<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, 1998
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 June 30, 1998, 16,077,965 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,
-------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales ........................................ $ 144.0 $ 116.3 $ 278.3 $ 229.3
Cost of products sold ....................... 116.3 82.8 219.5 165.0
------- ------- ------- -------
Gross Profit ..................................... 27.7 33.5 58.8 64.3
Selling expense ............................. 5.3 4.5 10.2 8.7
Research expense ............................ 1.7 1.6 3.0 3.1
General expense ............................. 5.1 4.5 9.4 8.6
------- ------- ------- -------
Operating Profit ................................ 15.6 22.9 36.2 43.9
Interest expense ............................ (1.8) (1.0) (3.2) (2.0)
Other income (expense), net ................. 0.1 0.5 0.7 0.6
------- ------- ------- -------
Income Before Income Taxes and Minority Interest . 13.9 22.4 33.7 42.5
Provision for income taxes .................. 0.6 8.3 8.7 15.8
------- ------- ------- -------
Income Before Minority Interest .................. 13.3 14.1 25.0 26.7
Minority interest in earnings of subsidiaries 1.1 1.4 2.8 2.7
------- ------- ------- -------
Net Income ....................................... $ 12.2 $ 12.7 $ 22.2 $ 24.0
======= ======= ======= =======
Net Income per Common Share
Basic ....................................... $ .76 $ .79 $ 1.38 $ 1.49
======= ======= ======= =======
Diluted ..................................... $ .75 $ .78 $ 1.36 $ 1.47
======= ======= ======= =======
Cash Dividends Declared per Common Share ......... $ .15 $ .15 $ .30 $ .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>
JUNE 30, DECEMBER 31,
1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ................................................... $ 1.0 $ 37.2
Accounts receivable ......................................................... 71.4 57.0
Inventories ................................................................. 68.9 56.3
Deferred income tax benefits ................................................ 3.8 3.3
Prepaid expenses ............................................................ 5.2 3.8
------ ------
Total Current Assets .................................................... 150.3 157.6
------ ------
Gross Property .................................................................. 442.2 370.0
Less accumulated depreciation ............................................... 177.2 168.9
------ ------
Net Property ............................................................ 265.0 201.1
------ ------
Noncurrent Deferred Income Tax Benefits .......................................... 23.3 18.4
------ ------
Deferred Charges and Other Assets ................................................ 14.4 13.9
------ ------
Total Assets ..................................................................... $453.0 $391.0
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt ........................................... $ 4.2 $ 2.5
Other short-term debt ....................................................... 10.2 0.5
Accounts payable ............................................................ 45.2 43.4
Accrued expenses ............................................................ 53.5 43.0
Income taxes payable ........................................................ 1.3 1.1
------ ------
Total Current Liabilities ............................................... 114.4 90.5
------ ------
Long-Term Debt ................................................................... 104.0 80.8
------ ------
Deferred Income Taxes ............................................................ 12.6 11.2
------ ------
Other Noncurrent Liabilities ..................................................... 24.0 21.9
------ ------
Minority Interest ................................................................ 4.7 7.1
------ ------
Contingencies (See Notes 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,
16,077,965 and 16,065,443 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively ....................... l.6 1.6
Additional paid-in capital .................................................. 60.6 60.3
Retained earnings ........................................................... 130.9 113.5
Accumulated other comprehensive income -
Unrealized foreign currency translation adjustments ....................... 0.2 4.1
------ ------
Total Stockholders' Equity .............................................. 193.3 179.5
------ ------
Total Liabilities and Stockholders' Equity ....................................... $453.0 $391.0
====== ======
</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,
-------------------
1998 1997
---- ----
<S> <C> <C>
Operations
Net income ................................... $22.2 $24.0
Depreciation and amortization ................ 10.7 6.9
Deferred income tax provision ................ 1.3 5.0
Minority interest in earnings of subsidiaries 2.8 2.7
Other ........................................ 2.5 1.7
Changes in operating working capital ......... (11.8) (22.6)
----- -----
Cash Provided by Operations ......... 27.7 17.7
----- -----
Investing
Capital spending ............................. (12.5) (11.0)
Capitalized software costs ................... (1.9) (3.2)
Acquisitions, net of cash acquired ........... (65.4) --
Other ........................................ (2.3) (3.7)
----- -----
Cash Used for Investing ............. (82.1) (17.9)
----- -----
Financing
Cash dividends paid to SWM stockholders ...... (4.8) (4.8)
Cash dividends paid to minority owner ........ (5.3) (4.5)
Changes in short-term debt ................... 7.3 (1.0)
Proceeds from issuances of long-term debt ... 24.2 4.8
Payments on long-term debt ................... (3.5) (3.3)
Proceeds from issuances of common stock ...... 0.3 0.1
----- -----
Cash Provided by (Used for) Financing 18.2 (8.7)
----- -----
Decrease in Cash and Cash Equivalents ............. (36.2) (8.9)
Cash and Cash Equivalents at beginning of period .. 37.2 30.9
----- -----
Cash and Cash Equivalents at end of period ........ $ 1.0 $22.0
===== =====
</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., including its subsidiaries, ("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, including two newly-acquired companies since
the beginning of February 1998 (see Note 7). 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 1997 Annual Report on Form 10-K. All
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the interim periods have been made
and are 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 1997 Annual
Report on Form 10-K.
Basic net income per common share is computed based on net income divided
by the weighted average number of common shares outstanding. The average numbers
of common shares used in the calculations of basic net income per common share
for the three and six month periods ended June 30, 1998 were approximately
16,077,900 and 16,073,000, respectively, and for the three and six month periods
ended June 30, 1997 were 16,056,800 and 16,055,600, respectively. Diluted net
income per common share is computed based on net income divided by the weighted
average number of common and potential common shares outstanding. The average
numbers of common and potential common shares used in the calculations of
diluted net income per common share for the three and six month periods ended
June 30, 1998 were approximately 16,297,200 and 16,311,600, respectively, and
for the three and six month periods ended June 30, 1997 were 16,306,400 and
16,297,900, respectively. The only potential common shares are those related to
stock options outstanding during the respective periods.
NOTE 3. INVENTORIES
The following schedule details inventories by major class as of June 30,
1998 and December 31, 1997:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- -------------
<S> <C> <C>
At the lower of cost on the First-In, First-Out (FIFO)
and weighted average methods or market:
Raw materials ............................................... $ 22.2 $ 20.1
Work in process ............................................. 13.0 11.3
Finished goods .............................................. 26.8 21.4
Supplies and other .......................................... 13.7 9.7
-------- --------
75.7 62.5
Excess of FIFO cost over Last-In, First-Out (LIFO) cost .......... (6.8) (6.2)
-------- --------
Total ..................................................... $ 68.9 $ 56.3
======== ========
</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, 1998 were 4.3 percent and 25.8 percent, respectively, compared with
37.1 percent and 37.2 percent for the respective corresponding periods of 1997.
The 1998 periods reflect the benefit of a reduction in the valuation allowance
recorded against certain French deferred income tax assets arising from net
operating loss carryforwards ("NOLs"). This adjustment reduced the provision for
income taxes by $5.2 in the second quarter of 1998. The reduction in the
valuation allowance was recorded because of continued strong earnings and
projected future earnings at the French businesses that utilize the NOLs,
reducing the uncertainty that these NOLs will be fully utilized in the future.
Excluding the impact of this adjustment, the effective income tax rates for the
three and six month periods ended June 30, 1998 would have been 41.7 percent and
41.2 percent, respectively. These higher effective income tax rates compared
with the corresponding periods of 1997 were primarily the result of an increase
in the corporate income tax rate enacted in France in November 1997 from 36.67
percent to 41.67 percent for 1997 and 1998, retroactive to January 1, 1997, and
to 40.00 percent for 1999. The increase applicable to the 1997 period was
recorded in the fourth quarter of 1997 when the income tax rate change was
enacted.
NOTE 5. LEGAL PROCEEDINGS
Under the terms of the spin-off, the Company assumed liability for and
agreed to indemnify Kimberly-Clark from litigation arising out of the operation
of the Company's predecessor businesses, including the following cases:
- - In January 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. 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, S.A. ("LTRI"), a French
subsidiary of the Company, specializes in the reconstitution process to
help the tobacco companies control nicotine levels.
- - In February 1998, Cleo Huffman, on behalf of herself and her deceased
husband, filed a complaint in the Circuit Court of Kanawha County, West
Virginia, against several tobacco companies, industry trade associations
and consultants, tobacco wholesalers, Kimberly-Clark, LTRI and others,
seeking equitable relief, $2.0 in compensatory damages and $3.0 in punitive
damages allegedly sustained as a result of the death of her husband which
plaintiff contends was caused by his "addiction" to smoking Camel
cigarettes. The fourteen-count complaint sets forth several theories of
liability, including intentional and negligent misrepresentation, breach of
express and implied warranties, intentional infliction of emotional
distress, product liability, sale of an unreasonably dangerous product and
conspiracy.
6
<PAGE> 7
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
- - In February 1998, Denny L. Parsons, personal representative of the estate
of Audrey E. Parsons, on behalf of his wife and other persons having claims
for "personal injury arising from the exposure to respirable asbestos
fibers and cigarette smoke", filed a purported class action in the Circuit
Court of Kanawha County, West Virginia, against 75 defendants including 42
asbestos defendants and 33 tobacco defendants including Kimberly-Clark and
LTRI. The plaintiff seeks to recover $3 in compensatory and $3 in punitive
damages on behalf of himself and his wife's estate and the same type of
damages for the purported class in an unspecified amount. The "asbestos
defendants" are alleged to be liable on several grounds including strict
liability, negligence, failure to warn, breach of warranty, conspiracy to
conceal the carcinogenic effects of asbestos, fraudulent misrepresentation,
and creation of false medical literature about the dangers of asbestos
exposure. The "tobacco defendants" are alleged to be liable on essentially
the same theories of liability and, additionally, fraudulent concealment,
misrepresentations about the addictive nature of nicotine, unjust
enrichment, and intentional infliction of emotional distress. The complaint
further alleges that the "asbestos" and "tobacco" defendants encouraged and
assisted each other in their wrongful conduct and that the inhalation of
asbestos fibers and tobacco smoke create a greater risk of lung cancer than
inhaling asbestos fibers or cigarette smoke alone.
- - In March 1998, Linda Morris, representative of the estate of Clifford
Morris, filed a complaint in the Circuit Court of Kanawha County, West
Virginia, against several tobacco companies, industry trade associations
and consultants, Kimberly-Clark and LTRI seeking $2 in compensatory and $3
in punitive damages allegedly sustained as a result of the death of her
husband, which plaintiff contends was caused by his addiction to
cigarettes. The fourteen count complaint alleges several theories of
liability including intentional and negligent misrepresentation, breach of
warranty, intentional infliction of emotional distress, product liability,
sale of an unreasonably dangerous product and conspiracy.
- - In June 1998, three union health and welfare funds on behalf of themselves
and "all labor-management multi-employer health and welfare trust funds
operating in the State of Utah", instituted a purported class action in the
U.S. District Court for the District of Utah, Central Division, against
several tobacco companies, tobacco industry trade associations, law firms
and component suppliers including Kimberly-Clark and LTRI, seeking to
recover compensatory and punitive damages in an unspecified amount for
health care expenditures caused by tobacco use, treble damages and
attorneys' fees, declaratory, injunctive and other equitable relief. The 21
count complaint sets forth several theories of liability including
violations of federal and Utah Racketeer Influenced and Corrupt
Organizations ("RICO") statutes, the Sherman Act, fraud and
misrepresentation, breach of express and implied warranties, negligence,
strict liability, aiding and abetting and conspiracy. Among other things,
the complaint alleges that the tobacco companies used the reconstituted
process "to triple or even quadruple the nicotine content of the
reconstituted tobacco in their cigarettes" and, further, that
Kimberly-Clark manufactured and sold reconstituted tobacco knowing that it
would be used by cigarette companies to manipulate the level of nicotine, a
substance known to be addictive, in their cigarettes.
As component suppliers, the Company believes that Kimberly-Clark and LTRI
have meritorious defenses to each of these cases. LTRI has or will seek to be
dismissed from these actions on the grounds that it is not subject to the
personal jurisdiction of the West Virginia and Utah courts, respectively. Due to
the uncertainties of litigation, the Company cannot predict the outcome of these
cases, and is unable to make a meaningful estimate of the amount or range of
loss which could result from an unfavorable outcome of these actions. These
cases will be vigorously defended.
7
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SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
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.
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 ("PRP") under the provisions of the U.S. Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), or analogous state
statutes, in connection with 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. Prior to the spin-off, the Spotswood mill also
responded to an information request by the New Jersey Department of
Environmental Protection ("NJDEP") with respect to another landfill site
allegedly used by the Spotswood mill. The Company has assumed Kimberly-Clark's
liabilities at each of 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 to sample groundwater by means of monitoring wells, in addition to other
long-term maintenance responsibilities for this former non-hazardous waste
disposal facility. Under the terms of a January 24, 1997 consent order with
MDEP, as amended, resulting from a Comprehensive Site Assessment and a
Corrective Action Alternative Assessment submitted by the Company to MDEP, the
Company is also required to correct a gas migration problem at the landfill
property line. Under the terms of the amended order, the deadline for reducing
gas concentrations to specified levels at the landfill property line has been
extended to September 15, 1998. The estimated total cost of such corrective
action, including annual operating expenses, is $0.5, which amount has been
accrued as of June 30, 1998.
The Company recently entered into an agreement with NJDEP to monitor
chloroform emissions at its Spotswood mill. Depending on the results of current
monitoring, it may be necessary to install chloroform emissions controls at the
mill in order to comply with air emissions limits under the New Jersey Air
Pollution Control Act. The need for such controls and their cost, if any, is
presently undetermined.
8
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SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
All of the Company's U.S. facilities may be affected by revised air
emissions and wastewater discharge standards under rules commonly known as the
"Cluster Rules". Although the Environmental Protection Agency ("EPA") originally
indicated that the proposed rules would be finalized in 1996, the first set of
rules was not published until April 1998. The EPA is currently engaged in
further rule-making. Based on a preliminary analysis, the first phase of the
Cluster Rules governing wastewater discharges does not appear to affect the
Company's three U.S. mills, as had previously been anticipated. However, the
later phases of the Cluster Rules (and/or Title V of the Clean Air Act
Amendments of 1990) and National Pollutant Discharge Elimination System permit
renewals may require the Company to install air and water pollution controls at
its U.S. facilities sometime after the year 2000. Due to uncertainty concerning
applicable requirements under the above-mentioned and other possible
regulations, potential capital expenditures which may become necessary for
compliance cannot be estimated until after such requirements, if any, are known.
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, Brazil and Canada, including the
aforementioned matters. For these purposes, the Company anticipates that it will
incur capital expenditures of approximately $3 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. ACQUISITIONS
On February 2, 1998, the Company's wholly-owned subsidiary,
Schweitzer-Mauduit Spain, S.L. ("SM-Spain"), paid approximately $62.0 in cash
for 99.97 percent ownership interest in Companhia Industrial de Papel Pirahy
("Pirahy"), a specialty paper manufacturer located near Rio de Janeiro, Brazil.
In connection with the acquisition of Pirahy, the Company modified its existing
credit agreement to provide a $20.0 term loan to SM-Spain. SM-Spain borrowed the
remaining funds for the transaction from Schweitzer-Mauduit France, S.A.R.L.
("SM-France"), a French subsidiary of the Company, which in turn utilized its
existing cash balances and borrowings from its revolving credit facilities.
Additionally, on February 11, 1998, the Company's second tier subsidiary,
Schweitzer-Mauduit Enterprises ("SM-Enterprises") paid 37.2 million French
francs (approximately $6.1) in cash and assumed approximately $5.8 in existing
net debt for all of the outstanding shares of Ingefico, S.A. and 97.1 percent of
the outstanding shares of its pulp and specialty paper manufacturing
subsidiaries, Groupe SAPAM and Papeteries de la Moulasse, located in St. Girons,
France. Subsequently, SM-Enterprises acquired all the remaining shares of the
minority interest for $0.2 in cash.
The above acquisitions have been accounted for under the purchase method of
accounting and, accordingly, the acquired assets and liabilities have been
recorded at their estimated fair values as of the respective dates of the
acquisitions. In conjunction with the acquisitions, liabilities were assumed as
follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 95.7
Less: Cash paid for the stock (68.3)
Direct costs incurred (2.0)
-------
Liabilities assumed $ 25.4
=======
</TABLE>
9
<PAGE> 10
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
The operating results of the newly-acquired companies are included in the
Consolidated Statements of Income beginning February 1, 1998. The following
summarizes unaudited consolidated pro forma results of operations, assuming the
acquisitions had occurred at the beginning of each of the following periods:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ------------------- FOR THE FULL YEAR ENDED
1998 1997 1998 1997 DECEMBER 31, 1997
---- ---- ---- ---- ------------------------
<S> <C> <C> <C> <C> <C>
Pro Forma Net Sales........................... $144.0 $143.3 $287.5 $ 283.7 $570.4
Pro Forma Net Income.......................... $ 12.2 $ 12.4 $ 22.3 $ 23.5 $ 44.2
Pro Forma Diluted Earnings Per Share.......... $ .75 $ .76 $ 1.37 $ 1.44 $ 2.71
</TABLE>
NOTE 8. RESTRUCTURING ACCRUAL
On April 15, 1998, the Company announced that it reached an agreement with
the labor union at its Spotswood mill to modify work rules and eliminate 67
hourly positions. The Company recorded a pre-tax charge of $1.7 in cost of
products sold for the cost of a related voluntary retirement program, reducing
second quarter 1998 earnings. Cost savings should begin to be realized in the
third quarter of 1998. On an ongoing basis, this program is expected to provide
annual net pre-tax cost savings of approximately $5.
NOTE 9. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting of
Comprehensive Income" which became effective in the first quarter of 1998.
Currently, the only item of comprehensive income not included in the Company's
determination of net income is the change in unrealized foreign currency
translation adjustments, as shown below for the three and six month periods
ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income....................................... $ 12.2 $ 12.7 $ 22.2 $ 24.0
Other comprehensive income, net of taxes:
Unrealized foreign currency
translation adjustments........ (0.2) (3.3) (3.9) (10.6)
------ ------ ------ -------
Comprehensive Income............................. $ 12.0 $ 9.4 $ 18.3 $ 13.4
====== ====== ====== =======
</TABLE>
More than 60 percent of the Company's assets and liabilities are outside
the United States, substantially all in France and Brazil. 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 accumulated other comprehensive income as unrealized foreign currency
translation adjustments. Unrealized foreign currency translation adjustments for
the three and six month periods ended June 30, 1998 and 1997 are substantially
all due to the strengthening of the U.S. dollar against the French franc during
the first three months of 1998 and the first six months of 1997 and the
strengthening of the U.S. dollar against the Brazilian real from the date of the
acquisition of the Brazilian subsidiary through the end of the second quarter of
1998.
10
<PAGE> 11
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which will be effective no later than
for the Company's 1998 Annual Report on Form 10-K. This new statement may affect
the Company's financial statement disclosures. The Company is evaluating how to
implement the new disclosure requirements.
Also, in June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which will require that all
derivative financial instruments be recognized as either assets or liabilities
in the balance sheet. SFAS No. 133 will be effective no later than for the
Company's first quarter of 2000. The Company is evaluating the effects of this
new statement and when to implement the new requirements.
11
<PAGE> 12
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 1997. Due to the non-tobacco related net sales of the newly-acquired
companies, the Company's non-tobacco industry products increased to
approximately eleven percent of the Company's net sales during the first six
months of 1998. The non-tobacco industry products are a diverse mix of products,
certain of which represent commodity paper grades produced to maximize machine
operations.
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. The
Company's Brazilian operations were acquired on February 2, 1998. Accordingly,
the results of its operations are included in SWM's consolidated financial
statements since the beginning of February 1998.
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.
Assets reported by geographic area represent assets which are directly used and
an allocated portion of jointly used assets. These assets include receivables
from other geographic areas and are referred to as intergeographic items.
RESULTS OF OPERATIONS
By Geography for the three months ended June 30, 1998 and 1997
(U.S. $ in millions)
<TABLE>
<CAPTION>
% OF CONSOLIDATED
% CHANGE -----------------
NET SALES 1998 1997 VS. 1997 1998 1997
- --------- ------ ------ -------- ----- -----
<S> <C> <C> <C> <C> <C>
United States ...................... $ 50.3 $ 51.0 - 1.4% 34.9% 43.9%
France.............................. 80.7 66.6 +21.2 56.1 57.3
Brazil.............................. 15.7 N.A. 10.9
Eliminations........................ (2.7) (1.3) (1.9) (1.2)
------ ------ ----- -----
Consolidated .................... $144.0 $116.3 +23.8% 100.0% 100.0%
====== ====== ===== =====
<CAPTION>
% OF CONSOLIDATED % RETURN ON SALES
% CHANGE ----------------- -----------------
OPERATING PROFIT 1998 1997 VS. 1997 1998 1997 1998 1997
- ---------------- ------ ----- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
United States.............. $ 1.6 $ 8.6 -81.4% 10.3% 37.6% 3.2% 16.9%
France..................... 17.3 16.0 + 8.1 110.9 69.9 21.4 24.0
Brazil..................... (1.7) N.A. (10.9) (10.8)
Unallocated/Eliminations... (1.6) (1.7) (10.3) (7.5)
------ ----- ----- -----
Consolidated............ $ 15.6 $22.9 -31.9% 100.0% 100.0% 10.8% 19.7%
====== ===== ===== =====
</TABLE>
N.A. - Not applicable
12
<PAGE> 13
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
BY GEOGRAPHY FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(U.S. $ IN MILLIONS)
<TABLE>
<CAPTION>
% OF CONSOLIDATED
% CHANGE -----------------
NET SALES 1998 1997 VS. 1997 1998 1997
- --------- ------ ----- --------- ----- ----
<S> <C> <C> <C> <C> <C>
United States ...................... $ 98.8 $100.7 - 1.9% 35.5% 43.9%
France.............................. 160.0 130.3 +22.8 57.5 56.8
Brazil.............................. 26.5 N.A. 9.5
Eliminations........................ (7.0) (1.7) (2.5) (0.7)
------ ------ ----- -----
Consolidated .................... $278.3 $229.3 +21.4% 100.0% 100.0%
====== ====== ===== =====
<CAPTION>
% OF CONSOLIDATED % RETURN ON SALES
% CHANGE ----------------- -----------------
OPERATING PROFIT 1998 1997 VS. 1997 1998 1997 1998 1997
- ---------------- ------ ------ -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
United States .......... $ 5.9 $ 16.3 -63.8% 16.3% 37.1% 6.0% 16.2%
France ................. 35.4 30.7 +15.3 97.8 69.9 22.1 23.6
Brazil ................. (2.1) N.A. (5.8) (7.9)
Unallocated/Eliminations (3.0) (3.1) (8.3) (7.0)
------ ------ ----- -----
Consolidated ........ $ 36.2 $ 43.9 -17.5% 100.0% 100.0% 13.0% 19.1%
====== ====== ===== ====
</TABLE>
N.A. - Not applicable
Primarily as a result of the recent acquisitions, total assets by
geographical area have changed as follows:
<TABLE>
<CAPTION>
% OF CONSOLIDATED
JUNE 30, DECEMBER 31, -----------------
TOTAL ASSETS 1998 1997 1998 1997
------------ ------- ----------- ----- ----
<S> <C> <C> <C> <C>
United States.................. $155.9 $155.4 34.4% 39.7%
France......................... 229.9 237.6 50.8 60.8
Brazil......................... 68.4 N.A. 15.1
Intergeographic items.......... (1.2) (2.0) (0.3) (0.5)
------ ------ ----- -----
Consolidated................ $453.0 $391.0 100.0% 100.0%
====== ====== ===== =====
</TABLE>
N.A. - Not applicable
Net Sales
Net sales increased by $27.7 million in the three month period ended June
30, 1998, compared with the corresponding period of the preceding year. This
increase was primarily attributable to sales at the two newly-acquired companies
and stronger sales volumes in France. Net sales of the newly-acquired Brazilian
and French companies totaled $25.3 million in the quarter. Excluding the
acquisitions, worldwide sales volumes increased by nine percent, favorably
affecting net sales by $8.8 million. Sales volumes from the French businesses
grew by 18 percent for the three month period, excluding the French acquisition,
with growth in all major product lines. Sales volumes declined at the U.S.
business unit by 4 percent for the three month period due to reduced domestic
cigarette production by the Company's customers. Compared with the same three
month period of the preceding year, changes in average selling prices and sales
mix had an unfavorable effect of $3.3 million, primarily as a result of changes
in the mix of products sold in France. The net sales comparison was unfavorably
affected $3.1 million by changes in currency exchange rates, primarily related
to a strengthened U.S. dollar versus the French franc.
13
<PAGE> 14
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Net sales increased by $49.0 million in the six month period ended June 30,
1998, compared with the corresponding period of the preceding year. This
increase was primarily attributable to sales at the two newly-acquired
companies, whose results are included in the Company's consolidated results
beginning in February 1998, and stronger sales volumes in France. Net sales of
the newly-acquired Brazilian and French companies totaled $43.5 million in the
period. Excluding the acquisitions, worldwide sales volumes increased by nine
percent, favorably affecting net sales by $17.0 million. Sales volumes from the
French businesses grew by 21 percent for the six month period, excluding the
French acquisition, with gains in all major product lines. Sales volumes
declined at the U.S. business unit by 8 percent for the six month period, due to
reduced domestic cigarette production by the Company's customers. Sales volumes
in the U.S. declined in all major product lines. Compared with the same six
month period of the preceding year, changes in average selling prices and sales
mix had an unfavorable effect of $2.5 million, primarily as a result of changes
in the mix of products sold in France. The net sales comparison was unfavorably
affected $9.0 million by changes in currency exchange rates, primarily related
to a strengthened U.S. dollar versus the French franc.
Operating Profit
Operating profit decreased by $7.3 million in the three month period ended
June 30, 1998, compared with the corresponding period of the preceding year, as
lower operating profit in the U.S. and an operating loss in Brazil were
partially offset by improved operating profit in France. The U.S. business
unit's operating profit was unfavorably impacted by a restructuring charge
related to its Spotswood, New Jersey mill, new computer systems expenses, lower
sales volumes, unfavorable fixed cost absorption due to lower mill production
volumes and lower mill productivity. The restructuring charge related to the
Spotswood mill reduced operating profit in the period by $1.7 million (see Note
8 of the Notes to Unaudited Consolidated Financial Statements). Amortization of
capitalized software costs related to the new integrated computer systems in the
U.S. and associated incremental operating expenses began in January 1998 and
negatively impacted the current three month period by $0.9 million. In Brazil, a
decline in sales of tobacco-related papers contributed to unfavorable mill
operations and an operating loss of $1.7 million in the quarter. In France,
operating profit improved as a result of higher French sales volumes, but this
improvement was partially offset by unfavorable changes in average selling
prices and sales mix, and changes in currency exchange rates. Changes in
currency exchange rates had an unfavorable impact of approximately $0.5 million.
Non-manufacturing expenses increased by $1.5 million during the quarter. This
increase was solely caused by expenses at the two newly-acquired companies.
Excluding expenses of the newly-acquired companies, non-manufacturing expenses
were six percent lower than in the corresponding period of the prior year.
Changes in per ton wood pulp costs compared with the prior year had a nominal
effect on operating profit in the three month period.
Operating profit decreased by $7.7 million in the six month period ended
June 30, 1998, compared with the corresponding period of the preceding year, as
lower operating profit in the U.S. and an operating loss in Brazil were
partially offset by improved operating profit in France. The U.S. business
unit's operating profit was unfavorably impacted by the restructuring charge,
new computer systems expenses, unfavorable fixed cost absorption, and lower
sales volumes. Amortization of capitalized software costs related to the new
integrated computer systems in the U.S. and associated incremental operating
expenses began in January 1998 and totaled $1.8 million for the first six
months. Additionally, start-up costs of $1.2 million were incurred in the first
quarter related to the new U.S. computer systems. The Brazilian operations had
an operating loss of $2.1 million in the year-to-date period. In France,
operating profit improved as a result of higher French sales and production
volumes, but this improvement was partially offset by unfavorable changes in
average selling prices and sales mix, and changes in currency exchange rates.
14
<PAGE> 15
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Changes in currency exchange rates had an unfavorable impact of approximately
$1.5 million. Non-manufacturing expenses increased by $2.2 million during the
six month period. This increase was solely caused by expenses at the two
newly-acquired companies. Excluding expenses of the newly-acquired companies,
non-manufacturing expenses were five percent lower than in the corresponding
period of the prior year. Per ton wood pulp cost decreases compared with the
prior year favorably impacted operating profit by $0.6 million in the six month
period, although this benefit was offset in part by changes in selling prices.
NON-OPERATING EXPENSES
Interest expense increased by $0.8 million and $1.2 million in the three
and six month periods ended June 30, 1998, respectively, compared with the
corresponding periods of the preceding year. The increases were primarily a
result of increased debt related to acquisitions in Brazil and France and higher
interest rates in France, partially offset by changes in currency exchange
rates. Other income (expense) consists primarily of interest income and foreign
currency transaction gains and losses in the 1998 and 1997 periods and a
one-time favorable litigation recovery in France in the first quarter, 1998.
INCOME TAXES
The effective income tax rates for the three and six month periods ended
June 30, 1998 were 4.3 percent and 25.8 percent, respectively, compared with
37.1 percent and 37.2 percent for the respective corresponding periods of 1997.
The 1998 periods reflect the benefit of a reduction in the valuation allowance
recorded against certain French deferred income tax assets arising from net
operating loss carryforwards ("NOLs"). This adjustment reduced the provision for
income taxes by $5.2 million in the second quarter of 1998. The reduction in the
valuation allowance was recorded because of continued strong earnings and
projected future earnings at the French businesses that utilize the NOLs,
reducing the uncertainty that these NOLs will be fully utilized in the future.
Excluding the impact of this adjustment, the effective income tax rates for the
three and six month periods ended June 30, 1998 would have been 41.7 percent and
41.2 percent, respectively. These higher effective income tax rates compared
with the corresponding periods of 1997 were primarily the result of an increase
in the corporate income tax rate enacted in France in November 1997 from 36.67
percent to 41.67 percent for 1997 and 1998, retroactive to January 1, 1997, and
to 40.00 percent for 1999. This higher French income tax rate increased the
provision for income taxes by approximately $0.8 million and $1.7 million, and
reduced net income by approximately $0.7 million and $1.4 million, for the three
and six month periods ended June 30, 1998, respectively. The increase applicable
to the 1997 period was recorded in the fourth quarter of 1997 when the income
tax rate change was enacted.
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 six months ended June 30, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
(U.S. $ IN MILLIONS)
1998 1997
------- -------
<S> <C> <C>
Net cash provided by operations.................... $ 27.7 $ 17.7
Increase in operating working capital.............. (11.8) (22.6)
Capital expenditures............................... 12.5 11.0
Capitalized software costs......................... 1.9 3.2
</TABLE>
15
<PAGE> 16
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company's primary source of liquidity is cash flow from operations,
which is principally obtained through operating earnings. The Company's net cash
provided by operations increased from $17.7 million for the six months ended
June 30, 1997 to $27.7 million for the six months ended June 30, 1998, primarily
as a result of changes in operating working capital, excluding the added working
capital obtained with the two recent acquisitions. Changes in operating working
capital contributed unfavorably to cash flow in both periods, by $11.8 million
and $22.6 million in the six month periods ended June 30, 1998 and 1997,
respectively. Excluding working capital of the two acquisitions, the 1998
increase in working capital was primarily due to a decrease in accounts payable,
mainly associated with 1998 payments for capital expenditures included in
accounts payable at December 31, 1997, and an increase in accounts receivable
mainly due to higher June 1998 sales compared with sales in December 1997. The
1997 increase in working capital was 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
quarter ended June 1997.
Cash provided by operations exceeded the level of capital spending during
the first six months of 1998. Capital spending for the six months ended June 30,
1998 included $1.3 million toward the expansion of the Malaucene, France mill,
$1.0 million toward upgrades to a paper machine at the Spotswood mill, and $0.7
million to complete an upgrade to a paper machine at the Ancram mill.
In addition to capital spending, the Company incurred, and deferred on the
balance sheet, additional software development costs of $1.9 million in the six
month period ended June 30, 1998, toward new company-wide integrated computer
systems. These computer systems are replacing the previously used Kimberly-Clark
systems and ensure the Company's computer systems are able to handle the change
to the year 2000.
In February 1998, two acquisitions were completed. On February 2, 1998,
SM-Spain paid approximately $62.0 million in cash for 99.97 percent ownership
interest in Pirahy. In connection with the acquisition of Pirahy, the Company
modified its existing credit agreement to provide a $20.0 million term loan to
SM-Spain. SM-Spain borrowed the remaining funds for the transaction from
SM-France, which in turn utilized its existing cash balances and borrowings from
its revolving credit facilities. Additionally, on February 11, 1998,
SM-Enterprises paid 37.2 million French francs (approximately $6.1 million) in
cash and assumed approximately $5.8 million in existing net debt for all of the
outstanding shares of Ingefico, S.A. and 97.1 percent of the outstanding shares
of its pulp and specialty paper manufacturing subsidiaries, Groupe SAPAM and
Papeteries de la Moulasse. Subsequently, SM-Enterprises acquired all the
remaining shares of the minority interest for $0.2 million in cash.
During the first quarter of 1998, the Ancram mill successfully completed a
rebuild of the wet end of a long fiber paper machine. During March 1997, the
Quimperle, France mill successfully started up its new long fiber paper machine.
This machine continues to operate well. During the first quarter of 1998, the
Quimperle mill initiated a speed-up program for this machine. By late 1998, this
speed-up program and the completed Ancram project will, together, increase the
Company's annual long fiber production capacity by 10 to 12 percent. In the
second quarter of 1998, the Company initiated an expansion of the Malaucene
mill. The expansion plan is expected to increase the mill's capacity for
finished tipping paper by approximately 45 percent. The plan includes spending
for increased printing and slitting capabilities and should be completed in the
second half of 1999.
16
<PAGE> 17
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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. No repurchases of common stock had
been made as of June 30, 1998. In the third quarter of 1998, the Company has
begun repurchasing some of its common stock under this program.
On July 30, 1998, the Board of Directors declared a quarterly cash dividend
of fifteen cents per share of common stock. The dividend will be payable on
September 14, 1998 to stockholders of record on August 10, 1998.
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, 1998. 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 June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which will be effective no later than
for the Company's 1998 Annual Report on Form 10-K. This new statement may affect
the Company's financial statement disclosures. The Company is evaluating how to
implement the new disclosure requirements.
Also, in June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which will require that all
derivative financial instruments be recognized as either assets or liabilities
in the balance sheet. SFAS No. 133 will be effective no later than for the
Company's first quarter of 2000. The Company is evaluating the effects of this
new statement and when to implement the new requirements.
OUTLOOK
During the remainder of 1998, the Company expects to benefit from continued
growth in sales volumes outside the United States, reflecting increased demand
for the Company's products and sales from recently acquired companies in Brazil
and France. Cost savings are expected to continue from recently implemented
capital projects and will begin to be realized from the Spotswood mill
restructuring program. The higher corporate income tax rate in France is
expected to negatively impact full year 1998 earnings by $.15 to $.20 per share
compared with 1997. Amortization of capitalized software costs related to the
new integrated computer systems in the U.S. began in January and is expected to
reduce full year 1998 earnings by approximately $.05 per share compared with
1997. Additionally, operating expenses for the new computer network in the U.S.
over and above the amount previously paid to Kimberly-Clark for utilization of
its systems are expected to have an unfavorable full year effect of
approximately $.08 per share in 1998 compared with 1997. The per ton cost of
wood pulp had declined somewhat in the first quarter of 1998, but increased
slightly in June 1998. The Company does not expect significant changes in the
per ton cost of wood pulp during the remainder of this year.
17
<PAGE> 18
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company has begun to integrate the Brazilian and French acquisitions,
which occurred in February 1998. Earnings of the Company's Brazilian operations
are currently under pressure as a result of weakness in the Brazilian cigarette
and paper markets. Some improvement is expected during the balance of the year
in the Company's Brazilian operations compared with second quarter performance,
although an operating loss is expected in Brazil for the balance of 1998. 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. However, order entry for tobacco-related papers in the U.S. is
stronger at the beginning of the third quarter than it was during the second
quarter. The direction of the U.S. cigarette market remains unclear at this
time, given potential tobacco settlement legislation, the effect of lower
exports of cigarettes by the Company's customers in the U.S. and the continuing
adverse publicity for the tobacco industry.
The Company expects capital spending for 1998 to be approximately $35 to
$40 million in total, focused primarily on internal capacity expansion, product
quality improvements and cost reduction opportunities. In addition to capital
spending, the Company expects to incur approximately $4 to $5 million of
additional capitalized software costs in 1998, primarily in France. Start-up of
the new systems in France is expected to begin in mid-1999.
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. Certain such factors that could cause the Company's future results to
differ materially from those expressed in any such forward-looking statements
are discussed in the Company's 1997 Annual Report on Form 10-K, Part I, Item 7,
under the heading "Factors That May Affect Future Results".
18
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Under the terms of the spin-off, the Company assumed liability for and
agreed to indemnify Kimberly-Clark from litigation arising out of the operation
of the Company's predecessor businesses, including the following new case:
In June 1998, three union health and welfare funds on behalf of themselves
and "all labor-management multi-employer health and welfare trust funds
operating in the State of Utah", instituted a purported class action in the
U.S. District Court for the District of Utah, Central Division, against
several tobacco companies, tobacco industry trade associations, law firms
and component suppliers including Kimberly-Clark and LTRI, seeking to
recover compensatory and punitive damages in an unspecified amount for
health care expenditures caused by tobacco use, treble damages and
attorneys' fees and declaratory, injunctive and other equitable relief. The
21 count complaint sets forth several theories of liability including
violations of federal and Utah RICO statutes, the Sherman Act, fraud and
misrepresentation, breach of express and implied warranties, negligence,
strict liability, aiding and abetting and conspiracy. Among other things,
the complaint alleges that the tobacco companies used the reconstituted
process "to triple or even quadruple the nicotine content of the
reconstituted tobacco in their cigarettes" and, further, that
Kimberly-Clark manufactured and sold reconstituted tobacco knowing that it
would be used by cigarette companies to manipulate the level of nicotine, a
substance known to be addictive, in their cigarettes.
As component suppliers, the Company believes that Kimberly-Clark and LTRI
have meritorious defenses to this case. LTRI will seek to be dismissed from this
action on the grounds that it is not subject to the personal jurisdiction of the
Utah court. Due to the uncertainties of litigation, the Company cannot predict
its outcome and 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
will be vigorously defended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on
Thursday, April 23, 1998, 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 13, 1998:
Three nominees, Mr. Wayne H. Deitrich, Mr. Leonard J.
Kujawa and Mr. Larry B. Stillman were elected as
Class III Directors to serve a three-year term
expiring at the 2001 Annual Meeting of Stockholders.
Other Directors continuing in office are:
Ms. Claire L. Arnold and Mr. Laurent G.
Chambaz Class I Directors whose terms will
expire at the 1999 Annual Meeting of
Stockholders, and
Mr. K.C. Caldabaugh, Mr. Jean-Pierre Le
Hetet and Mr. Richard D. Jackson Class II
Directors whose terms will expire at the
2000 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. Deitrich 13,803,585 - 125,289 - -
Director: Mr. Kujawa 13,802,908 - 125,966 - -
Director: Mr. Stillman 13,804,393 - 124,481 - -
</TABLE>
19
<PAGE> 20
ITEM 5. OTHER INFORMATION
On July 14, 1998, the Company announced that it reached agreement with Philip
Morris Incorporated on an amendment of the domestic supply agreement for fine
papers. The term of the revised agreement is from April 1, 1998 to June 30,
2002. The two companies had been operating under an extension to their original
supply agreement. The amended strategic supply agreement continues the Company's
ongoing supply of tobacco-related papers to Philip Morris' U.S. operations. The
amended agreement gives Philip Morris the right to purchase five percent of its
requirements from other suppliers in 1998 and ten percent in future years. The
Company expects that as long as it has sufficient capacity and continues to meet
Philip Morris' requirements, Philip Morris will have no incentive to access
other sources of supply. A supplement to the agreement creates the potential for
a seven-year exclusive supply arrangement with Philip Morris U.S.A. for an
experimental new product currently being jointly developed. The two companies
have also entered into a licensing and royalty agreement covering future
commercialization of this potential new paper product. Similar to arrangements
in the original strategic supply agreement, there is a right to extend or
terminate the amended strategic supply agreement by either party giving notice
24 months before the end of the then-current contract term. If the decision were
to terminate, the amended contract provides for a two-year phase-out.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
15. Independent Accountants' Report, dated July 23, 1998 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) On April 20, 1998, the Company filed a Current Report on Form 8-K
dated April 15, 1998, which reported the Company's announcement of
a job elimination and early retirement program at its Spotswood,
New Jersey mill.
(2) On July 7, 1998, the Company filed a Current Report on Form 8-K
dated July 7, 1998, which reported the Company's expected second
quarter earnings.
(3) On July 14, 1998, the Company filed a Current Report on Form 8-K
dated July 14, 1998, which reported that the Company had signed a
new Supply Agreement with Philip Morris Incorporated.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Schweitzer-Mauduit International, Inc.
(Registrant)
By: /s/ PAUL C. ROBERTS
-----------------------------------
Paul C. Roberts
Chief Financial Officer and
Treasurer
(duly authorized officer and
principal financial officer)
By: /s/ WAYNE L. GRUNEWALD
-----------------------------------
Wayne L. Grunewald
Controller
(principal accounting officer)
August 10, 1998
21
<PAGE> 22
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ------------
<S> <C> <C>
15. --- Independent Accountants' Report, dated July 23, 1998 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 June 30, 1998, the
related consolidated statements of income for the three and six month periods
ended June 30, 1998 and 1997, and the related consolidated statements of cash
flow for the six month periods ended June 30, 1998 and 1997. 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, 1997 and the related consolidated statements of income
and cash flow for the year then ended (not presented herein); and in our report
dated January 23, 1998, 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, 1997 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 23, 1998
<PAGE> 1
EXHIBIT 23
August 7, 1998
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
periods ended June 30, 1998 and 1997 as indicated in our report dated July 23,
1998; 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, 1998, 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,
1998, 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-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 71,400
<ALLOWANCES> 0
<INVENTORY> 68,900
<CURRENT-ASSETS> 150,300
<PP&E> 442,200
<DEPRECIATION> 177,200
<TOTAL-ASSETS> 453,000
<CURRENT-LIABILITIES> 114,400
<BONDS> 104,000
0
0
<COMMON> 1,600
<OTHER-SE> 191,700
<TOTAL-LIABILITY-AND-EQUITY> 453,000
<SALES> 278,300
<TOTAL-REVENUES> 278,300
<CGS> 219,500
<TOTAL-COSTS> 219,500
<OTHER-EXPENSES> 22,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,200
<INCOME-PRETAX> 33,700
<INCOME-TAX> 8,700
<INCOME-CONTINUING> 22,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,200
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.36
</TABLE>
