<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, 1999
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, 1999, 15,702,808 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,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales ........................................ $ 125.5 $ 134.4 $ 373.8 $ 412.7
Cost of products sold ....................... 98.3 107.7 292.5 327.2
-------- -------- -------- --------
Gross Profit ..................................... 27.2 26.7 81.3 85.5
Selling expense ............................. 4.7 5.1 13.9 15.3
Research expense ............................ 1.6 1.7 5.0 4.7
General expense ............................. 4.7 4.7 14.6 14.1
-------- -------- -------- --------
Operating Profit ................................. 16.2 15.2 47.8 51.4
Interest expense ............................ (1.4) (1.6) (4.3) (4.8)
Other income, net ........................... -- 0.2 1.9 0.9
-------- -------- -------- --------
Income Before Income Taxes and Minority Interest . 14.8 13.8 45.4 47.5
Provision for income taxes .................. 5.8 5.6 17.5 14.3
-------- -------- -------- --------
Income Before Minority Interest .................. 9.0 8.2 27.9 33.2
Minority interest in earnings of subsidiaries 1.4 1.4 4.1 4.2
-------- -------- -------- --------
Net Income ....................................... $ 7.6 $ 6.8 $ 23.8 $ 29.0
======== ======== ======== ========
Net Income per Common Share:
Basic ....................................... $ .48 $ .43 $ 1.50 $ 1.81
======== ======== ======== ========
Diluted ..................................... $ .48 $ .43 $ 1.50 $ 1.79
======== ======== ======== ========
Cash Dividends Declared per Common Share ......... $ .15 $ .15 $ .45 $ .45
======== ======== ======== ========
</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,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents .......................................................... $ 5.6 $ 6.7
Accounts receivable ................................................................ 78.5 69.5
Inventories ........................................................................ 62.8 69.4
Current income tax refunds receivable .............................................. 0.8 2.8
Deferred income tax benefits ....................................................... 3.6 5.2
Prepaid expenses ................................................................... 3.8 2.7
------- -------
Total Current Assets ........................................................... 155.1 156.3
------- -------
Gross Property ......................................................................... 458.5 479.3
Less accumulated depreciation ...................................................... 200.7 196.1
------- -------
Net Property ................................................................... 257.8 283.2
------- -------
Noncurrent Deferred Income Tax Benefits ................................................. 10.7 19.7
------- -------
Deferred Charges and Other Assets ....................................................... 16.5 15.5
------- -------
Total Assets ............................................................................ $ 440.1 $ 474.7
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt .................................................. $ 3.5 $ 4.4
Other short-term debt .............................................................. 8.7 11.3
Accounts payable ................................................................... 41.0 58.1
Accrued expenses ................................................................... 57.9 50.7
------- -------
Total Current Liabilities....................................................... 111.1 124.5
------- -------
Long-Term Debt .......................................................................... 104.7 108.4
------- -------
Deferred Income Taxes ................................................................... 12.8 12.7
------- -------
Other Noncurrent Liabilities ............................................................ 23.0 24.1
------- -------
Minority Interest ....................................................................... 6.0 8.0
------- -------
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,
16,078,733 shares issued at both September 30, 1999 and December 31, 1998 ...... 1.6 1.6
Additional paid-in capital ......................................................... 60.7 60.7
Common stock in treasury, at cost - 375,925 and 154,668 shares at September 30, 1999
and December 31, 1998, respectively ............................................ (7.1) (3.8)
Retained earnings .................................................................. 151.4 134.8
Accumulated other comprehensive income (loss) -
Unrealized foreign currency translation adjustments .............................. (24.1) 3.7
------- -------
Total Stockholders' Equity ..................................................... 182.5 197.0
------- -------
Total Liabilities and Stockholders' Equity .............................................. $ 440.1 $ 474.7
======= =======
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
3
<PAGE> 4
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
U.S. $ IN MILLIONS
(UNAUDITED)
<TABLE>
ACCUMULATED
COMMON STOCK ISSUED TREASURY STOCK ADDITIONAL OTHER
------------------- -------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) TOTAL
------ ------ ------ ------ ------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 ................. 16,065,443 $ 1.6 $ 60.3 $113.5 $ 4.1 $179.5
Net income for the nine months
ended September 30, 1998 .................. 29.0 29.0
Adjustments to unrealized foreign
currency translation ...................... 0.5 0.5
------
Comprehensive income........................ 29.5
Dividends declared ($0.45 per share) ...... (7.2) (7.2)
Purchases of treasury stock ................ 155,700 $ (3.8) (3.8)
Stock issued to directors as compensation 1,350 --
Stock issued for options exercised ......... 11,940 -- -- -- 0.3 -- -- 0.3
---------- ------ ------- ------ ------- ------ ------ ------
BALANCE, SEPTEMBER 30, 1998 ................ 16,078,733 1.6 155,700 (3.8) 60.6 135.3 4.6 198.3
Net income for the three months
ended December 31, 1998 ................... 2.0 2.0
Adjustments to unrealized foreign
currency translation ...................... (0.9) (0.9)
------
Comprehensive income........................ 1.1
Dividends declared ($0.15 per share) ...... (2.4) (2.4)
Stock issued to directors as compensation (1,032) --
Adjustments due to rounding ................ -- -- -- -- 0.1 (0.1) -- --
---------- ------ ------- ------ ------- ------ ------ ------
BALANCE, DECEMBER 31, 1998 .................. 16,078,733 1.6 154,668 (3.8) 60.7 134.8 3.7 197.0
Net income for the nine months
ended September 30, 1999 ................... 23.8 23.8
Adjustments to unrealized foreign
currency translation ....................... (27.8) (27.8)
------
Comprehensive loss........................... (4.0)
Dividends declared ($0.45 per share) ....... (7.2) (7.2)
Purchases of treasury stock ................. 226,400 (3.4) (3.4)
Stock issued to directors as compensation ... -- -- (5,143) 0.1 -- -- -- 0.1
---------- ------ ------- ------ ------- ------ ------ ------
BALANCE, SEPTEMBER 30, 1999 ................. 16,078,733 $ 1.6 375,925 $ (7.1) $ 60.7 $151.4 $(24.1) $182.5
========== ====== ======= ====== ======= ====== ====== ======
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
4
<PAGE> 5
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
U.S. $ IN MILLIONS
(UNAUDITED)
<TABLE>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1999 1998
---- ----
<S> <C> <C>
Operations
Net income .............................................. $ 23.8 $ 29.0
Depreciation and amortization ........................... 16.5 16.7
Deferred income tax provision ........................... 7.2 5.3
Minority interest in earnings of subsidiaries ........... 4.1 4.2
Other ................................................... (0.7) 5.0
Changes in operating working capital, excluding
effects of acquisitions ............................ (11.4) (13.8)
------ ------
Cash Provided by Operations .................... 39.5 46.4
------ ------
Investing
Capital spending ........................................ (20.3) (23.3)
Capitalized software costs .............................. (2.7) (3.0)
Acquisitions, net of cash acquired ...................... -- (65.4)
Other ................................................... (0.7) (2.2)
------ ------
Cash Used for Investing ........................ (23.7) (93.9)
------ ------
Financing
Cash dividends paid to SWM stockholders ................. (7.2) (7.2)
Cash dividends paid to minority owner ................... (5.2) (5.3)
Changes in short-term debt .............................. (2.6) 8.4
Proceeds from issuances of long-term debt ............... 6.1 24.5
Payments on long-term debt .............................. (4.6) (4.2)
Purchases of treasury stock ............................. (3.4) (3.8)
Proceeds from issuances of common stock ................. -- 0.3
------ ------
Cash Provided by (Used for) Financing .......... (16.9) 12.7
------ ------
Decrease in Cash and Cash Equivalents ........................ (1.1) (34.8)
Cash and Cash Equivalents at Beginning of Period ............. 6.7 37.2
------ ------
Cash and Cash Equivalents at End of Period ................... $ 5.6 $ 2.4
====== ======
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
5
<PAGE> 6
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 1. 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
of its majority-owned subsidiaries, including the results, since the beginning
of February 1998, of two companies acquired during February 1998 (see Note 7).
All material intercompany and interdivisional 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 1998 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 1998
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 nine month periods ended September 30, 1999 were
approximately 15,756,600 and 15,849,200, respectively, and for the three and
nine month periods ended September 30, 1998 were 16,006,600 and 16,050,600,
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 nine month periods ended September 30, 1999 were approximately 15,759,400
and 15,851,000, respectively, and for the three and nine month periods ended
September 30, 1998 were 16,099,600 and 16,240,700, 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:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
At the lower of cost on the First-In, First-Out (FIFO)
and weighted average methods or market:
Raw materials ........................................... $ 23.7 $ 25.9
Work in process ......................................... 9.1 9.3
Finished goods .......................................... 23.9 26.6
Supplies and other ...................................... 12.2 13.2
------- -------
68.9 75.0
Excess of FIFO cost over Last-In, First-Out (LIFO) cost ...... (6.1) (5.6)
------- -------
Total ................................................. $ 62.8 $ 69.4
======= =======
</TABLE>
6
<PAGE> 7
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, 1999 were 39.2 percent and 38.5 percent, respectively, compared
with 40.6 percent and 30.1 percent for the respective corresponding periods of
1998. The effective income tax rate for the nine month period of 1998 reflected
the benefit of a reduction in the valuation allowance recorded against certain
French deferred income tax assets arising from net operating loss
carryforwards. This adjustment reduced the deferred provision for income taxes
by $5.2 in the second quarter of 1998. Excluding the impact of this adjustment,
the effective income tax rate for the nine month period ended September 30,
1998 would have been 41.1 percent. The lower 1999 effective income tax rates
compared with the corresponding periods of 1998, excluding the 1998 income tax
adjustment, were primarily due to a decrease in the French corporate income tax
rate from 41.7 percent for 1998 to 40.0 percent for 1999 and a greater portion
of 1999 earnings generated in Brazil, which has a lower income tax rate than
the Company's average rate.
NOTE 5. 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, and analogous New Jersey statutes, in
connection with the Global Landfill Reclaiming Corporation ("Global Landfill")
waste disposal site in Old Bridge, New Jersey. The Global Landfill was utilized
by Kimberly-Clark's Spotswood, New Jersey mill. The Company has assumed
Kimberly-Clark's liabilities for the Global Landfill site. The Company
continues to participate in the remediation of the Global Landfill as a member
of a group of PRP's that entered into a consent decree with the state of New
Jersey in 1993.
The Company also assumed responsibility to administer a consent order
between Kimberly-Clark and the Massachusetts Department of Environmental
Protection ("MDEP") governing the post-closure care of the Willow Hill Landfill
in Lee, Massachusetts. The Company has taken all practical steps to comply with
the consent order and has reduced the concentration of landfill gases to the
levels specified in the consent order at 30 feet below ground level in 24 out
of 26 gas monitoring wells. Based on discussions with MDEP, the Company does
not expect that any penalties or fines will be assessed against the Company as
a result of its failure to achieve full compliance with the consent order at 30
feet below ground level at all of the gas monitoring wells. The Company will
continue its current remediation activities on a reduced monitoring schedule at
this landfill pending receipt of a final decision from MDEP on a request by the
Company to amend the consent order to modify the requirement for compliance at
30 feet below ground level.
7
<PAGE> 8
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
The Company 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 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. For these purposes,
the Company anticipates that it will incur capital expenditures of
approximately $2 to $4 annually in 1999 and 2000. The major projects included
in these estimates include upgrading wastewater treatment facilities at various
locations and installation of ink solvent treatment equipment 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 6. 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 a case captioned Edward J.
Sweeney, et. al. v. American Tobacco Company, et. al. (Court of Common Pleas of
Allegheny County, Pennsylvania). On October 6, 1999, the court entered an order
dismissing, without prejudice, Kimberly-Clark from the case.
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 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. Subsequently, Pirahy was renamed Schweitzer-Mauduit do Brasil, S.A.
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 S.A. ("Groupe SAPAM") and Papeteries de la Moulasse
S.A., located in St. Girons, France. Subsequently, SM-Enterprises acquired all
the remaining shares of Groupe SAPAM for $0.2 in cash. SM-Enterprises and
Ingefico, S.A. were then merged into Groupe SAPAM. Papeteries de la Moulasse
S.A. was renamed Papeteries de St. Girons S.A.
The operating results of the newly-acquired companies are included in the
Consolidated Statements of Income beginning February 1, 1998. Unaudited
consolidated pro forma net sales, net income and diluted earnings per share,
assuming the acquisitions had occurred at the beginning of 1998, would have
been $421.9, $29.1 and $1.80, respectively, for the nine month period ended
September 30, 1998.
8
<PAGE> 9
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 8. BUSINESS SEGMENT REPORTING
The Company is operated and managed based on the geographical location of
its manufacturing operations: the United States, France and Brazil. These
business segments manufacture and sell cigarette, tipping and plug wrap papers
used to wrap various parts of a cigarette, reconstituted tobacco products and
paper products used in cigarette packaging. While the products are comparable
in each segment, they vary based on the technological capabilities of each of
the manufacturing operations and the respective markets and customers served.
Sales by a segment into markets primarily served by a different segment occur
where specific product needs cannot be cost effectively met by the
manufacturing operations in that segment.
Tobacco industry products comprised approximately 90 percent of the
Company's consolidated net sales in the periods presented. The Company's
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 segment disclosure in the following tables, the term
"United States" includes operations in the United States and Canada. The
Canadian operations produce flax fiber used as raw material in the U.S.
operations. The Company's Brazilian operations, acquired on February 2, 1998,
and the operations of the French business acquired on February 11, 1998 are
included in the Company's consolidated financial statements since the beginning
of February 1998.
Intercompany sales of products between segments are made at market prices
and are referred to as intersegment sales. Expense amounts not associated with
segments are referred to as unallocated expenses. Assets reported by segment
represent assets which are directly used and an allocated portion of jointly
used assets. These assets include receivables from other segments, which are
referred to as intersegment eliminations.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------- % OF CONSOLIDATED
SEPTEMBER 30, SEPTEMBER 30, % CHANGE -----------------
NET SALES 1999 1998 VS. 1998 1999 1998
- --------- ---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
United States ......... $ 39.1 $ 47.4 -17.5% 31.2% 35.3%
France ................ 72.5 72.4 +0.1 57.8 53.9
Brazil ................ 14.2 16.9 -16.0 11.3 12.5
------- -------
Subtotal ......... 125.8 136.7
Intersegment sales by:
United States .... (0.1) (2.0) (0.1) (1.5)
France ........... (0.2) (0.3) (0.2) (0.2)
Brazil ........... -- -- -- --
------- ------- ------ ----- -----
Consolidated ... $ 125.5 $ 134.4 -6.6% 100.0% 100.0%
======= ======= ====== ===== =====
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------- % OF CONSOLIDATED % RETURN ON SALES
SEPTEMBER 30, SEPTEMBER 30, % CHANGE ----------------- -----------------
OPERATING PROFIT 1999 1998 VS. 1998 1999 1998 1999 1998
- ---------------- ---- ---- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
United States .......... $ 1.1 $ 1.4 - 21.4% 6.8% 9.2% 2.8% 3.0%
France ................. 15.2 14.7 + 3.4 93.8 96.7 21.0 20.3
Brazil ................. 0.8 0.4 +100.0 4.9 2.6 5.6 2.4
Unallocated expenses ... (0.9) (1.3) (5.5) (8.5)
------ ------ ----- -----
Consolidated...... $ 16.2 $ 15.2 + 6.6% 100.0% 100.0% 12.9% 11.3%
====== ====== ===== =====
</TABLE>
9
<PAGE> 10
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
------------------------- % OF CONSOLIDATED
SEPTEMBER 30, SEPTEMBER 30, % CHANGE -----------------
NET SALES 1999 1998 VS. 1998 1999 1998
- --------- ---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
United States ......... $ 124.1 $ 146.2 -15.1% 33.2% 35.4%
France ................ 212.3 232.4 -8.6 56.8 56.3
Brazil ................ 37.8 43.4 -12.9 10.1 10.5
------- -------
Subtotal......... 374.2 422.0
Intersegment sales by:
United States........ (0.1) (7.3) -- (1.7)
France............... (0.3) (2.0) (0.1) (0.5)
Brazil............... -- -- -- --
------- -------- ----- -----
Consolidated ...... $ 373.8 $ 412.7 -9.4% 100.0% 100.0%
======= ======== ===== =====
<CAPTION>
FOR THE NINE MONTHS ENDED
------------------------- % OF CONSOLIDATED % RETURN ON SALES
SEPTEMBER 30, SEPTEMBER 30, % CHANGE ------------------ ----------------
OPERATING PROFIT 1999 1998 VS. 1998 1999 1998 1999 1998
- ---------------- ---- ---- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
United States ........... $ 6.9 $ 7.3 -5.5% 14.4% 14.2% 5.6% 5.0%
France .................. 41.3 50.1 -17.6 86.4 97.5 19.5 21.6
Brazil .................. 3.3 (1.7) N.M. 6.9 (3.3) 8.7 (3.9)
Unallocated expenses .... (3.7) (4.3) (7.7) (8.4)
------- ------- ------ -----
Consolidated...... $ 47.8 $ 51.4 -7.0% 100.0% 100.0% 12.8% 12.5%
======= ======= ===== =====
</TABLE>
N.M. - Not meaningful.
<TABLE>
% OF CONSOLIDATED
SEPTEMBER 30, DECEMBER 31, -----------------
TOTAL ASSETS 1999 1998 1999 1998
------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
United States......................... $ 150.4 $ 156.3 34.2% 32.9%
France................................ 243.2 254.5 55.2 53.6
Brazil................................ 48.3 67.3 11.0 14.2
Intersegment eliminations............. (1.8) (3.4) (0.4) (0.7)
------- -------- ----- -----
Consolidated................. $ 440.1 $ 474.7 100.0% 100.0%
======== ======== ===== =====
</TABLE>
More than 65 percent of the Company's assets and liabilities are outside
of the United States, substantially all of which are in France or 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 (loss)
as unrealized foreign currency translation adjustments. In January 1999, the
Brazilian government allowed the Brazilian real to float freely versus the U.S.
dollar, which resulted in an immediate and substantial devaluation of the
Brazilian real against the U.S. dollar. Negative unrealized foreign currency
translation adjustments, as well as the total asset reductions shown above, for
the nine month period ended September 30, 1999 are substantially all due to
this devaluation of the Brazilian real and a stronger U.S. dollar against the
French franc at September 30, 1999 versus December 31, 1998.
NOTE 9. NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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
on the balance sheet. In July 1999, the FASB issued SFAS No. 137, which delays
the effective date for the new requirements of SFAS No. 133 by one year. As a
result, SFAS No. 133 will be effective no later than for the Company's first
quarter of 2001. The Company is evaluating the effects of this new statement
and when to implement the new requirements.
10
<PAGE> 11
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 the tables presented
in Note 8 to the Notes to Unaudited Consolidated Financial Statements
appropriately discuss and analyze the comparative results of operations and the
financial condition of the Company for the periods covered.
RESULTS OF OPERATIONS
Net Sales
Net sales decreased by $8.9 million in the three month period ended
September 30, 1999, compared with the corresponding period of the preceding
year. This decrease was a result of unfavorable currency exchange rates, lower
average selling prices and changes in sales volumes. Changes in currency
exchange rates had an unfavorable impact of $3.9 million on the net sales
comparison, as a result of a weaker French franc versus the U.S. dollar
compared with the same quarter of the prior year and the unfavorable effect of
the currency devaluation in Brazil earlier this year. Unfavorable sales mix and
lower selling prices compared with the same quarter of the prior year resulted
in a reduction in net sales of $3.0 million. Net sales decreased by $2.0
million in the quarter due to changes in sales volumes, although on a
consolidated basis sales volumes were essentially the same as the comparable
period of the prior year. Sales volumes decreased for the quarter at the U.S.
business unit by 12 percent compared with the same three month period of 1998,
primarily due to lower domestic cigarette shipments and a decline in the export
of cigarettes by U.S. cigarette manufacturers. In Brazil, sales volumes were
unchanged from the prior year level, with sales outside of Brazil essentially
offsetting weakness within the Brazilian market. Sales volumes from the French
businesses improved by seven percent, primarily as a result of increased
shipments to Western Europe, Russia and Eastern Europe.
Net sales decreased by $38.9 million in the nine month period ended
September 30, 1999, compared with the corresponding period of the preceding
year. This decrease was essentially due to the same factors as discussed above
for the three month period. An additional month of sales in the nine month
period of 1999 by the Brazilian and French companies acquired in February 1998
contributed favorably to the net sales comparison by $7.2 million in the
period, partially offsetting the negative factors. Excluding the additional
month of sales for the acquired entities, net sales decreased by $27.5 million
in the period due to changes in sales volumes. Excluding the additional month
of sales for the acquired entities, total sales volumes declined by seven
percent, with declines of nine percent in the United States, eight percent in
Brazil and five percent in France. Unfavorable sales mix and lower selling
prices compared with the same period of the prior year resulted in a reduction
in net sales of $12.3 million. Changes in currency exchange rates had an
unfavorable impact of $6.3 million on the net sales comparison, as a result of
the unfavorable effect of the currency devaluation in Brazil and the weaker
French franc versus the U.S. dollar.
11
<PAGE> 12
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Operating Profit
Operating profit increased by $1.0 million in the three month period ended
September 30, 1999, compared with the corresponding period of the preceding
year, as a result of improvements in the French and Brazilian businesses,
partially offset by reduced profitability in the United States. Operating
profit from the French business unit improved by $0.5 million due to increased
sales volumes, reduced manufacturing costs and lower selling expenses,
partially offset by lower average selling prices. Operating profit in Brazil
improved by $0.4 million as a result of better mill operations, cost reduction
programs and the positive impact of the Brazilian currency devaluation,
partially offset by lower average selling prices. Operating profit in the U.S.
declined by $0.3 million, with the benefits of cost savings programs and
improved mill operations partially offsetting the effect of lower production
and sales volumes. Non-manufacturing expenses decreased by $0.5 million during
the quarter primarily as a result of reduced selling expense. Changes in per
ton wood pulp costs compared with the same period of the prior year favorably
impacted operating expenses by $0.2 million, although this benefit was offset
by changes in selling prices.
Operating profit decreased by $3.6 million in the nine month period ended
September 30, 1999, compared with the corresponding period of the preceding
year. Operating profit from the French business unit declined by $8.8 million
due to lower sales volumes and lower average selling prices, partially offset
by reduced manufacturing costs. Operating profit in the United States declined
by $0.4 million, with the benefits of cost reduction programs and improved mill
operations, the absence of a one-time pre-tax charge of $1.7 million in the
1998 period related to a voluntary retirement program for certain hourly
employees at the Spotswood, New Jersey mill and the absence of $1.2 million in
1998 computer systems start-up expenses essentially offsetting the effect of
lower average selling prices and lower production and sales volumes in 1999. In
Brazil, improved mill operations, cost reduction programs and the positive
impact of the Brazilian currency devaluation resulted in an increase in
operating profit of $5.0 million for the nine-month period. Changes in per ton
wood pulp costs compared with the same period of the prior year favorably
impacted operating expenses by $2.8 million, although this benefit was offset
by changes in selling prices.
NON-OPERATING EXPENSES
Interest expense decreased by $0.2 million and $0.5 million in the three
and nine month periods ended September 30, 1999, respectively, compared with
the corresponding periods of the preceding year. These decreases were primarily
the result of lower average interest rates in 1999. The favorable effect of the
lower average interest rates in the nine month period were partially offset by
an additional month of interest expense related to debt associated with the
February 1998 acquisitions in Brazil and France. Other income, net consisted
primarily of interest income, royalties and foreign currency transaction gains
and losses in all of the 1999 and 1998 periods, recovery of prior period
business taxes in the year-to-date 1999 period and a favorable litigation
recovery in the year-to-date 1998 period.
12
<PAGE> 13
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INCOME TAXES
The effective income tax rates for the three and nine month periods ended
September 30, 1999 were 39.2 percent and 38.5 percent, respectively, compared
with 40.6 percent and 30.1 percent for the respective corresponding periods of
1998. The effective income tax rate for the nine month period of 1998 reflected
the benefit of a reduction in the valuation allowance recorded against certain
French deferred income tax assets arising from net operating loss
carryforwards. This adjustment reduced the deferred provision for income taxes
by $5.2 million in the second quarter of 1998. Excluding the impact of this
adjustment, the effective income tax rate for the nine month period ended
September 30, 1998 would have been 41.1 percent. The lower 1999 effective
income tax rates compared with the corresponding periods of 1998, excluding the
1998 income tax adjustment, were primarily due to a decrease in the French
corporate income tax rate from 41.7 percent for 1998 to 40.0 percent for 1999
and a greater portion of 1999 earnings generated in Brazil, which has a lower
income tax rate than the Company's average rate.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
(U.S. $ in millions)
Cash Provided by (Used for): 1999 1998
- ---------------------------- ---- ----
<S> <C> <C>
Changes in operating working capital........................................... $ (11.4) $ (13.8)
Operations..................................................................... 39.5 46.4
Capital spending............................................................... (20.3) (23.3)
Capitalized software costs..................................................... (2.7) (3.0)
</TABLE>
The Company's primary source of liquidity is cash flow from operations,
which is principally obtained through operating earnings. The Company's net
cash provided by operations decreased from $46.4 million for the nine months
ended September 30, 1998 to $39.5 million for the nine months ended September
30, 1999, primarily as a result of a decrease in net income. Changes in
operating working capital contributed unfavorably to cash flow in both periods,
by $11.4 million and $13.8 million in the nine month periods ended September
30, 1999 and 1998, respectively. The 1999 increase in working capital was
primarily due to a decrease in accounts payable, mainly associated with 1999
payments for capital expenditures and inventory purchases included in accounts
payable at December 31, 1998. Additionally, accounts receivable as of September
30, 1999 increased from the year-end 1998 amount because of increased export
sales having longer payment terms and higher quarter-end sales volumes.
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.
Capital spending for the nine months ended September 30, 1999 included
$7.2 million toward the speed-up of two machines in the French mills, $3.1
million toward the expansion of the Malaucene, France mill and $1.1 million
toward replacement of a yankee dryer in the Spay, France mill. During the first
nine months of 1998, capital spending included $2.5 million toward the
expansion of the Malaucene mill, $1.4 million to modify a paper machine at the
St. Girons, France mill, $1.2 million toward upgrades to a paper machine at the
Spotswood mill and $1.1 million toward speed-ups of two machines in the French
mills.
In addition to capital spending, in the nine month period ended September
30, 1999, the Company incurred and deferred on the balance sheet additional
software development costs of $2.7 million toward new integrated computer
systems, primarily in France. Additional modules successfully began operation
in France during the third quarter of 1999 without significant start-up
expenses. Other phases of the software development project in France are
scheduled to be placed in operation during the remainder of 1999 and during
2000, although a large portion of the installation of the new French systems
has been completed.
13
<PAGE> 14
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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 Groupe SAPAM for $0.2 million in cash.
In December 1998, the Company announced that the Board of Directors had
authorized the repurchase of shares of the Company's common stock for the
period January 1, 1999 through December 31, 2000 in an amount not to exceed $20
million. Through September 30, 1999, the Company has repurchased a total of
226,400 shares of its common stock for $3.4 million under this program. The
Company anticipates repurchasing additional common stock under this program
during the fourth quarter of 1999.
On October 28, 1999, the Company announced that the Board of Directors had
declared a quarterly cash dividend of fifteen cents per share of common stock.
The dividend will be payable on December 13, 1999 to stockholders of record on
November 8, 1999.
The Company's ongoing requirements for cash are expected to consist
principally of amounts required for capital expenditures, stockholder dividends
and working capital. Other than expenditures associated with environmental
matters (see Note 5 of the Notes to Unaudited Consolidated Financial
Statements) and other capital projects mentioned in the Outlook section below,
the Company had no material outstanding commitments as of September 30, 1999.
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 and overdraft facilities, will
be sufficient to fund its ongoing cash requirements.
NEW ACCOUNTING STANDARD
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 on the
balance sheet. In July 1999, the FASB issued SFAS No. 137, which delays the
effective date for the new requirements of SFAS No. 133 by one year. As a
result, SFAS No. 133 will be effective no later than for the Company's first
quarter of 2001. The Company is evaluating the effects of this new statement
and when to implement the new requirements.
OUTLOOK
Difficult market conditions are expected to continue through the remainder
of 1999. Despite recent stability in the Company's selling prices, the
generally weak pricing environment for the Company's paper products is expected
to continue due to excess worldwide production capacity for tobacco-related
papers and the result of global pricing negotiations with multinational
cigarette manufacturers.
14
<PAGE> 15
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Although sales volumes in the third quarter of 1999 were flat compared
with the same quarter of the prior year, they increased from the second quarter
of 1999 in each of the Company's business units. The Company's French business
unit's sales to Western and Eastern Europe and Russia have improved and are
expected to continue to improve compared with the prior year period. Sales
volumes in Brazil are expected to continue to be unfavorably affected by lower
cigarette consumption and production in Brazil due to economic conditions in
that country, as well as by a decline in the export of cigarettes manufactured
in Brazil as a result of taxes enacted on exports of cigarettes from Brazil.
However, the Company's increased sales efforts in other parts of Latin America,
together with improved product quality at our Brazilian mill, are resulting in
increased sales outside of Brazil by our Brazilian business. Sales volumes of
the U.S. business are expected to continue to be unfavorably affected by lower
U.S. cigarette consumption and production in the United States, due to
continuing adverse publicity and increases in the retail selling price of
cigarettes, as well as by a decline in the export of cigarettes manufactured in
the United States.
Production downtime was taken on certain machines in the United States,
France and Brazil during the most recent quarter to manage inventory levels,
and machine operating schedules were adjusted in order to operate the mills
efficiently. Further machine downtime is expected to be taken by the Company
during the fourth quarter of 1999 as needed in order to control inventories.
The Company's customers in the U.S. traditionally reduce their operating
schedules around holidays during the fourth quarter, which softens demand for
the Company's products and allows for additional maintenance and capital work.
Also, in Brazil, customer orders are typically lower in December due to a
January and February holiday season. However, this year, certain customers may
increase their year-end inventories as part of their contingency planning for
possible Year 2000 disruptions. As a result, the Company's fourth quarter
results in 1999 may be favorably impacted, which may offset some of the
softness in the Company's business normally experienced during the fourth
quarter.
Cost savings are expected to continue from recently implemented and
currently planned capital projects and from various cost reduction programs,
including the Spotswood mill retirement program, changes in the Brazilian
operations and a salaried workforce reduction program in the U.S. Earnings will
also benefit from the two major capital projects that began operation in Spay
and Malaucene during the second quarter of 1999.
The per ton cost of wood pulp increased during the second and third
quarters of 1999. The per ton cost of wood pulp is expected to increase further
during the fourth quarter of 1999, and the average cost during the fourth
quarter of 1999 is expected to exceed that of the comparable prior year period.
The Company's Brazilian business is expected to achieve positive operating
profit for the remainder of 1999 due to improved mill operations and savings
from cost reduction programs. The devaluation of the Brazilian currency during
the first quarter of 1999 is expected to have some continuing positive impact
on the Company's Brazilian operations, but not to the extent that it had
earlier in the year.
The Company expects capital spending to total approximately $30 million in
1999. The Company expects capital spending to total approximately $20 million
in 2000, focused primarily on product quality improvements and cost reduction
opportunities. Capitalized software costs are expected to total approximately
$3.5 million for the full year of 1999 and approximately $2 million in 2000.
15
<PAGE> 16
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
With the objective of continuing to offset the adverse effect of market
conditions by achieving improved mill operations and cost reduction programs,
management's current expectation is that diluted earnings per share for full
year 1999 will exceed the $1.80 per share achieved in 1998, excluding one-time
items recorded in 1998. Fourth quarter 1999 diluted earnings per share is
expected to be an improvement over the comparable prior year quarter, excluding
one-time items.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Many factors outside the control of the Company could impact the Company's
results. The following important factors, among others, in some cases have
affected, and in the future could affect, the Company's actual results and
could cause the Company's actual results for 1999 and beyond, to differ
materially from those expressed in any forward-looking statements made by, or
on behalf of, the Company.
Year 2000 Compliance
Many computer systems and other equipment with embedded chips or
processors utilize computer programs written using two digits to represent the
year rather than four digits. These programs may not properly recognize a year
"20XX". As a result, these programs may be unable to accurately process certain
data before, during or after the year 2000 and could result in major
governmental and business systems failures or miscalculations causing
disruptions in operations. This problem is commonly referred to as the "Year
2000" issue.
Because of the numerous information systems, mill process controls and
operating systems, and vendors and service providers that the Company uses, as
well as the Company's many customers and customer locations around the world,
the Company cannot exclude the possibility that there may be some disruption in
its business due to the Year 2000 issue. Due to the interdependent nature of
the Company and its systems with those of so many customers, vendors and
service providers, such as fuel oil suppliers and electric utilities, as well
as domestic and foreign governmental agencies, the Company and its operating
subsidiaries are exposed to many possible systems failures or processing
errors. As a result, the Company and its operating subsidiaries could be
materially adversely affected if utilities, private businesses and governmental
agencies with which they do business or that provide essential materials or
services are not Year 2000 compliant. The Company believes that the most
reasonably likely worst case scenarios would be temporary mill closings, delays
in the receipt of supplies, delays in the delivery of its products, delays in
collection of amounts due the Company, delays in payment of amounts owed by the
Company to others, and delays in receipt of needed services. As a consequence
of one or more of these scenarios, the Company's results of operations could be
materially adversely impacted by a temporary inability to conduct its business
in the ordinary course for some period of time. However, the Company believes
that its plans, including its contingency planning discussed below, should
minimize the adverse effect of any such business disruptions if they should
occur.
16
<PAGE> 17
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Each of the Company's business segments inventoried its business
operations, assessed its susceptibility to system failures or processing errors
as a result of Year 2000 issues and developed plans to address those issues.
The plans focused on three elements: information systems software and hardware,
mill process controls and operating systems, and vendors and service providers.
Each element was subdivided according to risk potential of high, medium and
low. High risk was defined as being critical to uninterrupted operation of the
business. Medium risk was defined as being necessary to support the business
but temporary work-arounds can be accomplished. Low risk was defined as being
minor inconveniences that should not impact the Company's business. Those
issues which were considered most critical to continuing operations were given
the highest priority.
Plans were implemented and, where necessary, modifications or corrective
actions have now been completed in each of the Company's businesses for all
high risk issues identified, as well as most of the medium risk issues
identified. Further testing of certain information systems and mill processes
has been performed with no significant issues identified. Additional testing is
being conducted in the fourth quarter. The Company continues to work with
certain customers and key vendors and suppliers to evaluate contingency plans
in order to further mitigate the effects of possible disruptions that may occur
and is continuing to evaluate related cost estimates for such plans. All of the
Company's operations have assessed the need for alternative supply arrangements
and will likely increase inventory levels of raw materials, supplies and
finished goods to try to reasonably ensure that operations are not interrupted
and unexpected costs are minimized. However, there can be no assurances that
all possible negative consequences can be identified and avoided.
In addition to the costs of new integrated computer systems which were
necessary irrespective of the approach of Year 2000, the Company currently
estimates that the cost of implementing its Year 2000 compliance plans will
total approximately $1.5 million. Approximately $1.3 million of the total has
been incurred through September 30, 1999, with the remainder expected to be
incurred during the fourth quarter of 1999. Approximately two-thirds of the
total cost is expected to have been expensed and one-third included in capital
projects. These estimates are subject to change, since they are based on
presently available information.
Euro Currency Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing currencies ("legal
currencies") and one common currency - the euro. The euro now trades on
currency exchanges and may be used in business transactions. Beginning in
January 2002, new euro-denominated bills and coins will be issued, and legal
currencies will be withdrawn from circulation by no later than June 2002. The
Company established a committee to identify and implement changes necessary to
address the systems and business issues raised by the euro currency conversion.
These issues include, among others, the need to adapt computer and other
business systems and equipment to accommodate euro-denominated transactions,
competitive implications of increased price transparency within European Union
countries, changes in currency exchange costs and rate exposures, continuity of
contracts that require payment in a legal currency and tax implications of the
conversion. The Company's French subsidiaries currently utilize multi-currency
software that was capable of euro-denominated sales and purchase transactions
on January 1, 1999. Consideration has also been given to other potential issues
in connection with the conversion, including those mentioned above. The Company
does not anticipate any significant negative consequences of these issues and
does not anticipate that the euro conversion will have a material adverse
impact on its financial condition or results of operations.
17
<PAGE> 18
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FORWARD-LOOKING STATEMENTS
Certain sections of this report, particularly the foregoing discussion
regarding the "Outlook" of the Company and "Factors That May Affect Future
Results", contain certain forward-looking statements, generally identified by
phrases such as "the Company expects" or words of similar effect.
Forward-looking statements are made 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 results of the Company will
be as estimated. Many factors outside the control of the Company also could
impact the realization of such estimates. The above-mentioned important
factors, among others, in some cases have affected, and in the future could
affect, the Company's actual results and could cause the Company's actual
results for 1999 and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Certain
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 1998 Annual Report on Form 10-K, Part II, Item 7, under the heading
"Factors That May Affect Future Results".
18
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, the Company assumed liability for and agreed to
indemnify Kimberly-Clark against its costs and liabilities in a case captioned
Edward J. Sweeney, et. al. v. American Tobacco Company, et. al. filed in the
Court of Common Pleas, Allegheny County, Pennsylvania. On October 6, 1999, the
court entered an order dismissing, without prejudice, Kimberly-Clark from the
case.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<S> <C>
15. Independent Accountants' Report, dated October 20, 1999 from Deloitte & Touche LLP to
Schweitzer-Mauduit International, Inc.
23. Independent Accountants' Consent.
27. Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K:
The registrant did not file any reports on Form 8-K during the quarter
for which this report is filed.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Schweitzer-Mauduit International, Inc.
(Registrant)
By: /s/ PAUL C. ROBERTS By: /s/ WAYNE L. GRUNEWALD
------------------------------- ---------------------------
Paul C. Roberts Wayne L. Grunewald
Chief Financial Officer and Controller
Treasurer (principal accounting officer)
(duly authorized officer and
principal financial officer)
November 8, 1999 November 8, 1999
20
<PAGE> 21
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
15. --- Independent Accountants' Report, dated October 20, 1999 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,
1999, the related consolidated statements of income for the three and nine
month periods ended September 30, 1999 and 1998, and the related statements of
changes in stockholders' equity and cash flow for the nine month periods ended
September 30, 1999 and 1998. 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, 1998 and the related consolidated statements of income,
changes in stockholders' equity and cash flow for the year then ended (not
presented herein); and in our report dated January 22, 1999, 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, 1998 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 20, 1999
<PAGE> 1
EXHIBIT 23
November 8, 1999
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 September 30, 1999 and 1998 as indicated in our report dated
October 20, 1999; 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, 1999, is
incorporated by reference in Registration Statements No. 33-99812, No.
33-99814, No. 33-99816, and No. 33-99848 on Form S-8.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
Yours truly,
Deloitte & Touche LLP
Atlanta, Georgia
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SCHWEITZER-MAUDUIT FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1999, 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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,600
<SECURITIES> 0
<RECEIVABLES> 78,500
<ALLOWANCES> 0
<INVENTORY> 62,800
<CURRENT-ASSETS> 155,100
<PP&E> 458,500
<DEPRECIATION> 200,700
<TOTAL-ASSETS> 440,100
<CURRENT-LIABILITIES> 111,100
<BONDS> 104,700
0
0
<COMMON> 1,600
<OTHER-SE> 180,900
<TOTAL-LIABILITY-AND-EQUITY> 440,100
<SALES> 373,800
<TOTAL-REVENUES> 373,800
<CGS> 292,500
<TOTAL-COSTS> 292,500
<OTHER-EXPENSES> 33,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,300
<INCOME-PRETAX> 45,400
<INCOME-TAX> 17,500
<INCOME-CONTINUING> 23,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,800
<EPS-BASIC> 1.50
<EPS-DILUTED> 1.50
</TABLE>
