<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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)
NO CHANGE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X. No .
---- ----
As of September 30, 1997, 16,065,203 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ----------------------------
1997 1996 1997 1996
----- ----- ---- ----
<S> <C> <C> <C> <C>
Net Sales.................................................$ 113.4 $ 118.5 $ 342.7 $ 355.8
Cost of products sold................................ 83.1 89.9 248.1 268.6
--------- --------- --------- --------
Gross Profit.............................................. 30.3 28.6 94.6 87.2
Selling expense...................................... 4.3 4.6 13.0 13.7
Research expense..................................... 1.6 1.3 4.7 4.4
General expense...................................... 3.8 3.9 12.4 12.5
--------- --------- --------- --------
Operating Profit.......................................... 20.6 18.8 64.5 56.6
Interest expense..................................... (1.1) (1.4) (3.1) (4.1)
Other income (expense), net.......................... 0.6 0.3 1.2 0.4
--------- --------- --------- --------
Income Before Income Taxes and Minority Interest.......... 20.1 17.7 62.6 52.9
Provision for income taxes........................... 7.4 6.6 23.2 19.8
-------- --------- --------- --------
Income Before Minority Interest........................... 12.7 11.1 39.4 33.1
Minority interest in earnings of subsidiary.......... 1.5 1.3 4.2 3.4
--------- --------- --------- --------
Net Income................................................$ 11.2 $ 9.8 $ 35.2 $ 29.7
========= ========= ========= ========
Net Income per Common Share...............................$ .70 $ .61 $ 2.19 $ 1.85
========= ========= ========= ========
Cash Dividends Declared per Common Share..................$ .15 $ .15 $ .45 $ .30
========= ========= ========= ========
</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>
SEPTEMBER 30, DECEMBER 31,
1997 1996
- - ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents..................................................... $ 30.6 $ 30.9
Accounts receivable........................................................... 62.4 65.1
Inventories................................................................... 59.1 49.2
Deferred income tax benefits.................................................. 3.0 3.3
Prepaid expenses.............................................................. 3.8 2.1
------- -------
Total Current Assets...................................................... 158.9 150.6
------- -------
Gross Property.................................................................... 357.0 361.0
Less accumulated depreciation................................................. 166.9 166.8
------- -------
Net Property.............................................................. 190.1 194.2
------- -------
Noncurrent Deferred Income Tax Benefits............................................ 19.0 30.2
------- -------
Deferred Charges and Other Assets.................................................. 10.9 5.6
------- -------
Total Assets....................................................................... $ 378.9 $ 380.6
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt............................................. $ 2.4 $ 2.9
Other short-term debt......................................................... 0.4 1.3
Accounts payable.............................................................. 34.3 54.5
Accrued expenses.............................................................. 46.7 42.5
Income taxes payable.......................................................... 2.0 0.6
------- -------
Total Current Liabilities................................................. 85.8 101.8
------- -------
Long-Term Debt..................................................................... 81.5 86.6
------- -------
Deferred Income Taxes.............................................................. 10.5 9.5
------- -------
Other Noncurrent Liabilities....................................................... 22.0 19.7
------- -------
Minority Interest.................................................................. 5.9 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,
16,065,203 and 16,052,621 shares issued and outstanding at September 30,
1997 and December 31, 1996, respectively.................................. 1.6 l.6
Additional paid-in capital.................................................... 60.3 60.0
Retained earnings............................................................. 105.8 77.8
Unrealized currency translation adjustments................................... 5.5 16.6
------- -------
Total Stockholders' Equity................................................ 173.2 156.0
------- -------
Total Liabilities and Stockholders' Equity......................................... $ 378.9 $ 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 NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
1997 1996
---- ----
<S> <C> <C>
Operations
Net income.................................................. $ 35.2 $ 29.7
Depreciation................................................ 10.5 10.0
Deferred income tax provision............................... 9.0 5.5
Minority interest in earnings of subsidiary................. 4.2 3.4
Non-cash utilization of restructuring reserve............... - 4.7
Other....................................................... 2.5 2.2
Changes in operating working capital........................ (23.5) 4.7
------- -------
Cash Provided by Operations........................ 37.9 60.2
------- -------
Investing
Capital spending............................................ (19.2) (28.2)
Capitalized software costs.................................. (4.8) -
Other....................................................... (3.6) (1.3)
------- -------
Cash Used for Investing............................ (27.6) (29.5)
------- -------
Financing
Cash dividends paid to SWM stockholders..................... (7.2) (4.8)
Cash dividends paid to minority owner....................... (4.5) (0.9)
Changes in short-term debt.................................. (0.9) (2.1)
Proceeds from issuances of long-term debt.................. 5.3 5.2
Payments on long-term debt.................................. (3.6) (5.2)
Proceeds from issuances of common stock..................... 0.3 -
------- -------
Cash Used for Financing............................ (10.6) (7.8)
------- -------
Increase (Decrease) in Cash and Cash Equivalents................. (0.3) 22.9
Cash and Cash Equivalents at beginning of period................. 30.9 5.9
------- -------
Cash and Cash Equivalents at end of period....................... $ 30.6 $ 28.8
======= =======
</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 nine months ended September
30, 1997 were approximately 16,062,900 and 16,058,000, respectively, and for
the three and nine months ended September 30, 1996 were approximately
16,052,300 and 16,051,900, respectively.
NOTE 3. INVENTORIES
The following schedule details inventories by major class as of September
30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
September 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 ........................................... $ 19.9 $ 19.7
Work in process ......................................... 9.9 10.4
Finished goods .......................................... 27.0 16.3
Supplies and other ...................................... 9.9 10.0
-------- --------
66.7 56.4
Excess of FIFO cost over Last-In,
First-Out (LIFO) cost ...................................... (7.6) (7.2)
-------- --------
Total ................................................. $ 59.1 $ 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 nine month periods ended
September 30, 1997 were 36.8 percent and 37.1 percent, respectively, compared
with 37.3 percent and 37.4 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 September 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 September 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 (i) for six months from the date of the
court's stay in July 1997, (ii) until the proposed legislative resolution of
pending tobacco litigation is enacted into law or (iii) until the stay is
lifted either for good cause shown or by further order of the court. 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
had 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. Since the
passive venting system did 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 will have submitted. The estimated total cost of such
a plan, including annual operating expenses, is $0.5, which amount has been
accrued as of September 30, 1997.
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 excavated eight test pits which disclosed the presence of general waste
and two crushed drums but no hazardous waste. The Company reported 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 $3 to $5 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 September 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 ...................... $ 46.1 $ 52.3 - 11.9% 40.7% 44.1%
Outside United States............... 67.0 67.1 - 0.1 59.1 56.6
Eliminations........................ 0.3 (0.9) 0.2 (0.7)
-------- -------- ----- -----
Consolidated .................... $ 113.4 $ 118.5 - 4.3% 100.0% 100.0%
======== ======== ===== =====
<CAPTION>
% Change % of Consolidated % Return on Sales
Operating Profit 1997 1996 vs. 1996 1997 1996 1997 1996
- - ---------------- ---- ---- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
United States.............. $ 4.2 $ 5.0 - 16.0% 20.4% 26.6% 9.1% 9.6%
Outside United States...... 17.7 15.2 + 16.4 85.9 80.8 26.4 22.7
Unallocated/Eliminations... (1.3) (1.4) (6.3) (7.4)
------- ------- ----- -----
Consolidated............ $ 20.6 $ 18.8 + 9.6% 100.0% 100.0% 18.2% 15.9%
======= ======= ===== =====
<CAPTION>
By Geography for the nine months ended September 30, 1997 and 1996
(U.S. $ in millions)
% Change % of Consolidated
--------------------
Net Sales 1997 1996 vs. 1996 1997 1996
- - --------- ---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
United States ...................... $ 146.8 $ 163.3 - 10.1% 42.8% 45.9%
Outside United States............... 197.3 196.3 + 0.5 57.6 55.2
Eliminations........................ (1.4) (3.8) (0.4) (1.1)
-------- -------- ----- -----
Consolidated .................... $ 342.7 $ 355.8 - 3.7% 100.0% 100.0%
======== ======== ===== =====
<CAPTION>
% Change % of Consolidated % Return on Sales
----------------- -----------------
Operating Profit 1997 1996 vs. 1996 1997 1996 1997 1996
- - ---------------- ---- ---- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
United States.............. $ 20.5 $ 20.8 - 1.4% 31.8% 36.7% 14.0% 12.7%
Outside United States...... 48.4 40.1 + 20.7 75.0 70.8 24.5 20.4
Unallocated/Eliminations... (4.4) (4.3) (6.8) (7.5)
------- ------- ----- -----
Consolidated............ $ 64.5 $ 56.6 + 14.0% 100.0% 100.0% 18.8% 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 $5.1 million in the three month period ended
September 30, 1997, compared with the corresponding period of the preceding
year. The net sales comparison was unfavorably effected $8.8 million by changes
in currency exchange rates. Worldwide sales volumes increased by three percent,
favorably effecting net sales by $2.8 million. Sales volumes from the French
businesses grew by 18 percent for the three month period primarily due to gains
in porous plug wrap and reconstituted tobacco leaf ("RTL") products. Sales
volumes declined at the U.S. business unit by 16 percent for the three month
period primarily due to lower export sales by the Company and its domestic
customers and inventory reductions by major customers. Compared with the same
three month period of the preceding year, changes in selling prices and sales
mix had a favorable effect of $0.9 million. An improved mix of products sold in
France was more than offset by lower average selling prices in France. Average
selling prices in the U.S. improved slightly compared with the corresponding
period of the preceding year because of contractual selling price adjustments
related to per ton wood pulp costs.
Net sales decreased by $13.1 million in the nine month period ended
September 30, 1997, compared with the corresponding period of the preceding
year. The net sales comparison was unfavorably effected $18.8 million by
changes in currency exchange rates. Exiting the 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 nine 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 nine month period by four percent, favorably effecting net
sales by $9.5 million. Sales volumes from the French businesses grew by 14
percent for the nine month period primarily due to gains in porous plug wrap
and RTL products. Excluding the first quarter of 1996 RTL volumes in the U.S.,
sales volumes declined at the U.S. business unit by eight percent for the nine
month period primarily due to lower export sales by the Company and its
domestic customers and inventory reductions by major customers. Compared with
the same nine month period of the preceding year, changes in selling prices and
sales mix had an unfavorable effect of $0.9 million. Lower average selling
prices more than offset an improved mix of products sold.
Operating Profit
Operating profit improved by $1.8 million in the three month period ended
September 30, 1997, compared with the corresponding period of the preceding
year. The improvement was primarily a result of the increased sales volumes in
France and improved mill operations. These favorable effects were partially
offset by lower U.S. business unit sales volumes and changes in currency
exchange rates. Changes in currency exchange rates had an unfavorable impact of
$1.1 million on the operating profit change in the three month period.
Operating profit improved by $7.9 million in the nine month period ended
September 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 $4.9 million in the nine month period. These
favorable effects were partially offset by the lower sales volumes for the U.S
business and lower selling prices. Changes in currency exchange rates had an
unfavorable impact of $1.6 million on the operating profit change in the nine
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 $1.0 million in the three
and nine month periods ended September 30, 1997, respectively, compared with
the corresponding periods of the preceding year. The decreases were primarily
due to the impact of currency exchange rates and 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 nine month periods ended
September 30, 1997 were 36.8 percent and 37.1 percent, respectively, compared
with 37.3 percent and 37.4 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
and capitalized software costs for the nine months ended September 30, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
(U.S. $ in millions)
1997 1996
---- ----
<S> <C> <C>
Net cash provided by operations.................................................... $ 37.9 $ 60.2
(Increase) Decrease in operating working capital................................... (23.5) 4.7
Capital expenditures............................................................... 19.2 28.2
Capitalized software costs......................................................... 4.8 -
</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 $60.2 million for the nine months
ended September 30, 1996 to $37.9 million for the nine months ended September
30, 1997, primarily as a result of changes in operating working capital.
Changes in operating working capital contributed unfavorably to cash flow in
the 1997 period by $23.5 million primarily due to a decrease in accounts
payable, mainly associated with 1997 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
second and third quarters of 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 nine months of 1997
caused the Company's consolidated total assets and liabilities to decline by
approximately seven percent as of September 30, 1997 compared with December 31,
1996.
Cash provided by operations exceeded the level of capital spending during
the first nine months of both 1997 and 1996. Capital spending for the nine
months ended September 30, 1997 included $3.1 million toward the new long fiber
paper machine in France, $2.0 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 $4.8 million in the
nine month period ended September 30, 1997, toward new company-wide integrated
computer systems. These computer systems will replace the currently used
Kimberly-Clark systems and ensure the Company's computer systems are able to
handle the change to the year 2000.
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 continues to operate well and is now running at above
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 September 30, 1997.
On October 23, 1997, the Board of Directors declared a quarterly cash
dividend of fifteen cents per share of common stock. The dividend will be
payable on December 8, 1997 to stockholders of record on November 10, 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 September 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 period, 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 nine months of 1997 as it did during the second half of 1996.
The fourth quarter is not expected to be materially impacted by the
year-to-year per ton cost of wood pulp comparison. 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. The
Company's customers in the U.S. traditionally reduce their operating schedules
around holidays in the fourth quarter, which could soften demand for the
Company's products and allow for additional maintenance and capital work.
Additionally, the Company's U.S. customers indicate weakness in export sales is
continuing and that adjustments are being made in their raw material inventory
levels. As a result, the U.S. business unit will take selective machine
downtime in the fourth quarter to help reduce U.S. inventory levels. Therefore,
earnings in the fourth quarter are not expected to be as strong as in the first
three quarters of 1997, as was also the case in 1995 and 1996.
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
$8 to $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
early 1998 for the U.S. portion and estimated to begin in 1999 for the French
portion.
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 5. OTHER INFORMATION
During the third quarter of 1997, a new five-year labor
agreement was concluded at the Lee mills, the Company's
second largest U.S. facility. Wage rate increases will be
three percent per year. Several changes were also made to
benefits programs that will help the Company control its
total labor-related costs.
14
<PAGE> 15
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 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 nine month periods ended September 30, 1997 and 1996.
15. Independent Accountants' Report, dated October 17, 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 July 9,
1997, which reported the Company's announcement, prior to the
release of its second quarter earnings, that earnings were
expected to exceed analysts' estimates.
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)
October 23, 1997
16
<PAGE> 17
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - ------ ----------- ----
<S> <C>
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 nine month periods ended September 30, 1997 and
1996.
15. --- Independent Accountants' Report, dated October 17, 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 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 September 30,
1997, the related consolidated statements of income for the three and nine
month periods ended September 30, 1997 and 1996, and the related consolidated
statements of cash flow for the nine month periods ended September 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
October 17, 1997
<PAGE> 1
EXHIBIT 23
October 22, 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 nine month periods ended September 30, 1997 and 1996 as indicated in
our report dated October 17, 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 September 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-MAUDIT FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 30,600
<SECURITIES> 0
<RECEIVABLES> 62,400
<ALLOWANCES> 0
<INVENTORY> 59,100
<CURRENT-ASSETS> 158,900
<PP&E> 357,000
<DEPRECIATION> 166,900
<TOTAL-ASSETS> 378,900
<CURRENT-LIABILITIES> 85,800
<BONDS> 81,500
0
0
<COMMON> 1,600
<OTHER-SE> 171,600
<TOTAL-LIABILITY-AND-EQUITY> 378,900
<SALES> 342,700
<TOTAL-REVENUES> 342,700
<CGS> 248,100
<TOTAL-COSTS> 248,100
<OTHER-EXPENSES> 30,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,100
<INCOME-PRETAX> 62,600
<INCOME-TAX> 23,200
<INCOME-CONTINUING> 35,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,200
<EPS-PRIMARY> 2.19
<EPS-DILUTED> 2.19
</TABLE>
