 100.0 | % |
Cost of products sold | 732.8 |
| | 762.8 |
| | (30.0 | ) | | (3.9 | ) | | 71.6 |
| | 73.3 |
|
Gross profit | $ | 290.0 |
| | $ | 278.5 |
| | $ | 11.5 |
| | 4.1 | % | | 28.4 | % | | 26.7 | % |
Gross profit for the year ended December 31, 20192022 increased by $11.5$727.4 million, or 4.1%,50.5% compared to $290 million from $278.5 million in the prior year. AMS gross profit increased by $12.8year-end. ATM segment net sales of $1,396.2 million primarily due to lower input costs, particularly resin, higher organic sales and improved manufacturing efficiencies and expenses associated with the closure of one site in 2018. In the EP segment, gross profit was flat. The favorable impact from lower wood pulp input costs and price and mix benefits was largely offset by negative impact from unfavorable currency movements and higher other input costs such as energy costs.
Nonmanufacturing Expenses
(dollars in millions)
|
| | | | | | | | | | | | | | | | | | | | |
| | | |
| | Percent Change | | Percent of Net Sales |
| 2019 | | 2018 | | Change | | | 2019 | | 2018 |
Selling expense | $ | 33.7 |
| | $ | 35.7 |
| | $ | (2.0 | ) | | (5.6 | )% | | 3.3 | % | | 3.4 | % |
Research expense | 13.5 |
| | 15.2 |
| | (1.7 | ) | | (11.2 | ) | | 1.3 |
| | 1.5 |
|
General expense | 105.1 |
| | 90.9 |
| | 14.2 |
| | 15.6 |
| | 10.3 |
| | 8.7 |
|
Nonmanufacturing expenses | $ | 152.3 |
| | $ | 141.8 |
| | $ | 10.5 |
| | 7.4 | % | | 14.9 | % | | 13.6 | % |
Nonmanufacturing expenses induring the year ended December 31, 20192022 increased by $10.5$465.5 million, or 7.4%,50.0% compared to $152.3prior year-end. Sales reflected the addition of the Neenah operations, organic sales growth from price increases and volume growth across the product lines, and negative currency impacts. The Company implemented price increases across the segment in response to higher input costs. The strongest sales gains in ATM were in release liners, and protective solutions.
FBS segment net sales of $771.2 million from $141.8during the year ended December 31, 2022 increased $261.9 million, inor 51.4% compared to the prior year dueyear-end. Sales reflected the addition of the Neenah operations, organic sales growth primarily from price increases across the product lines, and negative currency impacts. The Company implemented price increases across the segment in response to higher deferred compensationinput costs. The strongest sales gains in FBS were in packaging and specialty papers products.
Gross Profit
The following table presents gross profit (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | |
| | | | | Percent Change | | Percent of Net Sales |
| 2022 | | 2021 | | Change | | | 2022 | | 2021 |
Net sales | $ | 2,167.4 | | | $ | 1,440.0 | | | $ | 727.4 | | | 50.5 | % | | 100.0 | % | | 100.0 | % |
Cost of products sold | 1,729.8 | | | 1,109.7 | | | 620.1 | | | 55.9 | % | | 79.8 | % | | 77.1 | % |
Gross profit | $ | 437.6 | | | $ | 330.3 | | | $ | 107.3 | | | 32.5 | % | | 20.2 | % | | 22.9 | % |
Gross profit of $437.6 million during the year ended December 31, 2022 increased $107.3 million, or 32.5%, compared to the prior year-end. ATM gross profit increased $87.6 million, or 47.8% and FBS gross profit increased $19.7 million, or 13.4%, which reflected the addition of the Neenah operations, organic growth, as well as price increases more than offsetting higher input costs, including pulps and fibers, resins, and energy. In addition, the Company incurred $19.3 million related to purchase accounting expenses which was driven by a significantincreased Cost of products sold.
Nonmanufacturing Expenses
The following table presents nonmanufacturing expenses (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | |
| | | | | Percent Change | | Percent of Net Sales |
| 2022 | | 2021 | | Change | | | 2022 | | 2021 |
Selling expense | $ | 74.2 | | | $ | 46.7 | | | $ | 27.5 | | | 58.9 | % | | 3.4 | % | | 3.2 | % |
Research and development expense | 26.6 | | | 20.3 | | | 6.3 | | | 31.0 | % | | 1.2 | % | | 1.4 | % |
General expense | 266.1 | | | 169.9 | | | 96.2 | | | 56.6 | % | | 12.3 | % | | 11.8 | % |
Nonmanufacturing expenses | $ | 366.9 | | | $ | 236.9 | | | $ | 130.0 | | | 54.9 | % | | 16.9 | % | | 16.4 | % |
Nonmanufacturing expenses of $366.9 million during the year ended December 31, 2022 increased $130.0 million, or 54.9%, compared to the prior year-end. The increase is primarily due to direct and indirect merger acquisition and integration costs of $72.6 million, an increase in amortization expenses related to Neenah's intangible assets of $10.0 million, as well as the Company’s stock price throughout the year. Another key factor was increased IT spending.addition of Neenah's general expenses.
Restructuring and Impairment Expense
(dollars in
The following table presents restructuring and impairment expense by segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | |
| | | | | | | Percent of Net Sales |
| 2022 | | 2021 | | Change | | | 2022 | | 2021 |
Advanced Technical Materials | $ | 17.2 | | | $ | 1.9 | | | $ | 15.3 | | | | | 1.2 | % | | 0.2 | % |
Fiber-Based Solutions | 1.3 | | | 8.2 | | | (6.9) | | | | | 0.2 | % | | 1.6 | % |
Unallocated expenses | 0.8 | | | — | | | 0.8 | | | | | | | |
Total | 19.3 | | | $ | 10.1 | | | $ | 9.2 | | | | | 0.9 | % | | 0.7 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | | |
| | Percent Change | | Percent of Net Sales |
| 2019 | | 2018 | | Change | | | 2019 | | 2018 |
Advanced Materials & Structures | $ | 1.1 |
| | $ | 1.5 |
| | $ | (0.4 | ) | | (26.7 | )% | | 0.2 | % | | 0.3 | % |
Engineered Papers | 2.6 |
| | 0.2 |
| | 2.4 |
| | N.M. |
| | 0.5 |
| | — |
|
Total | $ | 3.7 |
| | $ | 1.7 |
| | $ | 2.0 |
| | 117.6 | % | | 0.4 | % | | 0.2 | % |
The Company incurred total restructuring and impairment expense of $3.7$19.3 million in the year ended December 31, 2019,2022, compared to $1.7$10.1 million in the year ended December 31, 2018,2021, an increase of $2.0$9.2 million, or 117.6%91.1%.
In the ATM segment, the Company incurred $17.2 million of restructuring and impairment expenses in the year ended December 31, 2019,2022, of which $13.9 million was related to the write-down of certain assets in conjunction with the divestiture of a portion of the legacy SWM ATM segment serving the industrials end-market. The assets were sold during the third quarter for net proceeds of $4.6 million and a loss of $0.4 million. The remaining $3.3 million of restructuring and impairment expenses consisted of $2.6 million in severance accruals for employees at our U.S., Brazilian and French manufacturing operationsis primarily related to EP segment, as well as $1.1the termination of a contract with an existing customer and the closure of the Appleton, Wisconsin facility, a facility acquired through the Merger. The Company recognized $1.9 million of restructuring and impairment expense in impairment charges at our U.S. and Chinese manufacturing facilitiesthe prior-year period related to our AMS segment.equipment impairment charges.
In the year ended December 31, 2018,2022, the FBS segment recognized $1.3 million of restructuring and impairment expenses consisted of $1.3expense primarily related to pension benefits for the Winkler, Manitoba facility. In the prior-year period, restructuring and impairment expense in the FBS segment included $4.7 million in severanceprimarily related to costs associated with closing the Spotswood, New Jersey facility and preparing it for sale, medical benefits and other accruals for employees at our U.S. and French manufacturing operations,relating to the Spotswood facility, as well as $0.4$0.8 million of severance-related restructuring expenses associated with the closure of the Winkler facility in impairment chargesCanada. The FBS segment also recognized $2.7 million of restructuring expenses in 2021 primarily related to severance accruals at our U.S. manufacturing facilities.operations in France.
Restructuring and impairment costs related to the Merger are included in corporate expenses as other unallocated expenses as these costs are not included in management's evaluation of the segments' performance. Unallocated and impairment expense for the year ended December 31, 2022 included $0.8 million related to the modification of leases due to the Merger. There were no unallocated expenses related to restructuring in the prior year-end.
Operating Profit
(dollars in
The following table presents operating profit by segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | |
| | | | | Percent Change | | Return on Net Sales |
| 2022 | | 2021 | | Change | | | 2022 | | 2021 |
Advanced Technical Materials | $ | 98.8 | | | $ | 61.6 | | | $ | 37.2 | | | 60.4 | % | | 7.1 | % | | 6.6 | % |
Fiber-Based Solutions | 106.6 | | | 100.5 | | | 6.1 | | | 6.1 | % | | 13.8 | % | | 19.7 | % |
Unallocated expenses | (154.0) | | | (78.8) | | | (75.2) | | | (95.4) | % | | | | |
Total | $ | 51.4 | | | $ | 83.3 | | | $ | (31.9) | | | (38.3) | % | | 2.4 | % | | 5.8 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | Percent Change | | Return on Net Sales |
| 2019 | | 2018 | | Change | | | 2019 | | 2018 |
Advanced Materials & Structures | $ | 64.3 |
| | $ | 49.5 |
| | $ | 14.8 |
| | 29.9 | % | | 13.5 | % | | 10.6 | % |
Engineered Papers | 119.2 |
| | 121.8 |
| | (2.6 | ) | | (2.1 | ) | | 21.8 |
| | 21.2 |
|
Unallocated expenses | (49.5 | ) | | (36.3 | ) | | (13.2 | ) | | (36.4 | ) | | | | |
Total | $ | 134.0 |
| | $ | 135.0 |
| | $ | (1.0 | ) | | (0.7 | )% | | 13.1 | % | | 13.0 | % |
Operating profit was $134.0$51.4 million in the year ended December 31, 20192022, compared with $135.0to $83.3 million duringin the prior year.year ended December 31, 2021, a decrease of $31.9 million, or 38.3%.
The AMS segment'sIn the ATM segment, operating profit in the year ended December 31, 20192022 was $64.3$98.8 million compared to $49.5$61.6 million in the prior year period. The increase of $14.8 million in the AMS segment's operating profit during the year ended December 31, 2019 compared to2021, an increase of 60.4%. In the prior-year period was positively impacted by sales growth, cost reductions, and lower raw material input costs.
The EP segment'sFBS segment, operating profit in the year ended December 31, 20192022 was $119.2$106.6 million, a decreasean increase of $2.6$6.1 million, or 2.1%6.1%, from $121.8compared to the prior year-end. In both segments, operating profit reflected the addition of the Neenah operations and the benefit of price increases more than offsetting higher input costs, partially offset by $29.4 million in the prior year. The decrease was primarily due topurchase accounting expenses and higher restructuring and impairment expenses as well asintangible asset amortization expenses associated with the Brazil Tax Assessments, and negative currency impacts partially offset by positive price and mix shifts and cost reduction activities.Merger.
Unallocated expenses in the year ended December 31, 20192022 were $49.5$154.0 million, up $13.2an increase of $75.2 million, or 36.4%95.4%, from the $36.3 million incompared to the prior year period.year-end. The increase was primarily due to higher deferred compensation$72.6 million in merger and integration costs related to the Merger, the addition of Neenah's unallocated expenses, as a result of positive stock price performance relativeand expenses related to 2018 and higher IT expenses to support growth initiatives.the cybersecurity incident.
Non-Operating Expenses, NetInterest Expense
Interest expense was $36.1$86.1 million in the year ended December 31, 2019,2022, an increase of $7.9$40.0 million, from $28.2 million inor 86.8%, compared to the year ended December 31, 2018. The increase in interest2021. Excluding a benefit of $4.5 million prior year expense is primarily due to $7.1 million of interestreversal related to the favorable settlement of Brazil tax assessments as discussed in Note20. Commitments and aContingencies of the Notes to Consolidated Financial Statements, interest expense increased mainly due to the incremental expense of assuming Neenah's debt and higher average floating interest rate compared to the prior year as a result of increases in market rates, partially offset by a lower total debt balance as of December 31, 2019 compared to the prior year. rates.
The weighted average effective interest rate on our debt facilities, including the impact of interest rate hedges, was approximately 4.42%5.11% and 4.20%4.04% for the years endedyears-ended December 31, 20192022 and 2018,2021, respectively.
Other expense,Income (Expense), Net
Other income (expense), net was $1.0income of $10.3 million in the year ended December 31, 2022, a decrease of $25.6 million, or 71.3%, compared to the year ended December 31, 2021. The current year included $7.3 million of sales of carbon dioxide credits in France, a $2.9 million gain on sale of equipment at the Winkler facility, and $2.0 million of foreign currency loss (net of derivatives activity). Other income (expense), net was income of $35.9 million during the year ended December 31, 2019 compared to $10.02021, mainly reflecting a $35.2 million Other income, net duringgain from the year ended December 31, 2018. The $11.0 million adverse change in Other (expense) income, net, was due primarily to the $10.2 million change in the fair valuesale of the contingent consideration liabilitySpotswood facility, a $4.0 million sale of carbon dioxide credits in France, as well as a $1.6 million favorable Brazil tax assessment settlement, offset by $6.9 million in realized foreign currency loss related to timing of the ConwedScapa acquisition in 2018, as discussed in Note 5. Business Acquisitions.cash settlement.
Income Taxes
A $15.2The $12.6 million and $10.7$9.4 million provisionbenefit for income taxes in the years endedyears-ended December 31, 20192022 and 2018,2021, respectively, resulted in an effective tax rate of 15.7%51.6% compared with 9.2%(12.9)% in the prior year. The Company’s effective tax rates differ from the statutory federal income tax rate of 21%net change was primarily due to varying tax ratesadjustments to valuation allowances in foreign jurisdictions, the relative amounts of income we earn in those jurisdictionscurrent and year over year adjustments of a $4.2 million reduction dueprior period, significant one-time items related to the one-time Brazil ICMS litigation accrual as compared toNeenah merger in 2022 and favorable mix of earnings in the prior year $13 million U.S. tax reform reduction.current period.
Income (Loss) from Equity Affiliates
Income from equity affiliates, net of income taxes, was $4.1$5.2 million in the year ended December 31, 20192022, compared with a loss of $11.3to $6.4 million during the prior year and reflectedreflects the results of operations of CTMChina Tobacco Mauduit (Jiangmen) Paper Industry Co. LTD and CTS. 2018 results included $15.0 million impairment of CTS, as discussed furtherChina Tobacco Schweitzer (Yunnan) Reconstituted Tobacco Co. LTD. The decline in Note 10. Joint Ventures.profitability was due to higher input costs.
Discontinued Operations
Because we closed our Philippines plant as previously reported, the results of this plant were reported as discontinued operations for all periods presented. Consequently, this plant's results have been removed from each line of the statements of income and the operating activities section of the statements of cash flow. In each case, a separate line has been added for the net results of the discontinued operation. Loss from discontinued operations was $0.0 million versus $0.3 million for the years ended December 31, 2019 and 2018, respectively. These amounts are primarily the result of the Company's efforts to dispose of the remaining assets and liabilities of the discontinued operations.
Net Income (Loss) and IncomeLoss per Share
Net incomeloss in the year ended December 31, 20192022 was $85.8$6.6 million, or $2.76$0.18 per diluted share, compared with $94.5to net income of $88.9 million, or $3.06$2.80 per diluted share, during the prior year period. The decrease in net income was primarily due to a $10.2 million decrease in Other income, net resulting from the 2018 change in the fair value of the Conwed contingent liability, a $7.9 million increase in interest expense, primarily related to the Brazil Tax Assessments, and a higher income tax expense of $4.5 million. Business trends that were key drivers of year-over-year financial performance included sales growth and lower resin input costs in the AMS segment, offset by lower sales volume and adverse currency movements in the EP segment.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity & Debt Overview
As of December 31, 2022, the Company had $1,693.9 million of total debt, $124.4 million of cash, and undrawn capacity on its $600.0 million revolving line of credit facility (the "Revolving Facility") of $404.0 million. Per the terms of the Company's amended Credit Agreement, net leverage was 3.71x at December 31, 2022, versus a current maximum covenant ratio of 5.50x. The Company’s nearest debt maturity is our 6.875%senior unsecured notes which are due in 2026.
A major factor in our liquidity and capital resource planning is our generation of cash flow from operations, which is sensitive to changes in the mix of products sold, volume and pricing of our products, as well as changes in our production volumes, costs and working capital. Our liquidity is supplemented by funds available under our revolving credit facility with a syndicate of banks that is used as either operating conditions or strategic opportunities warrant.
Cash Requirements
As of December 31, 2019, $60.32022, $83.2 million of our $103.0$124.4 million of cash and cash equivalents was held by foreign subsidiaries. Cash paid for income taxes (net of refunds) was $20.8$26.0 million for the year ended December 31, 2019. On December 22, 2017, the Tax Act was enacted into law. The Tax Act imposes a mandatory transition tax on accumulated foreign earnings and eliminates U.S. taxes on foreign subsidiary distributions. At December 31, 2017, we recorded a provisional tax liability of $48.7 million relating to the one-time mandatory transition tax on our accumulated foreign earnings, which we intend to pay over an eight-year payment schedule, as prescribed by the Tax Act. In the year ended December 31, 2018, we reduced the provisional tax liability by $13.0 million. We do not expect the payment of the transition taxes over the remaining years to adversely affect our liquidity and resource planning. Additionally, the Tax Act is not expected to adversely impact our debt covenant compliance.2022. We believe that our sources of liquidity and capital, including cash on-hand, cash generated from operations and our existing credit facilities, will be sufficient to finance our continued operations, our current growth plan, and growth strategy.dividend payments.
Capital spending for 2020 is projected to be approximately $40.0 million to $45.0 million. We generally fund our capital projects using cash on-hand, cash generated from operations and our existing credit facilities, including the Credit Agreement, as defined below in "Debt Instruments and Related Covenants."
Cash Provided by Operations
Net cash provided by operations was $160.3$202.2 million in the year ended December 31, 20192022, compared with $139.1$58.1 million in the prior year. Our net cash provided by operations increasedThe increase was primarily duerelated to a $22.5 million favorable year-over-year impact of net changesmovements in operating working capital which was primarily caused by lower accounts receivable balances versus prior year. Significant non-cash items that contributed to year-over-year changes in net income (and subsequently adjustedrelated cash flows, as well as cash realized from favorable interest rate swaps. The Company incurred significant costs for calculate operating cash flow) include the Brazilian tax litigation accrual in 2019advisory fees, transaction expenses, and the impairment of an equity affiliate, a benefitintegration costs all related to the Tax Act, and the favorable revaluation of contingent consideration in 2018.Merger.
Working Capital
As of December 31, 2019,2022, we had net operating working capital of $168.8$544.1 million andincluding cash and cash equivalents of $103.0$124.4 million, compared with net operating working capital of $195.2$366.7 million andincluding cash and cash equivalents of $93.8$74.7 million as of December 31, 2018. Changes2021. Results reflect additional working capital brought onto the balance sheet as a result of the Neenah merger, as well as unfavorable year-over-year movements in working capital related to the amounts that make up these balances also reflectgrowth in inventories (higher cost inventories due to rising input costs), partially offset by reduction in receivables.
In the impacts of changes in currency exchange rates, which are included in theyear ended December 31, 2022, net changes in operating working capital presentedincreased cash flow by $64.4 million primarily related to the decrease in accounts receivables as a result of the accounts receivable sales agreement entered into during the current year. Refer to Note 6. Accounts Receivable, Net for further information on the Consolidated Statements of Cash Flow.
our accounts receivable sales programs. In 2019,2021, net changes in operating working capital decreased cash flow by $1.8$61.4 million. The improvement compared with prior year was driven primarily by lower accountsmost significant working capital related cash outflow is related to higher receivables due to sales growth in both FBS and ATM and higher accrued expenses.costs of inventories on hand related to significantly higher input costs.
In 2018, net changes in operating working capital decreased cash flow by $24.3 million, driven primarily by higher accounts receivables associated with sales growth.
Cash Used forin Investing
Cash used for investing activities during 2019in the year ended December 31, 2022 was $14.8$481.3 million compared to $636.5 million in the prior year. Cash used in investing activities in the current year reflects Merger consideration of $518.5 million related to the repayment on Neenah’s outstanding debt (refer below in “Cash Provided by Financing Activities” for additional discussion) and consisted primarily of cash paid for capital spendingacquisition related costs incurred by Neenah, partially offset by proceeds$55.9 million cash acquired. Refer to Note 5. Business Acquisitions in the Notes to Consolidated financial statements for further discussion of the total consideration transferred to merge with Neenah. In addition, capital spending was $56.9 million. The cash used in investing activities was partially offset by $35.8 million received from the salesettlement of RTL Philippines assets.cross-currency swap contracts.
Cash used forin investing activities during 2018 was $27.5in the prior year primarily reflects the net $630.6 million and consisted primarily of cash paid for capital spending.
Capital Spending
consideration to acquire Scapa.
Capital spending
Cash Provided by Financing Activities
Cash provided by financing activities in the year ended December 31, 2022 was $28.6$331.6 million and $27.0compared to $599.9 million in 2019 and 2018, respectively.the prior year. During 2019 and 2018 capital spending was primarily related to maintenance capital spending, capacity additions to support growth in filtration, transportation and infrastructure end-markets, construction on AMS manufacturing facilities in China and Poland, the development of new products, the rebuild of certain paper manufacturing lines, and IT infrastructure.
We incur capital spending as necessary to meet legal requirements and otherwise in connection with the protection of the environment at our facilities in the U.S., United Kingdom, France, Belgium, Brazil, Canada, China and Poland. For these purposes, we expect to incur capital expenditures of less than $1.0 million in each of 2020 and 2021, of which no material amount is expected to be the result of environmental fines or settlements. The foregoing capital expenditures are not expected to reduce our ability to invest in other appropriate and necessary capital projects and are not expected to have a material adverse effect on our financial condition or results of operations.
Cash Used for Financing Activities
During 2019,year ended December 31, 2022, financing activities consisted primarily of net repayments$775.0 million of proceeds from borrowings under the Delayed Draw Term Loan Facility and Revolving Facility. The proceeds from the Delayed Draw Term Loan was used to repay Neenah's outstanding debt of $504.9 million upon consummation of the Merger. Refer to Note 5. Business Acquisitions in the Notes to Consolidated Financial statements for further discussion of the total Merger consideration. The proceeds was partially offset by $341.8 million of payments on borrowingsour long-term debt, which includes a pay down of $80.5$227.0 million on our Revolving Facility, $72.2 million in cash paid for dividends of $54.4 million paiddeclared to SWMthe Company's stockholders, and share repurchases$22.1 million of $0.9 million.payments for debt issuance costs associated with the amendment of our Credit Agreement and the Bridge Facility, as discussed in Note 14. Debt of the Notes to Consolidated Financial Statements.
During 2018,prior year ended December 31, 2021, financing activities consisted primarily of net repayments on$744.5 million proceeds from borrowings under the revolving credit facility, primarily to fund the Scapa acquisition including $350.0 million under the Term Loan B Facility and $343.0 million incremental borrowings of $61.1revolver loans, $55.9 million cash dividends of $53.2payments on long-term debt, $55.3 million paid to SWM stockholders,in cash paid for dividends declared to stockholders, the buyout of leased property at Knoxville for $15.4 million, $14.6 million payment for debt issuance costs associated with the amendment of $3.6 millionour Credit Agreement as discussed in Note 14. Debt of the Notes to Consolidated Financial Statements, and share repurchases of $3.0$3.4 million.
Dividend Payments
We have declared and paid cash dividends on our common stock every fiscal quarter since the second quarter of 1996. On February 20, 2020,22, 2023, we announced a cash dividend of $0.44$0.40 per share payable on March 20, 202024, 2023, to stockholders of record as of the close of business on March 4, 2020.7, 2023. The covenants contained in our Indenture and amended Credit Agreement, each, as defined below in "Debt Instruments and Related Covenants," require that we maintain certain financial ratios, as disclosed in Note 15.14. Debt of the Notes to Consolidated Financial Statements, none of which under normal business conditions materially limit our ability to pay such dividends. We will continue to assess our dividend policy in light of our overall strategy, cash generation, debt levels and ongoing requirements for cash to fund operations and to pursue possible strategic opportunities.
Share Repurchases
In 20192022 and 2018,2021, we repurchased 25,297273,027 shares and 75,39578,790 shares, respectively, of our common stock at a cost of $0.9$6.9 million and $3.0$3.4 million, respectively, for the value of employees' stock-based compensation share awards surrendered to satisfy their personal statutory income tax withholding obligations.
Debt Instruments and Related Covenants
|
| | | | | | | |
Debt Instruments and Related Covenants ($ in millions) | For the Years Ended December 31, |
2019 | | 2018 |
Changes in short-term debt | $ | (0.1 | ) | | $ | (1.3 | ) |
Proceeds from issuances of long-term debt | 19.1 |
| | 634.2 |
|
Payments on long-term debt | (99.5 | ) | | (694.0 | ) |
Net (repayments on) proceeds from borrowings | $ | (80.5 | ) | | $ | (61.1 | ) |
The following table presents activity related to our debt instruments for the years-ended (in millions): | | | | | | | | | | | |
| |
| | |
| Years Ended December 31, |
2022 | | 2021 |
Proceeds from issuances of long-term debt | $ | 775.0 | | | $ | 744.5 | |
Payments on long-term debt | (341.8) | | | (55.9) | |
Other financing | 0.3 | | | — | |
Net proceeds from borrowings | $ | 433.2 | | | $ | 688.6 | |
Net repaymentsproceeds from borrowings were $80.5$433.2 million during 2019. Absent any substantial acquisition(s) or any share repurchases, the Company does not expectyear ended December 31, 2022 compared to incur any significant additionalnet proceeds from borrowings of $688.6 million during 2020.the prior year-end.
Credit Agreement
On September 25, 2018, the Company entered into a $700.0 million credit agreement (the “Credit Agreement”), which replaced the Company’s previous senior secured credit facilities and providesprovided 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 A 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 theas additional Term Loan FacilityFacilities 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. SeeRefer to Note 15.14. Debt of the Notes to Consolidated Financial Statements, for more information.
BorrowingsOn February 10, 2021, we amended our Credit Agreement to, among other things, add a new seven-year $350.0 million Term Loan B Facility (the “Term Loan B Facility”) and to decrease the incremental loans that may be extended at the Company’s request to $250.0 million. The Credit Agreement was further amended effective February 22, 2022 to adjust the step-down schedule for the maximum net debt to EBITDA ratio. Refer to Note 14. Debt of the Notes to Consolidated Financial Statements for additional information about the Term Loan B Facility. The balance under the Term Loan B Facility was $344.8 million as of December 31, 2022.
In connection with the Merger, we further amended our Credit Agreement on May 6, 2022 in order to extend the maturity of the Revolving Credit Facility and the Term Loan A Facility to May 6, 2027, and to increase the availability under the Revolving Credit Facility, will initially bear interest, atsubject to consummation of the Company’s option, at either (i) 1.75% in excess ofMerger, to $600.0 million. Additionally, we added a reserve adjusted London Interbank Offered Rate (“LIBOR”) or (ii) 0.75% in excess of an alternative base rate. Borrowings under the$650.0 million delayed draw term loan facility (the "Delayed Draw Term Loan Facility will initially bear interest, atFacility") to be funded concurrent with the Company’s option, at either (i) 2.00% in excessclosing 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. Merger.
Unused borrowing capacity under the amended Credit Agreement was $495.5$404.0 million as of December 31, 2019.2022. We also had availability under our bank overdraft facilities and lines of credit of $6.1$1.7 million as of December 31, 2019.2022.
We had obtained financing commitments for a $648.0 million senior 364-day unsecured bridge facility and $500.0 million senior secured revolving credit facility in conjunction with the proposed Merger. On May 6, 2022, the Debt Commitment Letter was amended, reducing the Bridge Facility and senior secured revolving credit facility to $50.0 million and zero, respectively.
On July 5, 2022, in connection with the consummation of the Merger, the Company borrowed $650.0 million under the Delayed Draw Term Loan Facility. The funds were used to repay all of Neenah's outstanding debt of $445.9 million under its term loan B facility and $59.0 million under its global secured revolving credit facility, as well as pay down $100.0 million of our Revolving Facility. In addition, we terminated the Bridge Facility. Refer to Note 14. Debt, of the Notes to Consolidated Financial Statements, for further information related to the Delayed Draw Term Loan Facility. In addition, upon consummation of the Merger, we assumed Neenah's project financing agreement for the construction of a melt blown machine (the "German Loan Agreement"). The German Loan Agreement provided €10.0 million ($10.7 million as of May 30, 2022) of construction financing which is secured by the melt blown machine. Refer to Note 14. Debt for further information related to the German Loan Agreement.
In December 2022, $127.0 million of cash from operations was used to repay our Revolving Facility.
Borrowings under the amended Term Loan A Facility ("Term Loan A Credit Facility") will bear interest, at a rate equal to either (1) a forward-looking term rate based on the Secured Overnight Financing Rate (“Term SOFR”), plus the applicable margin or (2) the highest of (a) the federal funds effective rate plus 0.5%, (b) the rate of interest as published by the Wall Street Journal as the “bank prime loan” rate, and (c) Term SOFR plus 1.0%, in each case plus the applicable margin. The applicable margin for borrowings under the Term Loan A Credit Facility is expected to range from 1.25% to 2.75% for SOFR loans and from 0.25% to 1.75% for base rate loans, in each case depending on the Company’s then current net debt to EBITDA ratio.
Borrowings under the amended Revolving Facility or the Delayed Draw Term Loan facility in U.S. dollars will bear interest, at the Company’s option, at a rate equal to either (1) a forward-looking term rate based on Term SOFR, plus the applicable margin or (2) the highest of (a) the federal funds effective rate plus 0.5%, (b) the rate of interest as published by the Wall Street Journal as the “bank prime loan” rate, and (c) one-month Term SOFR plus 1.0%, in each case plus the applicable margin. Borrowings under the Revolving Facility in Euros will bear interest at a rate equal to the reserve-adjusted Euro interbank offered rate, or EURIBOR, plus the applicable margin. The applicable margin for borrowings under the revolving credit agreement is expected to range from 1.00% to 2.50% for SOFR loans and EURIBOR loans, and from 0.00% to 1.50% for base rate loans, in each case, depending on the Company’s then current net debt to EBITDA ratio.
Borrowings under the Term Loan B Facility will bear interest, at the Company's option, at either (i) 3.75% in excess of a reserve adjusted LIBOR rate (subject to a minimum floor of 0.75% or (ii) 2.75% in excess of an alternative base rate.
Under the terms of the amended 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 amended Credit Agreement, calculated on a trailing four fiscal quarter basis, not greater than 5.50x and an interest coverage ratio, also as defined in the amended Credit Agreement, of not less than 3.00x. The maximum allowable net debt to EBITDA ratio will decrease quarterly returning to 4.50x effective as of December 2023. In addition, borrowings and loans made under the amended 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 direct material domestic subsidiaries and by SWM Luxembourg.
The Company was in compliance with all of its covenants under the Indenture andamended Credit Agreement at December 31, 2019.2022. With the current level of borrowing and forecasted results, we expect to remain in compliance with our amended Credit Agreement financial covenants.
Our total debt to capital ratios, as calculated under the amended Credit Agreement, at December 31, 20192022 and December 31, 20182021 were 47.6%59.0% and 52.7%65.1%, respectively.
Indenture for 6.875% Senior SecuredUnsecured 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-ownedwholly owned subsidiaries that is a borrower under or that guarantees obligations under the amended 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 (the “Indenture”), 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, 2022.
Notional Cash Pooling
Off-Balance Sheet Arrangements
On November 15, 2022, certain of the Company’s subsidiaries entered into a notional cash pooling arrangement with JP Morgan to manage global liquidity requirements. As part of the pooling agreement, the participating subsidiaries combine their cash balances in pooling accounts at JP Morgan with the ability to offset bank overdrafts of one participant against the positive cash account balances held by another participant. Under the terms of the notional pooling agreement, the financial institution has the right, ability, and intent to offset a positive balance in one account against an overdrawn amount in another account. Amounts in each of the accounts are unencumbered and unrestricted with respect to use. As such, the net cash balance related to this pooling arrangement is included in Cash and cash equivalents in the Consolidated Balance Sheets.
As of December 31, 2019, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
OTHER FACTORS AFFECTING LIQUIDITY AND CAPITAL RESOURCES
The following table represents our future contractual cash requirements for the next five years and thereafter for our long-term debt obligations and other commitments ($ in(in millions):
| | | Payments due for the years ended | | Payments due for the years ended |
Contractual Obligations | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | Contractual Obligations | Total | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
Current debt (1) | $ | 2.8 |
| | $ | 2.8 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| Current debt (1) | $ | 41.1 | | | $ | 41.1 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Long-term debt (2) | 549.4 |
| | — |
| | 3.5 |
| | 3.5 |
| | 2.8 |
| | 2.1 |
| | 537.5 |
| Long-term debt (2) | 1,682.2 | | | — | | | 41.2 | | | 41.4 | | | 380.3 | | | 892.0 | | | 327.3 | |
Debt interest (3) | 203.0 |
| | 31.2 |
| | 31.1 |
| | 31.1 |
| | 31.0 |
| | 30.9 |
| | 47.7 |
| Debt interest (3) | 529.1 | | | 123.4 | | | 120.7 | | | 118.0 | | | 109.6 | | | 48.6 | | | 8.8 | |
Restructuring obligations (4) | 0.5 |
| | 0.5 |
| | — |
| | — |
| | — |
| | — |
| | — |
| Restructuring obligations (4) | 4.9 | | | 3.1 | | | 0.4 | | | 0.3 | | | 0.3 | | | 0.2 | | | 0.6 | |
Minimum operating lease payments (5) | 27.5 |
| | 6.2 |
| | 5.2 |
| | 4.0 |
| | 2.8 |
| | 2.3 |
| | 7.0 |
| Minimum operating lease payments (5) | 45.2 | | | 11.5 | | | 10.3 | | | 7.9 | | | 5.5 | | | 4.0 | | | 6.0 | |
Minimum financing lease payments (5) | | Minimum financing lease payments (5) | 32.3 | | | 2.3 | | | 2.3 | | | 2.2 | | | 2.2 | | | 2.2 | | | 21.1 | |
Purchase obligations - raw materials (6) | 15.9 |
| | 8.8 |
| | 3.8 |
| | 1.7 |
| | 1.1 |
| | 0.5 |
| | — |
| Purchase obligations - raw materials (6) | 103.5 | | | 102.5 | | | 1.0 | | | — | | | — | | | — | | | — | |
Purchase obligations - energy (7) | 46.7 |
| | 25.4 |
| | 14.8 |
| | 2.1 |
| | 0.5 |
| | 0.5 |
| | 3.4 |
| Purchase obligations - energy (7) | 90.4 | | | 77.3 | | | 11.7 | | | 0.5 | | | 0.5 | | | 0.4 | | | — | |
| Tax Act transition obligation (8) | 23.7 |
| | 2.3 |
| | 2.3 |
| | 2.3 |
| | 4.2 |
| | 5.6 |
| | 7.0 |
| Tax Act transition obligation (8) | 18.5 | | | 4.6 | | | 6.2 | | | 7.7 | | | — | | | — | | | — | |
Other contractual obligations (9) (10) (11) | 0.4 |
| | 0.4 |
| | — |
| | — |
| | — |
| | — |
| | — |
| Other contractual obligations (9) (10) (11) | 12.8 | | | 11.8 | | | 0.7 | | | 0.1 | | | 0.1 | | | 0.1 | | | — | |
Total | $ | 869.9 |
| | $ | 77.6 |
| | $ | 60.7 |
| | $ | 44.7 |
| | $ | 42.4 |
| | $ | 41.9 |
| | $ | 602.6 |
| Total | $ | 2,560.0 | | | $ | 377.6 | | | $ | 194.5 | | | $ | 178.1 | | | $ | 498.5 | | | $ | 947.5 | | | $ | 363.8 | |
| |
(1) | Current debt excludes debt issuance costs of $1.3 million; see Note 15.(1) Current debt excludes debt issuance costs of $6.4 million; refer to Note 14. Debt of the Notes to Consolidated Financial Statements. |
| |
(2) | Long-term debt excludes debt issuance costs of $4.6 million and $6.9 million in unamortized discount on the senior unsecured notes; see additional information regarding long-term debt in Note 15. Debt, of the Notes to Consolidated Financial Statements. |
| |
(3) | The amounts reflected in debt interest are based upon the short-term and long-term scheduled principal maturities and interest rates in effect as of December 31, 2019. Where specific maturities are not stated, such as for an overdraft line-of-credit, a repayment date coinciding with the end of the year was used for purposes of these calculations. With respect to our variable-rate debt outstanding at December 31, 2019, a 100 basis point increase in interest rates would increase our debt interest obligation by $3.7 million in 2020, taking into account the effect of the interest rate hedge transactions the Company has entered into as of December 31, 2019. For more information regarding our outstanding debt and associated interest rates, as well as hedging strategies in place which serve to fix the interest rate on a large portion of our debt, see Note 15. Debt, of the Notes to Consolidated Financial Statements. |
| |
(4) | Restructuring obligations are more fully discussed in Note 14. Restructuring and Impairment Activities, of the Notes to Consolidated Financial Statements. |
| |
(5) | Minimum operating lease payments relate to our future minimum obligations under non-cancelable operating leases having an initial or remaining term in excess of one year as of December 31, 2019. |
| |
(6) | Purchase obligations for raw materials include our calcium carbonate purchase agreement at our plant in Quimperlé, France, in which a vendor operates an on-site calcium carbonate plant and our plant has minimum purchase quantities. See Note 21. Commitments and Contingencies, of the Notes to Consolidated Financial Statements for additional information. |
| |
(7) | Purchase obligations for energy include obligations under agreements with (1) an energy co-generation supplier at our plants in Quimperlé, France and Spay, France, to supply steam for which our plants have minimum purchase commitments, (2) a natural gas supplier to supply and distribute 100% of the natural gas needs of our three French plants, (3) an electricity supplier to supply and distribute the electricity needs of our three French plants, (4) an energy supplier to supply a constant supply of electricity for our Pirahy plant in Brazil, (5) an energy supplier to supply natural gas for our Pirahy plant in Brazil and (6) an energy supplier has a contract to provide biomass at our Spay, France facility for the next two years. See Note 21. Commitments and Contingencies, of the Notes to Consolidated Financial Statements for additional information. |
| |
(8) | On December 22, 2017, the United States enacted the Tax Act into law, which requires a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. Companies may elect to pay the tax over eight years based on an installment schedule outlined in the Tax Act. We have made this election and have reflected our transition tax due by year as a contractual obligation. See Note. 18. Income Taxes, of the Notes to Consolidated Financial Statements for additional information. |
| |
(9) | Other contractual obligations relate to commitments for capital projects. Other contractual obligations exclude $1.7 million of unrecognized tax benefits associated with uncertain tax positions for which there is no contractual obligation. We had no other long-term liabilities as defined for purposes of this disclosure by the SEC as of December 31, 2019. |
| |
(10) | Other contractual obligations do not include any amounts for our pension obligations. The pension obligations are funded by our separate pension trusts, which held $127.0 million in assets at December 31, 2019. The combined projected benefit obligation ("PBO") of our U.S. and French pension plans was underfunded by $24.9 million and $26.6 million as of December 31, 2019 and 2018, respectively. We make contributions to our pension trusts based on many factors including regulatory guidelines, investment returns of the trusts and availability of cash for pension contributions versus other priorities. We expect 2020 funding to be in compliance with the Pension Protection Act of 2006. For information regarding our long-term pension obligations and trust assets, see Note 19. Postretirement and Other Benefits, of the Notes to Consolidated Financial Statements. |
| |
(11) | Other contractual obligations do not include any amounts for our postretirement healthcare and life insurance benefits. Such payments are dependent upon our retirees incurring costs and filing claims; therefore, future payments are uncertain. Our net payments under these plans were approximately $0.0 million and $0.1 million in the years ended December 31, 2019 and 2018, respectively. Based on this past experience, we currently expect our share of the net payments to be less than $1.0 million during 2020 for these benefits. For more information regarding our retiree healthcare and life insurance benefit obligations, see Note 19. Postretirement and Other Benefits, of the Notes to Consolidated Financial Statements. |
(2) Long-term debt excludes debt issuance costs of $23.0 million in unamortized discount on the credit facility; refer to additional information regarding long-term debt in Note 14. Debt of the Notes to Consolidated Financial Statements.
(3) The amounts reflected in debt interest are based upon the short-term and long-term scheduled principal maturities and interest rates in effect as of December 31, 2022. Where specific maturities are not stated, such as for an overdraft line-of-credit, a repayment date coinciding with the end of the year was used for purposes of these calculations. With respect to our variable-rate debt outstanding at December 31, 2022, a 100 basis point increase in interest rates would increase our debt interest obligation by $4.0 million in 2023, taking into account the effect of the interest rate hedge transactions the Company has entered into as of December 31, 2022. For more information regarding our outstanding debt and associated interest rates, as well as hedging strategies in place which serve to fix the interest rate on a large portion of our debt, refer to Note 14. Debt of the Notes to Consolidated Financial Statements. (4) Restructuring obligations are more fully discussed in Note 13. Restructuring and Impairment Activities of the Notes to Consolidated Financial Statements.
(5) Minimum operating and financing lease payments relate to our future minimum obligations under non-cancelable operating leases having an initial or remaining term in excess of one year as of December 31, 2022.
(6) Minimum purchase obligations for raw materials include our calcium carbonate purchase agreement at our plant in Quimperlé, France.
(7) Purchase obligations for energy including natural gas, electricity, and steam.
(8) On December 22, 2017, the United States enacted the Tax Act into law, which requires a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. Companies may elect to pay the tax over eight years based on an installment schedule outlined in the Tax Act. We have made this election and have reflected our transition tax due by year as a contractual obligation. Refer to Note. 17. Income Taxes of the Notes to Consolidated Financial Statements for additional information.
(9) Other contractual obligations relate to commitments for capital projects. Other contractual obligations exclude $19.9 million of unrecognized tax benefits associated with uncertain tax positions, for which there are no contractual obligations, inclusive of $8.1 million of uncertain tax positions that will offset a related deferred tax asset. We had no other long-term liabilities as defined for purposes of this disclosure by the SEC as of December 31, 2022.
(10) Other contractual obligations do not include any amounts for our pension obligations. The pension obligations are funded by our separate pension trusts, which held $492.5 million in assets at December 31, 2022. The combined projected benefit obligation ("PBO") of our pension plans was underfunded by $26.8 million and $11.4 million as of December 31, 2022 and 2021, respectively. We make contributions to our pension trusts based on many factors including regulatory guidelines, investment returns of the trusts and availability of cash for pension contributions versus other priorities. We expect 2023 funding to be in compliance with the Pension Protection Act of 2006. For information regarding our long-term pension obligations and trust assets, refer to Note 18. Postretirement and Other Benefits of the Notes to Consolidated Financial Statements.
(11) Other contractual obligations do not include any amounts for our postretirement healthcare and life insurance benefits. Such payments are dependent upon our retirees incurring costs and filing claims; therefore, future payments are uncertain. Our net payments under these plans were insignificant for the years ended December 31, 2022 and 2021, respectively. As such, we currently expect our share of the net payments to be insignificant during 2022.
OUTLOOK
For the AMSATM segment, we expect our growth outlook to be driven by macro factors affecting our five served end-markets including– filtration, transportation, infrastructureprotective solutions, release liners, healthcare, and construction, medical, and industrial,industrials – as well as industry demand for many of our key applications. We expect water and other specialty filtration applications, surface protectionprotective solutions products, within transportation, and release liners to deliver growth exceeding GDP (as well as relative outperformance during periods of GDP declines), driven by non-cyclical positive macro and application-specific demand drivers. We expect our healthcare products for infrastructure and construction end-markets to deliver growth exceeding GDP, or other global growth benchmarks, over the long-term due to the relative strong demand for the specific products we provide. Generally, we believe that our sales into the industrial and medical end-marketsend-market will perform relatively in line with long-term broad economic growth in the U.S. and to some extent Europe and China. Excluding potential impacts from raw material price movements, the Company generally projects margin expansionnear and long-term profit growth in the AMSATM segment as a result of expected organic sales growth.growth, as well as near-term (one to three years) Merger-related cost synergy benefits. For the EPFBS segment, we expect our performance to be driven by macro factors, such as the expected long-term trend of reduced cigarettecombustibles consumption and foreign exchange movements,other mature paper-based applications, with positive offsets from innovation and the potential regulatory changes in the tobacco industryincreased portfolio focus to growth areas such as approvalspremium packaging and consumer products. Due to recently elevated inflation and higher interest rates, coupled with increased geopolitical uncertainties impacting Europe, we believe the near-term global macro demand environment limits near-term demand visibility. However, looking longer term, given ATM’s relative size compared to FBS (approximately 65% of various new reduced-risk tobacco products or tax-related price increases. In addition, cigarette industry consolidation may play a role in affecting trends inannualized post-Merger net sales), the tobacco industry.Company believes it is well-positioned to deliver consolidated long-term organic sales and profit growth while also generating strong cash flows to support debt reduction, cash returns to shareholders, and growth investments.
FORWARD-LOOKING STATEMENTS
This reportAnnual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act") that are subject to the safe harbor created by thatthe Act and other legal protections. Forward-looking statements include, without limitation, those regarding 2020 outlook and future performance, mergers and acquisitions, future market trends, future RTL sales and volume trends, smoking attrition rates, synergies or growth from acquisitions,the incurrence of additional debt adoptionand expected maturities of LIP standards in new regions, reverse osmosis water filtrationthe Company’s debt obligations, the adequacy of our sources of liquidity and global drinking water demands,capital, acquisition integration and growth prospects (including international growth), the deductibility of goodwill associated with the Conwed acquisition, impactcost and timing of our restructuring actions, post-retirement healthcare and life insurance payments,the impact of the LIP intellectual propertyongoing litigation matters and opposition proceedings,environmental claims, the amount of capital spending and/or common stock repurchases, the profitability of CTS, pricing pressures (including related to LIP), future cash flows, benefits associated with our global asset realignment (including possible non-recurrence of one-time tax benefits, lower or higher effective tax rates), purchase accounting impacts, impacts and timing of our ongoing operational excellence and other cost-reduction and cost-optimization initiatives, increasing revenues coming fromthe impact of the COVID-19 pandemic on our non-tobacco operations, profitability, and cash flow, the expected benefits and accretion of the Neenah merger and Scapa acquisition and integration 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," "will," "typically" and similar words.
These forward-looking statements are prospective in nature and not based on historical facts, but rather on current expectations and on numerous assumptions regarding the business strategies and the environment in which the Company’s business shall operate in the future and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by those statements. These statements are not guarantees of future performance and involve certain risks and uncertainties that may cause actual results to differ materially from our expectations as of the date of this report. These risks include, among other things, those set forth in Part I, Item 1A. Risk Factors of this report, as well as the following factors:
Changes in sales or production volumes, pricing and/or manufacturing costs of Recon products, cigarette paper (including for LIP cigarettes), including any change by our customers in their tobacco and tobacco-related blends for their cigarettes, their target inventory levels and/or the overall demand for their products, new technologies such as e-cigarettes, inventory adjustments and rebalancings in our EP segment. Additionally, competition and changes in AMS end-market products due to changing customer demands;
Changes in the Chinese economy, including relating to the demand for reconstituted tobacco, premium cigarettes and netting;
•Risks associated with the implementation of our strategic growth initiatives, including diversification, and the Company's understanding of, and entry into, new industries and technologies;
•Risks associated with acquisitions, dispositions, strategic transactions and global asset realignment initiatives of Mativ;
•Adverse changes in the filtration, release liners, protective solutions, construction and infrastructure and healthcare sectors impacting key ATM segment customers;
•Changes in the source and intensity of competition in our commercial segments. We operateend-markets: filtration, protective solutions, release liners, healthcare, and industrials for ATM, and packaging and specialty papers and engineered papers (tobacco and alternatives) for FBS;
•Adverse changes in highly competitive marketssales or production volumes, pricing and/or manufacturing costs in which alternative supplies and technologies may attract our customers away from our products. In additional, our customers may, in some cases, produce for themselves the components that the Company sells to them for incorporation into their products, thus reducingATM or eliminating their purchases from us;FBS operating segments;
Our ability to attract and retain key personnel, due to our prior restructuring actions, the tobacco industry in which we operate or otherwise;
Weather conditions, including potential impacts, if any, from climate change, known and unknown, seasonality factors that affect the demand for virgin tobacco leaf and natural disasters or unusual weather events;
•Seasonal or cyclical market and industry fluctuations which may result in reduced net sales and operating profits during certain periods;
•Risks associated with our technological advantages in our intellectual property and the likelihood that our current technological advantages are unable to continue indefinitely;
Increases in commodity prices and lack•Supply chain disruptions, including the failure of availability of such commodities,one or more material suppliers, including energy, wood pulpresin, fiber, and resins, could impact the saleschemical suppliers, to supply materials as needed to maintain our product plans and profitability of our products;cost structure;
Adverse changes in the oil, gas, automotive, construction and infrastructure, and mining sectors impacting key AMS segment customers;
•Increases in operating costs due to inflation and continuing increases in the inflation rate or otherwise, such as labor expense, compensation and benefits costs;
•Business disruptions from the Merger that will harm the Company's business, including current plans and operations;
Employee retention•The possibility that Mativ may be unable to successfully integrate Neenah's operations with those of Mativ and achieve expected synergies and operating efficiencies within the expected time-frames or at all;
•Potential adverse reactions or changes to business relationships resulting from the Merger, including as it relates to the Company's ability to successfully renew existing client contracts on favorable terms or at all and obtain new clients;
•Our ability to attract and retain key personnel, including as a result of the Merger, labor shortages;
Changes in employment, wage and hour laws and regulations in the U.S., France and elsewhere, including loi de Securisation de l'emploi, unionization rule and regulations by the National Labor Relations Board, equal pay initiatives, additional anti-discrimination rules or tests and different interpretations of exemptions from overtime laws;
Laborshortages, labor strikes, stoppages disruptions or other disruptions at our facilities;disruptions;
•The impact of tariffs,substantial indebtedness Mativ has incurred and assumed in connection with the Merger and the imposition of any future tariffsneed to generate sufficient cash flows to service and other trade barriers, and the effects of retaliatory trade measures;repay such debt;
Existing and future governmental regulation and the enforcement thereof, for example relating to the tobacco industry, taxation and the environment (including the impact thereof on our Chinese joint ventures);
New reports as to the effect of smoking on human health or the environment;
•Changes in general economic, financial and credit conditions in the U.S., Europe, China and elsewhere, including the impact thereof on currency exchange rates (including any weakening of the euroEuro and Real) and on interest rates;
Changes in the method pursuant to which LIBOR rates are determined and the potential•The phasing out of USD LIBOR rates after 2021;2023 and the replacement with SOFR;
•A failure in our risk management and/or currency or interest rate swaps and hedging programs, including the failures of any insurance company or counterparty;
•Changes in the manner in which we finance our debt and future capital needs, including potential acquisitions;
•Changes in tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities;
The success•Uncertainty as to the long-term value of and costs associated with, our current or future restructuring initiatives,the common stock of Mativ, including the grantingdilution caused by Mativ’s issuance of additional shares of its common stock in connection with the Merger;
•Changes in employment, wage and hour laws and regulations in the U.S., France and elsewhere, including the loi de Securisation de l'emploi in France, unionization rules and regulations by the National Labor Relations Board in the U.S., equal pay initiatives, additional anti-discrimination rules or tests and different interpretations of exemptions from overtime laws;
•The impact of tariffs, and the imposition of any needed governmental approvalsfuture additional tariffs and other trade barriers, and the occurrenceeffects of work stoppagesretaliatory trade measures;
•Existing and future governmental regulation and the enforcement thereof that may materially restrict or other labor disruptions;adversely affect how we conduct business and our financial results;
•Weather conditions, including potential impacts, if any, from climate change, known and unknown, and natural disasters or unusual weather events;
Changes in the discount rates, revenue growth, cash flow growth rates or other assumptions used by the Company in its assessment for impairment of assets and adverse economic conditions or other factors that would result in significant impairment charges;
The failure of one or more material suppliers, including energy, resin and pulp suppliers, to supply materials as needed to maintain our product plans and cost structure;
•International conflicts and disputes, such as those involving the Russian Federation, Koreaongoing conflict between Russia and the Middle East,Ukraine, which restrict our ability to supply products into affected regions, due to the corresponding effects on demand, the application of international sanctions, or practical consequences on transportation, banking transactions, and other commercial activities in troubled regions;
Events occurring in countries having a large share of the global economy (such as China, Japan, or the EU) can have an impact on economies that are interdependent and thereby affect those in which the Company primarily operates. For example, the impact of a slowdown of the Chinese economy due to the outbreak of a virus there on the global economy and our future results is uncertain.
•Compliance with the FCPA and other anti-corruption laws or trade control laws, as well as other laws governing our operations;
The pace and extent of further international adoption of LIP cigarette standards and the nature of standards so adopted;
•Risks associated with our 50%-owned, non-U.S. joint ventures relating to controlpandemics and decision-making, compliance, accounting standards, transparency and customer relations, among others;
A failure in our risk management and/or currency or interest rate swaps and hedging programs,other public health emergencies, including the failurescontinued impact of, any insurance company or counterparty;and the governmental and third party response to, the COVID-19 pandemic and its variant strains;
•The number, type, outcomes (by judgment or settlement) and costs of legal, tax, regulatory or administrative proceedings, litigation and/or amnesty programs, including those in Brazil, France and Germany;
•Increased scrutiny from stakeholders related to environmental, social and governance ("ESG") matters, particularly our sales of combustible products business within the tobacco industry which represented approximately 20% of the Company's net sales for the year ended December 31, 2022, as well as our ability to achieve our broader ESG goals and objectives;
•The outcome and cost of the LIP-related intellectual property infringement and validity litigation against Glatz in Europe and the Glatz's German Patent Court invalidation proceedings;Europe;
Risks associated with our technological advantages in our intellectual property and the likelihood that our current technological advantages are unable to continue indefinitely;
Risks associated with acquisitions or other strategic transactions, including acquired liabilities and restrictions, retaining customers from businesses acquired, achieving any expected results or synergies from acquired businesses, complying with new regulatory frameworks, difficulties in integrating acquired businesses or implementing strategic transactions generally and risks associated with international acquisition transactions, including in countries where we do not currently have a material presence;
Risks associated with dispositions, including post-closing claims being made against us, disruption to our other businesses during a sale process or thereafter, credit risks associated with any buyer of such disposed assets and our ability to collect funds due from any such buyer;
Risks associated with our global asset realignment initiatives, including: changes in tax law, treaties, interpretations, or regulatory determinations; audits made by applicable regulatory authorities and/or our auditor; and our ability to operate our business in a manner consistent with the regulatory requirements for such realignment;
Increased taxation on tobacco-related products;
•Costs and timing of implementation of any upgrades or changes to our information technology systems;
•Failure by us to comply with any privacy or data security laws or to protect against theft of customer, employee and corporate sensitive information;
•The impact of cybersecurity risks related to breaches of security pertaining to sensitive Company, customer, or vendor information, as well as breaches in the technology that manages operations and other business processes; and
Changes in tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities;
Changes in construction and infrastructure spending and its impact on demand for certain products;
Potential loss of consumer awareness and demand for acquired companies’ products if it is decided to rebrand those products under the Company’s legacy brand names; and
•Other factors described elsewhere in this document and from time to time in documents that we file with the SEC.
All forward-looking statements made in this document are qualified by these cautionary statements. Forward-looking statements herein 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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Risk
Changes in foreign currency exchange rates may have an impact on our operating profit. Since we transact business in many countries, some of our sale and purchase transactions are denominated in a currency other than the local currency of our operations. As a result, changes in exchange rates between the currencies in which the transaction is denominated versus the local currency of our operation into which the transaction is being recorded can impact the amount of local currency recorded for such transaction. This can result in more or less local currency revenue or cost related to such transaction and thus have an effect on our operating profit. Currency transaction risk is mitigated partially in France as some of the revenue and expense transactions of our French subsidiaries are denominated in U.S. dollars, providing a degree of natural hedging. Our Brazilian and PolishEuropean operations are more fully exposed to currency transaction risk, especially as a result of U.S. dollar, euro, and euroBritish pound denominated sales respectively.in countries where these currencies are non-functional.
Additionally, changes in foreign currency exchange rates may have an impact on the amount reported in Other income (expense) income,, net. Once the above-indicated receivables and payables from the sale and purchase transactions have been recorded, to the extent currency exchange rates change prior to settlement of the balance, a gain or loss on the non-local currency denominated asset or liability balance may be experienced, in which case such gain or loss is included in Other income (expense) income,, net.
We utilize forward and swap contracts and, to a lesser extent, option contracts to selectively hedge our exposure to foreign currency transaction risk when it is practical and economical to do so. The use of these contracts minimizes transactional exposure to exchange rate changes because the gains or losses incurred on the derivative instrument will offset, in whole or in part, the loss or gain on the underlying foreign currency exposure. These instruments are entered into with money center banks, insurance companies or government agencies, collectively known as counterparties. We expect to continue to apply foreign currency hedging in our Brazilian and Polish operations infor the foreseeable future. As of December 31, 2019,2022, a 10% unfavorable change in the exchange rate of our functional currencies and those of our subsidiaries against the prevailing market rates of non-local currencies involving our transactional exposures would have resulted in a net pre-tax loss of approximately $3.2$16.0 million. These hypothetical gains or losses on foreign currency transactional exposures are based on the December 31, 20192022 rates and the assumed rates. While we believe the above loss resulting from the hypothetical unfavorable changes in foreign currency exchange rates could be material to our results of operations, we reduce this risk by selectively hedging our exposure when it is practical and economical to do so.
Interest Rate Risk
We may utilize a combination of variable-rate and fixed-rate debt consisting of short-term and long-term instruments. We selectively hedge our exposure to interest rate increases on our variable-rate, long-term debt when it is practical and economical to do so. We have utilized various forms of interest rate hedge agreements, including interest rate swap agreements and forward rate agreements. We utilize variable-to-fixed interest rate swap agreements, typically with contractual terms no longer than 60 months, which serve to convert a portion of our outstanding variable rate debt to a fixed rate. Various outstanding interest-bearing instruments are sensitive to changes in interest rates. With respect to our variable-rate debt outstanding at December 31, 2019,2022, a 100 basis point increase in interest rates would result in a $3.7$4.0 million decrease to our future annual pre-tax earnings, taking into account the effect of the interest rate hedge transactions the Company has entered into as of December 31, 2019.2022. As of December 31, 2019, the percentage2022, 20.8% and 79.2% of the Company’sCompany's total debt was fixed and floating interest rate debt, was 64% and 36%, respectively. The Company has entered into a number of interest rate hedge transactions to convert floating rate debt to fixed. On September 11, 2019, the Company entered into a pay-fixed, receive-variable interest rate swap with a maturity date of January 31, 2027. SeeRefer to Note 16.15. Derivatives, of the Notes to Consolidated Financial Statements for additional information. Including the impact of these transactions, as of December 31, 2019,2022, the percentage of the Company’s debt subject to fixed and floating rates of interest was 97%77.1% and 3%22.9%, respectively.
Commodity Price Risk
We are subject to commodity price risks from our purchases of raw materials, including resin and wood pulp. Resin is the largest single component of raw material cost in the AMSATM segment and wood pulp is our largest single component of raw material cost in our EPFBS segment. The per pound price of resin is volatile and may impact the future results of our AMSATM segment. Additionally, the per ton cost of wood pulp is cyclical in nature and more volatile than general inflation. During the period from January 20142017 through December 2019,2022, the U.S. list price of northern bleached softwood kraft pulp ("NBSK") a representative pulp grade that we use, increased by approximately 53%.ranged between $1,000 to $1,800 per ton. The average list price of NBSK for the year of 2022 was $1,700 per ton. We normally maintain approximately 50 to 90 days of inventories to support our operations. As a result, there is a lag in the impact of changes in the per ton list price of resin and wood pulp on our cost of products sold.
In our AMSATM segment, we utilize a variety of commodity grade and specialty resins, including a selection of specialized high temperature engineering grade resins. Certain of these specialty resins are significantly more expensive than commodity grade resins. Resin prices fluctuate significantly and can impact profitability. As we periodically enter into agreements with customers under which we agree to supply products at fixed prices, unanticipated increases in the costs of raw materials, or the lack of availability of such raw materials (due to force majeure or other reasons), can significantly impact our financial performance. Even where we do not have fixed-price agreements, we generally cannot pass through increases in raw material costs in a timely manner and in many instances are not able to pass through the entire increase to our customers. Further, some of the resins we use in our AMSATM segment are only available from a single supplier, or a limited number of suppliers. Consequently, such supplier(s) can control the availability and thus the cost of the resins we use, notwithstanding any changes in the cost of oil. It can be time consuming and costly, and occasionally impractical, to find replacement resins where such suppliers limit the availability or increase the cost of resins we use. Commodity grade resin prices typically correlate with crude oil prices while specialty resin prices often do not. To date, we have not utilized derivative instruments to manage this risk. With respect to our commodity price risk, a hypothetical 10% change in per ton resin prices would impact our future annual pre-tax earnings by approximately $13.5$27.6 million, assuming no compensating change in our selling prices.
Selling prices of our paper products are influenced, in part, by the market price for wood pulp, which is determined by worldwide industry supply and demand. Generally, over time, we have been able to increase our selling prices in response to increases in per ton wood pulp costs and have generally reduced our selling prices when wood pulp costs have significantly declined. Increases in prices of wood pulp could adversely impact our earnings if selling prices are not increased or if such increases do not fully compensate for or trail the increases in wood pulp prices. We have not utilized derivative instruments to manage this risk. With respect to our commodity price risk, a hypothetical 10% change in per ton wood pulp prices would impact our future annual pre-tax earnings by approximately $4.9$24.8 million, assuming no compensating change in our selling prices.
Our ATM segment acquires certain specialized pulp from two global suppliers and certain critical specialty chemicals from a limited number of suppliers. In general, these supply arrangements are covered by formal contracts and represent multi-year business relationships that have historically been sufficient to meet our needs. We expect these relationships to continue to operate in a satisfactory manner in the future. In the event of an interruption of production at any one supplier, we believe that each of these suppliers individually would be able to satisfy our short-term requirements for specialized pulp or specialty chemicals. In addition, short-term disruptions in the global supply chain for our raw materials, as experienced in 2022 and 2021, could negatively impact our ability to produce certain products which could adversely impact the mix and volume of products we can provide to our customers. In the event of a long-term disruption in our supply of specialized pulp or specialty chemicals, we believe we would be able to substitute other pulp grades or other specialty chemicals that would allow us to meet required product performance characteristics and incur only a limited disruption in our production. As a result, we do not believe that the substitution of such alternative pulp or specialty chemicals would have a material effect on our operations in the long run.
We believe that, while our exposure to commodity price risk is material to our results of operations, our customers understand such risk and over time changes in the price of the commodities used in our manufacturing processes are typically reflected in selling prices.
Energy Supply and Cost Volatility
In France,Western Europe, Poland, China and in the U.S., availability of energy is generally reliable, although prices can fluctuate significantly based on variations in demand. the geopolitical events in Russia and Ukraine have resulted in volatile energy prices in Europe as well as temporary concerns about supply of energy sources, such as natural gas, in the region. Currently, while energy prices remain elevated versus historical levels, supplies appear to be stable.
In Brazil, where that country's production of electricity is heavily reliant upon hydroelectric plants, availability of electricity has been affected in the past by rain variations. Although our Brazilian business currently has a sufficient supply of energy to continue its current level of operation, there can be no assurance that we will have sufficient electricity in the future, or that costs will remain stable. We have the ability to generate substantially all of the electrical energy used by our Munising mill and approximately 30 percent of the electrical energy at our Bruckmühl, Germany mill. Availability of energy is not expected to be a problem in the foreseeable future, but the purchase price of such energy can and likely will fluctuate significantly based on fluctuations in demand and other factors.
Due to the competitive pricing in the markets for most of our products, we are typically unable to fully pass throughpass-through higher energy costs to our customers. With respect to our purchased energy price risk, a hypothetical 10% change in per unit prices would impact our future annual pre-tax earnings by approximately $4.8$11.6 million, assuming no compensating change in our selling prices.
Periodically, when we believe it is appropriate to do so, we enter into agreements to procure a portion of our energy for future periods in order to reduce the uncertainty of future energy costs. However, in recent years this has only marginally slowed the increase in energy costs due to the volatile changes in energy prices we have experienced.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
| | | | | |
| Page |
| Page |
Consolidated Financial Statements | |
2020 | |
2020 | |
2021 | |
2020 | |
2020 | |
| |
Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34) | |
Schedules have been omitted because they are either not required, not applicable or the required information is included in the consolidated financial statements or notes thereto.
SCHWEITZER-MAUDUIT INTERNATIONAL,MATIV HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(dollars in millions, except per share amounts)
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
Net sales | $ | 1,022.8 |
| | $ | 1,041.3 |
| | $ | 982.1 |
|
Cost of products sold | 732.8 |
| | 762.8 |
| | 698.7 |
|
Gross profit | 290.0 |
| | 278.5 |
| | 283.4 |
|
| | | | | |
Selling expense | 33.7 |
| | 35.7 |
| | 33.3 |
|
Research expense | 13.5 |
| | 15.2 |
| | 17.8 |
|
General expense | 105.1 |
| | 90.9 |
| | 95.9 |
|
Total nonmanufacturing expenses | 152.3 |
| | 141.8 |
| | 147.0 |
|
| | | | | |
Restructuring and impairment expense | 3.7 |
| | 1.7 |
| | 8.1 |
|
Operating profit | 134.0 |
|
| 135.0 |
|
| 128.3 |
|
Interest expense | 36.1 |
| | 28.2 |
| | 26.9 |
|
Other (expense) income, net | (1.0 | ) | | 10.0 |
| | 0.1 |
|
Income from continuing operations before income taxes and income from equity affiliates | 96.9 |
| | 116.8 |
| | 101.5 |
|
| | | | | |
Provision for income taxes | 15.2 |
| | 10.7 |
| | 69.6 |
|
Income (Loss) from equity affiliates, net of income taxes | 4.1 |
| | (11.3 | ) | | 2.5 |
|
Income from continuing operations | 85.8 |
| | 94.8 |
| | 34.4 |
|
(Loss) gain from discontinued operations | — |
| | (0.3 | ) | | 0.1 |
|
Net income | $ | 85.8 |
| | $ | 94.5 |
| | $ | 34.5 |
|
| | | | | |
Net income (loss) per share - basic: | | | | | |
Income per share from continuing operations | $ | 2.78 |
| | $ | 3.08 |
| | $ | 1.12 |
|
Loss per share from discontinued operations | — |
| | (0.01 | ) | | — |
|
Net income per share – basic | $ | 2.78 |
| | $ | 3.07 |
| | $ | 1.12 |
|
| | | | | |
Net income (loss) per share – diluted: | |
| | |
| | |
Income per share from continuing operations | $ | 2.76 |
| | $ | 3.07 |
| | $ | 1.12 |
|
Loss per share from discontinued operations | — |
| | (0.01 | ) | | — |
|
Net income per share – diluted | $ | 2.76 |
| | $ | 3.06 |
| | $ | 1.12 |
|
| | | | | |
Weighted average shares outstanding: | | | | | |
| | | | | |
Basic | 30,652,200 |
| | 30,551,300 |
| | 30,407,100 |
|
| | | | | |
Diluted | 30,838,300 |
| | 30,692,900 |
| | 30,549,300 |
|
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | |
| | | | | |
Net sales | $ | 2,167.4 | | | $ | 1,440.0 | | | $ | 1,074.4 | |
Cost of products sold | 1,729.8 | | | 1,109.7 | | | 766.1 | |
Gross profit | 437.6 | | | 330.3 | | | 308.3 | |
| | | | | |
Selling expense | 74.2 | | | 46.7 | | | 36.9 | |
Research and development expense | 26.6 | | | 20.3 | | | 13.8 | |
General expense | 266.1 | | | 169.9 | | | 116.9 | |
Total nonmanufacturing expenses | 366.9 | | | 236.9 | | | 167.6 | |
| | | | | |
Restructuring and impairment expense | 19.3 | | | 10.1 | | | 11.9 | |
Operating profit | 51.4 | | | 83.3 | | | 128.8 | |
Interest expense | 86.1 | | | 46.1 | | | 30.5 | |
Other income (expense), net | 10.3 | | | 35.9 | | | (1.0) | |
Income (Loss) before income taxes and income from equity affiliates | (24.4) | | | 73.1 | | | 97.3 | |
| | | | | |
Income tax expense (benefit) | (12.6) | | | (9.4) | | | 18.4 | |
Income from equity affiliates, net of income taxes | 5.2 | | | 6.4 | | | 4.9 | |
| | | | | |
| | | | | |
Net income (loss) | $ | (6.6) | | | $ | 88.9 | | | $ | 83.8 | |
Dividends paid to Common Stockholders | (0.9) | | | (0.6) | | | (0.7) | |
Undistributed earnings available to Common Stockholders | — | | | (0.5) | | | (0.4) | |
Net income (loss) attributable to Common Stockholders | $ | (7.5) | | | $ | 87.8 | | | $ | 82.7 | |
| | | | | |
Net income (loss) per share | | | | | |
| | | | | |
| | | | | |
Basic | $ | (0.18) | | | $ | 2.83 | | | $ | 2.68 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Diluted | $ | (0.18) | | | $ | 2.80 | | | $ | 2.66 | |
| | | | | |
Weighted average shares outstanding: | | | | | |
Basic | 42,442,200 | | | 31,030,400 | | | 30,832,700 | |
Diluted | 42,442,200 | | | 31,400,300 | | | 31,104,200 | |
The accompanying notes are an integral part of these consolidated financial statements.
SCHWEITZER-MAUDUIT INTERNATIONAL,MATIV HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)
| | | For the Years Ended December 31, | |
| 2019 | | 2018 | | 2017 | | Years Ended December 31, |
Net income | $ | 85.8 |
| | $ | 94.5 |
| | $ | 34.5 |
| |
Other comprehensive (loss) income, net of tax: | | | | | | |
| | | 2022 | | 2021 | | 2020 |
Net income (loss) | | Net income (loss) | $ | (6.6) | | | $ | 88.9 | | | $ | 83.8 | |
Other comprehensive income (loss), net of tax: | | Other comprehensive income (loss), net of tax: | |
Foreign currency translation adjustments | 1.8 |
| | (28.6 | ) | | 36.0 |
| Foreign currency translation adjustments | (26.2) | | | (24.4) | | | 16.6 | |
Less: Reclassification adjustment for realized translation adjustments | (0.9 | ) | | (0.8 | ) | | — |
| Less: Reclassification adjustment for realized translation adjustments | — | | | — | | | (0.1) | |
| | | | | | |
Unrealized gains on derivative instruments | 1.6 |
| | 2.4 |
| | 2.0 |
| |
Less: Reclassification adjustment for (gains) losses on derivative instruments included in net income | (4.5 | ) | | (3.7 | ) | | 0.3 |
| |
Unrealized gain (loss) on derivative instruments | | Unrealized gain (loss) on derivative instruments | 35.4 | | | 6.1 | | | (11.6) | |
Less: Reclassification adjustment for loss on derivative instruments included in net income (loss) | | Less: Reclassification adjustment for loss on derivative instruments included in net income (loss) | 10.9 | | | 5.1 | | | 2.0 | |
| | | | | | |
Net gain (loss) from postretirement benefit plans | 0.6 |
| | (3.3 | ) | | 8.3 |
| Net gain (loss) from postretirement benefit plans | 2.6 | | | 3.3 | | | (0.1) | |
Less: Amortization of postretirement benefit plans' costs included in net periodic benefit cost | 3.3 |
| | 3.8 |
| | 3.3 |
| Less: Amortization of postretirement benefit plans' costs included in net periodic benefit cost | 0.9 | | | 2.8 | | | 3.9 | |
Other comprehensive income (loss) | 1.9 |
| | (30.2 | ) | | 49.9 |
| Other comprehensive income (loss) | 23.6 | | | (7.1) | | | 10.7 | |
Comprehensive income | $ | 87.7 |
| | $ | 64.3 |
| | $ | 84.4 |
| Comprehensive income | $ | 17.0 | | | $ | 81.8 | | | $ | 94.5 | |
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.