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SWM Schweitzer-Mauduit International

Filed: 5 May 21, 4:22pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period endedMarch 31, 2021
  OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the transition period from __________________to __________________
1-13948
(Commission file number)
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter) 
Delaware62-1612879
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
100 North Point Center East,Suite 600
Alpharetta,Georgia30022
(Address of principal executive offices)(Zip Code)
 
1-800-514-0186
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common stock, $0.10 par valueSWMNew York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes        No  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer," “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 

The Company had 31,409,529 shares of common stock issued and outstanding as of May 5, 2021.



SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

TABLE OF CONTENTS




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions, except per share amounts)
(Unaudited)
 Three Months Ended
 March 31, 2021March 31, 2020
Net sales$288.2 $261.5 
Cost of products sold207.4 187.2 
Gross profit80.8 74.3 
Selling expense9.1 9.5 
Research and development expense3.8 3.2 
General expense32.7 27.4 
Total nonmanufacturing expenses45.6 40.1 
Restructuring and impairment expense1.7 0.1 
Operating profit33.5 34.1 
Interest expense2.9 6.9 
Other (expense) income, net(2.6)0.6 
Income before income taxes and income from equity affiliates28.0 27.8 
Provision for income taxes7.4 5.3 
Income from equity affiliates, net of
  income taxes
1.0 
Net income$21.6 $22.5 
Net income per share - basic:  
Net income per share – basic$0.69 $0.72 
Net income per share – diluted:  
Net income per share – diluted$0.68 $0.72 
Weighted average shares outstanding:  
Basic30,974,200 30,712,300 
Diluted31,340,500 30,910,000 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1


SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in millions)
(Unaudited) 
 Three Months Ended
 March 31, 2021March 31, 2020
Net income$21.6 $22.5 
Other comprehensive loss, net of tax:
Foreign currency translation adjustments(9.9)(3.5)
Unrealized gain (losses) on derivative instruments4.4 (12.7)
Net gain from postretirement benefit plans0.1 0.1 
Less: amortization of postretirement benefit plans' costs included in net periodic cost1.6 0.4 
Other comprehensive loss(3.8)(15.7)
Comprehensive income$17.8 $6.8 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2


SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions, except per share amounts)
(Unaudited)
March 31,
2021
December 31,
2020
ASSETS  
Current assets  
Cash and cash equivalents$63.7 $54.7 
Accounts receivable, net172.9 148.5 
Inventories173.3 179.7 
Income taxes receivable3.3 6.2 
Other current assets14.9 7.3 
Total current assets428.1 396.4 
Property, plant and equipment, net324.1 339.0 
Deferred income tax benefits0.2 2.6 
Investment in equity affiliates60.0 59.3 
Goodwill401.8 403.7 
Intangible assets304.8 314.7 
Other assets68.5 69.2 
Total assets$1,587.5 $1,584.9 
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities  
Current debt$2.7 $2.8 
Accounts payable66.6 60.5 
Income taxes payable4.9 2.7 
Accrued expenses and other current liabilities83.5 100.9 
Total current liabilities157.7 166.9 
Long-term debt615.2 590.5 
Long-term income tax payable17.7 17.7 
Pension and other postretirement benefits35.3 36.5 
Deferred income tax liabilities45.0 45.1 
Other liabilities63.7 78.6 
Total liabilities934.6 935.3 
Stockholders’ equity:  
Preferred stock, $0.10 par value; 10,000,000 shares authorized; NaN issued or outstanding
Common stock, $0.10 par value; 100,000,000 shares authorized; 31,407,136 and 31,324,745 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively3.1 3.1 
Additional paid-in-capital94.6 92.2 
Retained earnings670.9 666.2 
Accumulated other comprehensive loss, net of tax(115.7)(111.9)
Total stockholders’ equity652.9 649.6 
Total liabilities and stockholders’ equity$1,587.5 $1,584.9 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3



SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(dollars in millions, except per share amounts)
(Unaudited)
 Common Stock Issued    
 SharesAmountAdditional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance, December 31, 201930,896,661 $3.1 $78.8 $638.4 $(122.6)$597.7 
Net income— — — 22.5 — 22.5 
Other comprehensive loss, net of tax— — — — (15.7)(15.7)
Dividends declared ($0.44 per share)— — — (13.7)— (13.7)
Restricted stock issuances, net320,005 — — — — — 
Stock-based employee compensation expense— — 2.1 — — 2.1 
Stock issued to directors as compensation1,130 — 0.1 — — 0.1 
Purchases and retirement of common stock(25,274)— — (1.0)— (1.0)
Balance, March 31, 202031,192,522 $3.1 $81.0 $646.2 $(138.3)$592.0 
Balance, December 31, 202031,324,745 $3.1 $92.2 $666.2 $(111.9)$649.6 
Net income— — — 21.6 — 21.6 
Other comprehensive loss, net of tax— — — — (3.8)(3.8)
Dividends declared ($0.44 per share)— — — (13.8)— (13.8)
Restricted stock issuances, net148,530 — — — — — 
Stock-based employee compensation expense— — 2.1 — — 2.1 
Stock issued to directors as compensation590 — 0.3 — — 0.3 
Purchases and retirement of common stock(66,729)— — (3.1)— (3.1)
Balance, March 31, 202131,407,136 $3.1 $94.6 $670.9 $(115.7)$652.9 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.






4


SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(dollars in millions)
(Unaudited) 
 Three Months Ended
 March 31,
2021
March 31,
2020
Operating  
Net income$21.6 $22.5 
Non-cash items included in net income:  
Depreciation and amortization16.9 15.3 
Deferred income tax3.0 0.7 
Pension and other postretirement benefits1.1 0.8 
Stock-based compensation2.1 2.2 
Income from equity affiliates(1.0)
Brazil tax assessment accruals, net(6.1)
Other items5.6 (2.7)
Changes in operating working capital, net of assets acquired:
Accounts receivable(27.7)(33.7)
Inventories1.8 10.8 
Prepaid expenses(4.8)(3.5)
Accounts payable11.3 1.3 
Accrued expenses and other current liabilities(13.5)(10.7)
Accrued income taxes2.4 2.1 
Net changes in operating working capital(30.5)(33.7)
Net cash provided by operations12.7 5.1 
Investing  
Capital spending(7.1)(7.4)
Capitalized software costs(0.5)(0.7)
Acquisitions, net of cash acquired(170.6)
Other investing0.3 2.4 
Net cash used in investing(7.3)(176.3)
5


SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(dollars in millions)
(Unaudited) 
 Three Months Ended
 March 31,
2021
March 31,
2020
Financing  
Cash dividends paid to SWM stockholders(13.8)(13.7)
Proceeds from issuances of long-term debt25.0 212.0 
Payments on long-term debt(0.6)(0.4)
Purchases of common stock(3.1)(1.0)
Payments for debt issuance costs(3.0)
Net cash provided by financing4.5 196.9 
Effect of exchange rate changes on cash and cash equivalents(0.9)(2.0)
Increase in cash and cash equivalents9.0 23.7 
Cash and cash equivalents at beginning of period54.7 103.0 
Cash and cash equivalents at end of period$63.7 $126.7 
Supplemental Cash Flow Disclosures
Cash paid for interest, net$1.4 $2.3 
Cash paid for taxes, net$2.0 $2.3 
Change in capital spending in accounts payable and accrued liabilities$4.9 $2.9 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


6

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. General

Nature of Business
 
Schweitzer-Mauduit International, Inc. ("SWM," "we," or the "Company"), headquartered in the United States of America, is a multinational diversified producer of highly engineered solutions and advanced materials for a variety of industries. The Company maintains 2 operating product line segments: Advanced Materials & Structures and Engineered Papers.

The Advanced Materials & Structures ("AMS") segment produces mostly resin-based rolled goods such as nets, films and meltblown materials, typically through an extrusion process or other non-woven technologies. AMS also provides converting and coating services. These products are used in a variety of specialty applications across the filtration, transportation, healthcare, construction, and industrial end-markets.

The Engineered Papers ("EP") segment primarily serves the tobacco industry with production of various cigarette papers and reconstituted tobacco products ("Recon"). Traditional reconstituted tobacco leaf ("RTL") is used as a blend with virgin tobacco in cigarettes and used in the production of small cigars. Recon, as well as low ignition propensity ("LIP") cigarette paper, a specialty product with fire-safety features, are two key profit drivers, which together account for more than half of segment net sales. The EP segment also produces non-tobacco papers for premium applications, such as energy storage and industrial commodity paper grades.

We conduct business in over 90 countries and operate 23 production locations worldwide, with facilities in the U.S., Canada, United Kingdom, France, Luxembourg, Belgium, Russia, Brazil, China and Poland. We also have a 50% equity interest in 2 joint ventures in China. The first, China Tobacco Mauduit (Jiangmen) Paper Industry Ltd. ("CTM"), produces various cigarette papers and the second, China Tobacco Schweitzer (Yunnan) Reconstituted Tobacco Co. Ltd. ("CTS"), produces RTL.

Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements and the notes thereto have been prepared in accordance with the instructions of Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission ("SEC") and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America ("U.S. GAAP"). However, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods.
 
The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year. The unaudited condensed consolidated financial statements and these notes thereto included herein should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 1, 2021.
 
Principles of Consolidation
 
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned, majority-owned and controlled subsidiaries. The Company’s share of the net income of its 50%-owned joint ventures in China is included in the condensed consolidated statements of income as Income from equity affiliates, net of income taxes. Intercompany balances and transactions have been eliminated.

7

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the condensed consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, inventory valuation, useful lives of tangible and intangible assets, fair values, sales returns and rebates, receivables valuation, pension, postretirement and other benefits, restructuring and impairment, taxes and contingencies. Furthermore, the Company considered the potential impact from the global economic and social disruption caused by the novel coronavirus (“COVID-19”) in estimates used in the Company’s financial statements as of and for the period ended March 31, 2021. The Company determined changes to these estimates did not have a material impact on our assessment of recoverability of our assets, including Accounts receivable, net, Goodwill, Intangible assets or long-lived assets. There may also be long-term undetermined effects on some of our customers and suppliers, and as a result of these uncertainties, actual results could differ materially from these estimates and assumptions.

Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The new standard simplifies income tax accounting requirements by removing certain exceptions to the general principles in Topic 740, Income Taxes. The provisions of this ASU were adopted effective January 1, 2021 and did not have a material impact on the condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, "Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans." The new standard modifies the annual disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans and requires the amendments to be applied on a retrospective basis for all periods presented. The provisions of this ASU were adopted effective January 1,2021 and the required changes, which are not significant and not expected to have a material impact, will be reflected in the annual financial statements.

Recently Issued Accounting Standards

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The new standard provides optional expedients and exceptions for applying generally accepted accounting principles ("GAAP") to contracts, hedging relationships, and other transactions affected by reference rate reform and the anticipated discontinuance of the London Interbank Offered Rate ("LIBOR") if certain criteria are met. The amendments in this ASU are effective for all entities as of March 12, 2020, through December 31, 2022. The Company does not currently have any contracts that have been changed to a new reference rate but will continue to evaluate the applicability and impact of the guidance.
8

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2. Revenue Recognition

The Company has 2 main sources of revenue: product sales and materials conversion. The Company recognizes product sales revenues when control of a product is transferred to the customer. For the majority of product sales, transfer of control occurs when the products are shipped from one of the Company’s manufacturing facilities to the customer. The cost of delivering finished goods to the Company’s customers is recorded as a component of Cost of products sold. Those costs include the amounts paid to a third party to deliver the finished goods. Any freight costs billed to and paid by a customer are included in net sales. The Company also provides services to customers through the conversion of customer-owned raw materials into processed finished goods. In these transactions, the Company generally recognizes 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 the Company expects to be entitled to in exchange for those goods or services. Generally, the Company considers 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, the Company defers recognition of revenue on satisfied performance obligations until the uncertainty is resolved. We record estimates for bad debts based on our expectations for the collectability of amounts due from customers, considering historical collection history, expectations for future activity and other discrete events as applicable.

Variable consideration, such as discounts or price concessions, is set forth in the terms of the contract at inception and is included in the assessment of the transaction price at the outset of the arrangement. The transaction price is allocated to the individual performance obligations due under the contract based on the relative stand-alone fair value of the performance obligations identified in the contract. The Company typically uses an observable price to determine the stand-alone selling price for separate performance obligations.

The Company does not typically include extended payment terms or significant financing components in its 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. The Company generally expenses sales commissions when incurred because the amortization period is one year or less. These costs are recorded within selling expenses. The Company does 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, the Company treats 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.

Following is the Company’s Net sales disaggregated by revenue source ($ in millions). Sales and usage-based taxes are excluded from Net sales.
Three Months Ended
March 31, 2021March 31, 2020
AMSEPTotalAMSEPTotal
Product revenues$158.3 $109.0 $267.3 $117.0 $124.7 $241.7 
Materials conversion revenues2.3 15.1 17.4 3.8 12.9 16.7 
Other revenues2.4 1.1 3.5 2.1 1.0 3.1 
Total revenues (1)
$163.0 $125.2 $288.2 $122.9 $138.6 $261.5 
     (1) Revenues include net hedging gains and losses for the three months ended March 31, 2021 and 2020.



9

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Net sales are attributed to the following geographic locations based on the location of the Company’s direct customers ($ in millions):
Three Months Ended
March 31, 2021March 31, 2020
AMSEPTotalAMSEPTotal
United States$105.7 $37.4 $143.1 $83.3 $43.9 $127.2 
Europe and the former Commonwealth of Independent States17.8 49.4 67.2 12.6 43.5 56.1 
Asia/Pacific (including China)32.4 22.2 54.6 20.7 28.8 49.5 
Latin America2.4 8.8 11.2 2.3 11.0 13.3 
Other foreign countries4.7 7.4 12.1 4.0 11.4 15.4 
Total revenues (1)
$163.0 $125.2 $288.2 $122.9 $138.6 $261.5 
    
(1) Revenues include net hedging gains and losses for the three months ended March 31, 2021 and 2020.

Note 3. Other Comprehensive Loss

Comprehensive income includes Net income, as well as certain items charged and credited directly to stockholders' equity, which are excluded from net income. The Company has presented Comprehensive income in the condensed consolidated statements of comprehensive income (loss). Reclassification adjustments of derivative instruments are presented in Net sales, Other (expense) income, net, or Interest expense in the condensed consolidated statements of income. See Note 11. Derivatives for additional information. Amortization of accumulated pension and other post-employment benefit ("OPEB") liabilities are included in the computation of net periodic pension and OPEB costs, which are more fully discussed in Note 13. Postretirement and Other Benefits.

Components of Accumulated other comprehensive loss, net of tax, were as follows ($ in millions):
March 31, 2021December 31, 2020
Accumulated pension and OPEB liability adjustments, net of income tax benefit of $12.2 million and $11.6 million at March 31, 2021 and December 31, 2020, respectively$(18.8)$(20.5)
Accumulated unrealized loss on derivative instruments, net of income tax benefit of $2.8 million and $2.8 million at March 31, 2021 and December 31, 2020, respectively(8.7)(13.1)
Accumulated unrealized foreign currency translation adjustments, net of income tax benefit of $6.8 million and $10.1 million at March 31, 2021 and December 31, 2020, respectively(88.2)(78.3)
Accumulated other comprehensive loss$(115.7)$(111.9)

Changes in the components of Accumulated other comprehensive (loss) income were as follows ($ in millions):
Three Months Ended
March 31, 2021March 31, 2020
Pre-taxTaxNet of
Tax
Pre-taxTaxNet of
Tax
Net gain (loss) on pension and OPEB liability adjustments$1.1 $0.6 $1.7 $0.7 $(0.2)$0.5 
Unrealized gain (loss) on derivative instruments4.5 (0.1)4.4 (15.6)2.9 (12.7)
Unrealized (loss) gain on foreign currency translation(6.5)(3.4)(9.9)(4.1)0.6 (3.5)
Total$(0.9)$(2.9)$(3.8)$(19.0)$3.3 $(15.7)
10

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Note 4. Business Acquisitions

On March 13, 2020, the Company completed the acquisition of 100% of the equity interest in Tekra, LLC and Trient, LLC, “Tekra,” pursuant to the definitive agreement signed as of February 20, 2020. Tekra is a converter of high-performance films and substrates which enhances the Company’s films capabilities. Tekra, part of the AMS segment, operates 2 manufacturing facilities located in Wisconsin.

The consideration transferred to acquire Tekra was $169.3 million, net of $1.6 million cash and cash equivalents acquired, subject to working capital adjustments that were finalized in 2020. The purchase price was funded with borrowings from our Revolving Credit Facility (as described under Note 10. Debt below).

The acquisition was accounted for as a business combination with the assets acquired and liabilities assumed measured at their fair values as of the acquisition date, primarily using Level 3 inputs.

The estimated purchase price allocation disclosed as of March 31, 2020, was revised during the second and third quarters as new information was received and analyzed resulting in a decrease in net intangible assets of $3.4 million, and other adjustments, consisting primarily of reclassifications within working capital, leading to a net decrease in total consideration of $1.8 million.

The consideration paid for Tekra and the final fair values of the assets acquired, and liabilities assumed as of the March 13, 2020 acquisition date are as follows ($ in millions):

Fair Value as of March 13, 2020
Cash and cash equivalents$1.6 
Accounts receivable8.6 
Inventory14.2 
Other current assets0.2 
Property, plant and equipment7.3 
Identifiable intangible assets81.8 
Other noncurrent assets3.7 
Total assets$117.4 
Accounts payable$3.0 
Other current liabilities2.0 
Other noncurrent liabilities2.7 
Net assets acquired$109.7 
Goodwill61.2 
Total consideration$170.9 

The fair value of receivables acquired approximates the gross contractual value. The contractual amount not expected to be collected is immaterial.

11

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Acquired inventory was comprised of finished goods and raw materials. The fair value of finished goods was based on net realizable value adjusted for the costs of selling and a reasonable profit margin on selling effort. The fair value of raw materials was determined to approximate book value.

Acquired intangible assets include customer relationships, tradenames and unpatented developed technologies. Intangible assets were valued using the multi-period excess earnings and relief-from-royalty methods, both forms of the income approach which considers a forecast of future cash flows generated from the use of each asset. The following table shows the final fair values assigned to identifiable intangible assets ($ in millions):
Fair Value as of March 13, 2020Weighted-Average Amortization Period (Years)
Amortizable intangible assets:   
Customer relationships$63.0  15
Tradenames and other10.8 15
Developed technology8.0  10
Total amortizable intangible assets$81.8 


During the three months ended March 31, 2020, the Company recognized $1.1 million in direct and indirect acquisition-related costs for the Tekra acquisition. Direct and indirect acquisition-related costs were expensed as incurred and are included in the General expense line item in the condensed consolidated statements of income.

The amounts of Net sales and Net Income of Tekra included in the Company's condensed consolidated income statement from the acquisition date are as follows ($ in millions):
March 13, 2020 - March 31, 2020
Net Sales$5.5 
Net Income$0.4 
The amount of unaudited pro forma Net sales for the three months ended March 31, 2020 for the combined entity were $285.4 million. Preparation of pro forma income from continuing operations for the periods presented is impractical given recent changes to the ownership structure of the acquired entities prior to the transaction.

Note 5. Net Income Per Share

The Company uses the two-class method to calculate earnings per share. The Company has granted restricted stock that contains non-forfeitable rights to dividends on unvested shares. Since these unvested shares are considered participating securities under the two-class method, the Company allocates earnings per share to common stock and participating securities according to dividends declared and participation rights in undistributed earnings.

Diluted net income per common share is computed based on Net income divided by the weighted average number of common and potential common shares outstanding. Potential common shares during the respective periods are those related to dilutive stock-based compensation, including long-term stock-based incentive compensation and directors’ accumulated deferred stock compensation, which may be received by the directors in the form of stock or cash. A reconciliation of the average number of common and potential common shares outstanding used in the calculations of basic and diluted net income per share follows ($ in millions, shares in thousands):
12

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended
March 31,
2021
March 31,
2020
Numerator (basic and diluted):  
Net income$21.6 $22.5 
Less: Dividends paid to participating securities(0.1)(0.3)
Less: Undistributed earnings available to participating securities(0.1)
Undistributed and distributed earnings available to common stockholders$21.4 $22.2 
Denominator:  
Average number of common shares outstanding30,974.2 30,712.3 
Effect of dilutive stock-based compensation366.3 197.7 
Average number of common and potential common shares outstanding31,340.5 30,910.0 


Note 6. Inventories
 
Inventories are valued at the lower of cost (using the First-In, First-Out and weighted average methods) or net realizable value. The Company's costs included in inventory primarily include resins, pulp, chemicals, direct labor, utilities, maintenance, depreciation, finishing supplies and an allocation of certain overhead costs. Machine start-up costs or abnormal machine shutdowns are expensed in the period incurred and are not reflected in inventory. The Company reviews inventories at least quarterly to determine the necessity of write-offs for excess, obsolete or unsalable inventory. The Company estimates write-offs for inventory obsolescence and shrinkage. These reviews require the Company to assess customer and market demand. The following schedule details inventories by major class ($ in millions):
March 31,
2021
December 31,
2020
Raw materials$65.2 $65.3 
Work in process24.6 23.2 
Finished goods75.5 83.5 
Supplies and other8.0 7.7 
Total$173.3 $179.7 
 

Note 7. Goodwill

The changes in the carrying amount of goodwill by reportable segment for the three months ended March 31, 2021 were as follows ($ in millions):
 AMSEPTotal
Goodwill as of December 31, 2020$398.4 $5.3 $403.7 
Foreign currency translation adjustments(1.7)(0.2)(1.9)
Goodwill as of March 31, 2021$396.7 $5.1 $401.8 

13

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8. Intangible Assets

The gross carrying amount and accumulated amortization for intangible assets which are in our AMS segment consisted of the following ($ in millions):
 March 31, 2021
 Gross
Carrying
Amount
Accumulated
Amortization
Accumulated ImpairmentsAccumulated Foreign ExchangeNet
Carrying
Amount
Amortized Intangible Assets
Customer relationships$339.2 $94.1 $$(1.1)$246.2 
Developed technology42.0 14.9 0.1 27.0 
Trade names32.7 1.6 20.7 0.3 10.1 
Non-compete agreements2.9 2.4 0.5 
Patents1.5 0.6 0.9 
Total$418.3 $113.6 $20.7 $(0.7)$284.7 
Unamortized Intangible Assets
Trade names$20.0 $— $0.1 $(0.2)$20.1 

 December 31, 2020
 Gross
Carrying
Amount
Accumulated
Amortization
Accumulated ImpairmentsAccumulated Foreign ExchangeNet
Carrying
Amount
Amortized Intangible Assets
Customer relationships$339.8 $88.5 $$(2.9)$254.2 
Developed technology42.1 14.1 (0.2)28.2 
Trade names32.7 1.4 20.7 0.3 10.3 
Non-compete agreements2.9 2.4 0.5 
Patents1.5 0.5 1.0 
Total$419.0 $106.9 $20.7 $(2.8)$294.2 
Unamortized Intangible Assets
Trade names$20.0 $— $0.1 $(0.6)$20.5 

Amortization expense of intangible assets was $6.5 million and $5.3 million for the three months ended March 31, 2021 and 2020, respectively. Finite-lived intangibles in the AMS segment are expensed using the straight-line amortization method. The estimated average aggregate amortization expense is $24.8 million in each of the next five years.
Note 9. Restructuring and Impairment Activities
 
The Company incurred restructuring and impairment expense of $1.7 million and $0.1 million in the three months ended March 31, 2021 and 2020, respectively, in the EP segment.

During the third quarter of 2020, we announced plans to shut down the Spotswood, New Jersey facility and shift the production of paper made there to other SWM facilities. This decision was part of our ongoing manufacturing optimization efforts and involved the co-development of a new paper production technology with one of the Company’s key customers. Production of paper at this facility ceased as of December 31, 2020.

14

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As a result of this decision, $1.4 million of restructuring and impairment expense was recognized in the three months ended March 31, 2021 related to the costs associated with closing this facility, maintaining the property and preparing it for sale.

In addition to restructuring costs relating to the Spotswood facility, the EP segment recognized $0.3 million and $0.1 million for the three months ended March 31, 2021 and 2020, respectively, related to severance accruals for employees at other manufacturing facilities. These restructuring charges relate to ongoing cost optimization initiatives to remain competitive within the EP segment. The cost optimization initiative project started in 2019 and is expected to be completed in 2022. The EP segment has recognized $7.2 million of restructuring charges cumulatively through March 31, 2021 related to this project.

The Company expects to record additional restructuring related costs in the EP segment during 2021 of approximately $1.4 million relating to the shutdown of the Spotswood, New Jersey facility, primarily associated with closing the facility and maintaining the property until it is sold. The Company does not expect to incur significant restructuring expenses related to the cost optimization initiatives in the EP segment during the remainder of 2021.

In the AMS segment, there were 0 restructuring and impairment expenses for the three months ended March 31, 2021 and 2020.

The following table summarizes total restructuring and related charges for the three months ended March 31, 2021:

Three Months Ended
March 31, 2021March 31, 2020
Restructuring and impairment expense:
Severance$0.3 $0.1 
Other1.4 
Total restructuring and impairment expense$1.7 $0.1 

The following table summarizes changes in restructuring liabilities during the periods ended March 31, 2021 and December 31, 2020. ($ in millions):

Three Months Ended
March 31, 2021March 31, 2020
Balance at beginning of year$7.4 $0.5 
Accruals for announced programs0.3 0.1 
Cash payments(2.2)(0.3)
Foreign exchange impact(0.1)
Balance at end of period$5.4 $0.3 

Restructuring liabilities were classified within Accrued expenses and other current liabilities in each of the condensed consolidated balance sheets.

15

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10. Debt
 
The components of total debt are summarized in the following table ($ in millions):
 
March 31,
2021
December 31,
2020
Revolving credit facility - U.S. dollar borrowings$75.0 $50.0 
Term loan facility195.0 195.5 
6.875% senior unsecured notes due October 1, 2026, net of discount of $5.8 million and $6.1 million at March 31, 2021 and December 31, 2020, respectively344.2 343.9 
French employee profit sharing4.7 5.0 
Finance lease obligations3.3 3.5 
Debt issuance costs(4.3)(4.6)
Total debt617.9 593.3 
Less: Current debt(2.7)(2.8)
Long-term debt$615.2 $590.5 
 
Credit Facility

On September 25, 2018, the Company entered into a $700.0 million credit agreement (the “Credit Agreement”), which replaced the Company’s previous senior secured credit facilities and provides for a five year $500.0 million revolving line of credit (the “Revolving Credit Facility”) and a seven year $200.0 million bank term loan facility (the “Term Loan 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 as additional Term Loan Facilities 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.

On February 10, 2021 we amended our Credit Agreement to, among other things, add a new seven year $350 million Term Loan B Facility (the “Term Loan B Facility”). The balance under the Term Loan B Facility was $0 as of March 31, 2021.

Borrowings under the Revolving Credit Facility currently bear interest, at the Company’s option, at either (i) 1.75% in excess of LIBOR or (ii) 0.75% in excess of an alternative base rate. Borrowings under the Term Loan A Facility currently bear interest, at the Company’s option, at either (i) 2.00% in excess of LIBOR 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. Any borrowings under the Term Loan B Facility will bear interest, at the Company's option, at either (i) 4.00% in excess of a reserve adjusted LIBOR rate (subject to a minimum floor of 0.75%) or (ii) 3.00% 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 5.50 and an interest coverage ratio, also as defined in the amended Credit Agreement, of not less than 3.00. The net debt to EBITDA ratio will decrease over the course of 24 months, returning to 4.50x effective as of June 30, 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 material domestic subsidiaries and by SWM Luxembourg.

The Company was in compliance with all of its covenants under the Credit Agreement at March 31, 2021.

Indenture for 6.875% Senior Unsecured Notes Due 2026

16

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On September 25, 2018, the Company closed a private offering of $350.0 million of 6.875% senior unsecured notes due 2026 (the “Notes”). The Notes were sold in a private placement in reliance on Rule 144A and Regulation S under the Securities Act of 1933, as amended, pursuant to a purchase agreement between the Company, certain subsidiaries of the Company and J.P. Morgan Securities LLC, as representative of the initial purchasers. The Notes are guaranteed on a senior unsecured basis by each of the Company’s existing and future wholly-owned subsidiaries that is a borrower under or that guarantees obligations under the Credit Agreement or that guarantees certain other indebtedness, subject to certain exceptions.

The Notes were issued pursuant to an 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 March 31, 2021.

As of March 31, 2021, the average interest rate was 2.33% on outstanding Revolving Credit Facility borrowings and 1.88% on outstanding Term Loan A Facility borrowings. The effective rate on the 6.875% senior unsecured notes due 2026 was 7.248%. The weighted average effective interest rate on the Company's debt facilities, including the impact of interest rate hedges, was approximately 4.03% and 3.84% for the three months ended March 31, 2021 and 2020, respectively.

As of March 31, 2021, and December 31, 2020, the Company's total deferred debt issuance costs, net of accumulated amortization, were $4.3 million and $4.6 million, respectively. Amortization expense of $0.3 million and $0.3 million was recorded during the three months ended March 31, 2021 and 2020, respectively, and has been included as a component of Interest expense in the accompanying condensed consolidated statements of income.

Principal Repayments

Following are the expected maturities for the Company's debt obligations as of March 31, 2021 ($ in millions):
2021$3.4 
20224.0 
202378.4 
20242.6 
2025188.7 
Thereafter345.1 
Total$622.2 

17

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Fair Value of Debt
 
At March 31, 2021 and December 31, 2020, the fair market value of the Company's 6.875% senior unsecured notes was $373.1 million and $371.0 million, respectively. The fair market value for the senior unsecured notes was determined using quoted market prices, which are directly observable Level 1 inputs. The fair market value of all other debt as of March 31, 2021 and December 31, 2020 approximated the respective carrying amounts as the interest rates are variable and based on current market indices.

Debt Issuance Costs

In conjunction with amendment to our Credit Agreement on February 10, 2021, the Company capitalized approximately $4 million of debt issuance costs during three months ended March 31, 2021 which will be amortized over the term of the various facilities under the amended Credit Agreement.
 
Note 11. Derivatives
 
In the normal course of business, the Company is exposed to foreign currency exchange rate risk and interest rate risk on its variable-rate debt. To manage these risks, the Company utilizes a variety of practices including, where considered appropriate, derivative instruments. The Company has no derivative instruments for trading or speculative purposes or derivatives with credit risk-related contingent features. All derivative instruments used by the Company are either exchange traded or are entered into with major financial institutions in order to reduce credit risk and risk of nonperformance by third parties. The fair values of the Company’s derivative instruments are determined using observable inputs and are considered Level 2 assets or liabilities.

The Company utilizes currency forward, swap and, to a lesser extent, option contracts to selectively hedge its exposure to foreign currency risk when it is practical and economical to do so. The use of these contracts minimizes transactional exposure to exchange rate changes. We designate certain of our foreign currency hedges as cash flow hedges. Changes in the fair value of cash flow hedges are reported as a component of Accumulated other comprehensive loss and reclassified into earnings when the forecasted transaction affects earnings. For foreign exchange contracts not designated as cash flow hedges, changes in the contracts’ fair values are recorded to net income each period.

The Company selectively hedges its exposure to interest rate increases on variable-rate, long-term debt when it is practical and economical to do so. Changes in the fair value of interest rate contracts considered cash flow hedges are reported as a component of Accumulated other comprehensive loss and reclassified into earnings when the forecasted transaction affects earnings.

The Company also uses cross currency swap contracts to selectively hedge its exposure to foreign currency related changes in our net investments in certain foreign operations. We designate these cross currency swap contracts as net investment hedges. Changes in the fair value of these hedges are deferred within the foreign currency translation component of Accumulated other comprehensive income and reclassified into earnings when the foreign investment is sold or substantially liquidated.

On September 11, 2019, the Company entered into a pay-fixed, receive-variable interest rate swap with a maturity date of January 31, 2027. The instrument is a hedge on a portion of the Company’s debt facility through the Credit Agreement. Under the terms of the interest rate swap, SWM will pay a fixed amount of interest each period in an amount equal to 1.724% on a notional amount of $185 million and receive interest payments monthly in an amount equal to the One-Month USD-LIBOR rate on the notional amount. The notional amount will reduce throughout the term of the swap as follows:

September 13, 2019 - December 31, 2020    $185 million notional
December 31, 2020 - December 31, 2021    $150 million notional
December 31, 2021 - January 31, 2027    $100 million notional

18

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As with the previous interest rate swap, the terms of the swap mirror the terms of the underlying debt, including timing of the payments and interest rates.

On October 24, 2018, the Company entered into a cross-currency swap with a major financial institution designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of $75 million swapped to €65.4 million at maturity. The Company will receive from our swap counterparty U.S. dollar interest at a fixed rate of 6.875% per annum and pay to our swap counterparty Euro interest at a fixed rate of 3.6725% per annum. The cross-currency swap will mature on October 1, 2021.

On January 29, 2019, the Company entered into a cross-currency swap with a major financial institution designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of $75 million swapped to €66.0 million at maturity. The Company will receive from our swap counterparty U.S. dollar interest at a fixed rate of 6.875% per annum and pay to our swap counterparty Euro interest at a fixed rate of 4.0525% per annum. The cross-currency swap will mature on October 1, 2021.

On September 11, 2019, the Company entered into a new pay-EUR, receive-USD cross-currency swap arrangement with a major financial institution having a maturity date of April 1, 2023. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of $100 million swapped to €90.9 million at maturity. Under the terms of the new cross-currency swap, SWM will pay a fixed amount of Euro-denominated interest at a rate of 5.638% semiannually and receive USD denominated payments at a rate of 6.875% semiannually on the notional amount of the swap.

On January 26, 2021, in anticipation of our announcement of our offer to acquire Scapa Group (as defined in and
further described under Note 16. Subsequent Events, below), we entered into a currency forward contract with a major financial institution. The terms of the contract provide for an exchange of a notional amount of GBP 439 million for USD, calculated using the contract rate as applicable at the settlement date. An additional currency forward contract with a major financial institution provides for the exchange of a notional amount of GBP 9.6 million for USD, calculated using the contract rate on April 21, 2021. See Note 16. Subsequent Events for additional information on the settlement of these contracts.

The following table presents the fair value of asset and liability derivatives and the respective condensed consolidated balance sheet locations at March 31, 2021 ($ in millions):
 
 Asset DerivativesLiability Derivatives
 Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Derivatives designated as hedges:    
Foreign exchange contractsAccounts receivable, net$2.6 Accrued expenses and other current liabilities$4.9 
Foreign exchange contractsOther assetsOther liabilities7.3 
Interest rate contractsAccounts receivable, netOther liabilities3.6 
Total derivatives designated as hedges 2.6  15.8 
Derivatives not designated as hedges:    
Foreign exchange contractsAccounts receivable, netAccrued expenses and other current liabilities5.7 
Total derivatives not designated as hedges  5.7 
Total derivatives $2.6  $21.5 
 
19

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the fair value of asset and liability derivatives and the respective condensed consolidated balance sheet locations at December 31, 2020 ($ in millions):
 
 Asset DerivativesLiability Derivatives
 Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Derivatives designated as hedges:    
Foreign exchange contractsAccounts receivable, net$0.9 Accrued expenses$11.0 
Foreign exchange contractsOther assetsOther liabilities12.3 
Interest rate contractsAccounts receivable, net0.3 Accrued expenses
Interest rate contractsOther assetsOther liabilities7.8 
Total derivatives designated as hedges $1.2  $31.1 
Derivatives not designated as hedges:    
Foreign exchange contractsAccounts receivable, netAccounts payable
Total derivatives not designated as hedges $ $
Total derivatives $1.2  $31.1 



20

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides the gross effect that derivative instruments designated in hedging relationships had on Accumulated other comprehensive loss and results of operations ($ in millions):
Derivatives Designated in Hedging RelationshipsUnrealized (Loss) Gain Recognized in AOCI on Derivatives, Net of TaxLocation of (Loss) Gain Reclassified
from AOCI
(Loss) Gain Reclassified
from AOCI
Three Months EndedThree Months Ended
March 31,March 31,
2021202020212020
Derivatives designated as cash flow hedge
Foreign exchange contracts$(0.6)$(5.0)Net sales$(0.6)$(0.6)
Foreign exchange contracts0.9 0.5 Other income (expense), net0.7 0.6 
Interest rate contracts4.1 (8.2)Interest expense
Derivatives designated as net investment hedge
Foreign exchange contracts7.0 12.0 Other income (expense), net
Total$11.4 $(0.7)$0.1 $


The Company's designated derivative instruments are highly effective. As such, related to the hedge ineffectiveness or amounts excluded from hedge effectiveness testing, there were no gains or losses recognized immediately in income for the three and three months ended March 31, 2021 or 2020, other than those related to the cross-currency swap, noted below.

The Company’s cross currency swaps were designated with terms based on the spot rate of the EUR. Future changes in the components related to the spot change on the notional will be recorded in OCI and remain there until the hedged subsidiaries are substantially liquidated. All coupon payments are recorded in earnings and the initial value of excluded components currently recorded in Accumulated other comprehensive loss as an unrealized translation adjustment are amortized to interest expense over the remaining term of the swap. For the three months ended March 31, 2021 and 2020, respectively, $1.1 million and $2.0 million was recognized in income as derivative amounts excluded from effectiveness testing as Interest expense.

The following table provides the effect that derivative instruments not designated as cash flow hedging instruments had on net income ($ in millions):
Derivatives Not Designated as Cash Flow Hedging InstrumentsLocation of Gain Recognized in IncomeAmount of (Loss) Gain Recognized in Income
Three Months Ended
 March 31, 2021March 31, 2020
Foreign exchange contractsOther income, net$(6.6)$0.2 



21

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12. Commitments and Contingencies

Litigation
 
Brazil

Imposto sobre Circulação de Mercadorias e Serviços ("ICMS"), a form of value-added tax in Brazil, was assessed to SWM-B in December of 2000. SWM-B received 2 assessments from the tax authorities of the State of Rio de Janeiro (the "State") for unpaid ICMS taxes on certain raw materials from January 1995 through October 1998 and from November 1998 through November 2000 (collectively, the "Raw Materials Assessments"). The Raw Materials Assessments concerned the accrual and use by SWM-B of ICMS tax credits generated from the production and sale of certain non-tobacco related grades of paper sold domestically. SWM-B contested the Raw Materials Assessments based on Article 150, VI of the Brazilian Federal Constitution of 1988, which grants immunity from ICMS taxes to papers intended for printing books, newspapers and periodicals, on the ground that tax immunity extends to the raw material inputs used to produce such papers. In 2015, the first chamber of the Federal Supreme Court decided the first Raw Materials Assessment in favor of SWM-B.  Different chambers of the Federal Supreme Court decided one Raw Materials Assessment in favor of SWM-B and the other against SWM-B. SWM-B recorded a liability of $8.6 million (based on the foreign currency exchange rate at March 31, 2021) in Other Liabilities to satisfy the adverse judgment in the second quarter of 2019 and continued to pursue appeals. On April 9, 2021, SWM-B resolved the remaining 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 concluded and this matter is fully resolved. As the result of the favorable settlement, we recognized a total benefit of $6.1 million in the first quarter of 2021, of which $4.6 million was in Interest expense and $1.6 million was in Other expense, net.

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 4 sets of assessments against SWM-B, one for May 2006 - November 2007, a second for January 2008 - December 2010, a third for September 2011 - September 2013, which was replaced by a smaller assessment for January - June 2013, and a fourth for July 2013 - December 2017 (collectively the "Electricity Assessments").  SWM-B challenged all Electricity Assessments in administrative proceedings before the State tax council (in the first-level court Junta de Revisão Fiscal and the appellate court Conselho de Contribuintes) based on Resolution 1.610/89, which defers these taxes on electricity purchased by an "electricity-intensive consumer."  In 2014, a majority of the Conselho de Contribuintes sitting en banc ruled against SWM-B in each of the first and second Electricity Assessments ($3.3 million and $6.3 million, respectively, based on the foreign currency exchange rate at March 31, 2021), 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 by the Conselho de Contribuintes in 2018 after the State admitted the tax did not apply as it had asserted. Instead, in August 2018, the State filed a revised third Electricity Assessment in the amount of $0.5 million for ICMS on electricity purchased during part of 2013, and a fourth Electricity Assessment in the amount of $7.0 million pertaining to ICMS and FECP on electricity purchased from July 2013 to December 2017. SWM-B filed challenges to these 2018 assessments in the first-level administrative court on the same grounds as the older cases. The Junta de Revisão Fiscal rejected SWM-B’s challenge to the revised third Electricity Assessment, but the Conselho de Contribuintes agreed with SWM-B that the 2013 claim was time-barred. Both the Junta de Revisão Fiscal and the Conselho de Contribuintes ruled against SWM-B in the fourth Electricity Assessment. Both 2019 decisions from the Conselho de Contribuintes are being appealed to the full bench of the Conselho de Contribuintes. The State issued a new regulation effective January 1, 2018 that only specific industries are “electricity-intensive consumers,” a list that excludes paper manufacturers. SWM-B contends this regulation shows that paper manufacturers were electricity-intensive consumers eligible to defer ICMS before 2018.

SWM-B cannot determine the outcome of the Electricity Assessments matters; as such, 0 loss has been accrued in our condensed consolidated financial statements.

Germany
22

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In January 2015, the Company initiated patent infringement proceedings in Germany against Glatz under multiple LIP-related patents. In December 2017, the Dusseldorf Appeal Court affirmed the German District Court judgment on infringement of EP1482815 against Glatz. 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 has filed an action in the German Patent Court to invalidate the German part of EP1482815. The German 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 hearing on this invalidity appeal has been scheduled for September 2021. The cost, timing and outcome of intellectual property litigation can be unpredictable and thus no assurances can be given as to the outcome or impact on us of such litigation.

Environmental Matters
 
The Company's operations are subject to various nations' federal, state and local laws, regulations and ordinances relating to environmental matters. The nature of the Company's operations exposes it to the risk of claims with respect to various environmental matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. While the Company has incurred in the past several years, and will continue to incur, capital and operating expenditures in order to comply with environmental laws and regulations, it believes that its future cost of compliance with environmental laws, regulations and ordinances, and its exposure to liability for environmental claims and its obligation to participate in the remediation and monitoring of certain hazardous waste disposal sites, will not have a material effect on its financial condition or results of operations. However, future events, such as changes in existing laws and regulations, or unknown contamination or costs of remediation of sites owned, operated or used for waste disposal by the Company (including contamination caused by prior owners and operators of such sites or other waste generators) may give rise to additional costs which could have a material effect on its financial condition or results of operations.

General Matters

In the ordinary course of conducting business activities, the Company and its subsidiaries become involved in certain other judicial, administrative and regulatory proceedings involving both private parties and governmental authorities. These proceedings include insured and uninsured regulatory, employment, intellectual property, general and commercial liability, environmental and other matters. At this time, the Company does not expect any of these proceedings to have a material effect on its reputation, business, financial condition, results of operations or cash flows. However, the Company can give no assurance that the results of any such proceedings will not materially affect its reputation, business, financial condition, results of operations or cash flows.

Note 13. Postretirement and Other Benefits

The Company sponsors pension benefits in the United States, France and Canada and OPEB benefits related to postretirement healthcare and life insurance in the United States and Canada. The Company’s Canadian pension and OPEB benefits and U.S. OPEB liability are not material and therefore are not included in the following disclosures.

23

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pension and OPEB Benefits

The components of net pension benefit costs for U.S. and French employees during the three months ended March 31, 2021 and 2020 were as follows ($ in millions):
Three Months Ended March 31,
 U.S. Pension BenefitsFrench Pension Benefits
 2021202020212020
Service cost$$$0.3 $0.3 
Interest cost0.7 0.9 
Expected return on plan assets(1.0)(1.2)
Amortizations and other0.9 0.8 0.3 0.3 
Net periodic benefit cost$0.6 $0.5 $0.6 $0.6 

The components of net periodic benefit cost other than the service cost component are included in Other (expense) income, net in the condensed consolidated statements of income. During the fiscal year ending December 31, 2021, the Company expects to recognize approximately $3.6 million of amortization in Accumulated other comprehensive loss related to its U.S. pension and OPEB plans and approximately $1.0 million for its French pension plans.


Note 14. Income Taxes

For interim financial reporting, the Company estimates the annual tax rate based on projected taxable income for the full year and records a quarterly income tax provision in accordance with ASC No. 740-270 "Accounting for Income Taxes in Interim Periods." These interim estimates are subject to variation due to several factors, including the ability of the Company to accurately forecast pre-tax and taxable income and loss by jurisdiction, changes in laws or regulations, and expenses or losses for which tax benefits are not recognized. Jurisdictions with a projected loss for the year or an actual year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of including these jurisdictions on the quarterly effective tax rate calculations could result in a higher or lower effective tax rate during a quarter, based upon the mix and timing of actual earnings versus annual projections.

As a result of the Tax Cuts and Jobs Act of 2017, the Company has significant previously taxed earnings and profits from its foreign subsidiaries that it is generally able to repatriate free of U.S. federal tax, due to transition tax and global intangible low taxed income (“GILTI”) treatment. Further, to the extent that any untaxed earnings and profits are distributed from foreign subsidiaries, such dividends should be eligible for a 100% dividends received deduction. Therefore, the Company does not assert indefinite reinvestment on earnings generated after December 31, 2017. The Company provides for deferred non-U.S. withholding taxes and U.S. state taxes on hypothetical repatriation of earnings generated after December 31, 2017.

All unrecognized tax positions could impact the Company's effective tax rate if recognized. With respect to penalties and interest incurred from income tax assessments or related to unrecognized tax benefits, the Company’s policy is to classify penalties as provision for income taxes and interest as interest expense in its condensed consolidated statement of income. There were 0 material income tax penalties or interest accrued during the three months ended March 31, 2021 or 2020.

The Company's effective tax rate was 26.4% and 19.1% for the three months ended March 31, 2021 and 2020, respectively. The increase was materially due to unfavorable discrete items, mix of earnings by jurisdiction and a reduction in US tax credits due to foreign law changes.



24

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 15. Segment Information
 
The Company's 2 operating product line segments are also the Company's reportable segments: Advanced Materials & Structures and Engineered Papers. The AMS segment primarily produces engineered resin-based rolled goods such as nets, films and other non-wovens for use in high-performance applications in the filtration, transportation, healthcare, construction, and industrial end-markets. It consists of the operations of various acquisitions. The EP segment primarily produces various cigarette papers and Recon for sale to cigarette manufacturers. The EP segment also includes non-tobacco paper for battery separators, printing and writing, drinking straw wrap and furniture laminates.
 
Information about Net Sales and Operating Profit

The accounting policies of these segments are the same as those described in Note 2. Summary of Significant Accounting Policies in the notes to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2020. The Company primarily evaluates segment performance and allocates resources based on operating profit. Expense amounts not associated with segments are referred to as unallocated expenses.
($ in millions)Net Sales
 Three Months Ended
 March 31, 2021March 31, 2020
AMS$163.0 56.6 %$122.9 47.0 %
EP125.2 43.4 138.6 53.0 
Total Consolidated$288.2 100.0 %$261.5 100.0 %
($ in millions)Operating Profit
 Three Months Ended
 March 31, 2021March 31, 2020
AMS$21.3 63.6 %$13.7 40.2 %
EP29.9 89.2 33.4 97.9 
Unallocated(17.7)(52.8)(13.0)(38.1)
Total Consolidated$33.5 100.0 %$34.1 100.0 %


Note 16.     Subsequent Events

On January 27, 2021, we issued an announcement pursuant to Rule 2.7 of the United Kingdom City Code on Takeovers and Mergers disclosing the terms of a recommended cash offer to acquire the entire issued and to be issued ordinary shares of Scapa Group plc, a company incorporated in England and Wales (“Scapa”), to be effected through a scheme of arrangement (the “Scheme”) under Part 26 of the United Kingdom Companies Act 2006, as amended (the “Acquisition”). Scapa is a UK-based innovation, design, and manufacturing solutions provider for healthcare and industrial markets and has operations across North America, Europe and Asia.

On April 15, 2021, the Scheme became effective in accordance with its terms following delivery to the Registrar of Companies in England and Wales of the orders of the High Court of Justice of England and Wales sanctioning the Scheme, and the Acquisition was completed. The offer price for the Acquisition was £2.15 (approximately $2.96 based on an exchange rate of $1:£1.3788 on April 15, 2021) in cash for each ordinary share of Scapa, valuing the entire ordinary share capital of Scapa at approximately £412.6 million on a fully-diluted basis (approximately $568.9 million). The Company settled the offer consideration with payment to Scapa shareholders under the Scheme on April 29, 2021.

As a result of the Acquisition, Scapa will become wholly-owned subsidiaries of the Company and part of the AMS segment.
25

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Company used the proceeds from the $350.0 million Term Loan B Facility, together with up to $325.0 million of the Company’s $500.0 million Revolving Credit Facility, to finance the cash consideration payable to Scapa shareholders under the Scheme and expenses payable in connection with the Acquisition.

On April 20, 2021 we settled currency forward contracts with notional amounts of £439 million and £9.6 million, reversing the unrealized loss recognized as of March 31, 2021.









26


Item 2.   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 unaudited condensed consolidated financial statements and related notes included elsewhere in this report and the audited consolidated financial statements and related notes and the selected financial data included in our Annual Report on Form 10-K for the year ended December 31, 2020. The discussion of our financial condition and results of operations includes various forward-looking statements about our markets, the demand for our products, our future prospects and other matters. These statements are based on certain assumptions and estimates that we consider reasonable. For information about risks and exposures relating to us and our business, you should read the section entitled "Risk Factors" in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 and the sections entitled "Forward-Looking Statements" at the end of this Item 2. Unless the context indicates otherwise, references to "SWM," "we," "us," "our," the "Company" or similar terms include Schweitzer-Mauduit International, Inc. and our consolidated subsidiaries.

This Management's Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of our financial statements with an understanding of our recent performance, our financial condition and our prospects.

COVID-19 Pandemic
We continue to monitor the impact of the COVID-19 pandemic on all aspects of our business. In general, many areas that were resilient to the economic challenges and volatility in 2020 remain healthy, such as tobacco, healthcare, and filtration, while those areas that were most affected, such as transportation and construction, began improving during the fourth quarter of 2020 and continued to perform well during the first quarter of 2021. At present, all of our facilities are operational. Furthermore, there have been only isolated and temporary customer shutdowns, and the Company is maintaining active dialogue with all key customers and suppliers regarding supply chain and production planning. Many of the Company’s products in our AMS segment have been deemed “essential” (e.g., filtration and healthcare) by local governments and thus the production facilities are not expected to have further shutdowns unless local governments mandate temporary closure or there are additional health and safety concerns beyond the current circumstances.
Given the recent financial results, the Company’s operating cash flows and available liquidity are ample to support operations and financial obligations. The Company also continues to actively assess the credit worthiness of its customers in the context of the potential business disruptions from COVID-19 but has not yet seen evidence of a material change to its ability to collect accounts receivable balances.
This is an uncertain period with events and circumstances changing frequently, and while senior management is meeting regularly to address all aspects of the pandemic, the magnitude and duration of economic disruption is difficult to predict and will depend on the scope, severity and duration of the pandemic. Further details about the risks and impacts discussed in the section below can be found in the forward-looking statements.

End-markets and sales. Management believes many of the Company’s end-markets have been and will remain relatively insulated from COVID-19-related economic challenges; however, some end-markets were temporarily negatively affected by decreased demand, particularly transportation, which has rebounded since the peak impacts in mid-2020. In addition, sales results may continue to demonstrate, some variability as customers manage inventories and safety stocks to protect against future potential supply chain disruptions.

Tobacco (EP) – The Company’s largest single end-market is the tobacco industry, which has not been materially affected by the pandemic. The Company believes some customers have increased their inventory levels to minimize supply chain impacts of potential future COVID-19 related disruptions.

Healthcare (AMS) – Management believes sales of these products, mostly consumables, are not sensitive to COVID-19-related economic weakness.
Filtration (AMS) The Company believes these products are generally less sensitive to economic volatility than typical industrial goods. Within the portfolio, air filtration products have seen accelerated demand due to heightened focus on air quality and attempts to minimize the spread of COVID-19.
27



Transportation (AMS) The Company’s primary products are aftermarket automotive paint protection films, which faced pronounced temporary near-term negative impacts, beginning late in the first quarter of 2020 through most of the third quarter of 2020, as a result of significant auto industry disruption and consumer purchasing behaviors as a result of COVID-19. However, since late in the third quarter of 2020, the Company’s transportation sales have improved significantly.

Construction (AMS) Management believes these end-markets have been impacted by local self-distancing regulations that may affect the construction industry, but these end markets have exhibited recent improvements and could be further positively supported by a potential increase in government-sponsored infrastructure spending.
Industrial (AMS & EP) The Company’s products service a broad range of applications, some of which are considered to be sensitive to economic activity and associated impacts of COVID-19, while other applications have been relatively unaffected.
Liquidity & Debt Overview. The Company currently has $617.9 million of total debt, $63.7 million of cash, and undrawn capacity on its $500.0 million revolving line of credit facility (the "Revolving Credit Facility") of $420.2 million at the end of the first quarter of 2021. Per the terms of the Company's $700.0 million credit agreement (the "Credit Agreement"), net leverage was 2.37x at the end of the first quarter, versus a maximum covenant ratio of 4.5x, though covenants contain an acquisition-related provision, allowing net leverage to reach 5.0x throughout 2021. The Company’s nearest debt maturity is the Revolving Credit Facility which is due in 2023. Please refer to liquidity and capital resources section for additional detail.

SUMMARY
 ($ in millions, except per share amounts)Three Months Ended
March 31,Percent of Net Sales
 2021202020212020
Net sales$288.2 $261.5 100.0 %100.0 %
Gross profit80.8 74.3 28.0 28.4 
Restructuring & impairment expense1.7 0.1 0.6 — 
Operating profit33.5 34.1 11.6 13.0 
Interest expense2.9 6.9 1.0 2.6 
Net income$21.6 $22.5 7.5 %8.6 %
Diluted earnings per share$0.68 $0.72  
Cash provided by operations$12.7 $5.1  
Capital spending$(7.1)$(7.4) 


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RESULTS OF OPERATIONS

Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31, 2020
 
Net Sales
($ in millions)
Three Months Ended
March 31, 2021March 31, 2020ChangePercent Change
Advanced Materials & Structures$163.0 $122.9 $40.1 32.6 %
Engineered Papers125.2 138.6 (13.4)(9.7)
Total$288.2 $261.5 $26.7 10.2 %

Net sales were $288.2 million in the three months ended March 31, 2021 compared with $261.5 million in the prior-year period. The increase in net sales consisted of the following ($ in millions):
AmountPercent
Changes in volume, product mix and selling prices$19.1 7.3 %
Changes due to net foreign currency impacts7.3 2.8 
Changes due to royalties0.3 0.1 
Total$26.7 10.2 %

AMS segment net sales were $163.0 million for the three months ended March 31, 2021 compared to $122.9 million during the prior-year period. The increase of $40.1 million or 32.6% included the benefit from the Tekra acquisition (closed March 13, 2020), and reflected rapid growth in transportation and filtration sales. Tekra net sales were $23.6 million and $5.5 million for the three months ended March 31, 2021 and 2020, respectively. Transportation sales continued to rebound sharply from negative COVID-19 impacts that began in the first quarter of 2020. Sales into filtration end-markets were up also double digits, driven by strong growth in air filtration, while all other filtration sub-segments increased as well. Healthcare increased, driven by continued robust volumes of woundcare, facemask, and packaging materials. Construction sales increased, led by double-digit growth in key infrastructure and construction applications. Industrial sales declined during the quarter.

EP segment net sales during the three months ended March 31, 2021 of $125.2 million decreased by $13.4 million, or 9.7%, versus net sales of $138.6 million in the prior-year quarter. The decrease in net sales was primarily the result of a 6% volume decrease, and unfavorable price/mix of 8%, partially offset by a 4% currency benefit. Decrease in volume reflected the continued strategic de-emphasis of non-tobacco products, as well as the decrease in high-value LIP tobacco papers as a result of the transitioning of supplies to a large customer from the Spotswood, NJ facility to other sites while the customer worked through legacy inventories. The decline in LIP papers also negatively impacted mix. These negative factors were partially offset by growth in Heat-not-Burn and certain other specialty tobacco paper products.
 
Gross Profit
($ in millions)
 Three Months Ended Percent ChangePercent of Net Sales
 March 31, 2021March 31, 2020Change20212020
Net sales$288.2 $261.5 $26.7 10.2 %100.0 %100.0 %
Cost of products sold207.4 187.2 20.2 10.8 72.0 71.6 
Gross profit$80.8 $74.3 $6.5 8.7 %28.0 %28.4 %
 
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Gross profit increased by $6.5 million during the three months ended March 31, 2021 to $80.8 million versus the prior-year period of $74.3 million.

AMS gross profit increased by $9.2 million, primarily due to strong organic sales growth and the incremental benefit of the acquired Tekra business, partially offset by higher input costs, primarily of polypropylene resin.

In the EP segment, gross profit decreased by $2.7 million, primarily due to lower sales and unfavorable price/mix impacts, and higher wood pulp input costs, partially offset by manufacturing cost improvements and $1.9 million of favorable foreign currency exchange.

Nonmanufacturing Expenses
($ in millions)
 Three Months Ended Percent ChangePercent of Net Sales
 March 31, 2021March 31, 2020Change20212020
Selling expense$9.1 $9.5 $(0.4)(4.2)%3.2 %3.6 %
Research expense3.8 3.2 0.6 18.8 1.3 1.2 
General expense32.7 27.4 5.3 19.3 11.4 10.5 
Nonmanufacturing expenses$45.6 $40.1 $5.5 13.7 %15.8 %15.3 %
 
Nonmanufacturing expenses in the three months ended March 31, 2021 increased by $5.5 million to $45.6 million from $40.1 million in the prior-year period, primarily due to $3.6 million of transaction costs associated with the Scapa acquisition and higher deferred compensation expenses and third party consulting expenses.

Restructuring and Impairment Expense
($ in millions)
 Three Months EndedPercent of Net Sales
 March 31, 2021March 31, 2020Change20212020
Advanced Materials & Structures$— $— $— — %— %
Engineered Papers1.7 0.1 1.6 1.4 0.1 
Unallocated expenses— — — — — 
Total$1.7 $0.1 $1.6 0.6 %— %
 
The Company incurred total restructuring and impairment expense of $1.7 million and $0.1 million in the three months ended March 31, 2021 and 2020, respectively. In the 2021 period, restructuring expense in the EP segment included $1.4 million related to the 2020 decision to shut down the Spotswood, New Jersey facility and included costs associated with closing the facility, maintaining the property and preparing it for sale.

In the 2021 period the EP segment also recognized $0.3 million of restructuring expenses related to severance accruals for employees at other manufacturing facilities.

In the comparable 2020 period, restructuring expense primarily related to ongoing cost optimization initiatives to remain competitive within the EP segment.



30


Operating Profit
($ in millions)
 Three Months EndedPercent ChangeReturn on Net Sales
 March 31, 2021March 31, 2020Change20212020
Advanced Materials & Structures$21.3 $13.7 $7.6 55.5 %13.1 %11.1 %
Engineered Papers29.9 33.4 (3.5)(10.5)23.9 24.1 
Unallocated expenses(17.7)(13.0)(4.7)(36.2)  
Total$33.5 $34.1 $(0.6)(1.8)%11.6 %13.0 %

Operating profit was $33.5 million in the three months ended March 31, 2021 compared with $34.1 million during the prior-year period.
 
The AMS segment's operating profit in the three months ended March 31, 2021 was $21.3 million compared to $13.7 million in the prior-year period. The increase of $7.6 million, or 55.5%, reflected strong organic sales growth and the incremental benefit of the acquired Tekra business partially offset by higher raw material costs.

The EP segment's operating profit in the three months ended March 31, 2021 was $29.9 million, a decrease of $3.5 million, or 10.5%, from $33.4 million in the prior-year period.  The decrease was primarily driven by lower gross profit and higher restructuring expenses as discussed above and an unfavorable $0.5 million of currency movements impact, partially offset by decreased SG&A expenses from cost control initiatives.

Unallocated expenses in the three months ended March 31, 2021 were $17.7 million compared to $13.0 million in the prior-year period, an increase of $4.7 million, or 36.2%. The increase was primarily due to $3.6 million of transaction costs related to the Scapa acquisition and higher deferred compensation expenses.

Non-Operating Expenses

Interest expense was $2.9 million in the three months ended March 31, 2021, a decrease from $6.9 million in the prior-year period. The decrease was primarily due to a benefit of $4.5 million prior year expense reversal related to the favorable settlement of Brazil tax assessments as discussed in Note 12. Commitments and Contingencies of the notes to the unaudited condensed consolidated financial statements. Interest expense on debt increased $0.5 million.
 
Other expense, net, was $2.6 million during the three months ended March 31, 2021 compared to Other income of $0.6 million in the prior year quarter, due primarily to $5.6 million mark-to-market loss of forward currency contracts on the British pound associated with the Scapa acquisition to hedge currency risk of the purchase price during the period between the transaction agreement and closing. This expense was partially offset by other components of the favorable Brazil tax assessment settlement.

Income Taxes

A $7.4 million provision for income taxes in the three months ended March 31, 2021 resulted in an effective tax rate of 26.4% compares with 19.1% in the prior-year quarter. The increase was due to unfavorable discrete items, mix of earnings by jurisdiction and a reduction in US tax credits due to foreign law changes.
Income from Equity Affiliates

Income from equity affiliates, which reflects the results of operations of CTM and CTS, was $1.0 million in the three months ended March 31, 2021 compared with income of $0.0 million during the prior-year period, and reflects the results of operations of CTM and CTS.

Net Income and Income per Share
 
Net income in the three months ended March 31, 2021 was $21.6 million, or $0.68 per diluted share, compared with $22.5 million, or $0.72 per diluted share, during the prior-year period. 
31



LIQUIDITY AND CAPITAL RESOURCES
 
A major factor in our liquidity and capital resource planning is our generation of cash flow from operations, which is sensitive to changes in the mix of products sold, sales volume and selling prices of our products, as well as changes in our production volumes, costs, foreign currency exchange rates and working capital. Our liquidity is supplemented by funds available under our Credit Agreement with a syndicate of banks that is used as either operating conditions or strategic opportunities warrant.

Cash Requirements

As of March 31, 2021, $44.1 million of the Company's $63.7 million of cash and cash equivalents was held by foreign subsidiaries. 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. We believe the proceeds from our Term Loan B Facility (as defined below) along with our existing credit facilities will be sufficient to fund our current growth plan.
 
Cash Provided by Operations

Net cash provided by operations was $12.7 million in the three months ended March 31, 2021 compared with $5.1 million in the prior-year period. The increase was primarily related to favorable year-over-year movements in working capital related cash flows.

Working Capital

As of March 31, 2021, the Company had net working capital of $273.1 million, including cash and cash equivalents of $63.7 million, compared with net working capital of $232.3 million, including cash and cash equivalents of $54.7 million as of December 31, 2020.  These changes primarily reflect the timing of payments and collections.

In the three months ended March 31, 2021, net changes in operating working capital used cash of $30.5 million, down from $33.7 million in the prior year period.

Cash Used for Investing

Cash used for investing activities during the three months ended March 31, 2021 was $7.3 million, compared to $176.3 million in the prior-year. The change primarily reflects the net $170.6 million consideration to acquire Tekra in prior year. Capital spending and capitalized software totaled $7.6 million, down $0.5 million.

Cash Provided by Financing Activities

During the three months ended March 31, 2021, financing activities consisted of $25.0 million proceeds from borrowings under the revolving credit facility, $13.8 million in cash paid for dividends declared to SWM stockholders, share repurchases of $3.1 million, $3.0 million payment for debt issuance costs associated with the amendment of our Credit Agreement as discussed in Note 10. Debt and Note16. Subsequent Events, of the notes to the unaudited condensed consolidated financial statements, and $0.6 million payments on long-term debt.

In the prior-year period, financing activities consisted of $212.0 million net proceeds from borrowings under the Revolving Credit Facility primarily to fund the Tekra acquisition, $13.7 million in cash paid for dividends declared to SWM stockholders, share repurchases of $1.0 million, and $0.4 million payments on long-term debt.

The Company presently believes that the sources of liquidity discussed above are sufficient to meet its anticipated funding needs for the foreseeable future.

Dividend Payments
 
32


We have declared and paid cash dividends on our common stock every fiscal quarter since the second quarter of 1996. On May 5, 2021, we announced a cash dividend of $0.44 per share payable on June 18, 2021 to stockholders of record as of May 21, 2021. The covenants contained in our Indenture and Credit Agreement require that we maintain certain financial ratios as disclosed in Note 10. Debt of the notes to the unaudited condensed consolidated financial statements, none of which under normal business conditions we would expect to materially limit our ability to pay such dividends. We plan to continue to assess our dividend policy in light of our capital allocation strategy, cash generation, debt levels and ongoing requirements for cash to fund operations and to pursue possible strategic opportunities.

Debt Instruments and Related Covenants
Debt Instruments
($ in millions)
Three Months Ended
March 31, 2021March 31, 2020
Proceeds from issuances of long-term debt$25.0 $212.0 
Payments on long-term debt(0.6)(0.4)
Net proceeds from borrowings$24.4 $211.6 
 
Net proceeds from borrowings were $24.4 million during the three months ended March 31, 2021. 

On February 10, 2021 we amended our Credit Agreement to, among other things, add a new seven year Term Loan B facility, which provides for additional capacity of $350 million (the "Term Loan B Facility"). See Note 10. Debt and Note 16. Subsequent Events, of the notes to unaudited condensed consolidated financial statements for additional information about the Term Loan B Facility. Other than potential borrowings under the Term Loan B Facility, the Company does not expect to incur any significant additional borrowings during 2021.
 
Unused borrowing capacity under the Credit Agreement was $420.2 million as of March 31, 2021. We also had availability under our bank overdraft facilities of $6.2 million as of March 31, 2021.

The Company was in compliance with all of its covenants under the Indenture and Credit Agreement at March 31, 2021. With the current level of borrowing and forecasted results, we expect to remain in compliance with financial covenants under the Credit Agreement.

Our total debt to capital ratios, as calculated under the Credit Agreement, at March 31, 2021 and December 31, 2020 were 48.6% and 47.7%, respectively.

Off-Balance Sheet Arrangements

As of March 31, 2021, we did not have any significant off-balance sheet arrangements, as defined in Item
303(a)(4)(ii) of SEC Regulation S-K.


FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995 that are subject to the safe harbor created by that Act and other legal protections. Forward-looking statements, include, without limitation, those regarding the incurrence of additional debt and expected maturities of the Company’s debt obligations, the adequacy of our sources of liquidity and capital, integration, and growth prospects (including international growth), the cost and timing of our restructuring actions, the impact of ongoing litigation matters and environmental claims, the amount of capital spending and/or common stock repurchases, future cash flows, purchase accounting impacts, impacts and timing of our ongoing operational excellence and other cost-reduction and cost-optimization initiatives, the impact of the COVID-19 pandemic on our operations, profitability, and cash flow, and other statements generally identified by words such as "believe," "expect," "intend," "plan," "potential," "anticipate," "project," "appear," "should," "could," "may," "will," "typically" and similar words. These statements are not guarantees of future performance and involve certain risks and
33


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 our Annual Report on Form 10-K for the year ended December 31, 2020, as well as the following factors:

Risks associated with pandemics and other public health emergencies, including the continued spread and impact of, and the governmental and third party response to, the COVID-19 pandemic;
The impact of mandatory business closures, limits on non-essential travel, “social or physical distancing” guidelines, “shelter-in-place” mandates and similar governmental and private measures taken to combat the spread of COVID-19;
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 and due to impact of tariffs;
Risks associated with the implementation of our strategic growth initiatives, including diversification, and the Company's understanding of, and entry into, new industries and technologies;
Changes in the source and intensity of competition in our commercial segments. We operate in highly competitive markets in which alternative supplies and technologies may attract our customers away from our products. In addition, our customers may, in some cases, produce for themselves the components that the Company sells to them for incorporation into their products, thus reducing or eliminating their purchases from us;
Our ability to attract and retain key personnel, due to our prior restructuring actions, the tobacco industry in which we operate or otherwise;
Weather conditions, including potential impacts, if any, from climate change, known and unknown, seasonality factors that affect the demand for virgin tobacco leaf and natural disasters or unusual weather events;
Seasonal or cyclical market and industry fluctuations which may result in reduced net sales and operating profits during certain periods;
Increases in commodity prices and lack of availability of such commodities, including energy, wood pulp and resins, which could impact the sales and profitability of our products;
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 or otherwise, such as labor expense, compensation and benefits costs;
Employee retention and labor shortages;
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 rule 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;
Labor strikes, stoppages, disruptions or other disruptions at our facilities;
The impact of tariffs, and the imposition of any future additional tariffs and other trade barriers, and the effects of retaliatory trade measures;
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 Euro and Real) and on interest rates and the effects of the ongoing discussions between the U.K. and European Union to determine the terms of the U.K.'s withdrawal from the European Union;
Changes in the method pursuant to which LIBOR rates are determined and the phasing out of USD LIBOR after 2023;
34


Changes in the manner in which we finance our debt and future capital needs, including potential acquisitions;
The success of, and costs associated with, our current or future restructuring initiatives, including the granting of any needed governmental approvals and the occurrence of work stoppages or other labor disruptions;
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, 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;
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 control 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, including the failures of any insurance company or counterparty;
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;
The outcome and cost of LIP-related intellectual property infringement and validity litigation in Europe and the Glatz's German Patent Court invalidation proceedings;
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;
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
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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 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risk exposure at March 31, 2021 is consistent with, and not materially different than, the market risk and discussion of exposure presented under the caption “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

We currently have in place systems relating to disclosure controls and procedures designed to ensure the timely recording, processing, summarizing and reporting of information required to be disclosed in periodic reports under the Securities Exchange Act of 1934, as amended. These disclosure controls and procedures include those designed to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions about required disclosure. Upon completing our review and evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2021, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures were effective as of March 31, 2021.

Changes in Internal Control Over Financial Reporting

No changes in our internal control over financial reporting were identified as having occurred in the fiscal quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings
 
The Company is involved in various legal proceedings and disputes. See Note 20. Commitments and Contingencies of the notes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020 and Note 12. Commitments and Contingencies of the notes to the unaudited condensed consolidated financial statements included in this report. Except as may have been referenced elsewhere in this report, there have been no material developments with regard to these matters.

Item 1A. Risk Factors

As of March 31, 2021, there were no material changes in the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Purchases of Equity Securities By the Issuer and Affiliated Purchasers

The following table indicates the cost of and number of shares of the Company's common stock it repurchased during 2021:
Issuer Purchases of Equity Securities
PeriodTotal
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 - 31, 2021619 $41.84 
February 1 - 28, 202166,110 45.87 — — — 
March 1-31, 2021— — 
Total Year-to-Date 202166,729 $45.83 — — — 

From time to time, the Company uses 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 Company's stock price, strategic opportunities and cash availability.

Item 3. Defaults Upon Senior Securities
 
Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.
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Item 6. Exhibits
Exhibit
Number
Exhibit
2.1
2.2
2.3
3.1
3.2
10.1
10.2
10.3
31.1
31.2
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101The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the condensed consolidated statements of income, (ii) the condensed consolidated statements of comprehensive income (loss), (iii) the condensed consolidated balance sheets, (iv) the condensed consolidated statements of changes in stockholders' equity, (v) the condensed consolidated statements of cash flow, and (vi) notes to condensed consolidated financial statements.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit101).



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Schweitzer-Mauduit International, Inc.
(Registrant)
 
By:/s/ Andrew Wamser
 Andrew Wamser
Executive Vice President and
Chief Financial Officer
(duly authorized officer and principal financial officer)
  
 May 5, 2021





By:/s/ Michael Schmit
 Michael Schmit
Corporate Controller and
Chief Accounting Officer
(principal accounting officer)
  
 May 5, 2021

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GLOSSARY OF TERMS
 
The following are definitions of certain terms that may be used in this Quarterly Report on Form 10-Q filing:

"Total debt to capital ratio" is total debt divided by the sum of total debt and total stockholders' equity.
"Reconstituted tobacco" is produced in two forms: leaf, or reconstituted tobacco leaf, and wrapper and binder products. Reconstituted tobacco leaf is blended with virgin tobacco as a design aid to achieve certain attributes of finished cigarettes. Wrapper and binder are reconstituted tobacco products used by manufacturers of cigars.
"Reverse osmosis" is a water purification technology that uses a semipermeable membrane to remove larger particles from drinking water.
"Tobacco paper" includes cigarette paper which wraps the column of tobacco within a cigarette and has varying properties such as basis weight, porosity, opacity, tensile strength, texture and burn rate, as well as plug wrap paper which wraps the outer layer of a cigarette filter and is used to hold the filter materials in a cylindrical form, and tipping paper which joins the filter element to the tobacco-filled column of the cigarette and is both printable and glueable at high speeds.
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