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, 2001
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, 2001, 14,834,709 shares of the Corporation's common stock, par
value $.10 per share, together with preferred stock purchase rights associated
therewith, were outstanding.
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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)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
2001 2000 2001 2000
------- ------- ------- -------
Net Sales ................................................. $ 125.3 $ 121.7 $ 249.4 $ 239.7
Cost of products sold ................................ 98.3 99.8 202.9 195.8
------- ------- ------- -------
Gross Profit .............................................. 27.0 21.9 46.5 43.9
Selling expense ...................................... 5.4 4.7 10.0 9.1
Research expense ..................................... 1.9 1.5 3.9 3.2
General expense ...................................... 5.2 4.6 10.3 9.1
Restructuring Charge (See Note 8) .................... 4.6 -- 4.6 --
------- ------- ------- -------
Operating Profit ......................................... 9.9 11.1 17.7 22.5
Interest expense ..................................... (1.1) (1.6) (2.4) (3.1)
Other income, net .................................... 0.5 0.5 1.1 2.1
------- ------- ------- -------
Income Before Income Taxes and Minority Interest .......... 9.3 10.0 16.4 21.5
Provision for income taxes ........................... 3.6 2.5 6.2 6.4
------- ------- ------- -------
Income Before Minority Interest ........................... 5.7 7.5 10.2 15.1
Minority interest in earnings of subsidiaries ........ 1.0 1.1 1.7 1.9
------- ------- ------- -------
Net Income................................................ $ 4.7 $ 6.4 $ 8.5 $ 13.2
======= ======= ======= =======
Net Income per Common Share:
Basic................................................ $ .33 $ .41 $ .58 $ .85
======= ======= ======= =======
Diluted.............................................. $ .32 $ .41 $ .57 $ .85
======= ======= ======= =======
Cash Dividends Declared per Common Share.................. $ .15 $ .15 $ .30 $ .30
======= ======= ======= =======
See Notes to Unaudited Consolidated Financial Statements
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SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents ......................................................... $ 21.8 $ 23.6
Accounts receivable ............................................................... 78.7 77.7
Inventories ....................................................................... 67.2 64.5
Current income tax refunds receivable ............................................. 3.2 2.9
Deferred income tax benefits ...................................................... 4.1 4.8
Prepaid expenses .................................................................. 3.5 1.7
------ ------
Total Current Assets .......................................................... 178.5 175.2
------ ------
Gross Property ........................................................................ 477.0 462.0
Less accumulated depreciation ..................................................... 211.2 212.5
------ ------
Net Property .................................................................. 265.8 249.5
------ ------
Noncurrent Deferred Income Tax Benefits ................................................ 1.8 1.0
------ ------
Deferred Charges and Other Assets ...................................................... 15.5 16.0
------ ------
Total Assets ........................................................................... $461.6 $441.7
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt ................................................. $ 29.3 $ 3.6
Other short-term debt ............................................................. 4.6 2.0
Accounts payable .................................................................. 47.0 52.7
Accrued expenses .................................................................. 52.9 52.1
------ ------
Total Current Liabilities ..................................................... 133.8 110.4
------ ------
Long-Term Debt ......................................................................... 66.4 97.7
------ ------
Noncurrent Deferred Income Tax Liabilities ............................................. 17.0 14.9
------ ------
Noncurrent Deferred Revenue ............................................................ 46.0 10.0
------ ------
Other Noncurrent Liabilities ........................................................... 27.7 22.4
------ ------
Minority Interest ...................................................................... 3.9 6.4
------ ------
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 ...................................................... l.6 1.6
Additional paid-in capital ........................................................ 60.6 60.5
Common stock in treasury, at cost - 1,244,024 and 1,288,471 shares at June 30, 2001
and December 31, 2000, respectively ........................................... (19.8) (20.5)
Retained earnings ................................................................. 179.3 175.3
Unearned compensation ............................................................. (0.6) (0.3)
Accumulated other comprehensive loss .............................................. (54.3) (36.7)
------ ------
Total Stockholders' Equity .................................................... 166.8 179.9
------ ------
Total Liabilities and Stockholders' Equity ............................................. $461.6 $441.7
====== ======
See Notes to Unaudited Consolidated Financial Statements
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SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
U.S. $ IN MILLIONS
(UNAUDITED)
COMMON STOCK ISSUED TREASURY STOCK ADDITIONAL
------------------------------- -------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------- ------------ ------------ ------------ ----------
BALANCE, DECEMBER 31, 1999 ....................... 16,078,733 $ 1.6 441,845 $ (8.0) $ 60.7
Net income for the six months
ended June 30, 2000 .........................
Adjustments to unrealized foreign
currency translation ........................
Comprehensive income ........................
Dividends declared ($0.30 per share) .............
Purchases of treasury stock ...................... 375,200 (5.4)
Restricted stock issuances ....................... (30,000) 0.6 (0.2)
Stock issued to directors as compensation ........ -- -- (3,119) -- --
------------- ------------ ------------ ------------ --------
BALANCE, JUNE 30, 2000 ........................... 16,078,733 1.6 783,926 (12.8) 60.5
Net income for the six months
ended December 31, 2000 .....................
Adjustments to unrealized foreign
currency translation ........................
Comprehensive income ......................
Dividends declared ($0.30 per share) .............
Purchases of treasury stock ...................... 507,500 (7.8)
Amortization of unearned compensation ............
Stock issued to directors as compensation ........ (2,355) 0.1
Issuance of shares for options exercised ......... -- -- (600) -- --
------------ ------------ ------------ -------- --------
BALANCE, DECEMBER 31, 2000 ....................... 16,078,733 1.6 1,288,471 (20.5) 60.5
Net income for the six months
ended June 30, 2001 .........................
Change in unrealized fair value
of derivative instruments ...................
Adjustments to unrealized foreign
currency translation ........................
Comprehensive loss ..........................
Dividends declared ($0.30 per share) .............
Restricted stock issuances ....................... (20,000) 0.3 0.1
Amortization of unearned compensation ............
Stock issued to directors as compensation ........ (1,647) 0.1
Issuance of shares for options exercised ......... -- -- (22,800) 0.3 --
------------ ------------ ------------ -------- --------
BALANCE, JUNE 30, 2001 ........................... 16,078,733 $ 1.6 1,244,024 $ (19.8) $ 60
============ ============ ============ ======== ========
ACCUMULATED
OTHER
RETAINED UNEARNED COMPREHENSIVE
EARNINGS COMPENSATION LOSS TOTAL
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 ....................... $ 156.7 $ (26.8) $ 184.2
Net income for the six months
ended June 30, 2000 ......................... 13.2 13.2
Adjustments to unrealized foreign
currency translation ........................ (5.2) (5.2)
-----------
Comprehensive income ........................ 8.0
Dividends declared ($0.30 per share) ............. (4.6) (4.6)
Purchases of treasury stock ...................... (5.4)
Restricted stock issuances ....................... $ (0.4)
Stock issued to directors as compensation ........ -- -- -- --
------------ ------------ ------------ -----------
BALANCE, JUNE 30, 2000 ........................... 165.3 (0.4) (32.0) 182.2
Net income for the six months
ended December 31, 2000 ..................... 14.6 14.6
Adjustments to unrealized foreign
currency translation ........................ (4.7) (4.7)
-----------
Comprehensive income ........................ 9.9
Dividends declared ($0.30 per share) ............. (4.6) (4.6)
Purchases of treasury stock ...................... (7.8)
Amortization of unearned compensation ............ 0.1 0.1
Stock issued to directors as compensation ........ 0.1
Issuance of shares for options exercised ......... -- -- -- --
------------ ------------ ------------ -----------
BALANCE, DECEMBER 31, 2000 ....................... 175.3 (0.3) (36.7) 179.9
Net income for the six months
ended June 30, 2001 ......................... 8.5 8.5
Change in unrealized fair value
of derivative instruments ................... (0.6) (0.6)
Adjustments to unrealized foreign
currency translation ........................ (17.0) (17.0)
----------
Comprehensive loss .......................... (9.1)
Dividends declared ($0.30 per share) ............. (4.5) (4.5)
Restricted stock issuances ....................... (0.4) --
Amortization of unearned compensation ............ 0.1 0.1
Stock issued to directors as compensation ........ 0.1
Issuance of shares for options exercised ......... -- -- -- 0.3
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2001 ........................... $ 179.3 $ (0.6) $ (54.3) $ 166.8
============ ============ ============ ===========
See Notes to Unaudited Consolidated Financial Statements
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SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
U.S. $ IN MILLIONS
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------
2001 2000
------ ------
Operations
Net income ........................................................................ $ 8.5 $ 13.2
Non-cash items included in net income:
Depreciation and amortization ................................................. 10.8 11.2
Deferred income tax provision ................................................. 2.0 3.5
Minority interest in earnings of subsidiaries ................................. 1.7 1.9
Other ......................................................................... 1.6 0.4
Advance payments from customers ................................................... 36.0 --
Changes in operating working capital .............................................. (10.7) (12.6)
------ ------
Cash Provided by Operations .............................................. 49.9 17.6
------ ------
Investing
Capital spending .................................................................. (41.9) (7.5)
Capitalized software costs ........................................................ (0.4) (0.8)
Other ............................................................................. (4.4) 0.5
------ ------
Cash Used for Investing .................................................. (46.7) (7.8)
------ ------
Financing
Cash dividends paid to SWM stockholders ........................................... (4.5) (4.6)
Cash dividends paid to minority owner ............................................. (3.4) (4.6)
Changes in short-term debt ........................................................ 2.6 (1.8)
Proceeds from issuances of long-term debt ......................................... 3.5 4.5
Payments on long-term debt ........................................................ (3.5) (3.1)
Purchases of treasury stock ....................................................... -- (5.4)
Proceeds from exercise of stock options ........................................... 0.3 --
------ ------
Cash Used for Financing .................................................. (5.0) (15.0)
------ ------
Decrease in Cash and Cash Equivalents .................................................. (1.8) (5.2)
Cash and Cash Equivalents at Beginning of Period ....................................... 23.6 15.1
------ ------
Cash and Cash Equivalents at End of Period ............................................. $ 21.8 $ 9.9
====== ======
See Notes to Unaudited Consolidated Financial Statements
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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 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. 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 2000 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 2000 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, 2001 were 14,776,000 and
14,768,600, respectively, and for the three and six month periods ended June 30,
2000 were approximately 15,352,400 and 15,451,900, 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, 2001 were 14,993,800 and 14,975,000, respectively, and for the three
and six month periods ended June 30, 2000 were approximately 15,389,300 and
15,488,100, respectively. Potential common shares are those related to stock
options and restricted stock outstanding and directors' accumulated deferred
stock compensation balances during the respective periods.
NOTE 3. INVENTORIES
The following schedule details inventories by major class:
June 30, December 31,
2001 2000
--------- ------------
At the lower of cost on the First-In, First-Out
(FIFO) and weighted average methods or market:
Raw materials ............................................... $ 25.1 $ 28.7
Work in process ............................................. 7.2 6.1
Finished goods .............................................. 28.4 23.7
Supplies and other .......................................... 11.9 12.2
-------- --------
72.6 70.7
Excess of FIFO cost over Last-In, First-Out (LIFO) cost .......... (5.4) (6.2)
--------- ---------
Total ..................................................... $ 67.2 $ 64.5
======== ========
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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, 2001 were 38.7 percent and 37.8 percent, respectively, compared with
25.0 percent and 29.8 percent for the respective corresponding periods of 2000.
The three and six month periods ended June 30, 2000 benefited from a $1.0
favorable adjustment to reduce Spanish deferred income tax valuation allowances.
The six month period ended June 30, 2000 also benefited from favorable tax
treatment of a settlement related to a prior-period claim. The effective income
tax rates for the three and six month periods of 2001 benefited from a decrease
in the French corporate income tax rate from 37.7 percent for 2000 to 36.3
percent for 2001.
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 and its obligation to participate in the
remediation or monitoring of certain hazardous waste disposal sites (see
additional information in Note 12 to the Notes to Consolidated Financial
Statements included in the Company's 2000 Annual Report on Form 10-K), 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.
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 $3 annually in 2001 and 2002. 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 other appropriate and necessary capital 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
On December 27, 2000, the Company's subsidiary in Brazil,
Schweitzer-Mauduit do Brasil, S.A. ("SWM-B") received two assessments from the
tax authorities of the State of Rio de Janeiro, Brazil concerning Imposto sobre
Circulacao de Mercadorias e Servicos ("ICMS"), a form of value-added tax,
consisting of unpaid ICMS taxes from January 1995 through November 2000,
together with interest and penalties in the total amount of approximately $13.6,
based on the foreign currency exchange rate at December 31, 2000 (the
"Assessment"). The Assessment concerned the accrual and use by SWM-B of ICMS tax
credits generated from the production and sale of certain non-tobacco related
grades of paper sold domestically that are immune from the tax to offset ICMS
taxes otherwise owed on the sale of products that are not immune. A portion of
the Assessment, estimated at December 31, 2000 at approximately $6.9, relates to
tax periods that predate the Company's acquisition of Companhia Industrial de
Papel Pirahy ("Pirahy"), the predecessor in name to SWM-B, and is covered by an
indemnification from the sellers of Pirahy. Administrative appeals were filed
and in April 2001 an adverse ruling was received as to the portion of the
Assessment that covered primarily the period of the Company's ownership
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SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
of SWM-B. The balance of the Assessment is still under administrative review.
Following the adverse decision at the administrative level, a judicial action
was filed in Rio de Janeiro and SWM-B was recently advised that enforcement of
the affected portion of the Assessment was enjoined by the court, without any
requirement for a deposit, pending final determination of SWM-B's action to
annul the tax debt. SWM-B continues to vigorously contest the Assessment on both
procedural and constitutional grounds and believes that the Assessment will
ultimately be resolved in its favor. However, the final resolution of this
matter will most likely entail both administrative and judicial proceedings up
to and including presentation of the matter to the Supreme Court of Brazil and
is not likely to be finally resolved for several years. No liability has been
recorded in the Company's financial statements for the Assessment. In December
2000, SWM-B suspended the further accrual and application of ICMS tax credits
generated on immune products to reduce its possible exposure to future ICMS tax
assessments. A reserve of $1.1 was recorded for the entire asset balance of
unused ICMS tax credits as of December 31, 2000.
Following closure of the ICMS tax audit of SWM-B discussed above, during
February 2001, SWM-B revised its prior-period ICMS treatment related to
consignment pulp purchases. As a result, the Company decreased the asset and
corresponding reserve on its books associated with these ICMS tax credits from
$1.1 to $0.2, still fully reserving this remaining asset balance of unused ICMS
tax credits. The Company took this action to eliminate the risk of a new ICMS
tax assessment while it awaited the final outcome of its challenge to the
Assessment that was issued in December 2000.
In April 2001, SWM-B received a third ICMS tax assessment for penalty only
in the amount of approximately $0.3 related to its revised treatment of the ICMS
tax credits relating to consignment pulp. The State of Rio de Janeiro tax
authorities contend that the Company revised its position on the credits
associated with consignment pulp in response to an open tax audit and is
therefore subject to penalties. The Company believes this assessment is without
basis as the ICMS audit was closed prior to February 2001 and no ongoing inquiry
was active at the time the Company adjusted these ICMS credits. The Company is
vigorously challenging this assessment.
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 adverse effect on the Company's
consolidated financial statements.
NOTE 7. 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, plug wrap and tipping papers
used to wrap various parts of a cigarette, reconstituted tobacco products and
paper products used in cigarette packaging. While the products are similar 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 domiciled in that segment.
Tobacco industry products comprised approximately 87 to 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 only produce flax fiber used as raw material in the U.S.
operations.
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SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
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. Eliminations and unallocated
assets include receivables from other segments and immaterial balances of the
Company's international holding company in Spain.
FOR THE THREE MONTHS ENDED
-------------------------- % OF CONSOLIDATED
JUNE 30, JUNE 30, % CHANGE -------------------
NET SALES 2001 2000 VS. 2000 2001 2000
-------- -------- -------- ------ ------
United States ................................. $ 42.5 $ 39.8 + 6.8% 33.9% 32.7%
France ........................................ 71.0 64.7 + 9.7 56.7 53.2
Brazil ........................................ 14.6 17.2 -15.1 11.7 14.1
------- -------
Subtotal ............................. 128.1 121.7
Intersegment sales by:
United States ............................ -- -- -- --
France ................................... (1.7) -- (1.4) --
Brazil ................................... (1.1) -- (0.9) --
------- ------- ----- -----
Consolidated ......................... $ 125.3 $ 121.7 + 3.0% 100.0% 100.0%
======= ======= ===== =====
FOR THE THREE MONTHS ENDED
-------------------------- % OF CONSOLIDATED % RETURN ON SALES
JUNE 30, JUNE 30, % CHANGE ----------------- -----------------
OPERATING PROFIT 2001 2000 VS. 2000 2001 2000 2001 2000
- ---------------- -------- -------- -------- ------ ------ ------ ------
United States.............. $ 2.0 $ 0.1 N.M. 20.2% 0.9% 4.7% 0.3%
France..................... 12.8 10.8 + 18.5% 129.3 97.3 18.0 16.7
Brazil..................... (3.0) 1.5 N.M. (30.3) 13.5 (20.5) 8.7
Unallocated expenses....... (1.9) (1.3) (19.2) (11.7)
------- ------ ----- -----
Consolidated...... $ 9.9 $ 11.1 - 10.8% 100.0% 100.0% 7.9% 9.1%
======= ====== ===== =====
FOR THE SIX MONTHS ENDED
------------------------ % OF CONSOLIDATED
JUNE 30, JUNE 30, % CHANGE --------------------
NET SALES 2001 2000 VS. 2000 2001 2000
-------- -------- -------- ------ ------
United States ................................. $ 87.2 $ 77.9 +11.9% 35.0% 32.5%
France ........................................ 136.3 128.7 + 5.9 54.6 53.7
Brazil ........................................ 29.6 33.1 -10.6 11.9 13.8
------ ------
Subtotal ............................. 253.1 239.7
Intersegment sales by:
United States ............................ -- -- -- --
France ................................... (1.8) -- (0.7) --
Brazil ................................... (1.9) -- (0.8) --
------- ------ ----- -----
Consolidated ......................... $ 249.4 $239.7 + 4.0% 100.0% 100.0%
======= ====== ===== =====
FOR THE SIX MONTHS ENDED
------------------------ % OF CONSOLIDATED % RETURN ON SALES
JUNE 30, JUNE 30, % CHANGE ----------------- -----------------
OPERATING PROFIT 2001 2000 VS. 2000 2001 2000 2001 2000
-------- -------- -------- ------ ------ ------ ------
United States .................... $ 2.1 $ 1.8 + 16.7% 11.9% 8.0% 2.4% 2.3%
France ........................... 21.9 20.5 + 6.8 123.7 91.1 16.1 15.9
Brazil ........................... (2.9) 2.8 N.M. (16.4) 12.4 (9.8) 8.5
Unallocated expenses ............. (3.4) (2.6) (19.2) (11.5)
------- ------- ----- -----
Consolidated ............ $ 17.7 $ 22.5 - 21.3 100.0% 100.0% 7.1% 9.4%
======= ======= ===== =====
N.M. - Not Meaningful
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SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
% OF CONSOLIDATED
JUNE 30, DECEMBER 31, ----------------------
TOTAL ASSETS 2001 2000 2001 2000
-------- -------- ---- ----
United States......................... $ 201.4 $ 155.4 43.6% 35.2%
France................................ 213.6 232.6 46.3 52.7
Brazil................................ 46.2 53.9 10.0 12.2
Eliminations and unallocated assets... 0.4 (0.2) 0.1 (0.1)
-------- -------- ----- -----
Consolidated................. $ 461.6 $ 441.7 100.0% 100.0%
======== ======== ===== =====
Approximately 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. Negative unrealized foreign
currency translation adjustments, as well as the asset reductions for France and
Brazil shown above, are primarily due to a stronger U.S. dollar against the euro
and the Brazilian real at June 30, 2001 versus December 31, 2000.
NOTE 8. RESTRUCTURING CHARGE
In the second quarter of 2001, the Company recorded a pre-tax charge of
$4.6 related to changes in business conditions of the Company's Brazilian
business and the resulting decision to exit the printing and writing uncoated
papers market and shut down one of its paper machines and associated equipment.
Non-cash write-downs of equipment represented $4.1 of the second quarter pre-tax
charge. The balance of the second quarter charge was primarily for write-downs
of related inventories, spare parts and machine clothing.
In addition, a further pre-tax charge of approximately $0.5 to $0.7 will be
recorded by the Company's Brazilian business in the third quarter of 2001,
primarily related to employee termination and severance costs as a result of the
decisions to exit the printing and writing uncoated papers market and to shut
down one of its paper machines.
NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." The statement requires
that all derivative financial instruments, whether designated in hedging
relationships or not, be recognized as either assets or liabilities on the
balance sheet at fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in current period earnings. If
the derivative is designated as a cash flow hedge, the effective portions of
changes in the fair value of the derivative are recorded in other comprehensive
income (loss) and are recognized in the income statement when the hedged item
affects earnings. Changes in the fair value of derivatives not designated as
hedging instruments or that do not qualify for hedge treatment, as well as the
ineffective portion of a particular derivative instrument designated and
qualifying as a hedge, must be recognized currently in the income statement.
The Company selectively hedges its interest rate and foreign currency
exposures when it is practicable and cost-effective to do so, on a
non-speculative basis. The Company also enters into contracts with certain
customers and vendors in which prices for the Company's normal sales and
purchases may be fixed
10
11
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
for periods of time, or may have automatic price adjustment features related to
changes in costs of raw materials or other components. Based on the terms of
these contracts, which provide for sale or purchase of items, other than a
financial instrument or derivative instrument, that will result in physical
delivery of such items in quantities expected to be sold or used by the Company
over a reasonable period in the normal course of business, such contracts are
deemed to meet the normal purchases and normal sales exception of SFAS No. 133
and, therefore, are neither considered to be nor accounted for as derivative
financial instruments.
The Company had no outstanding derivative financial instruments designated
as hedges as of January 1, 2001. The Company recorded no cumulative effect of
adopting SFAS 133. During the first quarter of 2001, the Company entered into
interest rate swap agreements to fix the variable rate component of certain of
its variable rate long-term debt. These interest rate swap contracts were
designated as cash flow hedges and qualified for short-cut method treatment
under SFAS No 133. As such, the Company assumed there was no ineffectiveness of
these hedge contracts, and accordingly, no gain or loss was recorded in the
income statement relative to the changes in fair value of these interest rate
swap contracts, but instead the changes in fair value of the contracts were
reflected in other comprehensive income (loss). There were no new derivative
contract agreements entered into by the Company during the second quarter of
2001.
NOTE 10. NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method of accounting. SFAS No. 142 changes
the accounting for goodwill from an amortization method to an impairment-only
approach. Thus, amortization of goodwill, including goodwill recorded in past
business combinations, will cease upon adoption of SFAS No. 142, which will be
effective for the Company beginning January 1, 2002. The Company is evaluating
the effects of these new accounting standards, however the Company does not
anticipate any material effect on its financial statements.
11
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 7 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 increased by $3.6 million in the three month period ended June
30, 2001 compared with the corresponding period of the preceding year. This
increase was a result of changes in sales volumes and higher average selling
prices, partially offset by unfavorable changes in currency exchange rates.
Although sales volumes for the quarter decreased in total by one percent
compared with the same quarter of the prior year, changes in sales volumes
contributed favorably to the net sales comparison by $5.3 million in the
quarter. Sales volumes for the quarter increased by eight percent for the French
business unit, with higher sales of both tobacco-related papers and
reconstituted tobacco leaf products. For the U.S. business unit, sales volumes
decreased by five percent with declines in sales of both commercial and
industrial and tobacco-related papers. For the Brazilian business unit, sales
volumes declined by 15 percent, with lower sales of commercial and industrial
papers more than offsetting improvements in tobacco-related papers. This
tobacco-related papers sales volume improvement was primarily within the
Brazilian market due, in part, to an increase in inventories by a major
customer. Lower sales of commercial and industrial papers in Brazil were caused
by a decline in printing and writing uncoated grades of paper due to a slowdown
in the Brazilian printing and writing papers market as well as by a decision by
the Company to reduce its sales of certain grades of these papers that had been
negatively impacted by ICMS, a form of value-added business tax. In addition, an
electricity rationing program in Brazil resulted in reduced production of
printing and writing grades of papers. Higher average selling prices had a
positive $3.6 million impact on the net sales comparison. Higher average selling
prices were experienced in the French, U.S. and Brazilian businesses. The
improvement in average selling prices in the quarter included the benefit of
certain retroactive price increases in the United States of approximately $1.3
million related to prior periods, primarily the first quarter of 2001. Changes
in currency exchange rates had an unfavorable impact of $5.3 million on the net
sales comparison, as a result of a stronger U.S. dollar versus the euro and the
Brazilian real compared with the same quarter of the prior year.
Net sales increased by $9.7 million in the six month period ended June 30,
2001 compared with the corresponding period of the preceding year. This increase
was a result of changes in sales volumes and higher average selling prices,
partially offset by unfavorable changes in currency exchange rates. Net sales
increased by $13.9 million in the period due to changes in sales volumes which
increased in total by one percent compared with the same six month period of the
prior year. Sales volumes increased at the French business unit by six percent,
with higher sales of both tobacco-related papers and reconstituted tobacco leaf
products. Sales volumes of the U.S. business unit increased by four percent,
primarily as a result of higher sales of tobacco-related papers. For the
Brazilian business unit, sales volumes declined by 13 percent, with lower sales
of commercial and industrial papers more than offsetting improvements in
tobacco-related papers (see further comments regarding the mix of sales by the
Company's Brazilian business in the previous paragraph). Sales volumes of all
three business segments had been unfavorably impacted in the first quarter of
2000 by a shift of sales volumes related to Year 2000 concerns of certain
customers which increased their year-end 1999 inventories. Higher average
selling prices had a positive $4.5 million impact on the net sales comparison.
Changes in currency exchange rates had an unfavorable impact of $8.7 million on
the net sales comparison, as a result of a stronger U.S. dollar versus the euro
and the Brazilian real compared with the same period of the prior year.
12
13
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Operating Profit
Operating profit decreased by $1.2 million in the three month period ended
June 30, 2001 compared with the corresponding period of the preceding year.
Excluding a $4.6 million pre-tax charge recorded by the Company's Brazilian
business (see "Brazilian Restructuring" below), operating profit for the quarter
improved by $3.4 million, with improvement in each of the three business
segments. All three business segments experienced lower per ton wood pulp costs,
favorably impacting operating profit by $2.3 million in total. Higher costs of
purchased energy in all three business segments unfavorably impacted operating
profit in total by $1.3 million. Operating profit for the French business unit
increased by $2.0 million as a result of higher sales volumes, higher average
selling prices and lower per ton wood pulp costs, partially offset by increased
selling expense. Operating profit in the United States increased by $1.9 million
as a result of higher average selling prices, lower per ton wood pulp costs and
improved mill operations other than at the Spotswood, New Jersey mill. These
favorable factors in the United States were partially offset by increased
operating expenses of $1.4 million at the Spotswood mill and higher purchased
energy costs. Operating profit in Brazil, excluding the restructuring charge,
increased by $0.1 million as the favorable effects of higher sales of
tobacco-related papers, higher average selling prices and lower per ton wood
pulp costs more than offset the unfavorable effects of lower production and
sales of printing and writing papers and increased research expense in support
of new product development activities. Nonmanufacturing expenses increased by
$1.7 million during the quarter as a result of higher selling expense in France,
higher research expense, primarily in Brazil, and higher general expense,
primarily due to increased benefit costs in the United States.
Operating profit decreased by $4.8 million in the six month period ended
June 30, 2001 compared with the corresponding period of the preceding year.
Excluding the $4.6 million pre-tax charge recorded by the Company's Brazilian
business (see "Brazilian Restructuring" below), operating profit decreased by
$0.2 million, with a decrease in the Brazilian business segment more than
offsetting improvements in the French and U.S. business segments. The favorable
effects of lower per ton wood pulp costs in the second quarter comparison offset
the unfavorable effects of higher per ton wood pulp costs in the first quarter
comparison. Operating profit was unfavorably impacted in all three business
segments by increased energy prices having a $3.6 million effect in total.
Excluding the restructuring charge, operating profit in Brazil decreased by $1.1
million primarily as a result of increased local business taxes, a decline in
the production and sales of printing and writing grades of papers, higher energy
costs and increased research expense more than offsetting the benefits of
increased tobacco-related paper sales volumes and higher average selling prices.
Operating profit for the French business unit increased by $1.4 million as a
result of higher sales volumes and higher average selling prices partially
offset by increased per ton wood pulp and energy costs and nonmanufacturing
expenses. Operating profit in the United States improved by $0.3 million as a
result of increased sales volumes, higher average selling prices and improved
mill operations other than at the Spotswood mill, partially offset by increased
operating expenses of $3.4 million at the Spotswood mill and higher purchased
energy and nonmanufacturing expenses. Nonmanufacturing expenses increased by
$2.8 million for the six month period comparison as a result of higher general,
research and selling expenses. Higher general expense was caused primarily by
increased benefit costs in the United States. Research expense increased in the
United States and Brazil in support of new product development activities.
Higher selling expense was incurred in France.
13
14
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Brazilian Restructuring
The Brazilian printing and writing uncoated papers market has shown
weakness over the past six months resulting in pressure on operating margins.
Beginning in January 2001, the Company also reduced its sales of certain grades
of these papers that had been negatively impacted by ICMS, a form of value-added
business tax. In addition, in late May 2001, the Brazilian government enacted an
electricity rationing program which has an overall objective of a 20 percent
reduction in electricity consumption in Brazil and mandates a 25 percent
reduction in electricity consumption by the paper industry in the most populated
and industrialized regions of Brazil. In response to the Brazilian government's
electricity reduction directive, the Company's Brazilian business implemented an
electricity reduction program; however, to achieve the 25 percent reduction, it
was necessary to institute production curtailments. Machine downtime was taken
to reduce production of the Company's least profitable products. The printing
and writing uncoated papers business has been the least profitable product line
in Brazil while also being the largest energy user. The duration of the
government's electricity reduction directive is uncertain although it is
expected to last at least six months, through the traditional "dry period" in
Brazil. The Brazilian government's forced electricity reduction program is in
response to unusually low water levels in the lakes and reservoirs supplying
Brazil's hydroelectric facilities that provide 90 percent of that country's
electricity.
As a result of these business conditions, the Company made a decision to
exit the printing and writing uncoated papers business in Brazil which will
permit the Company's Brazilian operations to comply with the government's
electricity rationing program and to better focus on and service its other more
profitable product lines. This plan to restructure its Brazilian operations
resulted in the Company recording a pre-tax charge in the second quarter of 2001
of $4.6 million, primarily for the non-cash write-down of assets related to the
printing and writing uncoated papers business. An additional pre-tax charge of
$0.5 to $0.7 million will be recorded in the third quarter of 2001, primarily
related to employee termination and severance costs.
NON-OPERATING EXPENSES
Interest expense was lower by $0.5 million and $0.7 million for the three
and six month periods ended June 30, 2001, respectively, compared with the
corresponding periods of the preceding year. In 2001, a larger amount of
interest was capitalized to capital projects than during the comparable periods
of 2000. The favorable effect of lower average interest rates in the United
States during 2001 was largely offset by higher average interest rates in
France. Other income, net consisted primarily of interest income, royalty income
and foreign currency transaction gains and losses in each of the periods
presented, and a favorable settlement reflected in the six month period of 2000
related to a prior-period claim.
INCOME TAXES
The effective income tax rates for the three and six month periods ended
June 30, 2001 were 38.7 percent and 37.8 percent, respectively, compared with
25.0 percent and 29.8 percent for the respective corresponding periods of 2000.
The three and six month periods ended June 30, 2000 benefited from a $1.0
million favorable adjustment to reduce Spanish deferred income tax valuation
allowances. The six month period ended June 30, 2000 also benefited from
favorable tax treatment of a settlement related to a prior-period claim. The
effective income tax rates for the three and six month periods of 2001 benefited
from a decrease in the French corporate income tax rate from 37.7 percent for
2000 to 36.3 percent for 2001.
14
15
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended June 30,
-------------------------
(U.S. $ in millions)
Cash Provided by (Used for): 2001 2000
---- ----
Changes in operating working capital.............................................. $ (10.7) $ (12.6)
Advance payments from customers................................................... 36.0 -
Operations........................................................................ 49.9 17.6
Capital spending.................................................................. (41.9) (7.5)
Purchases of treasury stock....................................................... -- (5.4)
The Company's primary source of liquidity is cash flow from operations,
which is principally obtained through operating earnings. The Company's net cash
provided by operations increased from $17.6 million to $49.9 million for the six
month periods ended June 30, 2000 and June 30, 2001, respectively, primarily due
to $36.0 million obtained in the 2001 period from advance payments from
customers. These advance payments are for future product purchases for which the
Company has recorded Noncurrent Deferred Revenue, which will be amortized into
Net Sales as earned and credited to customers based upon a mutually agreed-upon
amount per unit of future product sales. Changes in operating working capital
contributed unfavorably to cash flow by $10.7 million and $12.6 million in the
six month periods ended June 30, 2001 and 2000, respectively. The 2001 increase
in working capital was primarily due to a decrease in accounts payable and an
increase in inventories, both in part due to the banded cigarette paper capital
project at the Spotswood mill. The 2000 increase in working capital was
primarily due to a decrease in accounts payable and an increase in accounts
receivable.
Capital spending in the six month period ended June 30, 2001 included $35.0
million toward the implementation of the banded cigarette paper project at the
Spotswood mill. During the first six months of 2000, capital spending included
$2.3 million toward two projects at the Spotswood mill for a new high-speed
slitter and a mill effluent solids removal system and $0.9 million toward
improvement of a reconstituted tobacco leaf machine in the Spay, France mill.
During the six month period ended June 30, 2000, the Company repurchased a
total of 375,200 shares of its common stock for $5.4 million. During 2000, the
Company's Board of Directors authorized the repurchase of additional shares of
the Company's common stock during the period January 1, 2001 through December
31, 2002 in an amount not to exceed $20 million. During the first six months of
2001, the Company did not repurchase any shares of its common stock. Common
stock repurchases in 2001 will be dependent upon various factors, including cash
availability, the stock price and strategic opportunities.
On July 26, 2001, 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 10, 2001 to stockholders of record on
August 13, 2001.
The Company's ongoing requirements for cash are expected to consist
principally of amounts required for capital expenditures, including the banded
cigarette paper project, stockholder dividends, purchases of Company stock and
working capital. Other than expenditures associated with capital projects, the
Company had no material outstanding commitments as of June 30, 2001.
The Company believes its cash flow from operations, including advance
payments from customers for future product purchases, together with borrowings
available under its revolving credit and other credit facilities, will be
sufficient to fund its ongoing cash requirements.
15
16
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Outstanding term loans under the Company's current bank Credit Agreement
are payable in three equal semiannual installments beginning in January 2002
based on existing terms. The Company has reflected the first installment payment
totaling approximately $25.7 million in Current Liabilities rather than in
Long-Term Debt on its consolidated balance sheet as of June 30, 2001. However,
the Company intends to refinance such loans with long-term financing prior to
the first installment payment date.
NEW ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
The adoption of these new accounting standards had no material effect on the
Company's consolidated financial position or results of operations.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method of
accounting. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business combinations, will cease
upon adoption of SFAS No. 142, which will be effective for the Company beginning
January 1, 2002. The Company is evaluating the effects of these new accounting
standards, however the Company does not anticipate any material effect on its
financial statements.
OUTLOOK
Cigarette consumption and production in the United States continue to
decline as a result of declines in domestic cigarette consumption and exports of
cigarettes manufactured in the United States, however the decline in 2000 and
thus far in 2001 is at a lower rate than in 1998 and 1999. Sales volumes of
tobacco-related papers of the Company's U.S. business segment appear to have
stabilized. The negative impact of lower U.S. cigarette production is being more
than offset by the Company's increased market share within the North American
market. Outside the United States, trends of improvement are expected to
continue in tobacco-related paper sales in Eastern and Western Europe and Latin
America. Growth in full year French reconstituted tobacco leaf sales volumes is
anticipated for 2001 compared with 2000.
Although the Company's Brazilian business experienced improvement in its
sales of tobacco-related papers in the first six months of 2001 compared with
the comparable period of the prior year both within Brazil and in Latin American
countries outside of Brazil, that increase was more than offset by a significant
decline in its sales of printing and writing papers as a result of business
conditions in Brazil (see "Brazilian Restructuring" above). The Company's
Brazilian business segment's net sales of printing and writing uncoated papers
totaled approximately $25 million in the full year of 2000. With the
restructuring in the Brazilian operations, the Brazilian government's
electricity rationing program is not expected to significantly affect the demand
for the Company's tobacco-related papers nor the Company's ability to produce
such papers. The Company does not expect the availability of major raw materials
such as wood pulp, chemicals and chalk and the ability to receive raw materials
and ship finished product to be materially impacted by the electricity rationing
program. Exiting the printing and writing uncoated papers market will permit the
Company's Brazilian business to better focus on and service its other more
profitable product lines. Cost reduction activities to be implemented as part of
the restructuring will be fully completed by the end of 2001, after which time
the restructuring in Brazil is not expected to have a material impact on ongoing
financial results. However, the third and fourth quarters of 2001 are likely to
be negatively impacted by the restructuring program until the related cost
reduction activities in Brazil are fully implemented. An additional pre-tax
charge of $0.5 to $0.7 million will be recorded in the third quarter of 2001 in
Brazil, primarily related to employee termination and severance costs.
16
17
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
During 2000, the Company and Philip Morris reached agreement to proceed
with the modification of paper machines and related manufacturing equipment at
the Company's Spotswood mill to produce commercial quantities of a new
proprietary banded cigarette paper for Philip Morris. Capital spending for the
implementation of the banded cigarette paper project is currently expected to
total approximately $40 to $45 million for the full year 2001. The Company does
not expect this project to impair its ability to pursue other appropriate
business opportunities. Funding for the Spotswood mill conversion and increased
working capital requirements will come from internal sources and from advance
payments by Philip Morris against future product purchases. Spotswood mill
operating expenses are expected to continue being a negative factor for the
balance of 2001 due to the unfavorable impact of the capital project on mill
operations, although improvement is anticipated in subsequent quarters.
The Company experienced higher energy costs in the first half of 2001
compared with the comparable period of the prior year. Higher energy costs may
persist throughout 2001. However, the per ton cost of wood pulp has declined
during the first half of 2001 compared with the last half of 2000 and is
expected to provide a positive quarter-to-quarter comparison in the second half
of 2001. This could provide an opportunity for the Company to retain the
improvement in gross profit margin experienced during the second quarter.
Worldwide demand for tobacco-related papers remains below worldwide
capacity for such papers despite actions by suppliers to shut-down less
efficient machines. The combination of this continuing excess worldwide capacity
for tobacco-related papers and the strong U.S. dollar versus European and other
foreign currencies continues to make it difficult to increase selling prices.
However, some improvement is expected in selling prices during the second half
of 2001 compared with the comparable period of the prior year, although the
year-to-year comparison is not expected to be as strong as during the second
quarter. The average selling prices for the second quarter comparison benefited
from certain retroactive price increases in the United States. The decline in
per ton wood pulp costs is expected to exert pressure on selling prices.
Cost reduction continues to be a priority in each of the Company's business
segments. Future periods are expected to benefit from various cost savings
programs and certain past and future capital projects.
The French corporate income tax rate declined from 37.7 percent for 2000 to
36.3 percent for 2001. The Company expects its consolidated effective income tax
rate to be approximately 36 percent for the balance of 2001.
Excluding capital spending associated with the banded cigarette paper
project, the Company expects to control its capital spending to approximately
$25 million for 2001.
17
18
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, particularly in the foregoing
discussion regarding the "Outlook" of the Company, constitute forward-looking
statements, generally identified by phrases such as the Company "expects" or
"anticipates", as well as by use of words of similar effect, such as "appears",
"could", "should", "may" and "typically," within the meaning of the Private
Securities Litigation Reform Act of 1995 and are subject to the safe harbor
created by that Act. This report contains many such forward-looking statements,
including statements regarding management's expectations and beliefs concerning
future events and factors impacting the Company, including future selling prices
for the Company's products, future market prices for wood pulp used by the
Company, future consumption and rates of purchased energy, expected sales
volumes trends, new product introductions, future banded cigarette paper
implementation costs, expected Brazilian restructuring implementation and costs,
anticipated cost savings, anticipated financial and operational results,
anticipated capital spending, anticipated effective income tax rates and tax and
other governmental actions, contingencies, anticipated common stock share
repurchases and other expected transactions of the Company. 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. Certain factors 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 2001 and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. In addition to
those mentioned above, 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 2000 Annual Report on Form 10-K, Part
II, Item 7, under the heading "Factors That May Affect Future Results."
18
19
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on Thursday, April
26, 2001, at which the following matters were submitted to a vote, as had been
indicated in the Company's proxy statement mailed on or about March 13, 2001:
Three nominees, Mr. Wayne H. Deitrich, Mr. Leonard J. Kujawa and Mr.
Larry B. Stillman, were elected as Class III Directors to serve a three-year
term expiring at the 2004 Annual Meeting of Stockholders. The results of the
voting of stockholders were as follows:
For Against Abstentions
--- ------- -----------
Director: Mr. Deitrich 13,092,377 1,335,706 -
Director: Mr. Kujawa 13,095,024 1,333,059 -
Director: Mr. Stillman 12,561,200 1,866,883 -
Other Directors continuing in office are (i) Ms. Claire L. Arnold, Mr.
Alan R. Batkin and Mr. Laurent G. Chambaz, Class I Directors, whose terms will
expire at the 2002 Annual Meeting of Stockholders and (ii) Mr. K.C. Caldabaugh,
Mr. Jean-Pierre Le Hetet and Mr. Richard D. Jackson, Class II Directors, whose
terms will expire at the 2003 Annual Meeting of Stockholders.
An amendment to the Company's Equity Participation Plan (the "Plan") was
approved to incorporate a definition of the term "Total and Permanent
Disability" and to increase the number of shares of common stock authorized for
use in granting stock options to key employees who participate in the Plan. The
results of the voting of stockholders on this proposed amendment were as
follows:
For Against Abstentions
--- ------- -----------
11,983,538 2,416,106 28,412
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
15. Independent Accountants' Report, dated July 18, 2001 from
Deloitte & Touche LLP to Schweitzer-Mauduit International,
Inc.
23. Independent Accountants' Consent.
(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
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)
August 2, 2001 August 2, 2001
20
21
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------
15. --- Independent Accountants' Report, dated July 18, 2001 from Deloitte & Touche LLP to Schweitzer-Mauduit
International, Inc.
23. --- Independent Accountants' Consent.