<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, 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 June 30, 1999, 15,800,356 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,
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales ........................................... $ 119.7 $ 144.0 $ 248.3 $ 278.3
Cost of products sold .......................... 95.0 116.3 194.2 219.5
--------- --------- --------- ---------
Gross Profit ........................................ 24.7 27.7 54.1 58.8
Selling expense ................................ 4.5 5.3 9.2 10.2
Research expense ............................... 1.6 1.7 3.4 3.0
General expense ................................ 5.0 5.1 9.9 9.4
--------- --------- --------- ---------
Operating Profit ................................... 13.6 15.6 31.6 36.2
Interest expense ............................... (1.4) (1.8) (2.9) (3.2)
Other income, net .............................. 0.9 0.1 1.9 0.7
--------- --------- --------- ---------
Income Before Income Taxes and Minority Interest .... 13.1 13.9 30.6 33.7
Provision for income taxes ..................... 4.9 0.6 11.7 8.7
--------- --------- --------- ---------
Income Before Minority Interest ..................... 8.2 13.3 18.9 25.0
Minority interest in earnings of subsidiaries... 1.1 1.1 2.7 2.8
--------- --------- --------- ---------
Net Income .......................................... $ 7.1 $ 12.2 $ 16.2 $ 22.2
========= ========= ========= =========
Net Income per Common Share:
Basic .......................................... $ .45 $ .76 $ 1.02 $ 1.38
========= ========= ========= =========
Diluted ........................................ $ .45 $ .75 $ 1.02 $ 1.36
========= ========= ========= =========
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,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ....................................................... $ 3.2 $ 6.7
Accounts receivable ............................................................. 74.6 69.5
Inventories ..................................................................... 64.8 69.4
Current income tax refunds receivable ........................................... 1.2 2.8
Deferred income tax benefits .................................................... 3.5 5.2
Prepaid expenses ................................................................ 4.6 2.7
-------- --------
Total Current Assets ........................................................ 151.9 156.3
-------- --------
Gross Property ...................................................................... 448.4 479.3
Less accumulated depreciation ................................................... 192.8 196.1
-------- --------
Net Property ................................................................ 255.6 283.2
-------- --------
Noncurrent Deferred Income Tax Benefits .............................................. 13.0 19.7
-------- --------
Deferred Charges and Other Assets .................................................... 16.5 15.5
-------- --------
Total Assets ......................................................................... $ 437.0 $ 474.7
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt ............................................... $ 3.4 $ 4.4
Other short-term debt ........................................................... 12.6 11.3
Accounts payable ................................................................ 41.4 58.1
Accrued expenses ................................................................ 56.3 50.7
-------- --------
Total Current Liabilities ....................................................... 113.7 124.5
-------- --------
Long-Term Debt ....................................................................... 102.2 108.4
-------- --------
Deferred Income Taxes ................................................................ 12.5 12.7
-------- --------
Other Noncurrent Liabilities ......................................................... 25.3 24.1
-------- --------
Minority Interest .................................................................... 4.4 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 June 30, 1999 and December 31, 1998 ........ l.6 1.6
Additional paid-in capital ...................................................... 60.7 60.7
Common stock in treasury, at cost - 278,377 and 154,668 shares at June 30, 1999
and December 31, 1998, respectively ......................................... (5.8) (3.8)
Retained earnings ............................................................... 146.2 134.8
Accumulated other comprehensive income (loss) -
Unrealized foreign currency translation adjustments ........................... (23.8) 3.7
-------- --------
Total Stockholders' Equity .................................................. 178.9 197.0
-------- --------
Total Liabilities and Stockholders' Equity ........................................... $ 437.0 $ 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>
<CAPTION>
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 six months
ended June 30, 1998.................... 22.2 22.2
Adjustments to unrealized foreign
currency translation................... (3.9) (3.9)
------
Comprehensive income........................ 18.3
Dividends declared ($0.30 per share)........ (4.8) (4.8)
Stock issued to directors as compensation... 582 --
Stock issued for options exercised.......... 11,940 -- 0.3 -- -- 0.3
---------- ----- ------ ------- ------ ------
BALANCE, JUNE 30, 1998...................... 16,077,965 1.6 60.6 130.9 0.2 193.3
Net income for the six months
ended December 31, 1998................ 8.8 8.8
Adjustments to unrealized foreign
currency translation................... 3.5 3.5
------
Comprehensive income........................ 12.3
Dividends declared ($0.30 per share)........ (4.8) (4.8)
Purchases of treasury stock................. 155,700 $ (3.8) (3.8)
Stock issued to directors as compensation... 768 (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 six months
ended June 30, 1999.................... 16.2 16.2
Adjustments to unrealized foreign
currency translation................... (27.5) (27.5)
------
Comprehensive loss.......................... (11.3)
Dividends declared ($0.30 per share)........ (4.8) (4.8)
Purchases of treasury stock................. 127,200 (2.0) (2.0)
Stock issued to directors as compensation... -- -- (3,491) -- -- -- -- --
---------- ----- ------- ------ ------ ------- ----- ------
BALANCE, JUNE 30, 1999...................... 16,078,733 $ 1.6 278,377 $ (5.8) $ 60.7 $ 146.2 $(23.8) $178.9
========== ===== ======= ====== ====== ======= ====== ======
</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>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------
1999 1998
---- ----
<S> <C> <C>
Operations
Net income........................................................ $ 16.2 $ 22.2
Depreciation and amortization..................................... 10.9 10.7
Deferred income tax provision..................................... 4.2 1.3
Minority interest in earnings of subsidiaries..................... 2.7 2.8
Other............................................................. 1.2 2.5
Changes in operating working capital, excluding
effects of acquisitions...................................... (11.9) (11.8)
------- -------
Cash Provided by Operations.............................. 23.3 27.7
------- -------
Investing
Capital spending.................................................. (15.5) (12.5)
Capitalized software costs........................................ (2.2) (1.9)
Acquisitions, net of cash acquired................................ -- (65.4)
Other............................................................. 0.5 (2.3)
------- -------
Cash Used for Investing.................................. (17.2) (82.1)
------- -------
Financing
Cash dividends paid to SWM stockholders........................... (4.8) (4.8)
Cash dividends paid to minority owner............................. (5.2) (5.3)
Changes in short-term debt........................................ 1.3 7.3
Proceeds from issuances of long-term debt......................... 5.2 24.2
Payments on long-term debt........................................ (4.1) (3.5)
Proceeds from issuances of common stock........................... -- 0.3
Purchases of treasury stock....................................... (2.0) --
------- -------
Cash Provided by (Used for) Financing.................... (9.6) 18.2
------- -------
Decrease in Cash and Cash Equivalents.................................. (3.5) (36.2)
Cash and Cash Equivalents at Beginning of Period....................... 6.7 37.2
------- -------
Cash and Cash Equivalents at End of Period............................. $ 3.2 $ 1.0
======= =======
</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 six month periods ended June 30, 1999 were approximately
15,867,200 and 15,896,200, respectively, and for the three and six month periods
ended June 30, 1998 were 16,077,900 and 16,073,000, 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, 1999 were approximately 15,870,100 and 15,897,600, respectively, and
for the three and six month periods ended June 30, 1998 were 16,297,200 and
16,311,600, 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>
June 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 ............................................... $ 24.0 $ 25.9
Work in process ............................................. 8.9 9.3
Finished goods .............................................. 25.5 26.6
Supplies and other .......................................... 12.3 13.2
-------- --------
70.1 75.0
Excess of FIFO cost over Last-In, First-Out (LIFO) cost .......... (5.3) (5.6)
-------- --------
Total ..................................................... $ 64.8 $ 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 six month periods
ended June 30, 1999 were 37.4 percent and 38.2 percent, respectively, compared
with 4.3 percent and 25.8 percent for the respective corresponding periods of
1998. The effective income tax rates for the three and six month periods 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 rates for the three and six month periods ended June
30, 1998 would have been 41.7 percent and 41.2 percent, respectively. 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 and the
United States, which have lower income tax rates than France.
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 under the provisions of the U.S. Comprehensive Environmental
Response, Compensation and Liability Act, or analogous state statutes, in
connection with two waste disposal sites utilized by the Company's Spotswood,
New Jersey mill. The Company has assumed Kimberly-Clark's liabilities at each of
these sites. The Company's liability at one of these sites, the Industrial
Solvents Chemical Company site in Newberry Township, Pennsylvania, has now been
fully resolved with nominal payments made under a 1997 consent decree with the
state of Pennsylvania. The Company continues to participate in the remediation
of the other site, the Global Landfill Reclaiming Corporation site in Old
Bridge, New Jersey, as a member of a group of potentially responsible parties
that entered into a consent decree with the state of New Jersey in 1993.
In 1992, the Company's Spotswood mill received an information request
from the New Jersey Department of Environmental Protection and Energy with
respect to another landfill site allegedly used by the Spotswood mill. The
Company responded and there has been no further inquiry regarding this site.
7
<PAGE> 8
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
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.
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). In June 1999, an oral agreement was reached
with the plaintiffs to dismiss, without prejudice, Kimberly-Clark. The Company
expects that the parties will shortly finalize and file with the court a
stipulated order dismissing 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.
8
<PAGE> 9
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
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
$287.5, $22.3 and $1.37, respectively for the six month period ended June 30,
1998.
9
<PAGE> 10
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 U.S., 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 at least 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 U.S. 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
JUNE 30, JUNE 30, % CHANGE -----------------
NET SALES 1999 1998 VS. 1998 1999 1998
- --------- ---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
United States ............. $ 39.5 $ 50.3 - 21.5% 33.0% 34.9%
France .................... 68.3 80.7 - 15.4 57.1 56.1
Brazil .................... 11.9 15.7 - 24.2 9.9 10.9
-------- --------
Subtotal ......... 119.7 146.7
Intersegment sales by:
United States ........ -- (2.1) -- (1.5)
France ............... -- (0.6) -- (0.4)
Brazil ............... -- -- -- --
-------- -------- ----- -----
Consolidated...... $ 119.7 $ 144.0 - 16.9% 100.0% 100.0%
======== ======== ===== =====
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------- % OF CONSOLIDATED % RETURN ON SALES
JUNE 30, JUNE 30, % CHANGE ----------------- -----------------
OPERATING PROFIT 1999 1998 VS. 1998 1999 1998 1999 1998
- ---------------- ---- ---- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
United States.............. $ 1.7 $ 1.6 + 6.2% 12.5% 10.3% 4.3% 3.2%
France..................... 12.5 17.3 - 27.7 91.9 110.9 18.3 21.4
Brazil..................... 0.5 (1.7) N.M. 3.7 (10.9) 4.2 (10.8)
Unallocated expenses....... (1.1) (1.6) (8.1) (10.3)
------- ------- ----- -----
Consolidated...... $ 13.6 $ 15.6 - 12.8% 100.0% 100.0% 11.4% 10.8%
======= ======= ===== =====
</TABLE>
N.M. - Not meaningful.
10
<PAGE> 11
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------ % OF CONSOLIDATED
JUNE 30, JUNE 30, % CHANGE -------------------
NET SALES 1999 1998 VS. 1998 1999 1998
- --------- ---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
United States ...................... $ 85.0 $ 98.8 - 14.0% 34.2% 35.5%
France.............................. 139.8 160.0 - 12.6 56.3 57.5
Brazil.............................. 23.6 26.5 - 10.9 9.5 9.5
------- -------
Subtotal................... 248.4 285.3
Intersegment sales by:
United States.................. -- (5.3) -- (1.9)
France......................... (0.1) (1.7) -- (0.6)
Brazil......................... -- -- -- --
------- ------- ----- -----
Consolidated .............. $ 248.3 $ 278.3 - 10.8% 100.0% 100.0%
======= ======= ===== =====
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------ % OF CONSOLIDATED % RETURN ON SALES
JUNE 30, JUNE 30, % CHANGE ----------------- -----------------
OPERATING PROFIT 1999 1998 VS. 1998 1999 1998 1999 1998
- ---------------- ---- ---- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
United States.............. $ 5.8 $ 5.9 - 1.7% 18.4% 16.3% 6.8% 6.0%
France..................... 26.1 35.4 - 26.3 82.6 97.8 18.7 22.1
Brazil..................... 2.5 (2.1) N.M. 7.9 (5.8) 10.6 (7.9)
Unallocated expenses....... (2.8) (3.0) (8.9) (8.3)
------- ------- ----- -----
Consolidated...... $ 31.6 $ 36.2 - 12.7% 100.0% 100.0% 12.7% 13.0%
======= ======= ===== =====
</TABLE>
N.M. - Not meaningful.
<TABLE>
<CAPTION>
% OF CONSOLIDATED
JUNE 30, DECEMBER 31, -----------------
TOTAL ASSETS 1999 1998 1999 1998
------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
United States......................... $ 153.7 $ 156.3 35.2% 32.9%
France................................ 234.0 254.5 53.5 53.6
Brazil................................ 50.7 67.3 11.6 14.2
Intersegment eliminations............. (1.4) (3.4) (0.3) (0.7)
------- -------- ----- -----
Consolidated................. $ 437.0 $ 474.7 100.0% 100.0%
======== ======== ===== =====
</TABLE>
More than 60 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 six month period ended June 30, 1999 are substantially all due to this
devaluation of the Brazilian real and a stronger U.S. dollar against the French
franc at June 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.
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 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 $24.3 million in the three month period ended
June 30, 1999, compared with the corresponding period of the preceding year.
This decrease was due primarily to lower sales volumes and reduced average
selling prices in each of the business segments. Net sales decreased by $17.3
million in the quarter due to a 13 percent decline in sales volumes. Sales
volumes decreased for the quarter at the U.S. business unit by 18 percent
compared with the same three month period of 1998, primarily due to lower
domestic cigarette shipments, a decline in the export of cigarettes by U.S.
cigarette manufacturers and the timing of the U.S. business unit's shipments.
Sales volumes from the French businesses declined by 10 percent, primarily as a
result of decreased shipments to China and Eastern Europe. In Brazil, sales
volumes were down by 15 percent, primarily due to lower cigarette production in
Brazil and a decline in printing and writing paper sales related to weak
economic conditions in that country. Unfavorable sales mix and lower selling
prices compared with the same quarter of the prior year resulted in a reduction
in net sales of $4.7 million. Changes in currency exchange rates had an
unfavorable impact of $2.3 million on the net sales comparison, as a result of
the unfavorable effect of a currency devaluation in Brazil and a weaker French
franc versus the U.S. dollar compared with the same quarter of the prior year.
Net sales decreased by $30.0 million in the six month period ended June
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 six 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 net sales for
the acquired entities, net sales decreased by $25.5 million in the period due to
a 10 percent decline in sales volumes. Excluding the additional month of sales
for the acquired entities in the six month period comparison, sales volumes
declined by 11 percent in France, 13 percent in Brazil and seven percent in the
U.S. Unfavorable sales mix and lower selling prices compared with the same
period of the prior year resulted in a reduction in net sales of $9.3 million.
Changes in currency exchange rates had an unfavorable impact of $2.4 million on
the net sales comparison, as a result of the unfavorable effect of the currency
devaluation in Brazil.
12
<PAGE> 13
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Operating Profit
Operating profit decreased by $2.0 million in the three month period
ended June 30, 1999, compared with the corresponding period of the preceding
year. Operating profit from the French business unit declined by $4.8 million
due to lower sales volumes, lower average selling prices and start-up costs
related to two capital projects, partially offset by reduced manufacturing costs
and lower selling expense. In the U.S., the benefits of cost reduction programs,
improved mill operations and 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 mill offset the effect of lower sales volumes
and lower average selling prices 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 $2.2 million for the
three-month period. Brazilian margins improved over the comparable period of the
prior year since some of its sales are tied to U.S. dollar selling prices.
Non-manufacturing expenses decreased by $1.0 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 profit by $1.1 million, although this benefit was offset by changes in
selling prices.
Operating profit decreased by $4.6 million in the six month period
ended June 30, 1999, compared with the corresponding period of the preceding
year. Operating profit from the French business unit declined by $9.3 million
due to lower sales volumes and lower average selling prices, partially offset by
reduced manufacturing costs. In the U.S., the benefits of cost reduction
programs and improved mill operations, the absence of the one-time pre-tax
charge of $1.7 million in the 1998 period related to the voluntary retirement
program for certain hourly employees and the absence of $1.2 million in computer
systems start-up expenses in the 1998 period offset the effect of lower average
selling prices and lower 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 $4.6 million
for the six-month period. Changes in per ton wood pulp costs compared with the
same period of the prior year favorably impacted operating profit by $2.6
million, although this benefit was offset by changes in selling prices.
NON-OPERATING EXPENSES
Interest expense decreased by $0.4 million and $0.3 million in the
three and six month periods ended June 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 six month period were partially offset by an
additional month of interest expense related to debt associated with the
acquisitions in Brazil and France in February 1998. Other income, net consisted
primarily of interest income, royalties and foreign currency transaction gains
and losses in the 1999 and 1998 periods, recovery of prior period business taxes
in 1999 and a favorable litigation recovery in the first quarter of 1998.
13
<PAGE> 14
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 six month periods
ended June 30, 1999 were 37.4 percent and 38.2 percent, respectively, compared
with 4.3 percent and 25.8 percent for the respective corresponding periods of
1998. The effective income tax rates for the three and six month periods 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 rates for the three and six month periods
ended June 30, 1998 would have been 41.7 percent and 41.2 percent, respectively.
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
and the United States, which have lower income tax rates than France.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
(U.S. $ in millions)
Cash Provided by (Used for): 1999 1998
- ---------------------------- ---- ----
<S> <C> <C>
Changes in operating working capital.............................................. $ (11.9) $ (11.8)
Operations........................................................................ 23.3 27.7
Capital spending.................................................................. (15.5) (12.5)
Capitalized software costs........................................................ (2.2) (1.9)
</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 $27.7 million for the six months ended
June 30, 1998 to $23.3 million for the six months ended June 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 $11.9 million and $11.8
million in the six month periods ended June 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. 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.
In the second quarter of 1998, the Company initiated a $7.1 million
expansion of the Malaucene, France mill, which is expected to increase the
mill's capacity for finished tipping paper by approximately 45 percent. This
project includes spending for increased printing and slitting capabilities. In
the fourth quarter of 1998, the Company initiated a $9.9 million capital project
to increase reconstituted tobacco leaf production capacity at the Spay, France
mill by approximately 10 percent. Both of these capital projects began operation
during the second quarter of 1999.
During the second quarter of 1999, after reaching mutual agreement on
certain contractual labor changes with the labor union, a $5.0 million capital
project was authorized to install a new high-speed slitter at the Spotswood
mill. This project is expected to support further improvement in the
manufacturing of cigarette paper, with improved product quality and reduced
costs. This project is expected to begin operation in the second half of 2000.
14
<PAGE> 15
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Capital spending for the six months ended June 30, 1999 included $6.4
million toward the speed-up of two machines in the French mills and $2.4 million
toward the expansion of the Malaucene mill. During the first six months of 1998,
capital spending included $1.3 million toward the expansion of the Malaucene
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, New York
mill.
In addition to capital spending, in the six month period ended June 30,
1999, the Company incurred and deferred on the balance sheet additional software
development costs of $2.2 million toward new integrated computer systems,
primarily in France. Several modules successfully began operation in France
during the second quarter of 1999 without significant start-up expenses.
Increased operating costs and amortization expense for the software placed in
service were incurred during the quarter, although these incremental costs were
not significant. Other phases of the software development project in France are
scheduled to be placed in operation during the second half of 1999 and during
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 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 June 30, 1999, the Company has repurchased a total of 127,200
shares of its common stock for $2.0 million under this program. All of these
repurchases took place in the second quarter of 1999. The Company anticipates
repurchasing additional common stock under this program during the third quarter
of 1999.
On July 29, 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 September 13, 1999 to stockholders of record on
August 9, 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 June 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 facilities, will be sufficient
to fund its ongoing cash requirements.
15
<PAGE> 16
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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. 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 U.S., 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 U.S. The Company's French business unit's shipments to China
have not returned to the levels experienced during the first six months of 1998,
and lower sales to Eastern Europe and southeast Asia are also expected to
continue. 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 following recently enacted taxes on exports of cigarettes
from Brazil. The uncertain pricing environment for the Company's paper products
is expected to continue through 1999 due to weak market conditions and global
pricing negotiations with multinational cigarette manufacturers.
With weakened demand for the Company's paper products, certain machines
were shut down to manage inventory levels, and machine operating schedules were
adjusted in order to operate the mills efficiently. The Company's customers in
the U.S. traditionally reduce their operating schedules around holidays during
the third and fourth quarters, 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. Further machine downtime will be taken by the Company during the
second half of 1999 as needed in order to control inventories.
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.
Although still below that of the comparable periods of the prior year,
the per ton cost of wood pulp increased somewhat during the second quarter of
1999 compared with the first quarter of 1999. The per ton cost of wood pulp is
expected to increase further during the balance of 1999, and the average cost
during the second half of 1999 may 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, although not at the levels achieved in the
first two quarters of 1999. 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 during the balance of 1999, but not to the extent
that it had in the first half of the year.
16
<PAGE> 17
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Company expects capital spending to total between $30 and $35
million in 1999 and between $20 and $25 million in 2000, focused primarily on
capacity expansion, product quality improvements and cost reduction
opportunities. Capitalized software costs are expected to total approximately $4
million for the full year of 1999 and approximately $2 million in 2000.
With the objective of largely offsetting 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.
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.
Each of the Company's business segments has inventoried its business
operations, assessed its susceptibility to system failures or processing errors
as a result of Year 2000 issues and developed a plan to address those issues.
The plans focus on three elements: information systems software and hardware,
mill
17
<PAGE> 18
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
process controls and operating systems, and vendors and service providers. Each
element has been subdivided according to risk potential of high, medium and low.
High risk is defined as being critical to uninterrupted operation of the
business. Medium risk is defined as being necessary to support the business but
temporary work-arounds can be accomplished. Low risk is defined as being minor
inconveniences that should not impact the Company's business. Those issues which
are considered most critical to continuing operations have been given the
highest priority.
On January 1, 1998, the Company's U.S. operations, including the
research and headquarters areas, began utilizing new integrated information
systems to replace the Kimberly-Clark systems formerly used in the U.S. A
benefit of the new systems is that they are expected to provide Year 2000
compliance in the area of information systems. In the U.S., mill process
controls and operating systems have been reviewed for nearly 3,000 pieces of
equipment and systems. Nine high risk equipment or systems issues were
identified. For these issues, modification requirements and a schedule for
compliance have been developed with the applicable equipment and systems
vendors. Approximately 80 percent of these corrective action plans are complete
with the balance expected to be completed during the third quarter of 1999.
The Company's French businesses have inventoried and evaluated all
their information systems. Approximately one-fourth of these information systems
are believed to be Year 2000 compliant. Upon implementation in mid-1999 of
certain new integrated computer systems in France, substantially all of the
French businesses' information systems are expected to be Year 2000 compliant.
Less than three percent of the approximately 2,000 pieces of mill process
control equipment and operating systems will require modification or
replacement. Approximately 85 percent of these corrective action plans are
complete with the balance expected to be completed by the end of the third
quarter of 1999.
The Company's Brazilian business has inventoried and evaluated all of
its information systems. Nine of its systems required modifications to become
Year 2000 compliant. Upgrades for all nine systems were developed and
implemented by the end of the second quarter of 1999. Of its mill process
control equipment and operating systems, ten required modification and upgrades
for these systems have been completed.
Inquiries have been mailed to key vendors and service providers for the
Company's U.S., French and Brazilian operations as to the status of their Year
2000 compliance. Follow-up requests have been sent to those vendors and service
providers that had not responded and to those whose responses were incomplete or
inadequate. Critical vendors and suppliers are being contacted either by phone
or in person to review the status of their Year 2000 compliance plans.
Coincident with the actions described above, the Company and its
operating subsidiaries are developing and evaluating contingency plans to
further mitigate the effects of possible disruptions that may occur and are
developing and evaluating related cost estimates for such plans. All of the
Company's operations are assessing the need for alternative supply arrangements
and increased inventory levels of raw materials, supplies and finished goods, as
well as other possible measures based on the responses from vendors and service
providers. Contingency plans are being developed 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.
18
<PAGE> 19
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Company currently estimates that the total cost of implementing its
Year 2000 compliance plans will be approximately $1.5 million, substantially all
to be incurred in 1999, excluding the costs of the new integrated computer
systems. Approximately two-thirds of this amount is expected to be expensed and
one-third included in capital projects. These preliminary estimates are subject
to change, since they are based on presently available information, and will be
updated as the Company continues its assessments, proceeds with implementation
of modifications and replacements necessary to become compliant, receives
further feedback from vendors and service providers and formulates reasonable
and necessary contingency plans.
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. 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.
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".
19
<PAGE> 20
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. In June 1999, an
oral agreement was reached with the plaintiffs to dismiss, without prejudice,
Kimberly-Clark. The Company expects that the parties will shortly finalize and
file with the court a stipulated order dismissing Kimberly-Clark from the case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on Thursday,
April 22, 1999, 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 12,
1999:
Two nominees, Ms. Claire L. Arnold and Mr. Laurent G. Chambaz were
elected as Class I Directors to serve a three-year term expiring at the
2002 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: Ms. Arnold 13,022,285 -- 135,571 -- --
Director: Mr. Chambaz 12,819,035 -- 338,821 -- --
</TABLE>
Other Directors continuing in office are (i) 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 and (ii) Mr. Wayne H.
Deitrich, Mr. Leonard J. Kujawa and Mr. Larry B. Stillman, Class III Directors,
whose terms will expire at the 2001 Annual Meeting of Stockholders.
ITEM 5. OTHER INFORMATION
During the second quarter of 1999, the Board of Directors established a
ninth Director position and elected Alan R. Batkin as a Director effective May
1, 1999. Mr. Batkin is Vice-Chairman of Kissinger Associates, Inc., a
geopolitical consulting firm and a Director of Hasbro, Inc. and PEC Corporation.
He will stand for election at the Annual Meeting of Stockholders in April 2000.
Also during the second quarter of 1999, a new labor agreement was
approved at the Pirahy mill in Brazil. This new collective bargaining agreement
expires on May 31, 2000.
20
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10. Amendment No. 2, dated May 6, 1999, to the Amended and
Restated Credit Agreement.
15. Independent Accountants' Report, dated July 21, 1999 from
Deloitte & Touche LLP to Schweitzer-Mauduit International,
Inc.
23. Independent Accountants' Consent.
27. Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K:
The registrant did not file any reports on Form 8-K during the quarter
for which this report is filed.
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)
August 6, 1999 August 6, 1999
21
<PAGE> 22
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10. -- Amendment No. 2, dated May 6, 1999, to the Amended and Restated Credit Agreement.
15. -- Independent Accountants' Report, dated July 21, 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 10
AMENDMENT NO.2,
DATED AS OF MAY 6, 1999, TO THE
AMENDED AND RESTATED CREDIT AGREEMENT
This Amendment No. 2 dated as of May 6, 1999 ("Amendment") is among
Schweitzer-Mauduit International, Inc., a Delaware corporation ("Company" or
"Guarantor"), Schweitzer-Mauduit France S.A.R.L., a French corporation ("SMF"),
PDM Industries, S.N.C., a French corporation ("PDM"), Schweitzer-Mauduit Spain,
S.L., sociedad unipersonal, a Spanish corporation with a sole shareholder
("SMS", together with the Company, SMF and PDM, the "Borrowers"), the banks
party hereto ("Banks") and Societe Generale, as agent for the Banks ("Agent").
INTRODUCTION
A. The Borrowers, the Guarantor, the Banks and the Agent are
party to the Amended and Restated Credit Agreement dated as of January 30, 1998,
as amended by Amendment No. 1 dated as of January 29, 1999 (as amended, the
"Credit Agreement").
B. The Borrowers have requested that the Banks agree to amend the
definition of "Restricted Payment".
THEREFORE, the Borrowers, the Guarantor, the Agent and the Banks hereby
agree as follows:
Section 1. Definitions; References. Unless otherwise defined in this
Amendment, terms used in this Amendment which are defined in the Credit
Agreement shall have the meanings assigned to such terms in the Credit
Agreement.
Section 2. Amendments. Upon the satisfaction of each of the conditions
precedent set forth in Section 4 below, the Credit Agreement is hereby amended
as follows:
(a) The definition of "Restricted Payment" in Section 1.01 of the
Credit Agreement is hereby amended in its entirety as follows:
"Restricted Payment" means the making by the Company of any
dividends or other distributions (in cash, property, or otherwise) with
respect to its capital stock other than dividends payable in the
Company's stock.
(b) Section 6.11. A new Section 6.11 is hereby added as follows:
Section 6.11. Stock Purchases. The Company will not purchase, redeem or
otherwise acquire any shares of its capital stock except that the Company may
purchase (a) up to $20,000,000 of its capital stock in any fiscal year and (b)
its capital stock in connection with its employee 401(k) retirement plan.
<PAGE> 2
Section 3. Representations and Warranties. The Borrowers and the
Guarantor represent and warrant to the Agent and the Banks as of the date
hereof:
(a) Any representations and warranties set forth in the Credit
Agreement and in the other Credit Documents (other than those made as of a
specific date) are true and correct in all material respects;
(b) (i) The execution, delivery and performance of this Amendment
are within the corporate power and authority of the Borrowers and the Guarantor
and have or will have been duly authorized by appropriate proceedings and (ii)
this Amendment constitutes a legal, valid, and binding obligation of the
Borrowers and the Guarantor enforceable in accordance with its terms, except as
limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
similar laws affecting the rights of creditors generally and general principles
of equity;
(c) No Default or Event of Default has occurred and is continuing;
and
(d) No Potential Phaseout Event has occurred.
Section 4. Effectiveness. This Amendment shall become effective and the
Credit Agreement shall be amended as provided in Section 2 of this Amendment
upon the occurrence of the following conditions precedent:
(a) The Agent shall have received this Amendment duly and validly
executed by the Borrowers, the Agent and the Majority Banks, in form and
substance satisfactory to the Agent; and
(b) The Company shall have paid to the Agent for the ratable
benefit of the Banks an amendment fee in an amount equal to 0.125% of the U.S.
Revolving Commitment, French Revolving Commitment and Term Advances.
Section 5. Choice of Law. This Amendment shall be governed by and
construed and enforced in accordance with the laws of the State of New York.
Section 6. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original.
2
<PAGE> 3
EXECUTED as of the 6th day of May, 1999.
BORROWERS:
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
By: /s/ WAYNE H. DEITRICH
-------------------------------------------------------
Wayne H. Deitrich
Chairman and Chief Executive Officer
SCHWEITZER-MAUDUIT FRANCE S.A.R.L.
By: /s/ JEAN-PIERRE LE HETET
-------------------------------------------------------
Jean-Pierre Le Hetet
Gerant (Manager)
PDM INDUSTRIES S.N.C.
By: Papeteries de Mauduit S.A., as Manager
By: /s/ JEAN-PIERRE LE HETET
-----------------------------------------------
Jean-Pierre Le Hetet
Legal Representative
SCHWEITZER-MAUDUIT SPAIN, S.L.
By: /s/ RAYMOND NEDELLEC
-------------------------------------------------------
Raymond Nedellec
Board Delegate
3
<PAGE> 4
GUARANTOR:
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
By: /s/ WAYNE H. DEITRICH
-------------------------------------------------------
Wayne H. Deitrich
Chairman and Chief Executive Officer
AGENT:
SOCIETE GENERALE
By: /s/ RICHARD M. LEWIS
-------------------------------------------------------
Richard M. Lewis
Director
BANKS:
SOCIETE GENERALE
By: /s/ RICHARD M. LEWIS
-------------------------------------------------------
Richard M. Lewis
Director
BANQUE NATIONALE DE PARIS
By: /s/ WARREN ROSS
-------------------------------------------------------
Warren Ross
Assistant Vice President
4
<PAGE> 5
CREDIT LYONNAIS
By: /s/ ROGER CHANTAL
-------------------------------------------------------
Roger Chantal
Gestion des Contrats Entreprises
NATEXIS BANQUE
By: /s/ Y. MAZETIER
-------------------------------------------------------
Y. Mazetier
By: /s/ MARC BRIERE
-------------------------------------------------------
Marc Briere
SUNTRUST BANK, ATLANTA
By: /s/ ASHLEIGH R. BAUCOM
-------------------------------------------------------
Ashleigh R. Baucom
Associate
WACHOVIA BANK, N.A.
By: /s/ TAMMIE FABBRINI
-------------------------------------------------------
Tammie Fabbrini
Vice President
5
<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, 1999, the
related consolidated statements of income for the three and six month periods
ended June 30, 1999 and 1998, and the related statements of changes in
stockholders' equity and cash flow for the six month periods ended June 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
July 21, 1999
<PAGE> 1
EXHIBIT 23
August 6, 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 June 30, 1999 and 1998 as indicated in our report dated July 21,
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 June 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 SIX MONTHS ENDED JUNE
30, 1999, 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-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,200
<SECURITIES> 0
<RECEIVABLES> 74,600
<ALLOWANCES> 0
<INVENTORY> 64,800
<CURRENT-ASSETS> 151,900
<PP&E> 448,400
<DEPRECIATION> 192,800
<TOTAL-ASSETS> 437,000
<CURRENT-LIABILITIES> 113,700
<BONDS> 102,200
0
0
<COMMON> 1,600
<OTHER-SE> 177,300
<TOTAL-LIABILITY-AND-EQUITY> 437,000
<SALES> 248,300
<TOTAL-REVENUES> 248,300
<CGS> 194,200
<TOTAL-COSTS> 194,200
<OTHER-EXPENSES> 22,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,900
<INCOME-PRETAX> 30,600
<INCOME-TAX> 11,700
<INCOME-CONTINUING> 16,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,200
<EPS-BASIC> 1.02
<EPS-DILUTED> 1.02
</TABLE>
