<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 JUNE 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 June 30, 1996, 16,051,937 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>
JUNE 30, DECEMBER 31,
1996 1995
- - - -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents ...................................................... $ 14.8 $ 5.9
Accounts receivable ............................................................ 70.6 69.5
Inventories .................................................................... 51.2 56.0
Deferred income tax benefits ................................................... 3.2 5.1
Prepaid expenses ............................................................... 4.0 l.0
------ ------
Total Current Assets ......................................................... 143.8 137.5
------ ------
Gross Property ................................................................... 333.3 322.0
Less accumulated depreciation .................................................. 162.5 155.5
------ ------
Net Property ................................................................. 170.8 166.5
------ ------
Noncurrent Deferred Income Tax Benefits .......................................... 35.2 40.1
------ ------
Deferred Charges and Other Assets ................................................ 2.8 2.9
------ ------
Total Assets ..................................................................... $352.6 $347.0
====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Short-term debt ................................................................ $ 1.9 $ 2.5
Current portion of long-term debt .............................................. 3.3 2.4
Accounts payable ............................................................... 38.8 44.3
Accrued expenses ............................................................... 42.6 43.6
Income taxes payable ........................................................... 1.5 1.3
------ ------
Total Current Liabilities..................................................... 88.1 94.1
------ ------
Long-Term Debt ................................................................... 87.8 91.6
------ ------
Deferred Income Taxes ............................................................ 8.3 10.1
------ ------
Other Noncurrent Liabilities ..................................................... 20.3 18.3
------ ------
Minority Interest ................................................................ 4.0 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,
16,051,937 and 16,051,109 shares issued and outstanding at June 30, 1996
and December 31, 1995, respectively ...................................... l.6 1.6
Additional paid-in capital ................................................... 60.0 60.0
Retained earnings ............................................................ 63.8 46.3
Unrealized currency translation adjustments .................................. 18.7 22.0
------ ------
Total Stockholders' Equity ............................................... 144.1 129.9
------ ------
Total Liabilities and Stockholders' Equity ....................................... $352.6 $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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
------ ------ ------ ------
Net Sales ......................................... $117.5 $113.4 $237.3 $222.9
Cost of products sold ........................... 87.7 88.6 178.7 173.6
------ ------ ------ ------
Gross Profit ...................................... 29.8 24.8 58.6 49.3
Advertising, promotion and selling expenses ..... 4.7 4.4 9.1 8.2
Research expense ................................ 1.1 1.1 3.1 2.1
General expense ................................. 4.2 2.8 8.6 5.7
------ ------ ------ ------
Operating Profit .................................. 19.8 16.5 37.8 33.3
Interest expense ................................ (1.3) (1.2) (2.7) (1.3)
Interest expense to affiliated companies ........ - (3.4) - (6.2)
Interest income from affiliated companies ....... - 5.2 - 8.6
Other income (expense), net ..................... 0.1 0.2 0.1 (0.3)
------ ------ ------ ------
Income Before Income Taxes and Minority Interest .. 18.6 17.3 35.2 34.1
Provision for income taxes ...................... 6.9 6.2 13.2 12.3
------ ------ ------ ------
Income Before Minority Interest ................... 11.7 11.1 22.0 21.8
Minority interest in earnings of subsidiary ..... 1.2 0.8 2.1 1.6
------ ------ ------ ------
Net Income ........................................ $ 10.5 $ 10.3 $ 19.9 $ 20.2
====== ====== ====== ======
Net Income per Common Share $ .65 $ 1.24
====== ======
Pro Forma Net Income per Common Share (Note 2) .... $ .46 $ .95
====== ======
Cash Dividends Declared per Common Share .......... $ .15 $ .15
====== ======
</TABLE>
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 six months
ended June 30, 1995 ....................... 12.0 8.2 20.2
Advances to affiliates ..................... (8.8) (8.8)
Dividends declared ......................... (10.3) (10.3)
Adjustments due to translation ............. - - - - 16.3 16.3
------ ------ ------ ----- ----- ------
BALANCE, JUNE 30, 1995 ...................... 37.2 65.7 70.9 67.4 21.3 262.5
Net income for the five months
ended November 30, 1995 .................. 14.5 4.7 19.2
Advances from affiliates ................... 6.3 6.3
Dividends declared (3) ..................... (36.5) (36.5)
Return of capital (2) (3) .................. (37.1) (56.0) (93.1)
Adjustments due to translation ............. (1.2) (1.2)
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 six months ended
June 30, 1996 ........................... 19.9 19.9
Dividends declared ......................... (2.4) (2.4)
Stock issued to directors as compensation .. 828
Adjustments due to translation ............. - - - - - - (3.3) (3.3)
---------- ---- ------ ------ ------ ----- ----- ------
BALANCE, JUNE 30, 1996 ...................... 16,051,937 $1.6 $ - $ 60.0 $ 63.8 $ - $18.7 $144.1
========== ==== ====== ====== ====== ===== ===== ======
</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. 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 SIX MONTHS
ENDED JUNE 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Operations
Net income .......................................... $19.9 $20.2
Depreciation ........................................ 6.7 6.4
Deferred income tax provision 3.2 4.2
Minority interest in earnings of subsidiary 2.1 1.6
Non-cash utilization of restructuring reserve ....... 4.5 -
Other................................................ 2.0 -
Changes in operating working capital ................ (5.6) (2.8)
----- -----
Cash Provided by Operations ..................... 32.8 29.6
----- -----
Investing
Capital spending .................................... (19.0) (6.5)
Advances to affiliates .............................. - (8.8)
Other ............................................... (0.9) 2.9
----- -----
Cash Used for Investing ......................... (19.9) (12.4)
----- -----
Financing
Cash dividends paid to SWM stockholders ............. (2.4) -
Cash dividends paid to affiliates ................... - (10.3)
Changes in receivables from affiliates .............. - (57.9)
Changes in short-term debt .......................... (0.6) 24.2
Changes in debt payable to affiliates within one year - 28.4
Proceeds from issuances of long-term debt .......... 4.5 5.9
Payments on long-term debt .......................... (4.6) (3.3)
Cash dividends paid to minority owner ............... (0.9) (3.9)
Other ............................................... - 0.5
----- -----
Cash Used for Financing .......................... (4.0) (16.4)
----- -----
Increase in Cash and Cash Equivalents ............... 8.9 0.8
Cash and Cash Equivalents at beginning of period .... 5.9 0.6
----- -----
Cash and Cash Equivalents at end of period .......... $14.8 $ 1.4
===== =====
</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 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 $100.0 to Kimberly-Clark in connection with the
Distribution.
On April 18, 1996 the Board of Directors declared the first quarterly cash
dividend of fifteen cents ($.15) per share of common stock. The dividend,
totaling $2.4, was paid on June 10, 1996 to stockholders of record on May 13,
1996.
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 June 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 the three and six months ended June 30, 1996
were both 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 six months
ended June 30, 1995 and for the remaining quarters of 1995:
<TABLE>
<CAPTION>
1995
-------------------------------------------------------
Second
First Second YTD Third(a) Fourth(b) Total
----- ------ ------ -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Historical net income .................. $ 9.9 $10.3 $ 20.2 $13.9 $ 2.7 $36.8
Pro forma adjustments:
Incremental operating expense (c) ..... (l.4) (1.4) (2.8) (1.3) (0.4) (4.5)
Incremental interest expense (d) ...... (1.4) (1.3) (2.7) (1.4) (0.8) (4.9)
Reversal of net interest income
from affiliates (e) .................. (0.5) (1.8) (2.3) (0.7) (0.3) (3.3)
Net tax benefit of adjustments ........ 1.3 1.5 2.8 1.5 0.6 4.9
----- ----- ------ ----- ----- -----
Pro forma net income ................... $ 7.9 $ 7.3 $15.2 $12.0 $ 1.8 $29.0
===== ===== ====== ===== ===== =====
Pro forma net income per common share .. $ .49 $ .46 $ .95 $ .75 $ .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 item was $.28 per share, which was partially
offset by the $0.6 additional 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 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 June 30, 1996
and December 31, 1995:
<TABLE>
<CAPTION>
June 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..................................................... $18.9 $25.9
Work in process................................................... 9.0 7.4
Finished goods.................................................... 19.7 22.0
Supplies and other................................................ 9.9 10.2
----- -----
57.5 65.5
Excess of FIFO cost over Last-In,
First-Out (LIFO) cost................................................ (6.3) (9.5)
----- -----
Total........................................................... $51.2 $56.0
===== =====
</TABLE>
NOTE 4. INCOME TAXES
The effective tax rates for the three and six months ended June 30, 1996
increased to 37.1 percent and 37.5 percent, respectively, from 35.8 percent and
36.1 percent for the respective corresponding periods of 1995. The provision
for income taxes increased in 1996 primarily as a result of an increase in the
effective statutory income tax rate enacted in France in July 1995 from 33.33
percent to 36.67 percent.
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 six month periods ended June 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 June 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 is
appealing this decision. The other bank filed a claim in 1995 against the
mutual funds which were managing this financial product. 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
10
<PAGE> 11
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
up to $13.5 in interim response costs and expects future remedial costs
to range from an additional $20 to $40. 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.
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 will be 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 $0.2. In the CAAA, the Company has recommended against
certain other corrective actions on the grounds that they would be ineffective
and cause undue expense. MDEP is expected to inform the Company in the third
quarter of 1996 whether it accepts the Company's recommendations for corrective
action. Based on current information, the Company believes that the substance
of its recommendation will be accepted and that the cost of corrective action,
including on-going maintenance and monitoring activities, will not have a
material adverse effect on the Company's financial condition or results of
operations.
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 $10 in
1998 to meet legal requirements and otherwise relating to the protection of the
environment at the Company's facilities in the United States and France. The
major projects included in these estimates include upgrading wastewater
treatment facilities at various locations and installation of equipment to
treat volatile organic compound emissions in France.
NOTE 6. LEGAL PROCEEDINGS
The Company is involved in certain legal actions and claims arising in the
ordinary course of business. Management believes, based on advice of legal
counsel, that such litigation and claims will be resolved without a material
effect on the Company's consolidated financial statements.
NOTE 7. SUBSEQUENT EVENTS
Effective July 15, 1996, the Board of Directors declared a quarterly cash
dividend of fifteen cents ($.15) per share of common stock. The dividend will
be payable on September 9, 1996 to stockholders of record on August 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. The 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. The operating profit restatement between "Outside United States" and
"Unallocated/Eliminations" amounted to $0.3 and $0.6 for the three and six
month periods ended June 30, 1995, respectively. The "United States" and
"Consolidated" operating profit amounts were not affected.
RESULTS OF OPERATIONS
By Geography for the three months ended June 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 ...................... $ 52.7 $ 54.5 - 3.3% 44.9% 48.1%
Outside United States .............. 65.7 60.8 + 8.1 55.9 53.6
Eliminations ....................... (0.9) (1.9) (0.8) (1.7)
------ ------ ----- -----
Consolidated ...................... $117.5 $113.4 + 3.6% 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 ...................... $ 7.6 $ 6.1 + 24.6% 38.4% 14.4% 11.2%
Outside United States .............. 13.5 10.5 + 28.6% 68.2 20.5 17.3
Unallocated/Eliminations............ (1.3) (0.1) (6.6)
------- ----- -----
Consolidated ...................... $ 19.8 $16.5 + 20.0% 100.0% 16.9% 14.6%
======= ===== =====
</TABLE>
By Geography for the six months ended June 30, 1996 and 1995
(U.S. $ in millions)
<TABLE>
% Change % of 1996 % of 1995
Net Sales 1996 1995 vs. 1995 Consolidated Consolidated
- - - --------- ---- ---- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
United States ..................................... $111.0 $110.9 + 0.1% 46.8% 49.8%
Outside United States ............................. 129.2 115.7 + 11.7 54.4 51.9
Eliminations ...................................... (2.9) (3.7) (l.2) (1.7)
------ ------ ----- -----
Consolidated ..................................... $237.3 $222.9 + 6.5% 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 .......................... $ 15.8 $13.4 + 17.9% 41.8% 14.2% 12.1%
Outside United States .................. 24.9 20.2 + 23.3 65.9 19.3 17.5
Unallocated/Eliminations................ (2.9) (0.3) (7.7)
------- ----- -----
Consolidated .......................... $ 37.8 $33.3 + 13.5% 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 increased by $4.1 million and $14.4 million in the three and six
month periods ended June 30, 1996, respectively, as compared to the
corresponding periods of the preceding year as a result of changes in worldwide
sales volumes ($4.1 million and $5.7 million, respectively) and changes in
selling prices and improved sales mix ($3.2 million and $9.3 million,
respectively), partially offset by unfavorable changes in currency exchange
rates ($3.2 million and $0.6 million, respectively). Sales volumes declined by
one percent overall for the three month period compared to the same period of
the preceding year. Sales volumes improved by one percent overall for the six
month period compared to the same period of the preceding year. Excluding
reconstituted tobacco leaf volumes in the U.S., a product line the Company
exited at the beginning of the second quarter of 1996 as previously announced,
sales volumes improved by seven percent and six percent for the three and six
month periods, respectively, with volumes from the French businesses up six
percent for both periods and volumes growing nine percent for the three month
period and six percent for the six month period at the U.S. business unit.
Average selling prices increased for most major product lines in France because
of price increases implemented in prior quarters. Average selling prices
declined in the U.S. primarily because of contractual price reductions related
to a decline in the per ton cost of wood pulp.
Operating Profit
Operating profit improved by $3.3 million and $4.5 million in the three
and six month periods ended June 30, 1996, respectively, as compared to the
corresponding periods of the preceding year primarily as a result of higher
selling prices and unit volumes in France and a decline in per ton wood pulp
costs, all of which were partially offset by higher selling, research and
general expenses, and unfavorable changes in currency exchange rates. Per ton
wood pulp cost decreases favorably impacted operating profit by $4.4 million
and $3.7 million in the three and six month periods, respectively. Selling
expenses were higher in France from commissions on export sales and increased
travel expenses. Research expenses were higher for the six month period
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
$0.6 million and $0.1 million in the three and six month periods ended June 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 (affiliate and non-affiliate) of $0.6 million and
$1.1 million for the three and six month periods ended June 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 tax rates for the three and six months ended June 30, 1996
increased to 37.1 percent and 37.5 percent, respectively, from 35.8 percent and
36.1 percent for the respective periods of 1995. The provision for income
taxes increased in 1996 primarily as a result of an increase in the effective
statutory income tax rate enacted in France in July 1995 from 33.33 percent to
36.67 percent.
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 six month periods ended June 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 six months ended June 30, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
(U.S. $ in millions)
1996 1995
------------- -------------
<S> <C> <C>
Net cash provided by operations ............. $32.8 $29.6
Increase in operating working capital ....... (5.6) (2.8)
Capital Expenditures......................... 19.0 6.5
</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 $32.8 million for the six months ended
June 30, 1996 from $29.6 million for the six months ended June 30, 1995.
Changes in operating working capital contributed unfavorably to cash flow by
$5.6 million in the 1996 period due principally to decreases in accounts
payable, primarily associated with payments of spin-off related items and
capital expenditures included in accounts payable at December 31, 1995, and
increases in prepaid expenses, primarily due to timing of payments related to
vacation pay in France and insurance premiums in both the U.S. and France.
Changes in operating working capital contributed unfavorably to cash flow by
$2.8 million in the 1995 period due principally to higher inventories,
associated with higher raw material purchases, and higher trade receivables,
due to increased sales volumes, partially offset by increases in accounts
payable, associated with increased capital spending and higher raw material
purchases, and higher accrued expenses.
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. reconstituted tobacco
leaf product line and to restructure operations at the manufacturing facility
in Malaucene, France, announced during the fourth quarter of 1995, is
proceeding on schedule. Of the approximate $2.7 million of estimated cash
expenses included in the previously recorded $7.3 million charge, the Company
paid $1.7 million during the first six months of 1996, primarily for severance
related costs in France and the U.S., and costs of mothballing the equipment of
the U.S. reconstituted tobacco leaf operations. The Company expects that the
remainder of costs will be incurred and the associated restructuring reserve
closed out by the end of the third quarter, 1996.
Cash flow from operations during the first six months of both 1996 and
1995 exceeded the level of capital spending. Capital spending for the six
months ended June 30, 1996 included $5.2 million for the new $24 million long
fiber paper machine in France, authorized in December 1995, $3.3 million for
the installation of new high-speed cigarette paper converting equipment at the
Spotswood mill, $2.1 million to furnish the Company's newly leased corporate
and U.S. business unit headquarters and U.S. research facilities, $1.3 million
at the Quimperle, France mill for a production reorganization project and $0.8
million for new electrical perforating equipment at the mill in Malaucene,
France.
The Company's capital spending program for the full year 1996 is expected
to total between $45 and $50 million, focused primarily on internal capacity
expansion, cost reduction projects and environmental upgrades (see Note 5 of
the Notes to Unaudited Consolidated Financial Statements).
On April 18, 1996 the Board of Directors declared the first quarterly cash
dividend of fifteen cents ($.15) per share of common stock. The dividend,
totaling $2.4 million, was paid on June 10, 1996 to stockholders of record on
May 13, 1996. Effective July 15, 1996, the Board of Directors declared a
quarterly cash dividend of fifteen cents ($.15) per share of common stock. The
dividend will be payable on September 9, 1996 to stockholders of record on
August 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 June 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.
On May 20, 1996, the Company announced an odd-lot selling/purchasing
program that was completed on July 23, 1996. The voluntary program enabled SWM
stockholders with fewer than 100 shares of its common stock as of May 13, 1996
to sell all of their shares or purchase enough additional shares to reach 100
shares. The Company retained an independent service provider to manage the
program. All shares traded under the program were traded on the open market,
thus not affecting the number of the Company's shares issued and outstanding.
As a result of the program, the number of SWM stockholders has been reduced by
approximately 21,000, including approximately 7,000 registered stockholders.
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 increased selling prices in France compared to the average for
the prior year. It also expects to continue to benefit from lower per ton wood
pulp costs, compared to the prior year, which costs began to decline in late
1995. However, earnings in the third and fourth quarters are not expected to
be as strong as in the second quarter since per ton wood pulp costs began to
increase in June 1996. Per ton wood pulp costs in the second half of 1996 are
expected to be less than per ton costs in the second half of 1995.
Additionally, the Company's customers in the U.S. traditionally reduce their
operating schedules around the July and December holidays, which could soften
the demand for the Company's products during the second half of 1996.
Sales volumes for the Company's Cigarette Papers and French reconstituted
tobacco leaf are expected to strengthen in 1996, reflecting increased demand
for the Company's products. The reconstituted tobacco leaf 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 comparable to
that of the first and second quarters 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 in mid-1997.
18
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
The Annual Meeting of the Company was held on Thursday, April 18,
1996, at which the following matters were submitted to a vote as
had been indicated in the Company's proxy statement mailed on or
about March 15, 1996:
1. Two nominees, Ms. Claire Lewis Arnold and Mr.
Laurent G. Chambaz, were elected as Class I Directors to serve
a three-year term expiring at the 1999 Annual Meeting of
Stockholders. Other Directors continued in office are:
Mr. Jean-Pierre Le Hetet, Mr. K. C. Caldabaugh and
Mr. Richard D. Jackson-Class II Directors whose terms
will expire at the 1997 Annual Meeting of Stockholders,
and
Mr. Wayne H. Deitrich, Mr. Leonard J. Kujawa and
Mr. Larry B. Stillman-Class III Directors whose terms
will expire at the 1998 Annual Meeting of
Stockholders.
2. The material terms of the Company's Equity
Participation Plan (the "Plan") were submitted to the
Company's public stockholders for approval in order to
preserve the Company's tax deduction for certain awards
granted under the Plan by complying with the terms of Section
162(m) of the Internal Revenue Code (as amended) and the
regulations thereunder. The Plan was approved by the
stockholders of the Company.
3. The material terms of the Company's Long-Term
Incentive Plan ("the LTIP") were submitted to the Company's
public stockholders for approval to comply with the
performance-based compensation exception set forth in Section
162(m) of the Internal Revenue Code (as amended) and the
regulations thereunder, so that, to the extent possible,
compensation paid under the LTIP will be fully deductible by
the Company. The Plan was approved by the stockholders of the
Company.
The results of the voting of stockholders were as follows:
<TABLE>
<CAPTION>
Broker
For Against Withheld Abstentions Non-Votes
---------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Director: Ms. Arnold 13,688,875 - 563,832 - -
Director: Mr. Chambaz 13,580,202 - 672,505 - -
Approval of the Equity
Participation Plan 9,754,655 1,866,947 - 61,435 2,569,670
Approval of the Long-
Term Incentive Plan 13,889,098 295,688 - 67,921 -
</TABLE>
19
<PAGE> 20
ITEM 5. OTHER INFORMATION
During the second quarter 1996, Kimberly-Clark Corporation received
a favorable ruling from the Internal Revenue Service confirming the
tax-free nature of the spin-off of the Company to Kimberly-Clark
Corporation's stockholders on November 30, 1995.
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 six months of
1996.
15. Independent Accountants' Report, dated July 17, 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.
20
<PAGE> 21
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)
August 2, 1996
21
<PAGE> 22
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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 six
months of 1996.
15. --- Independent Accountants' Report, dated July 17,
1996 from Deloitte & Touche LLP to Schweitzer-
Mauduit International, Inc.
23. --- Independent Accountants' Consent.
27. --- Financial Data Schedule (for SEC use only).
<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 June 30, 1996,
the related consolidated statements of income for the three and six months
ended June 30, 1996 and 1995, the consolidated statements of cash flow for the
six months ended June 30, 1996 and 1995, and the consolidated statement of
changes in stockholders' equity for the six months ended June 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
July 17, 1996
<PAGE> 1
EXHIBIT 23
August 1, 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 June 30, 1996 and 1995 as indicated in our report dated July 17,
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 June 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>
EXHIBIT 27
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SCHWEITZER-MAUDUIT FOR THE SIX MONTHS ENDED JUNE
30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 14,800
<SECURITIES> 0
<RECEIVABLES> 70,600
<ALLOWANCES> 0
<INVENTORY> 51,200
<CURRENT-ASSETS> 143,800
<PP&E> 333,300
<DEPRECIATION> 162,500
<TOTAL-ASSETS> 352,600
<CURRENT-LIABILITIES> 88,100
<BONDS> 87,800
0
0
<COMMON> 1,600
<OTHER-SE> 142,500
<TOTAL-LIABILITY-AND-EQUITY> 352,600
<SALES> 237,300
<TOTAL-REVENUES> 237,300
<CGS> 178,700
<TOTAL-COSTS> 178,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,700
<INCOME-PRETAX> 35,200
<INCOME-TAX> 13,200
<INCOME-CONTINUING> 19,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,900
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.24
</TABLE>
