<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, 1997
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
30022-8246
(Address of principal executive offices)
(Zip Code)
1-800-514-0186
(Registrant's telephone number, including area code)
CHANGE
FORMER ZIP CODE: 30202-8246
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, 1997, 16,056,827 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 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,
-------------------- ------------------
1997 1996 1997 1996
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Net Sales ..................................................... $ 116.3 $ 117.5 $ 229.3 $ 237.3
Cost of products sold .................................... 82.8 87.7 165.0 178.7
--------- ------- ------- -------
Gross Profit .................................................. 33.5 29.8 64.3 58.6
Selling expense .......................................... 4.5 4.7 8.7 9.1
Research expense ......................................... 1.6 1.1 3.1 3.1
General expense .......................................... 4.5 4.2 8.6 8.6
--------- ------- ------- -------
Operating Profit ............................................. 22.9 19.8 43.9 37.8
Interest expense ......................................... (1.0) (1.3) (2.0) (2.7)
Other income (expense), net .............................. 0.5 0.1 0.6 0.1
--------- ------- ------- -------
Income Before Income Taxes and Minority Interest .............. 22.4 18.6 42.5 35.2
Provision for income taxes ............................... 8.3 6.9 15.8 13.2
--------- ------- ------- -------
Income Before Minority Interest ............................... 14.1 11.7 26.7 22.0
Minority interest in earnings of subsidiary .............. 1.4 1.2 2.7 2.1
--------- ------- ------- -------
Net Income..................................................... $ 12.7 $ 10.5 $ 24.0 $ 19.9
========= ======= ======= =======
Net Income per Common Share ................................... $ .79 $ .65 $ 1.49 $ 1.24
========= ======= ======= =======
Cash Dividends Declared per Common Share....................... $ 15 $ .15 $ .30 $ .15
========= ======= ======= =======
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
2
<PAGE> 3
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
- - ----------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents..................................................... $ 22.0 $ 30.9
Accounts receivable........................................................... 60.7 65.1
Inventories................................................................... 54.4 49.2
Deferred income tax benefits.................................................. 3.0 3.3
Prepaid expenses.............................................................. 4.1 2.1
---------- ----------
Total Current Assets...................................................... 144.2 150.6
---------- ----------
Gross Property.................................................................... 350.5 361.0
Less accumulated depreciation................................................. 164.2 166.8
---------- ----------
Net Property.............................................................. 186.3 194.2
---------- ----------
Noncurrent Deferred Income Tax Benefits............................................ 22.3 30.2
---------- ----------
Deferred Charges and Other Assets.................................................. 9.5 5.6
---------- ----------
Total Assets....................................................................... $ 362.3 $ 380.6
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt............................................. $ 2.4 $ 2.9
Other short-term debt......................................................... 0.3 1.3
Accounts payable.............................................................. 35.1 54.5
Accrued expenses.............................................................. 41.7 42.5
Income taxes payable.......................................................... 1.0 0.6
---------- ----------
Total Current Liabilities................................................. 80.5 101.8
---------- ----------
Long-Term Debt..................................................................... 81.7 86.6
---------- ----------
Deferred Income Taxes.............................................................. 9.5 9.5
---------- ----------
Other Noncurrent Liabilities....................................................... 21.5 19.7
---------- ----------
Minority Interest.................................................................. 4.4 7.0
---------- ----------
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,
16,056,827 and 16,052,621 share issued and outstanding at June 30, 1997
and December 31, 1996, respectively....................................... l.6 1.6
Additional paid-in capital.................................................... 60.1 60.0
Retained earnings............................................................. 97.0 77.8
Unrealized currency translation adjustments................................... 6.0 16.6
---------- ----------
Total Stockholders' Equity................................................ 164.7 156.0
---------- ----------
Total Liabilities and Stockholders' Equity......................................... $ 362.3 $ 380.6
========== ==========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
3
<PAGE> 4
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
U.S. $ IN MILLIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------
1997 1996
-------- -------
<S> <C> <C>
Operations
Net income ................................... $ 24.0 $ 19.9
Depreciation ................................. 6.9 6.7
Deferred income tax provision ................ 5.0 3.2
Minority interest in earnings of subsidiary .. 2.7 2.1
Non-cash utilization of restructuring reserve. -- 4.5
Other ........................................ 1.7 2.0
Changes in operating working capital ......... (22.6) (5.6)
------- -------
Cash Provided by Operations ......... 17.7 32.8
------- -------
Investing
Capital spending ............................. (11.0) (19.0)
Capitalized software costs ................... (3.2) -
Other ........................................ (3.7) (0.9)
------- -------
Cash Used for Investing ............. (17.9) (19.9)
------- -------
Financing
Cash dividends paid to SWM stockholders ...... (4.8) (2.4)
Cash dividends paid to minority owner ........ (4.5) (0.9)
Changes in short-term debt ................... (1.0) (0.6)
Proceeds from issuances of long-term debt ... 4.8 4.5
Payments on long-term debt ................... (3.3) (4.6)
Proceeds from issuances of common stock ...... 0.1 --
------- -------
Cash Used for Financing ............. (8.7) (4.0)
------- -------
Increase (Decrease) in Cash and Cash Equivalents .. (8.9) 8.9
Cash and Cash Equivalents at beginning of period .. 30.9 5.9
------- -------
Cash and Cash Equivalents at end of period ........ $ 22.0 $ 14.8
======= =======
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
4
<PAGE> 5
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 1. NATURE OF THE BUSINESS
Schweitzer-Mauduit International, Inc. ("SWM" or the "Company") is a
diversified producer of premium specialty papers and the world's largest
supplier of fine papers to the tobacco industry. The Company was formed as a
spin-off from Kimberly-Clark Corporation ("Kimberly-Clark") at the close of
business on November 30, 1995.
NOTE 2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of SWM and all
its majority-owned subsidiaries. All material intercompany and interdivision
amounts and transactions have been eliminated.
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 1996 Annual Report to Stockholders. 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 generally 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 1996 Annual
Report to Stockholders.
The average numbers of common shares outstanding used in the calculations
of net income per common share for the three and six months ended June 30, 1997
were approximately 16,056,800 and 16,055,600, respectively, and for the three
and six months ended June 30, 1996 were approximately 16,051,900 and 16,051,700,
respectively.
NOTE 3. INVENTORIES
The following schedule details inventories by major class as of June 30,
1997 and December 31, 1996:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------- ------------
<S> <C> <C>
At the lower of cost on the First-In, First-Out (FIFO)
and weighted average methods or market:
Raw materials ....................................... $ 18.6 $ 19.7
Work in process ..................................... 9.9 10.4
Finished goods ...................................... 23.5 16.3
Supplies and other .................................. 9.5 10.0
------- -------
61.5 56.4
Excess of FIFO cost over Last-In,
First-Out (LIFO) cost .................................. (7.1) (7.2)
------- -------
Total ............................................. $ 54.4 $ 49.2
======= =======
</TABLE>
5
<PAGE> 6
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 4. INCOME TAXES
The effective income tax rates for the three and six month periods ended
June 30, 1997 were 37.1 percent and 37.2 percent, respectively, compared with
37.1 percent and 37.5 percent for the respective corresponding periods of 1996.
Along with numerous other companies and banks in France, Papeteries de
Mauduit S.A. ("PdM"), a French subsidiary of the Company, 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 approximately $1.9 as of
June 30, 1997, including penalties for "abuse of the law" and late payment. A
recent court decision has held that another purchaser of the bonds was not
liable for "abuse of the law", thus eliminating that portion of the claim. The
amount of penalties related to "abuse of the law" included in the tax claim
against PdM is approximately $0.8. If the same decision were applied to the tax
claim against PdM, PdM's exposure as of June 30, 1997 would be reduced to
approximately $1.1. 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 has appealed this
decision. The case against the other bank has been briefed, and oral
presentations are expected to occur later this year. No reserve has been
established for the tax claim against PdM. Based on information currently
available, there exists a reasonable possibility of an unfavorable outcome for
this claim. Since the claim relates to a period prior to PdM joining the French
consolidated tax group, any unfavorable outcome could not be offset with the net
operating loss carryforwards of the French consolidated tax group.
NOTE 5. LEGAL PROCEEDINGS
On January 31, 1997, James E. McCune on behalf of himself and other
"nicotine dependent" West Virginia cigarette smokers filed, in the Circuit Court
of Kanawha County, West Virginia, a purported class action against several
tobacco companies, industry trade associations and consultants, tobacco
wholesalers and cigarette component manufacturers, including Kimberly-Clark,
seeking equitable relief and compensatory and punitive damages in an unspecified
amount for mental suffering and physical injuries allegedly sustained as a
result of having smoked cigarettes. Under the terms of the spin-off agreements
with Kimberly-Clark, the Company assumed liability for and agreed to indemnify
Kimberly-Clark from litigation arising out of the operations of the Company's
businesses, including this case. The nine-count complaint sets forth several
theories of liability, including intentional and negligent misrepresentation,
negligence, product liability, breach of warranty and conspiracy. Among other
things, the complaint alleges that nicotine is an addictive substance, that the
tobacco companies, by using reconstituted tobacco, are able to control the
precise amount of nicotine in their cigarettes and that LTR Industries, a French
subsidiary of the Company, specializes in the reconstitution process to help the
tobacco companies control nicotine levels. As a component supplier, the Company
believes that it has meritorious defenses to this case, but due to the
uncertainties of litigation, the Company cannot predict its outcome. The Company
is unable to make a meaningful estimate of the amount or range of loss which
could result from an unfavorable outcome of this action. This case has been
stayed for at least six months pending consideration of the proposed legislative
resolution of pending tobacco litigation announced by the tobacco industry and
certain states' Attorneys General. When and if the stay is lifted, the case will
be vigorously defended.
Also, the Company is involved in certain other legal actions and claims
arising in the ordinary course of business. Management believes that such
litigation and claims will be resolved without a material effect on the
Company's consolidated financial statements.
6
<PAGE> 7
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 6. ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws,
regulations and ordinances relating to various environmental matters. The nature
of the Company's operations expose it to the risk of claims with respect to
environmental matters and there can be no assurance that material costs or
liabilities will not be incurred in connection with such claims. Based on the
Company's experience to date, the Company believes that its future cost of
compliance with environmental laws, regulations and ordinances, and its exposure
to liability for environmental claims, will not have a material adverse effect
on the Company's financial condition or results of operations. However, future
events, such as changes in existing laws and regulations, or unknown
contamination of sites owned, operated or used for waste disposal by the Company
(including contamination caused by prior owners and operators of such sites or
other waste generators) may give rise to additional costs which could have a
material adverse effect on the Company's financial condition or results of
operations.
Prior to the spin-off, Kimberly-Clark was named a potentially responsible
party under the provisions of the U.S. Comprehensive Environmental Response,
Compensation and Liability Act, or analogous state statutes, 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. The Company
has assumed Kimberly-Clark's liabilities at these sites but does not believe
that any of these proceedings will result in the imposition of monetary
sanctions or have a material adverse effect on the Company's business or
financial condition.
The Company 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. Under the terms of a consent order signed on January 24, 1997 with
MDEP resulting from a Comprehensive Site Assessment and a Corrective Action
Alternative Assessment ("CAAA") submitted by the Company to MDEP, the Company
has until September 10, 1997 to correct a gas migration problem by means of a
passive gas venting system, as the Company recommended in its CAAA, at a cost of
$0.1. If the passive venting system does not bring the site into compliance by
September 10, 1997, the Company must submit to MDEP, no later than December 1,
1997, a revised compliance plan which employs technologies other than passive
gas venting. If the site is not in full compliance by February 10, 1998, the
Company must then implement, subject to MDEP's possible modification, the
compliance plan which it would have submitted. The cost of such a plan could
range from $0.3 to $1.5 in addition to an estimated $0.1 for annual operating
expenses. No reserve has been established for a revised compliance plan, should
such action become necessary.
The Company also assumed Kimberly-Clark's ownership of and responsibility for
the Valley Mill Landfill site in Lee, Massachusetts. The landfill was operated
by Kimberly-Clark from 1968 to 1969 and was capped in 1970. On December 23, 1996
the Company received a Notice of Responsibility ("Notice") from MDEP under
Section 21E of the Massachusetts Oil and Material Release Prevention and
Response Act stating that an electro-magnetic survey ("Survey") performed by a
contractor of EPA at the site indicated that buried metallic objects may be
present in the subsurface. The Survey was conducted following an anonymous call
to MDEP alleging the site contains buried metal drums. The Company has responded
preliminarily to the Notice, and has excavated eight test pits which disclosed
the presence of general waste and two crushed drums but no hazardous waste. The
Company will report the results of its investigation to MDEP. Based on current
information, the Company believes that this matter will be closed without the
Company incurring any remediation costs.
7
<PAGE> 8
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Some or all of the Company's U.S. facilities may be subject to revised air
emissions and wastewater discharge standards under rules commonly known as the
"Cluster Rules". The first phase of the Cluster Rules, proposed by the EPA in
1993, would affect only wastewater discharges from the Ancram, New York and Lee,
Massachusetts mills and would require compliance within three years after the
issuance of the new rules. The Spotswood mill discharges its effluent to a
publicly-owned treatment works. Although the EPA originally indicated that the
proposed rules would be finalized in 1996, final rules have not yet been issued.
The estimated capital expenditures for compliance with the first phase of the
proposed Cluster Rules at the Ancram and Lee mills are between $4 and $7 in the
aggregate. However, due to 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 V 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 V of the Clean Air Act Amendments cannot
be estimated until after the EPA proposes applicable requirements, if any.
The Company incurs spending necessary to meet legal requirements and
otherwise relating to the protection of the environment at the Company's
facilities in the United States, France and Canada, including the aforementioned
proposed Cluster Rules. For these purposes, the Company anticipates that it will
incur approximately $3 in capital expenditures in 1997 and approximately $5 to
$7 annually in 1998 and 1999. 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. The foregoing capital expenditures are not expected to reduce the
Company's ability to invest in capacity expansion, quality improvements, capital
replacements, productivity improvements, or cost containment projects, and are
not expected to have a material adverse effect on the Company's financial
condition or results of operations.
NOTE 7. NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which will be effective for the Company's 1997 annual financial
statements. SFAS No. 128 simplifies the standards for computing earnings per
share ("EPS") and makes the computation comparable to international standards.
SFAS No. 128 replaces the presentation of "primary" EPS with a presentation of
"basic" EPS and requires dual presentation of "basic" and "diluted" EPS on the
face of the income statement. The Company will adopt SFAS No. 128 in the
Company's 1997 Annual Report to Stockholders and will restate all previously
reported EPS data presented. The Company's computation of "basic" EPS will be
the same as EPS previously reported and currently calculated. The Company's
"diluted" EPS amounts for current and previously reported periods are not
expected to be materially different than "basic" EPS amounts.
In June 1997, the FASB issued two new statements, SFAS No. 130, "Reporting
of Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which will both be effective no later than
for the Company's 1998 Annual Report to Stockholders. These two new statements
may affect the Company's financial statement disclosures. The Company is
evaluating how and when to implement these new disclosure statements.
8
<PAGE> 9
ITEM 2. SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND 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 and reconstituted tobacco products. The Company's
non-tobacco industry products represented approximately six percent of the
Company's net sales in 1996.
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.
RESULTS OF OPERATIONS
By Geography for the three months ended June 30, 1997 and 1996
(U.S. $ in millions)
<TABLE>
<CAPTION>
% Change % of Consolidated
-----------------
Net Sales 1997 1996 vs. 1996 1997 1996
- - --------- ----- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
United States ...................... $ 51.0 $ 52.7 3.2% 43.9% 44.9%
Outside United States............... 66.6 65.7 + 1.4 57.3 55.9
Eliminations........................ (1.3) (0.9) (1.2) (0.8)
-------- -------- ----- -----
Consolidated .................... $ 116.3 $ 117.5 - 1.0% 100.0% 100.0%
======== ======== ===== =====
% Change % of Consolidated % Return on Sales
----------------- -----------------
Operating Profit 1997 1996 vs. 1996 1997 1996 1997 1996
- - ---------------- ---- ---- -------- ----- ----- ---- ----
United States.............. $ 8.6 $ 7.6 + 13.2% 37.6% 38.4% 16.9% 14.4%
Outside United States...... 16.0 13.5 + 18.5 69.9 68.2 24.0 20.5
Unallocated/Eliminations... (1.7) (1.3) (7.5) (6.6)
------- ------- ----- -----
Consolidated............ $ 22.9 $ 19.8 + 15.7% 100.0% 100.0% 19.7% 16.9%
======= ======= ===== =====
By Geography for the six months ended June 30, 1997 and 1996
(U.S. $ in millions)
% of Consolidated
% Change ------------------
Net Sales 1997 1996 vs. 1996 1997 1996
- - --------- ------- -------- -------- ----- -----
United States ...................... $ 100.7 $ 111.0 - 9.3% 43.9% 46.8%
Outside United States............... 130.3 129.2 + 0.9 56.8 54.4
Eliminations........................ (1.7) (2.9) (0.7) (1.2)
------- ------- ----- -----
Consolidated .................... $ 229.3 $ 237.3 - 3.4% 100.0% 100.0%
======= ======= ===== =====
% of Consolidated % Return on Sales
% Change ----------------- -----------------
Operating Profit 1997 1996 vs. 1996 1997 1996 1997 1996
- - ---------------- ------- ------- -------- ------ ----- ---- ----
United States.............. $ 16.3 $ 15.8 + 3.2% 37.1% 41.8% 16.2% 14.2%
Outside United States...... 30.7 24.9 + 23.3 69.9 65.9 23.6 19.3
Unallocated/Eliminations... (3.1) (2.9) (7.0) (7.7)
------- ------- ------ -----
Consolidated............ $ 43.9 $ 37.8 + 16.1% 100.0% 100.0% 19.1% 15.9%
======= ======= ====== =====
</TABLE>
9
<PAGE> 10
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Net Sales
Net sales decreased by $1.2 million in the three month period ended June
30, 1997, compared with the corresponding period of the preceding year. The net
sales comparison was unfavorably effected $5.8 million by changes in currency
exchange rates. Worldwide sales volumes increased by four percent, favorably
effecting net sales by $1.7 million. Sales volumes from the French businesses
grew by 11 percent for the three month period, primarily due to gains in porous
plug wrap and reconstituted tobacco leaf products. Sales volumes declined at the
U.S. business unit by five percent for the three month period primarily due to
lower export sales by the Company and its domestic customers. Compared with the
same three month period of the preceding year, changes in selling prices and
sales mix had a favorable effect of $2.9 million. An improved mix of products
sold in France resulted in an increased average selling price in France. Average
selling prices in the U.S. were essentially unchanged compared with the
corresponding period of the preceding year.
Net sales decreased by $8.0 million in the six month period ended June 30,
1997, compared with the corresponding period of the preceding year. The net
sales comparison was unfavorably effected $10.0 million by changes in currency
exchange rates. Exiting the reconstituted tobacco leaf ("RTL") product line in
the U.S. at the beginning of the second quarter of 1996 also unfavorably
effected the net sales comparison for the six month period by $2.9 million.
Excluding the U.S. RTL sales volumes of the first quarter of 1996, worldwide
sales volumes increased in the six month period by five percent, favorably
effecting net sales by $6.7 million. Sales volumes from the French businesses
grew by 13 percent for the six month period, primarily due to gains in porous
plug wrap and reconstituted tobacco leaf products. Excluding the first quarter
of 1996 RTL volumes in the U.S., sales volumes declined at the U.S. business
unit by five percent for the six month period primarily due to lower export
sales of cigarette paper. Compared with the same six month period of the
preceding year, changes in selling prices and sales mix had an unfavorable
effect of $1.8 million. Average selling prices in France were essentially
unchanged. Average selling prices in the U.S. declined primarily because of
contractual price reductions related to the decline in the per ton cost of wood
pulp.
Operating Profit
Operating profit improved by $3.1 million in the three month period ended
June 30, 1997, compared with the corresponding period of the preceding year. The
improvement was primarily a result of the increased sales volumes and an
improved mix of products sold in France, and improved mill operations. These
favorable effects were partially offset by somewhat higher non-manufacturing
expenses, primarily reflecting timing differences in research spending, and
changes in currency exchange rates. Changes in currency exchange rates had an
unfavorable impact of $0.5 million on the operating profit change in the three
month period.
Operating profit improved by $6.1 million in the six month period ended
June 30, 1997, compared with the corresponding period of the preceding year. The
improvement was primarily a result of the increased sales volumes in France,
improved mill operations and a decline in the per ton cost of wood pulp. Per ton
wood pulp cost decreases compared with the prior year favorably impacted
operating profit by $4.8 million in the six month period. These favorable
effects were partially offset by the lower average selling prices in the U.S.
Changes in currency exchange rates had an unfavorable impact of $0.5 million on
the operating profit change in the six month period.
10
<PAGE> 11
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
NON-OPERATING EXPENSES
Interest expense decreased by $0.3 million and $0.7 million in the three
and six month periods ended June 30, 1997, respectively, compared with the
corresponding periods of the preceding year. The decreases were primarily due to
lower interest rates in France in the current year periods. Other income
(expense) consists primarily of interest income and foreign currency transaction
gains and losses.
INCOME TAXES
The effective income tax rates for the three and six month periods ended
June 30, 1997 were 37.1 percent and 37.2 percent, respectively, compared with
37.1 percent and 37.5 percent for the respective corresponding periods of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations, the amount attributable to changes in
operating working capital, and the amount of cash used for capital expenditures
for the six months ended June 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
(U.S. $ in millions)
1997 1996
---- ----
<S> <C> <C>
Net cash provided by operations ...... $ 17.7 $32.8
Increase in operating working capital. (22.6) (5.6)
Capital expenditures ................. 11.0 19.0
</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 decreased from $32.8 million for the six months ended
June 30, 1996 to $17.7 million for the six months ended June 30, 1997. Changes
in operating working capital contributed unfavorably to cash flow in both six
month periods, but to a much greater extent in the 1997 period. Changes in
operating working capital in the 1997 period consisted primarily of a decrease
in accounts payable, mainly associated with payments for capital expenditures
and capitalized software costs included in accounts payable at December 31,
1996, and an increase in finished goods inventories in the U.S. business unit in
the quarter ended June 1997.
More than one-half of the Company's assets and liabilities are outside the
United States, substantially all in France. The balance sheets of the Company's
foreign subsidiaries are translated at period-end currency exchange rates, and
the differences from historical exchange rates are reflected in stockholders'
equity as unrealized currency translation adjustments. The strengthening of the
U.S. dollar against the French franc during the first six months of 1997 caused
the Company's consolidated total assets and liabilities to decline by
approximately six percent as of June 30, 1997 compared with December 31, 1996.
Cash provided by operations exceeded the level of capital spending during
the first six months of both 1997 and 1996. Capital spending for the six months
ended June 30, 1997 included $3.0 million toward the new long fiber paper
machine in France, $1.6 million toward upgrades to a paper machine at the Ancram
mill, and $1.0 million toward upgrading the flax pulping operations at the
Spotswood mill.
11
<PAGE> 12
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
In addition to capital spending, the Company incurred, and deferred on the
balance sheet, additional software development costs of $3.2 million in the six
month period ended June 30, 1997, toward new company-wide integrated computer
systems that will replace the currently used Kimberly-Clark systems.
During March 1997, the Quimperle, France mill successfully started up the
new long fiber paper machine. This machine adds approximately 6,000 metric tons
of annual capacity for the production of porous plug wrap and other long fiber
products. The new machine is operating well and is running at near end-of-curve
production rates.
On April 24, 1997, the Board of Directors authorized a program to permit
the repurchase of the Company's common stock through December 31, 1998 in an
aggregate amount not to exceed $20 million. This will provide the Company
flexibility in the event other timely strategic investments are not available.
No repurchases of common stock were made as of June 30, 1997.
On July 24, 1997, the Board of Directors declared a quarterly cash dividend
of fifteen cents ($.15) per share of common stock. The dividend will be payable
on September 15, 1997 to stockholders of record on August 11, 1997.
The Company's ongoing requirements for cash consist principally of amounts
required for capital expenditures, the new company-wide integrated computer
systems, stockholder dividends and working capital. Other than expenditures
associated with environmental matters (see Note 6 of the Notes to Unaudited
Consolidated Financial Statements) and other capital projects mentioned in the
Outlook section below, the Company had no material outstanding commitments as of
June 30, 1997. 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.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which will be effective for the Company's 1997 annual financial
statements. SFAS No. 128 simplifies the standards for computing earnings per
share ("EPS") and makes the computation comparable to international standards.
SFAS No. 128 replaces the presentation of "primary" EPS with a presentation of
"basic" EPS and requires dual presentation of "basic" and "diluted" EPS on the
face of the income statement. The Company will adopt SFAS No. 128 in the
Company's 1997 Annual Report to Stockholders and will restate all previously
reported EPS data presented. The Company's computation of "basic" EPS will be
the same as EPS previously reported and currently calculated. The Company's
"diluted" EPS amounts for current and previously reported periods are not
expected to be materially different than "basic" EPS amounts.
In June 1997, the FASB issued two new statements, SFAS No. 130, "Reporting
of Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which will both be effective no later than
for the Company's 1998 Annual Report to Stockholders. These two new statements
may affect the Company's financial statement disclosures. The Company is
evaluating how and when to implement these new disclosure statements.
12
<PAGE> 13
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
OUTLOOK
During the remainder of 1997, the Company expects to continue to benefit
from growth in sales volumes of the French business unit, compared to the
respective prior year periods, reflecting increased demand for the Company's
products, and from improved mill operations as a result of recently implemented
capital projects. The per ton cost of wood pulp remained relatively stable
through the first half of 1997 as it did during the second half of 1996. The per
ton cost of wood pulp may increase in the second half of 1997. The direction of
the domestic cigarette market is unclear at this time, given the potential
tobacco litigation settlement and the impact of continuing adverse publicity.
Additionally, the Company's customers in the U.S. traditionally reduce their
operating schedules around holidays during the third and fourth quarters, which
could soften the demand for the Company's products and allow for additional
maintenance and capital work. As a result, earnings in the third and fourth
quarters are not expected to be as strong as in the second quarter.
The Company expects capital spending for 1997 to be less than that of 1996,
but still higher than the historical average. Capital spending for 1997 is
estimated at approximately $35 million, focused primarily on internal capacity
expansion, cost reduction opportunities and upgrades to environmental treatment
facilities. In addition, the Company expects to incur approximately $10 million
of software development costs in 1997, which will be deferred on the balance
sheet until such systems are placed in service beginning in 1998.
Certain comments contained herein concerning the business outlook and
anticipated financial results of the Company constitute forward-looking
statements and are based upon management's expectations and beliefs concerning
future events impacting the Company. There can be no assurances that such events
will occur or that the Company's results will be as estimated. Many factors
outside the control of the Company also could impact the realization of such
estimates.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on
Thursday, April 24, 1997, at which the following matter was
submitted to a vote as had been indicated in the Company's
proxy statement mailed on or about March 19, 1997:
Three nominees, Mr. K.C. Caldabaugh, Mr. Jean-Pierre
Le Hetet and Mr. Richard D. Jackson were elected as Class
II Directors to serve a three-year term expiring at
the 2000 Annual Meeting of Stockholders. Other Directors
continuing in office are:
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, and
Ms. Claire L. Arnold and Mr. Laurent G. Chambaz
Class I Directors whose terms will expire at the
1999 Annual Meeting of Stockholders.
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: Mr. Caldabaugh 13,939,185 - 30,759 - -
Director: Mr. Le Hetet 13,937,174 - 32,770 - -
Director: Mr. Jackson 13,939,588 - 30,356 - -
</TABLE>
ITEM 5. OTHER INFORMATION
During the second quarter of 1997, a new five-year labor
agreement was concluded at the Spotswood mill, the Company's
largest U.S. facility. Wage rate increases will be three
percent per year. Several changes were also made to benefits
programs and to improve work practices that will help the
Company control its total labor-related costs.
The labor agreement for the Lee mills was to expire July 31,
1997. The union membership voted to reject the agreement
negotiated by union and Company representatives and a strike
vote was passed. The existing labor agreement has been
extended by mutual written agreement while negotiations
continue between the union and the Company. In accordance with
the agreement, employees are continuing to work during the
extension period.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10. Amendment No. 3 to Philip Morris Supply Agreement.
11. The following statement is filed as an exhibit to Part I of this
Form 10-Q:
The net income per common share computations included in the
Consolidated Statements of Income in Part I, Item 1, of this Form
10-Q are 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 periods presented
were options outstanding under the Company's Equity Participation
Plan.
Alternative computations of "primary" and "fully diluted" net
income per common share amounts 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 three and six month
periods ended June 30, 1997 and 1996.
15. Independent Accountants' Report, dated July 18, 1997 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:
(1) The Company filed a Current Report on Form 8-K dated April 24,
1997, which reported the Company's announcement of the Board of
Directors' authorization of the repurchase of shares of the
Company's common stock during the period of April 24, 1997 through
December 31, 1998 in an amount not to exceed $20 million.
(2) The Company filed a Current Report on Form 8-K dated June 26,
1997, which reported a six month extension to December 31, 1999 of
the fine papers Supply Agreement between the Company and Philip
Morris - U.S.
15
<PAGE> 16
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 11, 1997
16
<PAGE> 17
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - ------ ----------- ----
<S> <C> <C>
10. --- Amendment No. 3 to Philip Morris Supply Agreement.
11. --- The following statement is filed as an exhibit to Part I of
this Form 10-Q:
The net income per common share computations included in the
Consolidated Statements of Income in Part 1, Item 1, of this
Form 10-Q are 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
periods presented were options outstanding under the Company's
Equity Participation Plan.
Alternative computations of "primary" and "fully diluted" net
income per common share amounts 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 three and six month periods ended June 30, 1997 and 1996.
15. --- Independent Accountants' Report, dated July 18, 1997 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 10
Amendment No. 3 to the Agreement
between
Philip Morris Incorporated
and
Schweitzer-Mauduit International, Inc.
for
Fine Papers Supply
This Amendment No. 3, effective June 26, 1997, is by and between Philip
Morris Incorporated, a Virginia Corporation doing business as Philip Morris
U.S.A. ("Philip Morris"), and Schweitzer-Mauduit International, Inc., a Delaware
corporation ("SWM").
RECITALS
WHEREAS, Kimberly-Clark Corporation ("Kimberly-Clark") and Philip
Morris entered into a certain agreement, effective January 1, 1993, for the
manufacture and sale by Kimberly-Clark and the purchase by Philip Morris of Fine
Papers and entered into Amendment No. 1 to such agreement, effective September
12, 1995 (such agreement, as amended, is hereinafter referred to as the "Supply
Agreement");
WHEREAS, Kimberly-Clark assigned its rights and obligations under the
Supply Agreement to SWM, effective as of the close of business on November 30,
1995;
WHEREAS, Philip Morris and SWM entered into Amendment No. 2 to the
Supply Agreement, effective December 20, 1996; and
WHEREAS, Philip Morris and SWM now desire to amend the Supply Agreement
as set forth hereinbelow.
NOW, THEREFORE, in consideration of the forgoing and other good and
valuable consideration, the exchange and sufficiency of which are hereby
acknowledged, Philip Morris and SWM agree as follows:
1. Capitalized terms herein shall have the same meaning as in the
Supply Agreement.
2. The first sentence of Article II.A of the Supply Agreement shall be
amended by replacing June 30, 1999 with December 31, 1999. The purpose of this
change is to allow the parties up to six additional months (until December 31,
1997) to reach agreement on changes to the Supply Agreement that will make it
acceptable to both for the Supply Agreement to extend beyond the initial term
for at least one renewal term.
<PAGE> 2
3. The GSPs for flax Cigarette Papers established by Amendment No. 2 to
the Supply Agreement shall continue to be effective for the second six months of
calendar year 1997.
4. All other terms and conditions of the Supply Agreement shall remain
unchanged.
5. This Amendment No. 3 may be executed in one or more counterparts,
and the different counterparts signed by each of the parties, taken together,
shall evidence the agreement of the parties.
6. The Supply Agreement, Amendment No. 2 and this Amendment No. 3
constitute the entire agreement of the parties with respect to their subject
matter and supersede any prior or contemporaneous agreements or understandings
between Philip Morris and SWM regarding their subject matter.
IN WITNESS WHEREOF, the parties have caused this Amendment No. 3 to be
executed by their duly authorized representatives effective as of the date first
set forth above.
PHILIP MORRIS INCORPORATED
BY /s/ R. D. LATSHAW
--------------------------------------
TITLE Director, Purchasing
-----------------------------------
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
BY /s/ N. DANIEL WHITFIELD
--------------------------------------
TITLE President - U.S. Operations
-----------------------------------
2
<PAGE> 1
EXHIBIT 15
INDEPENDENT ACCOUNTANTS' REPORT
Schweitzer-Mauduit International, Inc.:
We have reviewed the accompanying consolidated balance sheet of
Schweitzer-Mauduit International, Inc. and subsidiaries as of June 30, 1997, the
related consolidated statements of income for the three and six month periods
ended June 30, 1997 and 1996, and the related consolidated statements of cash
flow for the six month periods ended June 30, 1997 and 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, 1996 and the related consolidated statements of income
and cash flow for the year then ended (not presented herein); and in our report
dated January 31, 1997, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 1996 is fairly
stated in all material respects in relation to the balance sheet from which it
has been derived.
Deloitte & Touche LLP
Atlanta, Georgia
July 18, 1997
<PAGE> 1
EXHIBIT 23
August 11, 1997
Schweitzer-Mauduit International, Inc.
100 North Point Center East, Suite 600
Alpharetta, Georgia 30022-8246
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
three and six month periods ended June 30, 1997 and 1996 as indicated in our
report dated July 18, 1997; because we did not perform an 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, 1997, 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 SIX MONTHS ENDED JUNE 30,
1997, 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-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 22,000
<SECURITIES> 0
<RECEIVABLES> 60,700
<ALLOWANCES> 0
<INVENTORY> 54,400
<CURRENT-ASSETS> 144,200
<PP&E> 350,500
<DEPRECIATION> 164,200
<TOTAL-ASSETS> 362,300
<CURRENT-LIABILITIES> 80,500
<BONDS> 81,700
0
0
<COMMON> 1,600
<OTHER-SE> 163,100
<TOTAL-LIABILITY-AND-EQUITY> 362,300
<SALES> 229,300
<TOTAL-REVENUES> 229,300
<CGS> 165,000
<TOTAL-COSTS> 165,000
<OTHER-EXPENSES> 20,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,000
<INCOME-PRETAX> 42,500
<INCOME-TAX> 15,800
<INCOME-CONTINUING> 24,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,000
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.49
</TABLE>
