<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from.............to.....................
Commission file number 1-13948
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1612879
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 NORTH POINT CENTER EAST
SUITE 600
ALPHARETTA, GEORGIA
30202-8246
(Address of principal executive offices)
(Zip Code)
1-800-514-0186
(Registrant's telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed since last
report)
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 X . No .
----- -----
As of September 30, 1996, 16,052,309 shares of the Corporation's common stock,
par value $.10 per share, together with preferred stock purchase rights
associated therewith, were outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
- - -------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents ........................................................ $ 28.8 $ 5.9
Accounts receivable .............................................................. 64.2 69.5
Inventories ...................................................................... 47.6 56.0
Deferred income tax benefits ..................................................... 3.3 5.1
Prepaid expenses ................................................................. 3.1 l.0
------ ------
Total Current Assets ......................................................... 147.0 137.5
------ ------
Gross Property ....................................................................... 341.6 322.0
Less accumulated depreciation .................................................... 165.3 155.5
------ ------
Net Property ................................................................. 176.3 166.5
------ ------
Noncurrent Deferred Income Tax Benefits .............................................. 32.6 40.1
------ ------
Deferred Charges and Other Assets .................................................... 2.9 2.9
------ ------
Total Assets ......................................................................... $358.8 $347.0
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt .................................................................. $ 0.4 $ 2.5
Current portion of long-term debt ................................................ 3.2 2.4
Accounts payable ................................................................. 34.5 44.3
Accrued expenses ................................................................. 45.9 43.6
Income taxes payable ............................................................. 1.9 1.3
------ ------
Total Current Liabilities .................................................... 85.9 94.1
------ ------
Long-Term Debt ....................................................................... 87.7 91.6
------ ------
Deferred Income Taxes ................................................................ 8.2 10.1
------ ------
Other Noncurrent Liabilities ......................................................... 20.6 18.3
------ ------
Minority Interest .................................................................... 5.3 3.0
------ ------
Contingencies (See Notes 4, 5 and 6)
Stockholders' Equity
Preferred Stock -$.10 par value - 10,000,000 shares authorized, none issued ...... - -
Common Stock -$.10 par value - 100,000,000 shares authorized,
16,052,309 and 16,051,109 shares issued and outstanding at September 30, 1996
and December 31, 1995, respectively .......................................... l.6 1.6
Additional paid-in capital ....................................................... 60.0 60.0
Retained earnings ................................................................ 71.2 46.3
Unrealized currency translation adjustments ...................................... 18.3 22.0
------ ------
Total Stockholders' Equity ................................................... 151.1 129.9
------ ------
Total Liabilities and Stockholders' Equity ........................................... $358.8 $347.0
====== ======
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
2
<PAGE> 3
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- --------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Sales ......................................... $118.5 $121.5 $355.8 $344.4
Cost of products sold ........................... 89.9 94.7 268.6 268.3
------ ------ ------ ------
Gross Profit ...................................... 28.6 26.8 87.2 76.1
Advertising, promotion and selling expenses ..... 4.6 4.6 13.7 12.8
Research expense ................................ 1.3 1.2 4.4 3.3
General expense ................................. 3.9 2.9 12.5 8.6
------ ------ ------ ------
Operating Profit .................................. 18.8 18.1 56.6 51.4
Interest expense ................................ (1.4) (0.7) (4.1) (2.0)
Interest expense to affiliated companies ........ - (3.1) - (9.3)
Interest income from affiliated companies ....... - 3.7 - 12.3
Other income (expense), net ..................... 0.3 - 0.4 (0.3)
------ ------ ------ ------
Income Before Income Taxes and Minority Interest .. 17.7 18.0 52.9 52.1
Provision for income taxes ...................... 6.6 2.9 19.8 15.2
------ ------ ------ ------
Income Before Minority Interest ................... 11.1 15.1 33.1 36.9
Minority interest in earnings of subsidiary ..... 1.3 1.2 3.4 2.8
------ ------ ------ ------
Net Income ........................................ $ 9.8 $ 13.9 $ 29.7 $ 34.1
====== ====== ====== ======
Net Income per Common Share $ .61 $ 1.85
====== ======
Pro Forma Net Income per Common Share (Note 2) .... $ .75 $ 1.70
====== ======
Cash Dividends Declared per Common Share .......... $ .15 N.A. $ .30 N.A.
====== ======
</TABLE>
N.A. - Not Applicable in 1995.
See Notes to Unaudited Consolidated Financial Statements
3
<PAGE> 4
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
U.S. $ IN MILLIONS
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ISSUED
AND OUTSTANDING PREDECESSORS' ADDITIONAL UNREALIZED
-------------------- CAPITAL PAID-IN RETAINED DIVISION CURRENCY
SHARES AMOUNT STOCK (1) CAPITAL EARNINGS EQUITY TRANSLATION TOTAL
-------- ------ ------------- ---------- -------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 ................ $37.2 $65.7 $69.2 $68.0 $ 5.0 $245.1
Net income for the nine months
ended September 30, 1995 ............... 23.0 11.1 34.1
Advances to affiliates ................... (11.8) (11.8)
Dividends declared ....................... (38.6) (38.6)
Return of capital (2) .................... (37.1) (37.1)
Adjustments due to translation ........... - - - - 17.3 17.3
------ ----- ----- ------ ----- ------
BALANCE, SEPTEMBER 30, 1995 ............... 0.1 65.7 53.6 67.3 22.3 209.0
Net income for the two months
ended November 30, 1995 ................ 3.5 1.8 5.3
Advances from affiliates ................. 9.3 9.3
Dividends declared (3) ................... (8.2) (8.2)
Return of capital (3) .................... (56.0) (56.0)
Adjustments due to translation ........... (2.2) (2.2)
Debt assumed from Kimberly-Clark (3) ..... (25.0) (25.0)
Stock distribution to holders of
Kimberly-Clark stock ................... 16,051,109 $1.6 (0.1) 50.3 - (53.4) 1.6 -
---------- ---- ------ ----- ----- ------ ----- ------
BALANCE, DECEMBER 1, 1995 ................. 16,051,109 1.6 - 60.0 48.9 - 21.7 132.2
Net loss for the month
ended December 31, 1995 ................ (2.6) (2.6)
Adjustments due to translation ........... - - - - - - 0.3 0.3
---------- ---- ------ ----- ----- ------ ----- ------
BALANCE, DECEMBER 31, 1995 ............... 16,051,109 1.6 - 60.0 46.3 - 22.0 129.9
Net income for the nine months ended
September 30, 1996 ..................... 29.7 29.7
Dividends declared ....................... (4.8) (4.8)
Stock issued to directors as
compensation ........................... 1,200
Adjustments due to translation ........... - - - - - (3.7) (3.7)
---------- ---- ------ ----- ----- ------ ----- ------
BALANCE, SEPTEMBER 30, 1996 ............... 16,052,309 $1.6 $ - $60.0 $71.2 $ - $18.3 $151.1
========== ==== ====== ===== ===== ====== ===== ======
</TABLE>
(1) Changes in predecessors' capital stock relate to Schweitzer-Mauduit
France S.A.R.L. ("SMF"), previously named Kimberly-Clark France S.A.R.L.
The issuances of stock of Schweitzer-Mauduit International, Inc. ("SWM" or
the "Company") and Schweitzer-Mauduit Canada, Inc. to Kimberly-Clark
Corporation ("Kimberly-Clark") and Kimberly-Clark, Inc. (an indirect
wholly-owned Canadian subsidiary of Kimberly-Clark), respectively, on
August 21, 1995 and August 17, 1995, respectively, solely for the purpose
of effecting the Distribution (see Note 1 of Notes to Unaudited
Consolidated Financial Statements) were nominal amounts and thus are not
reflected in the above statement. Prior to the Distribution, $0.1 of the
common stock was attributable to LTR Industries S.A. ("LTRI") and was
unchanged during all the periods presented up until November 30, 1995.
(2) Represents contributions to SMF equity by Kimberly-Clark which were, in
turn, invested in whole or in part in the French consumer and service
products ("C&S") subsidiaries of SMF. The investments in these
subsidiaries have been retroactively reflected in the accompanying
Unaudited Consolidated Financial Statements as having been distributed to
Kimberly-Clark. Accordingly, these additional C&S investments have been
shown as return of capital distributions to Kimberly-Clark (or as
dividends to the extent the investment exceeded SMF's available common
stock amount). See Note 1 of Notes to Unaudited Consolidated Financial
Statements.
(3) In connection with the Distribution, the Company paid $56.0 to
Kimberly-Clark as a return of capital. This payment was in addition to
the debt of Kimberly-Clark, which the Company assumed in the U.S. ($25.0)
and retained in France ($10.8), and a cash dividend from LTRI to
Kimberly-Clark of $8.2 on the date of the Distribution. The aggregate of
these items represented a distribution of $100.0 to Kimberly-Clark in
connection with the Distribution.
See Notes to Unaudited Consolidated Financial Statements
4
<PAGE> 5
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
U.S. $ IN MILLIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1996 1995
---- ----
<S> <C> <C>
Operations
Net income ............................................... $ 29.7 $ 34.1
Depreciation ............................................. 10.0 9.9
Deferred income tax provision ............................ 5.5 4.3
Minority interest in earnings of subsidiary .............. 3.4 2.8
Non-cash utilization of restructuring reserve ............ 4.7 -
Other .................................................... 2.2 0.2
Changes in operating working capital ..................... 4.7 3.6
------ ------
Cash Provided by Operations .......................... 60.2 54.9
------ ------
Investing
Capital spending ......................................... (28.2) (9.9)
Advances to affiliates ................................... - (11.8)
Other .................................................... (1.3) (0.6)
------ ------
Cash Used for Investing .............................. (29.5) (22.3)
------ ------
Financing
Cash dividends paid to SWM stockholders .................. (4.8) -
Cash dividends paid to affiliates ........................ - (10.3)
Changes in receivables from affiliates ................... - (61.1)
Changes in short-term debt ............................... (2.1) 15.9
Changes in debt payable to affiliates within one year .... - 24.2
Proceeds from issuances of long-term debt ................ 5.2 6.1
Payments on long-term debt ............................... (5.2) (3.5)
Cash dividends paid to minority owner .................... (0.9) (3.9)
Other .................................................... - 0.5
------ ------
Cash Used for Financing .............................. (7.8) (32.1)
------ ------
Increase in Cash and Cash Equivalents ........................ 22.9 0.5
Cash and Cash Equivalents at beginning of period ............. 5.9 0.6
------ ------
Cash and Cash Equivalents at end of period ................... $ 28.8 $ 1.1
====== ======
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
5
<PAGE> 6
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 1. BACKGROUND
In April 1995, the Board of Directors of Kimberly-Clark Corporation
("Kimberly-Clark") approved a plan providing for a distribution (the
"Distribution") to its stockholders through a tax-free spin-off of its U.S.,
French and Canadian business operations that manufacture and sell
tobacco-related papers and other specialty paper products (the "Businesses") to
customers predominately in the United States, Europe and China.
In order to effectuate the Distribution of the Businesses, on August 21,
1995 and July 31, 1995, respectively, Schweitzer-Mauduit International, Inc.
("SWM" or the "Company") and Schweitzer-Mauduit Canada, Inc. ("SM-Canada") were
incorporated and nominally capitalized. Immediately prior to the Distribution,
Kimberly-Clark transferred to the Company (the "Transfer") (i) the assets and
liabilities of its U.S.-based specialty products business; (ii) all of the
issued and outstanding shares of SM-Canada; (iii) all of the issued and
outstanding shares of Schweitzer-Mauduit France, S.A.R.L. (previously named
Kimberly-Clark France S.A.R.L., or "S.A.R.L."), a French corporation ("SMF");
and (iv) 72 percent of the issued and outstanding shares of LTR Industries,
S.A., a French corporation ("LTRI"). At the time of the Distribution, the
Company had initial authorized capital of 100,000,000 common shares (par value
$.10 per share) and 10,000,000 preferred shares (par value $.10 per share).
After the Transfer, the Company consisted of the operating assets and
liabilities of Kimberly-Clark's U.S. specialty products business and
investments in SM-Canada (100 percent owned), SMF (100 percent owned) and LTRI
(72 percent owned). SMF, directly or indirectly, owns 100 percent of two
principal French subsidiaries: Papeteries de Mauduit S.A. ("PdM") and
Papeteries de Malaucene S.A. ("PdMal"). The Transfer was accounted for at
historical cost in a manner similar to a pooling of interests as the entities
were all under common control.
In July 1995, the stockholder of SMF, then a wholly-owned subsidiary of
Kimberly-Clark, approved the conversion of $65.4 of receivables from an
affiliated company to an equity investment in such company. Such affiliated
company was one of two wholly-owned consumer and service products ("C&S")
subsidiaries (unrelated to the tobacco-related and specialty papers businesses)
which were merged together, and the shares of the merged entity were
distributed to Kimberly-Clark prior to the Distribution. The conversion of
receivables to an equity investment was recorded as a return of capital to
Kimberly-Clark, reducing the par value of common stock of SMF by $37.1, with
the excess recorded as a non-cash dividend reducing retained earnings by $28.3.
SMF remained part of the Company to permit PdM and PdMal to utilize income tax
loss carryforwards previously generated by the French C&S operations.
On November 1, 1995, Kimberly-Clark announced that its Board of Directors
had approved the Distribution of all outstanding shares of common stock of SWM
to Kimberly-Clark stockholders. The Distribution was made on November 30, 1995
to stockholders of record on November 13, 1995, at the distribution ratio of
one share of SWM common stock for every ten shares of Kimberly-Clark common
stock held on the date of record. Effective at the close of business on
November 30, 1995 (the "Distribution Date"), the Company became an independent,
publicly-owned company as a result of the Distribution.
6
<PAGE> 7
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
In connection with the Distribution, the Company paid $56.0 to
Kimberly-Clark as a return of capital. This payment was in addition to debt of
Kimberly-Clark, which the Company assumed in the U.S. ($25.0) and retained in
France ($10.8), and a cash dividend from LTRI to Kimberly-Clark of $8.2 on the
date of the Distribution. The aggregate of these items represented a
distribution of $100.0 to Kimberly-Clark in connection with the Distribution.
Effective April 18, 1996 and July 15, 1996, the Board of Directors
declared the first and second, respectively, quarterly cash dividends each of
fifteen cents ($.15) per share of common stock. The dividends, each totaling
$2.4, were paid on June 10, 1996 and September 9, 1996 to stockholders of
record on May 13, 1996 and August 12, 1996, respectively.
NOTE 2. BASIS OF PRESENTATION AND PRO FORMA INFORMATION
Basis of Presentation
These financial statements include the accounts of SWM and its
majority-owned subsidiaries. All material intercompany and interdivision
transactions are eliminated.
The Balance Sheets as of September 30, 1996 and December 31, 1995 are
presented on a consolidated basis. The Statements of Income, Cash Flows and
Changes in Stockholders' Equity for all periods prior to the Distribution Date
include the combined results of operations and cash flows of the Businesses
under Kimberly-Clark as if the Businesses had been operating as a single entity
prior to the Distribution. The combined statements include historical
information and reflect the assets, liabilities, net income and cash flows of
the Businesses. Kimberly-Clark's U.S. business had been reported as a division
(not a separate legal entity) of Kimberly-Clark, the Canadian business had been
reported as a division of a Canadian subsidiary of Kimberly-Clark, and the
French businesses had been reported as consolidated subsidiaries of
Kimberly-Clark.
The French C&S operations have been excluded from the consolidated
financial statements of the Company because the Businesses and the French C&S
operations had been independently operated and managed, had totally separate
facilities, no common sales forces or purchasing functions, no substantive
intercompany transactions (except in the ordinary course of managing
Kimberly-Clark's intercompany financing activities), and no other
commonalities, in substance or in form. The accompanying consolidated
financial statements accordingly reflect the distribution of the French C&S
subsidiaries to Kimberly-Clark as of the beginning of the earliest period
presented.
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission and on the same basis as the audited financial
statements included in the Company's Annual Report on Form 10-K. All
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the interim periods have been
made and are of a normal recurring nature. Operating results for any quarter
are not necessarily indicative of the results for any other quarter or for the
full year. These financial statements should be read in connection with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K. Certain reclassifications have been made to conform 1995 data to
the 1995 Form 10-K and current period presentation.
The average number of common shares outstanding used in the calculation of
net income per common share for both the three and nine months ended September
30, 1996 was approximately 16,052,000.
7
<PAGE> 8
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Pro Forma Information
Pro forma net income has been presented based on information prepared
under assumptions as to the effects on the Company's financial statements of
certain intercompany, stockholders' equity and operating transactions related
to the Distribution as though these transactions occurred at the beginning of
the periods presented. Pro forma net income per common share has been computed
based on the assumption that pro forma average shares outstanding, for all
periods prior to December 1, 1995, were the actual number of shares
(16,051,109) issued and distributed in the Distribution. The number of shares
outstanding from the Distribution Date to December 31, 1995 did not change.
The following summarizes the effects of the pro forma adjustments and the pro
forma weighted average common shares outstanding for the three and nine months
ended September 30, 1995 and for the remaining quarter of 1995:
<TABLE>
<CAPTION>
1995
-------------------------------------------------------
Third
First Second Third(a) YTD(a) Fourth(b) Total
----- ------ -------- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Historical net income ..................... $ 9.9 $10.3 $ 13.9 $ 34.1 $ 2.7 $ 36.8
Pro forma adjustments:
Incremental operating expense (c) ........ (l.4) (1.4) (1.3) (4.1) (0.4) (4.5)
Incremental interest expense (d) ......... (1.4) (1.3) (1.4) (4.1) (0.8) (4.9)
Reversal of net interest income
from affiliates (e) ..................... (0.5) (1.8) (0.7) (3.0) (0.3) (3.3)
Net tax benefit of adjustments ........... 1.3 1.5 1.5 4.3 0.6 4.9
------------------------------------------------------
Pro forma net income ...................... $ 7.9 $ 7.3 $ 12.0 $ 27.2 $ 1.8 $ 29.0
===== ===== ====== ====== ===== ==========
Pro forma net income per common share ..... $ .49 $ .46 $ .75 $ 1.70 $ .11 $ 1.81
===== ===== ====== ====== ===== ==========
Pro forma weighted average common
shares outstanding for all periods ....... 16,051,109
</TABLE>
- - ------------------------
a) Results for the third quarter 1995 included a $4.5 one-time deferred
income tax benefit as a result of the increase in the effective statutory
income tax rate enacted in France in July 1995 from 33.33 percent to 36.67
percent. The impact of this one-time item was $.28 per share, which was
partially offset by the $0.6 additional current income tax expense
recorded in the third quarter 1995 for the retroactive effect of the
enactment back to January 1, 1995. The net impact of this item on net
income for the third quarter 1995 was $3.9, or $.24 per share.
b) Results for the fourth quarter 1995 included a $7.3 one-time pre-tax
restructuring charge, the net income impact of which was $4.4, or $.27 per
share.
c) Estimated incremental information systems, administration and management
expense associated with being a stand-alone publicly-owned entity.
d) Estimated incremental interest expense associated with new debt issued
and debt assumed from Kimberly-Clark, and to adjust other interest expense
for the estimated effect of the pro forma adjustments.
e) Reversal of intercompany interest income and expense related to
intercompany receivables and liabilities attributable to Kimberly-Clark's
European cash management program.
8
<PAGE> 9
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 3. INVENTORIES
The following schedule details inventories by major class as of September
30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
At the lower of cost on the First-In,
First-Out (FIFO) and weighted average methods or market:
Raw materials ....................................... $ 18.2 $ 25.9
Work in process ..................................... 7.6 7.4
Finished goods ...................................... 19.1 22.0
Supplies and other .................................. 9.8 10.2
------ ------
54.7 65.5
Excess of FIFO cost over Last-In,
First-Out (LIFO) cost ................................. (7.1) (9.5)
------ ------
Total ............................................. $ 47.6 $ 56.0
====== ======
</TABLE>
NOTE 4. INCOME TAXES
The effective income tax rates for the three and nine months ended
September 30, 1996 increased to 37.3 percent and 37.4 percent, respectively,
from 16.1 percent and 29.2 percent for the respective corresponding periods of
1995. The provision for income taxes increased in 1996 primarily as a result
of the impact of an increase in the effective statutory income tax rate enacted
in France in July 1995 from 33.33 percent to 36.67 percent, retroactive to
January 1, 1995. The net effect of the tax rate increase was favorable for
1995 because it increased the value of the tax benefits recognized from the net
operating loss carryforwards retained by the Company's operations in France.
The third quarter 1995 impact related to deferred tax assets, net of
liabilities, was a favorable one-time effect of $4.5 on the deferred provision
for income taxes, partially offset by the unfavorable impact on the current
provision for income taxes of $1.0, including a $0.6 retroactive adjustment of
the six month period ended June 30, 1995.
The Company's 1995 French income tax returns filed in April 1996 reflected
tax net loss carryforward amounts greater than those which had previously been
reflected on the Company's balance sheet. Thus, the Company recorded an amount
of additional deferred tax asset in the first quarter. There is uncertainty,
however, whether the benefit of these amounts will ultimately be realized by
the Company. Accordingly, an additional valuation allowance was recorded in
the first quarter to fully offset the additional deferred tax asset related to
these tax net loss carryforwards. The amount of the additional deferred tax
asset and off-setting valuation allowance was $15, resulting in no impact on
net income for the three or nine month periods ended September 30, 1996.
Along with numerous other companies and banks in France, PdM is subject to
a tax claim with respect to its purchase of certain bonds in 1988 which were
represented by the two selling banks as carrying specific tax benefits. The
French taxing authority is challenging the use by PdM of those benefits. The
tax claim against PdM by the French taxing authority is $1.9 as of September
30, 1996, including late payment penalties. The Company is vigorously
defending the claim based on the merits and has filed claims against each bank
on the basis of their misrepresentation of certain facts. The Company's claim
against one of the banks was rejected by a trial court in May 1996 and the
Company will appeal this decision. The case against the other bank has been
briefed and oral presentations are scheduled for December 1996. No reserve has
been established for this claim. Based on information currently available,
there exists a reasonable possibility of an unfavorable outcome for this claim.
9
<PAGE> 10
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 5. ENVIRONMENTAL MATTERS
Kimberly-Clark was named a potentially responsible party ("PRP") under the
provisions of the U.S. Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), or analogous state statues, at two waste disposal
sites utilized by the Company's Spotswood, New Jersey mill and one site used by
the Company's former Mt. Holly Springs, Pennsylvania mill. Under the terms of
the Distribution, the Company assumed all liabilities associated with each of
the following matters:
- - - In August 1992, the Spotswood mill received an information request from
the New Jersey Department of Environmental Protection and Energy
("NJDEPE"), now known as the New Jersey Department of Environmental
Protection ("NJDEP"), with respect to the Jones Industrial Service
Landfill. Neither Kimberly-Clark nor the Company has any internal records
indicating that the mill used the site. However, the Spotswood mill
received routing sheets completed by a nonhazardous waste disposal
transporter used by the mill which indicate that the transporter may have
sent three loads of Spotswood mill waste to the site in September 1980.
The NJDEP issued a draft Record of Decision ("ROD") in June 1995 which
evaluated remedial alternatives at the site. The draft ROD included a
NJDEP list of PRPs, but Kimberly-Clark was not named on the list.
Although the amount of the Company's liability, if any, at this site
cannot yet be determined, based on the involvement of a number of other
PRPs and the amount of waste that the Spotswood mill allegedly sent to the
Jones Industrial Service Landfill, the Company does not believe that its
liability at this site will be material.
- - - On February 6, 1991, the NJDEPE identified Kimberly-Clark as a PRP under
the provisions of the New Jersey Spill Compensation and Control Act for
remediation of the Global Sanitary Landfill waste disposal site located in
Old Bridge Township, New Jersey based on the Spotswood mill's disposal of
waste at such site. The United States Environmental Protection Agency
("EPA") has designated the disposal site as a state-led site under CERCLA
with the NJDEP acting as lead agency. In May 1991, Kimberly-Clark signed
a PRP agreement and paid an administrative assessment. In August 1993, a
consent decree was executed by the State of New Jersey and the PRPs
pursuant to which Kimberly-Clark agreed to pay $0.6 for its share of Phase
I cleanup costs. This amount has been reflected in the Company's
financial statements. Although the Spotswood mill's share of Phase II
cleanup costs cannot yet be determined, based on the involvement of a
number of other PRPs, the volume of waste at the Global Sanitary Landfill
waste disposal site allocated to Kimberly-Clark and the expected cost of
Phase II cleanup, the Company does not believe that its liability at this
site will be material.
- - - In April 1995, Kimberly-Clark received a letter from the Industrial
Solvents and Chemical Company ("ISCC") Site PRP Steering Committee stating
that it had been identified by the Pennsylvania Department of
Environmental Protection as a generator of waste at a nine acre site in
Newberry Township, York County, Pennsylvania. The PRP group believes that
the Company's former Mt. Holly Springs, Pennsylvania facility sent 825
gallons of waste to the ISCC site. The PRP group has determined that the
waste allegedly sent by the Company represents 0.0185 percent of the total
amount of waste sent to the ISCC site and, therefore, has assigned to the
Company a 0.0185 percent share of the response costs. The PRP Steering
Committee has committed to incur up to $13.5 in interim response costs and
expects future remedial costs to range from an additional $20 to $30.
Considering these cost estimates and the Company's 0.0185 percent share of
response costs, the Company does not believe its liability at this site
will be material.
10
<PAGE> 11
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
The Company, as part of the Distribution, assumed all liabilities
associated with each of the foregoing matters, as well as responsibility for
compliance with the New Jersey Industrial Site Recovery Act, as amended, in
connection with the transfer of the Spotswood mill to the Company. Based on
technical environmental information about the actions needed to comply with
this statute, such compliance is not expected to have a material adverse effect
on the Company's financial condition or results of operations.
The Company also assumed responsibility to administer a consent order
between Kimberly-Clark and the Massachusetts Department of Environmental
Protection ("MDEP") governing the post-closure care of the Willow Hill Landfill
in Lee, Massachusetts. The Company is obligated to maintain the integrity of
the cover and sample groundwater monitoring wells, in addition to other
long-term maintenance responsibilities for this former non-hazardous waste
disposal facility. Pursuant to Massachusetts law, a comprehensive site
assessment ("CSA") has been performed and submitted to MDEP in connection with
the closure of the Willow Hill Landfill. MDEP approved the CSA in a May 15,
1996 letter to the Company on the condition that a Corrective Action
Alternative Assessment ("CAAA") be performed to address certain environmental
conditions identified in the CSA. On July 15, 1996, the Company submitted to
MDEP a CAAA recommending certain corrective action, the cost of which is not
expected to exceed $0.1. In the CAAA, the Company recommended against certain
other corrective actions on the grounds that they would be ineffective and
cause undue expense. Based on current information, the Company believes that
MDEP is willing to accept the Company's proposal to proceed with the less
costly corrective action plan on the understanding that the site will be in
compliance with the applicable standard by mid-1998. If the Company's
corrective action plan does not achieve compliance with the applicable standard
by November 1, 1997, the Company may be required to implement an alternate
corrective action, as necessary, to bring the site into compliance with such
standard. The cost of an alternate corrective action could be as much as an
additional $1.0.
Within three to ten years, some or all of the Company's U.S. facilities
may be subject to revised air emissions and wastewater discharge standards, the
first phase of which were proposed by the EPA in December 1993. These rules
are commonly known as the "Cluster Rules". The first phase of the proposed
Cluster Rules would affect only wastewater discharges from the Ancram, New York
mill and the Lee mills. Because the Spotswood mill discharges its effluent to
a publicly-owned treatment works, it is not subject to this initial proposal.
If the EPA conforms to its published schedule, this first phase of the Cluster
Rules will be finalized in late 1996 and will require compliance by affected
facilities in late 1999. Although the actual cost of compliance with the
Cluster Rules will depend on the requirements imposed by the final standards,
the estimated capital expenditures for compliance with the proposed Cluster
Rules at the Ancram mill and the Lee mills is between $8 and $11 in the
aggregate. However, because of uncertainty concerning applicable requirements
under the final Cluster Rules, the Company can give no assurance that this
estimate will accurately reflect the actual cost of compliance.
In addition, the later phases of the Cluster Rules (and/or Title III of
the Clean Air Act Amendments of 1990) may further regulate air emissions and
wastewater discharges from the Spotswood mill and require the Company to
install additional air pollution controls at its other U.S. facilities sometime
after the year 2000. Potential capital expenditures to comply with this
subsequent phase of the Cluster Rules and/or Title III of the Clean Air Act
Amendments cannot be estimated until after the EPA proposes applicable
requirements, if any.
11
<PAGE> 12
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
The Company anticipates that it will incur total capital expenditures of
approximately $2 to $4 annually in 1996 and 1997 and approximately $5 to $10 in
1998 to meet legal requirements and otherwise relating to the protection of the
environment at the Company's facilities in the United States and France,
including the aforementioned estimated capital spending through 1998 associated
with the first phase of the proposed Cluster Rules. The major projects
included in these estimates include upgrading wastewater treatment facilities
at various locations and installation of equipment to treat volatile organic
compound emissions in France.
NOTE 6. LEGAL PROCEEDINGS
The Company is involved in certain legal actions and claims arising in the
ordinary course of business. Management believes, based on advice of legal
counsel, that such litigation and claims will be resolved without a material
effect on the Company's consolidated financial statements.
NOTE 7. SUBSEQUENT EVENTS
Effective October 18, 1996, the Board of Directors declared a quarterly
cash dividend of fifteen cents ($.15) per share of common stock. The dividend
will be payable on December 9, 1996 to stockholders of record on November 12,
1996.
12
<PAGE> 13
ITEM 2. SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CERTAIN BACKGROUND INFORMATION
The Company was incorporated on August 21, 1995 as a wholly-owned
subsidiary of Kimberly-Clark, formed to own the assets of Kimberly-Clark's U.S.
specialty products business as well as related investments in Canada and
France. Through the November 30, 1995 Distribution date, the specialty
products operations in the U.S. and Canada were conducted by operating
divisions of Kimberly-Clark and one of its Canadian subsidiaries, respectively.
The specialty products operations in France were conducted through LTRI, a 72
percent-owned subsidiary of Kimberly-Clark, and two indirect wholly-owned
Kimberly-Clark subsidiaries, PdMal and PdM. These latter two companies were
owned by Schweitzer-Mauduit France S.A.R.L. ("SMF"), previously named
Kimberly-Clark France S.A.R.L., which prior to the Distribution was a
wholly-owned subsidiary of Kimberly-Clark.
Two Kimberly-Clark consumer and service products ("C&S") businesses
located in France, which were unrelated to the Company and Businesses, were
also subsidiaries of SMF's predecessor. The French C&S subsidiaries were
merged together and the shares of the merged entity were distributed to
Kimberly-Clark prior to the Distribution. SMF, however, remained part of the
Company in order to permit PdM and PdMal to utilize the substantial net
operating loss carryforwards previously generated by the French C&S operations.
The French C&S businesses were operated and managed independently of the
Businesses, with totally separate facilities, no common sales forces or
purchasing functions, no substantive intercompany transactions (except in the
ordinary course of managing Kimberly-Clark's intercompany financing activities)
and no other commonalities. Accordingly, the French C&S operations have been
excluded from the consolidated financial statements of the Company included
elsewhere herein and from the following discussion of results of operations.
Management believes that the following commentary and tables appropriately
discuss and analyze the comparative results of operations and the financial
condition of the Company for the periods covered.
OVERVIEW
The Company operates principally in one industry segment, which consists
of cigarette paper, tipping paper and plug wrap paper used to wrap various
parts of a cigarette ("Cigarette Papers") and reconstituted tobacco products.
The Company's non-tobacco industry products represented approximately six
percent of the Company's net sales in 1995.
Interest expense, interest income and other nonoperating expenses reported
for the periods prior to the Distribution relate primarily to financing
activities associated with the Kimberly-Clark European cash management program,
for which SMF functioned as a cash management and financing entity for other
Kimberly-Clark affiliates, primarily in France.
13
<PAGE> 14
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
For purposes of the geographic disclosure in the following tables, the
term "United States" includes operations in the U.S. and Canada. The Canadian
operations exist primarily to produce flax fiber used as raw material in the
U.S. operations and have no material effect on such geographic disclosure.
Adjustments to net sales set forth in the following tables consist of
eliminations of intercompany sales of products between geographic areas.
Adjustments to operating profit consist of unallocated overhead expenses not
associated with geographic areas and eliminations of intercompany transactions.
Certain 1995 geographical amounts have been restated from amounts
previously reported to more appropriately reflect how management internally
manages the geographical businesses and reports its results in 1996. The 1995
restatement was to deduct royalties paid by the French operations to the U.S.
operations after, rather than before, operating profit, consistent with the way
the U.S. operations report such income, and to charge certain overhead expenses
to "Unallocated" rather than the French and U.S. operations. The 1995
"Consolidated" operating profit amounts were not affected.
RESULTS OF OPERATIONS
By Geography for the three months ended September 30, 1996 and 1995
(U.S. $ in millions)
<TABLE>
<CAPTION>
% Change % of 1996 % of 1995
Net Sales 1996 1995 vs. 1995 Consolidated Consolidated
- - --------- ---- ---- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
United States ................ $ 52.3 $ 54.7 - 4.4% 44.1% 45.0%
Outside United States ........ 67.1 69.3 - 3.2 56.6 57.0
Eliminations ................. (0.9) (2.5) (0.7) (2.0)
------ ------ ----- -----
Consolidated ............... $118.5 $121.5 - 2.5% 100.0% 100.0%
====== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
% Return on Sales
% Change % of 1996 ------------------
Operating Profit 1996 1995 vs. 1995 Consolidated 1996 1995
- - ---------------- ---- ---- -------- ------------ ---- ----
<S> <C> <C> <C> <C> <C> <C>
United States ................ $ 5.0 $ 4.9 + 2.0% 26.6% 9.6% 9.0%
Outside United States ........ 15.2 13.5 + 12.6 80.8 22.7 19.5
Unallocated/Eliminations ..... (1.4) (0.3) (7.4)
------ ------ -----
Consolidated ............... $ 18.8 $ 18.1 + 3.9% 100.0% 15.9% 14.9%
====== ====== =====
</TABLE>
By Geography for the nine months ended September 30, 1996 and 1995
(U.S. $ in millions)
<TABLE>
<CAPTION>
% Change % of 1996 % of 1995
Net Sales 1996 1995 vs. 1995 Consolidated Consolidated
- - --------- ---- ---- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
United States ................ $163.3 $165.6 - 1.4% 45.9% 48.1%
Outside United States ........ 196.3 185.0 + 6.1 55.2 53.7
Eliminations ................. (3.8) (6.2) (l.1) (1.8)
------ ------ ----- -----
Consolidated ............... $355.8 $344.4 + 3.3% 100.0% 100.0%
====== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
% Return on Sales
% Change % of 1996 ------------------
Operating Profit 1996 1995 vs. 1995 Consolidated 1996 1995
- - ---------------- ---- ---- -------- ------------ ---- ----
<S> <C> <C> <C> <C> <C> <C>
United States ................ $ 20.8 $ 18.3 + 13.7% 36.7% 12.7% 11.1%
Outside United States ........ 40.1 33.7 + 19.0 70.8 20.4 18.2
Unallocated/Eliminations ..... (4.3) (0.6) (7.5)
------ ------ -----
Consolidated ............... $ 56.6 $ 51.4 + 10.1% 100.0% 15.9% 14.9%
====== ====== =====
</TABLE>
14
<PAGE> 15
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Net Sales
Net sales decreased by $3.0 million in the three month period ended
September 30, 1996 compared to the corresponding period of the preceding year,
while for the nine month period of 1996 net sales increased $11.4 million as
compared to the corresponding period of the preceding year. Both periods were
unfavorably affected by reduced sales volumes in the U.S. as a result of
exiting the reconstituted tobacco leaf ("RTL") product line in the U.S. at the
beginning of the second quarter of 1996 as previously announced ($2.7 million
and $6.3 million, respectively) and by unfavorable changes in currency exchange
rates ($2.2 million and $2.8 million, respectively). Excluding the U.S. RTL
sales volumes, worldwide sales volumes increased in the three and nine month
periods ended September 30, 1996 by four and five percent respectively, with
these higher worldwide sales volumes contributing to increased net sales by
$3.8 million and $13.1 million, respectively. Excluding RTL volumes in the
U.S., sales volumes improved at the U.S. business unit by nine percent and
seven percent for the three and nine month periods, respectively, with volumes
from the French businesses equal to the prior year level for the three month
period and up four percent for the nine month period. Changes in selling
prices and sales mix had an unfavorable effect of $1.9 million in the three
month period compared to the same period of the preceding year, but had a
favorable effect of $7.4 million for the nine month period. Average selling
prices increased for most major product lines in France compared to the prior
year because of price increases implemented in prior quarters. Average selling
prices declined in the U.S. compared to the prior year primarily because of
contractual price reductions related to a decline in the per ton cost of wood
pulp.
Operating Profit
Operating profit improved by $0.7 million and $5.2 million in the three
and nine month periods ended September 30, 1996, respectively, as compared to
the corresponding periods of the preceding year. The improvement was primarily
a result of increased sales volumes in the U.S. in product lines other than
RTL, higher selling prices and improved unit volumes in France and a decline in
per ton wood pulp costs, all of which were partially offset by lower selling
prices in the U.S., higher selling, research and general expenses, and
unfavorable changes in currency exchange rates. Per ton wood pulp cost
decreases compared to the prior year favorably impacted operating profit by
$5.8 million and $9.5 million in the three and nine month periods,
respectively. Selling expenses were higher in France in the nine month period
from commissions on export sales and increased travel expenses. Research
expenses were higher for the three and nine month periods primarily because of
differences in the amount of machine time and other trial costs shared with
customers. General expenses increased due to additional administrative costs
incurred to operate as an independent company. Changes in currency exchange
rates are estimated to have decreased operating profit by $0.4 million and $0.5
million in the three and nine month periods ended September 30, 1996,
respectively, compared to the preceding year.
NON-OPERATING EXPENSES
Interest expense in 1996 was primarily associated with the debt incurred
in connection with the Distribution (see "Liquidity and Capital Resources").
Overall net interest income (expense), from affiliates and non-affiliates, of
$(0.1) million and $1.0 million for the three and nine month periods ended
September 30, 1995, respectively, principally resulted from the Company's
financing activities in connection with the Kimberly-Clark European cash
management program prior to the Distribution.
15
<PAGE> 16
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
INCOME TAXES
The effective income tax rates for the three and nine months ended
September 30, 1996 increased to 37.3 percent and 37.4 percent, respectively,
from 16.1 percent and 29.2 percent for the respective corresponding periods of
1995. The provision for income taxes increased in 1996 primarily as a result
of the impact of an increase in the effective statutory income tax rate enacted
in France in July 1995 from 33.33 percent to 36.67 percent, retroactive to
January 1, 1995. The net effect of the tax rate increase was favorable for
1995 because it increased the value of the tax benefits recognized from the net
operating loss carryforwards retained by the Company's operations in France.
The third quarter 1995 impact related to deferred tax assets, net of
liabilities, was a favorable one-time effect of $4.5 on the deferred provision
for income taxes, partially offset by the unfavorable impact on the current
provision for income taxes of $1.0, including a $0.6 retroactive adjustment of
the six month period ended June 30, 1995.
The Company's 1995 French income tax returns filed in April 1996 reflected
tax net loss carryforward amounts greater than those which had previously been
reflected on the Company's balance sheet. Thus, the Company recorded an amount
of additional deferred tax asset in the first quarter. There is uncertainty,
however, whether the benefit of these amounts will ultimately be realized by
the Company. Accordingly, an additional valuation allowance was recorded in
the first quarter to fully offset the additional deferred tax asset related to
these tax net loss carryforwards. The amount of the additional deferred tax
asset and off-setting valuation allowance was $15 million, resulting in no
impact on net income for the three or nine month periods ended September 30,
1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations, that portion attributable to changes in
operating working capital, and the amount of cash used for capital expenditures
for the nine months ended September 30, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
(U.S. $in millions)
1996 1995
---- ----
<S> <C> <C>
Net cash provided by operations ................... $60.2 $54.9
Decrease in operating working capital ............. 4.7 3.6
Capital Expenditures .............................. 28.2 9.9
</TABLE>
The Company's primary source of liquidity is cash flow from operations,
which is principally obtained through operating earnings. The Company's net
cash provided by operations increased to $60.2 million for the nine months
ended September 30, 1996 from $54.9 million for the nine months ended September
30, 1995. Changes in operating working capital contributed favorably to cash
flow by $4.7 million in the 1996 period and by $3.6 million in the 1995 period.
Changes in operating working capital in the 1996 period consisted primarily of
decreases in inventories, as a result of higher sales and lower per ton wood
pulp costs, and decreases in accounts receivable due to the timing of
collections from certain customers, partially offset by decreases in accounts
payable, primarily associated with payments of spin-off related items and
capital expenditures included in accounts payable at December 31, 1995.
16
<PAGE> 17
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Company's restructuring plan to exit the U.S. RTL product line and to
restructure operations at the manufacturing facility in Malaucene, France,
announced during the fourth quarter of 1995, has been completed on schedule.
Of the previously recorded $7.3 million charge, the Company paid $1.7 million
during the first nine months of 1996, primarily for severance related costs in
France and costs of mothballing the equipment of the U.S. RTL operations. The
Company has incurred all costs of the plan, and the associated restructuring
reserve was closed out by the end of the third quarter, 1996.
Cash flow from operations during the first nine months of both 1996 and
1995 exceeded the level of capital spending. Capital spending for the nine
months ended September 30, 1996 included $8.2 million for the new $24 million
long fiber paper machine in France, authorized in December 1995, $3.4 million
for the installation of new high-speed cigarette paper converting equipment at
the Spotswood mill, $2.2 million at the Quimperle, France mill for a production
reorganization project, and $2.1 million to furnish the Company's newly leased
corporate and U.S. business unit headquarters and U.S. research facilities.
The Company's capital spending program for the full year 1996 is expected
to total between $45 and $50 million, focused primarily on internal capacity
expansion, cost reduction projects and environmental upgrades (see Note 5 of
the Notes to Unaudited Consolidated Financial Statements).
Effective April 18, 1996 and July 15, 1996 the Board of Directors declared
the first and second, respectively, quarterly cash dividends each of fifteen
cents ($.15) per share of common stock. The dividends, each totaling $2.4
million, were paid on June 10, 1996 and September 9, 1996 to stockholders of
record on May 13, 1996 and August 12, 1996, respectively. Effective October
18, 1996, the Board of Directors declared a quarterly cash dividend of fifteen
cents ($.15) per share of common stock. The dividend will be payable on
December 9, 1996 to stockholders of record on November 12, 1996.
The Company's ongoing requirements for cash consist principally of amounts
required for capital expenditures, stockholder dividends and working capital.
Other than expenditures associated with environmental matters (see Note 5 of
the Notes to Unaudited Consolidated Financial Statements) and other capital
projects of the aforementioned capital spending program, as of September 30,
1996 the Company had no material outstanding commitments. The principal
sources of cash are expected to be cash flow from operations and borrowings
from commercial banks.
The Company believes its cash flow from operations, together with
borrowings available under its revolving credit facilities, will be sufficient
to fund its ongoing cash requirements.
17
<PAGE> 18
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which became effective for the Company beginning January l,
1996. SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply Accounting Principles
Board (APB) Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. The Company will continue to
apply APB Opinion No. 25 to its stock-based compensation awards to employees
and will disclose in the Company's 1996 Annual Report the required pro forma
effect on net income and earnings per share.
OUTLOOK
During the remainder of 1996, the Company expects to continue to benefit
somewhat from lower per ton wood pulp costs compared to per ton wood pulp costs
in the fourth quarter of 1995. However, compared to the second and third
quarters of 1996, earnings in the fourth quarter are expected to be negatively
affected by per ton wood pulp costs that began to increase in June 1996, with
additional price increases expected to be phased in during the fourth quarter.
Additionally, the Company's customers in the U.S. traditionally reduce their
operating schedules around the Thanksgiving and Christmas holidays, which could
soften the demand for the Company's products and allow for additional
maintenance and capital work during the fourth quarter of 1996.
Sales volumes for the Company's Cigarette Papers and French RTL are
expected to remain strong through the remainder of 1996, reflecting increased
demand for the Company's products. The RTL product line in the U.S. was phased
out at the beginning of the second quarter 1996 as previously announced.
The Company will continue incurring costs necessary to operate as an
independent, stand-alone organization. These incremental stand-alone costs are
expected to total approximately $5.5 million in 1996, primarily attributable to
general and administrative expenses, compared to approximately $1.5 million of
additional costs incurred in 1995 in connection with the spin-off. The $1.5
million amount included non-recurring costs of approximately $0.9 million. The
Company also will continue incurring interest expense, at a level essentially
comparable to that of the quarter just ended, related to bank debt incurred in
connection with the Distribution (see "Liquidity and Capital Resources" above).
The Company expects capital spending to increase during 1996 and 1997
compared to the level of spending in 1995, which was consistent with historical
spending levels. The increased capital spending will support capacity
increases to accommodate anticipated sales volume growth, cost reduction
opportunities and upgrades to environmental treatment facilities. Included in
this spending is $24 million for the new paper machine being installed in
Quimperle, France and expected to commence production during the second quarter
of 1997.
18
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
11. The following statement is filed as an exhibit to Part I of
this Form 10-Q:
The net income per common share computation included in the 1996
Consolidated Statement of Income in Part 1, Item 1, of this Form 10-Q
is based on the average number of shares of common stock outstanding.
The only "common stock equivalents" or other potentially dilutive
securities or agreements (as defined in Accounting Principles Board
Opinion No. 15) which were contained in the Company's capital
structure during the period presented were options outstanding under
the Company's Equity Participation Plan.
Alternative computations of "primary" and "fully diluted" net income
per common share amounts for 1996 assume the exercise of outstanding
stock options using the "treasury stock method". There is no
significant difference between net income per common share presented
in Item 1 and net income per common share calculated on a "primary"
and "fully diluted" basis for the first nine months of 1996.
15. Independent Accountants' Report, dated October 15, 1996 from
Deloitte & Touche LLP to Schweitzer-Mauduit International, Inc.
23. Independent Accountants' Consent.
27. Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K:
The registrant did not file any reports on Form 8-K during the quarter
for which this report is filed.
19
<PAGE> 20
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/ PAUL C. ROBERTS
------------------------------------
Paul C. Roberts
Chief Financial Officer and
Treasurer
(duly authorized officer and
principal financial officer)
By: /s/ WAYNE L. GRUNEWALD
------------------------------
Wayne L. Grunewald
Controller
(principal accounting officer)
November 1, 1996
20
<PAGE> 21
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - ------- ----------- ------------
<S> <C> <C> <C>
11. --- The following statement is filed as an exhibit to
Part I of this Form 10-Q:
The net income per common share computation
included in the 1996 Consolidated Statement of
Income in Part 1, Item 1, of this Form 10-Q is
based on the average number of shares of common
stock outstanding. The only "common stock
equivalents" or other potentially dilutive
securities or agreements (as defined in
Accounting Principles Board Opinion No. 15) which
were contained in the Company's capital structure
during the period presented were options
outstanding under the Company's Equity
Participation Plan.
Alternative computations of "primary" and "fully
diluted" net income per common share amounts for
1996 assume the exercise of outstanding stock
options using the "treasury stock method". There
is no significant difference between net income
per common share presented in Item 1 and net
income per common share calculated on a "primary"
and "fully diluted" basis for the first nine
months of 1996.
15. --- Independent Accountants' Report, dated October 15,
1996 from Deloitte & Touche LLP to
Schweitzer-Mauduit International, Inc.
23. --- Independent Accountants' Consent.
27. --- Financial Data Schedule (for SEC use only).
</TABLE>
<PAGE> 1
EXHIBIT 15
INDEPENDENT ACCOUNTANTS' REPORT
Schweitzer-Mauduit International, Inc.:
We have made a review of the accompanying consolidated balance sheet of
Schweitzer-Mauduit International, Inc. and subsidiaries as of September 30,
1996, the related consolidated statements of income for the three and nine
months ended September 30, 1996 and 1995, the consolidated statements of cash
flow for the nine months ended September 30, 1996 and 1995, and the
consolidated statement of changes in stockholders' equity for the nine months
ended September 30, 1996. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Schweitzer-Mauduit International,
Inc. as of December 31, 1995 and the related consolidated statements of income,
changes in stockholders' equity, and cash flow for the year then ended (not
presented herein); and in our report dated January 31, 1996, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1995 is fairly stated in all material respects in relation to the
balance sheet from which it has been derived and the consolidated statement of
changes in stockholders' equity for the year ended December 31, 1995 is fairly
stated in all material respects in relation to the consolidated statement of
changes in stockholders' equity from which it has been derived.
Deloitte & Touche LLP
Atlanta, Georgia
October 15, 1996
<PAGE> 1
EXHIBIT 23
October 31, 1996
Schweitzer-Mauduit International, Inc.
100 North Point Center East, Suite 600
Alpharetta, Georgia 30202-8246
Dear Sirs:
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Schweitzer-Mauduit International, Inc. and subsidiaries for the
periods ended September 30, 1996 and 1995 as indicated in our report dated
October 15, 1996; because we did not perform and audit, we expressed no opinion
on that information.
We are aware that our report referred to above, which was included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, is
incorporated by reference in Registration Statements No. 33-99812, No.
33-99814, No. 33-99816, and No. 33-99848 on Form S-8.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
Yours truly,
Deloitte & Touche LLP
Atlanta, Georgia
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SCHWEITZER-MAUDUIT FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 28,800
<SECURITIES> 0
<RECEIVABLES> 64,200
<ALLOWANCES> 0
<INVENTORY> 47,600
<CURRENT-ASSETS> 147,000
<PP&E> 341,600
<DEPRECIATION> 165,300
<TOTAL-ASSETS> 358,800
<CURRENT-LIABILITIES> 85,900
<BONDS> 87,700
0
0
<COMMON> 1,600
<OTHER-SE> 149,500
<TOTAL-LIABILITY-AND-EQUITY> 358,800
<SALES> 355,800
<TOTAL-REVENUES> 355,800
<CGS> 268,600
<TOTAL-COSTS> 268,600
<OTHER-EXPENSES> 30,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,100
<INCOME-PRETAX> 52,900
<INCOME-TAX> 19,800
<INCOME-CONTINUING> 29,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,700
<EPS-PRIMARY> 1.85
<EPS-DILUTED> 1.85
</TABLE>
