FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-13948
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1612879
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 NORTH POINT CENTER EAST
SUITE 600
ALPHARETTA, GEORGIA
30022-8246
(Address of principal executive offices)
(Zip Code)
1-800-514-0186
(Registrant's telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
As of September 30, 2001, 14,835,330 shares of the Corporation's common stock,
par value $.10 per share, together with preferred stock purchase rights
associated therewith, were outstanding.
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
------- ------- ------- -------
Net Sales ................................................. $ 123.4 $ 126.8 $ 372.8 $ 366.5
Cost of products sold ................................ 97.3 102.3 300.2 298.1
------- ------- ------- -------
Gross Profit .............................................. 26.1 24.5 72.6 68.4
Selling expense ...................................... 4.5 4.4 14.5 13.5
Research expense ..................................... 2.1 1.6 6.0 4.8
General expense ...................................... 4.3 4.2 14.6 13.3
Restructuring Charge (See Note 8) .................... 0.5 -- 5.1 --
------- ------- ------- -------
Operating Profit ......................................... 14.7 14.3 32.4 36.8
Interest expense ..................................... (1.2) (1.6) (3.6) (4.7)
Other income, net .................................... 1.0 0.5 2.1 2.6
------- ------- ------- -------
Income Before Income Taxes and Minority Interest .......... 14.5 13.2 30.9 34.7
Provision for income taxes ........................... 5.1 4.2 11.3 10.6
------- ------- ------- -------
Income Before Minority Interest ........................... 9.4 9.0 19.6 24.1
Minority interest in earnings of subsidiaries ........ 1.2 1.0 2.9 2.9
------- ------- ------- -------
Net Income................................................ $ 8.2 $ 8.0 $ 16.7 $ 21.2
======= ======= ======= =======
Net Income per Common Share:
Basic................................................ $ .55 $ .53 $ 1.13 $ 1.38
======= ======= ======= =======
Diluted.............................................. $ .54 $ .53 $ 1.11 $ 1.38
======= ======= ======= =======
Cash Dividends Declared per Common Share.................. $ .15 $ .15 $ .45 $ .45
======= ======= ======= =======
See Notes to Unaudited Consolidated Financial Statements
2
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
ASSETS
Current Assets
Cash and cash equivalents ................................................. $ 33.0 $ 23.6
Accounts receivable ....................................................... 75.9 77.7
Inventories ............................................................... 65.1 64.5
Current income tax refunds receivable ..................................... 1.8 2.9
Deferred income tax benefits .............................................. 4.5 4.8
Prepaid expenses .......................................................... 2.4 1.7
------ ------
Total Current Assets .................................................. 182.7 175.2
------ ------
Gross Property ................................................................ 499.3 462.0
Less accumulated depreciation ............................................. 220.0 212.5
------ ------
Net Property .......................................................... 279.3 249.5
------ ------
Noncurrent Deferred Income Tax Benefits ........................................ 1.5 1.0
------ ------
Deferred Charges and Other Assets .............................................. 14.8 16.0
------ ------
Total Assets ................................................................... $478.3 $441.7
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt ......................................... $ 56.9 $ 3.6
Other short-term debt ..................................................... 0.4 2.0
Accounts payable .......................................................... 37.1 52.7
Accrued expenses .......................................................... 56.7 52.1
Current deferred revenue .................................................. 8.7 --
------ ------
Total Current Liabilities ............................................. 159.8 110.4
------ ------
Long-Term Debt ................................................................. 42.2 97.7
------ ------
Noncurrent Deferred Income Tax Liabilities ..................................... 19.4 14.9
------ ------
Noncurrent Deferred Revenue .................................................... 44.3 10.0
------ ------
Other Noncurrent Liabilities ................................................... 32.8 22.4
------ ------
Minority Interest .............................................................. 5.4 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 - 1,243,403 and 1,288,471 shares at
September 30, 2001 and December 31, 2000, respectively ................ (19.8) (20.5)
Retained earnings ......................................................... 185.3 175.3
Unearned compensation ..................................................... (0.6) (0.3)
Accumulated other comprehensive loss ...................................... (52.7) (36.7)
------ ------
Total Stockholders' Equity ............................................ 174.4 179.9
------ ------
Total Liabilities and Stockholders' Equity ..................................... $478.3 $441.7
====== ======
See Notes to Unaudited Consolidated Financial Statements
3
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
U.S. $ IN MILLIONS
(UNAUDITED)
COMMON STOCK ISSUED ADDITIONAL
------------------- TREASURY STOCK PAID-IN RETAINED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS COMPENSATION
------ ------ ------ ------ ---------- -------- ------------
BALANCE, DECEMBER 31, 1999..................... 16,078,733 $ 1.6 441,845 $ (8.0) $ 60.7 $ 156.7
Net income for the nine months
ended September 30, 2000.................. 21.2
Adjustments to unrealized foreign
currency translation......................
Comprehensive income......................
Dividends declared ($0.45 per share)........... (6.9)
Purchases of treasury stock.................... 706,200 (10.1)
Restricted stock issuances..................... (30,000) 0.6 (0.2) $ (0.4)
Amortization of unearned compensation 0.1
Stock issued to directors as compensation...... -- -- (4,283) 0.1 -- -- --
---------- ----- --------- ------ ------ ------ ---------
BALANCE, SEPTEMBER 30, 2000.................... 16,078,733 1.6 1,113,762 (17.4) 60.5 171.0 (0.3)
Net income for the three months
ended December 31, 2000................... 6.6
Adjustments to unrealized foreign
currency translation......................
Comprehensive income......................
Dividends declared ($0.15 per share)........... (2.3)
Purchases of treasury stock.................... 176,500 (3.1)
Stock issued to directors as compensation (1,191)
Issuance of shares for options exercised -- -- (600) -- -- -- --
---------- ----- --------- ------ ------ ------ -------
BALANCE, DECEMBER 31, 2000..................... 16,078,733 1.6 1,288,471 (20.5) 60.5 175.3 (0.3)
Net income for the nine months
ended September 30, 2001.................. 16.7
Change in unrealized fair value
of derivative instruments.................
Adjustments to unrealized foreign
currency translation......................
Comprehensive income......................
Dividends declared ($0.45 per share)........... (6.7)
Restricted stock issuances..................... (20,000) 0.3 0.1 (0.4)
Amortization of unearned compensation 0.1
Stock issued to directors as compensation (2,268) 0.1
Issuance of shares for options exercised -- -- (22,800) 0.3 -- -- --
---------- ----- --------- ------ ------ ------ -------
BALANCE, SEPTEMBER 30, 2001.................... 16,078,733 $ 1.6 1,243,403 $(19.8) $ 60.6 $185.3 $ (0.6)
========== ===== ========= ====== ====== ====== =======
ACCUMULATED
OTHER
COMPREHENSIVE
LOSS TOTAL
---- -----
BALANCE, DECEMBER 31, 1999..................... $ (26.8) $184.2
Net income for the nine months
ended September 30, 2000.................. 21.2
Adjustments to unrealized foreign
currency translation...................... (14.0) (14.0)
-------
Comprehensive income...................... 7.2
Dividends declared ($0.45 per share)........... (6.9)
Purchases of treasury stock.................... (10.1)
Restricted stock issuances..................... --
Amortization of unearned compensation 0.1
Stock issued to directors as compensation...... -- 0.1
------- -------
BALANCE, SEPTEMBER 30, 2000.................... (40.8) 174.6
Net income for the three months
ended December 31, 2000................... 6.6
Adjustments to unrealized foreign
currency translation...................... 4.1 4.1
-------
Comprehensive income...................... 10.7
Dividends declared ($0.15 per share)........... (2.3)
Purchases of treasury stock.................... (3.1)
Stock issued to directors as compensation --
Issuance of shares for options exercised -- --
------- -------
BALANCE, DECEMBER 31, 2000..................... (36.7) 179.9
Net income for the nine months
ended September 30, 2001.................. 16.7
Change in unrealized fair value
of derivative instruments................. (1.1) (1.1)
Adjustments to unrealized foreign
currency translation...................... (14.9) (14.9)
-------
Comprehensive income...................... 0.7
Dividends declared ($0.45 per share)........... (6.7)
Restricted stock issuances..................... --
Amortization of unearned compensation 0.1
Stock issued to directors as compensation 0.1
Issuance of shares for options exercised -- 0.3
------- -------
BALANCE, SEPTEMBER 30, 2001.................... $ (52.7) $174.4
======= ======
See Notes to Unaudited Consolidated Financial Statements
4
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
U.S. $ IN MILLIONS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
2001 2000
----- -----
Operations
Net income ................................................. $16.7 $21.2
Non-cash items included in net income:
Depreciation and amortization .......................... 16.0 16.7
Deferred income tax provision .......................... 3.8 4.8
Minority interest in earnings of subsidiaries .......... 2.9 2.9
Other .................................................. 1.9 0.6
Advance payments from customers ............................ 43.0 4.0
Changes in operating working capital ....................... (9.4) (6.9)
----- -----
Cash Provided by Operations ....................... 74.9 43.3
----- -----
Investing
Capital spending ........................................... (55.9) (14.0)
Capitalized software costs ................................. (0.6) (1.1)
Other ...................................................... 2.6 (2.9)
----- -----
Cash Used for Investing ........................... (53.9) (18.0)
----- -----
Financing
Cash dividends paid to SWM stockholders .................... (6.7) (6.9)
Cash dividends paid to minority owner ...................... (3.4) (4.6)
Changes in short-term debt ................................. (1.6) (7.3)
Proceeds from issuances of long-term debt .................. 3.8 4.9
Payments on long-term debt ................................. (4.0) (3.6)
Purchases of treasury stock ................................ -- (10.1)
Proceeds from exercise of stock options .................... 0.3 --
----- -----
Cash Used for Financing ........................... (11.6) (27.6)
----- -----
Increase (Decrease) in Cash and Cash Equivalents ................ 9.4 (2.3)
Cash and Cash Equivalents at Beginning of Period ................ 23.6 15.1
----- -----
Cash and Cash Equivalents at End of Period ...................... $33.0 $12.8
===== =====
See Notes to Unaudited Consolidated Financial Statements
5
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 1. NATURE OF THE BUSINESS
Schweitzer-Mauduit International, Inc., including its subsidiaries,
("SWM" or the "Company") is a diversified producer of premium specialty papers
and the world's largest supplier of fine papers to the tobacco industry. The
Company's principal products include cigarette, tipping and plug wrap papers
used to wrap various parts of a cigarette, reconstituted tobacco leaf for use as
filler in cigarettes, reconstituted tobacco wrappers and binders for cigars and
paper products used in cigarette packaging. 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 nine month periods ended September 30, 2001 were
14,785,300 and 14,774,200, respectively, and for the three and nine month
periods ended September 30, 2000 were 15,132,200 and 15,344,600, respectively.
Diluted net income per common share is computed based on net income divided by
the weighted average number of common and potential common shares outstanding.
The average numbers of common and potential common shares used in the
calculations of diluted net income per common share for the three and nine month
periods ended September 30, 2001 were 15,106,300 and 15,018,800, respectively,
and for the three and nine month periods ended September 30, 2000 were
15,168,900 and 15,380,900, 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:
September 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 ............................................... $ 24.5 $ 28.7
Work in process ............................................. 7.6 6.1
Finished goods .............................................. 25.7 23.7
Supplies and other .......................................... 12.5 12.2
-------- --------
70.3 70.7
Excess of FIFO cost over Last-In, First-Out (LIFO) cost .......... (5.2) (6.2)
--------- ---------
Total ..................................................... $ 65.1 $ 64.5
======== ========
6
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 4. INCOME TAXES
The effective income tax rates for the three and nine month periods
ended September 30, 2001 were 35.2 percent and 36.6 percent, respectively,
compared with 31.8 percent and 30.5 percent for the respective corresponding
periods of 2000. The three and nine month periods ended September 30, 2000
benefited from a favorable $0.8 income tax adjustment associated with
repatriations from Schweitzer-Mauduit Spain, S.L., a wholly-owned subsidiary of
the Company, to the parent. The nine month period ended September 30, 2000 also
benefited from a $1.0 favorable adjustment to reduce Spanish deferred income tax
valuation allowances and a favorable tax benefit of $0.4 related to settlement
of a prior-period claim. The effective income tax rates for the three and nine
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 for full-year 2001 and approximately $4 in 2002, none of which is the result
of environmental violations. The major projects included in these estimates
include upgrading wastewater treatment facilities 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 (collectively,
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
7
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
from the sellers of Pirahy ("Assessment 1"). The second assessment pertains
exclusively to periods that SWM-B owned the Pirahy mill ("Assessment 2").
Administrative appeals were filed on the Assessment, and in April 2001 and
August 2001 decisions were rendered on these administrative appeals. The State
of Rio de Janeiro tax authorities denied the appeal of Assessment 2 in its
entirety and reduced the original amount of Assessment 1 by approximately $1.6
million based on the Company's argument that Assessment 1 covered periods barred
by the applicable statute of limitations. Following these decisions at the
administrative level, judicial actions to annul the tax and to enjoin
enforcement of the Assessment pending adjudication were filed in Rio de Janeiro
on behalf of SWM-B. The courts issued injunctions against enforcement of the
Assessment without the requirement for any bond or posting of other collateral
by SWM-B, pending final determination of SWM-B's action to annul the tax debts.
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 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 based on the Company's evaluation that SWM-B is
more likely than not to prevail in its challenge of the Assessment under the
facts and law as presently understood.
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 due to the punitive nature of penalties
associated with such assessments and SWM-B's plans to transition from immune
products to other non-immune products. 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 customer requirements and the manufacturing
capabilities of each of the operations. 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.
8
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Tobacco industry products comprised approximately 87 to 92 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. 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
SEPTEMBER 30, SEPTEMBER 30, % CHANGE ----------------------
NET SALES 2001 2000 VS. 2000 2001 2000
------------ ------------- --------- ---- -----
United States ...................... $ 41.3 $ 41.9 - 1.4% 33.5% 33.0%
France.............................. 70.5 67.2 + 4.9 57.1 53.0
Brazil.............................. 12.1 18.6 -34.9 9.8 14.7
------- --------
Subtotal................... 123.9 127.7
Intersegment sales by:
United States.................. -- (0.1) -- (0.1)
France......................... -- (0.1) -- (0.1)
Brazil......................... (0.5) (0.7) (0.4) (0.5)
-------- -------- ------ ------
Consolidated .............. $ 123.4 $ 126.8 - 2.7% 100.0% 100.0%
======= ======== ===== =====
FOR THE THREE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30, % CHANGE % OF CONSOLIDATED % RETURN ON SALES
OPERATING PROFIT 2001 2000 VS. 2000 2001 2000 2001 2000
---- ---- -------- ---- ---- ---- ----
United States.............. $ (0.3) $ 1.3 N.M. (2.0)% 9.1% (0.7)% 3.1%
France..................... 14.7 12.7 + 15.7% 100.0 88.8 20.9 18.9
Brazil..................... 1.7 1.4 + 21.4 11.5 9.8 14.0 7.5
Unallocated expenses....... (1.4) (1.1) (9.5) (7.7)
------- ------- ------ -----
Consolidated...... $ 14.7 $ 14.3 + 2.8% 100.0% 100.0% 11.9% 11.3%
======= ====== ===== =====
FOR THE NINE MONTHS ENDED
---------------------------- % OF CONSOLIDATED
SEPTEMBER 30, SEPTEMBER 30, % CHANGE -------------------
NET SALES 2001 2000 VS. 2000 2001 2000
------- --------- -------- ---- ----
United States ...................... $ 128.5 $ 119.8 + 7.3% 34.5% 32.7%
France.............................. 206.8 195.9 + 5.6 55.5 53.4
Brazil.............................. 41.7 51.7 -19.3 11.2 14.1
------- -------
Subtotal................... 377.0 367.4
Intersegment sales by:
United States.................. -- (0.1) -- --
France......................... (1.8) (0.1) (0.5) --
Brazil......................... (2.4) (0.7) (0.7) (0.2)
------- -------- ----- -----
Consolidated .............. $ 372.8 $ 366.5 + 1.7% 100.0% 100.0%
======= ======== ===== ======
FOR THE NINE MONTHS ENDED % OF CONSOLIDATED % RETURN ON SALES
SEPTEMBER 30, SEPTEMBER 30, % CHANGE ----------------------------------------
OPERATING PROFIT 2001 2000 VS. 2000 2001 2000 2001 2000
---- ---- -------- ---- ---- ---- ----
United States.............. $ 1.8 $ 3.1 - 41.9% 5.5% 8.4% 1.4% 2.6%
France..................... 36.6 33.2 + 10.2 113.0 90.2 17.7 16.9
Brazil..................... (1.2) 4.2 N.M. (3.7) 11.4 (2.9) 8.1
Unallocated expenses....... (4.8) (3.7) (14.8) (10.0)
------- ------ ----- ------
Consolidated...... $ 32.4 $ 36.8 - 12.0% 100.0% 100.0% 8.7% 10.0%
======= ====== ===== ======
N.M. - Not Meaningful
9
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
% OF CONSOLIDATED
-------------------------
TOTAL ASSETS 2001 2000 2001 2000
-------- -------- ------ ------
United States......................... $ 201.1 $ 155.4 42.0% 35.2%
France................................ 235.4 232.6 49.2 52.7
Brazil................................ 40.0 53.9 8.4 12.2
Eliminations and unallocated assets... 1.8 (0.2) 0.4 (0.1)
-------- -------- ------ ------
Consolidated................. $ 478.3 $ 441.7 100.0% 100.0%
======== ======== ===== =====
As of September 30, 2001, 58 percent of the Company's assets and
liabilities were 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 have been recorded during
2001, primarily due to a stronger U.S. dollar against the euro and the Brazilian
real at September 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 in Brazil 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 spare parts and machine clothing.
In addition, after determining which employees would be affected and
providing notice to such affected employees, the Company recorded a further
pre-tax charge of $0.5 in the third quarter of 2001, primarily related to
employee termination and severance costs incurred by the Company's Brazilian
business as a result of the decisions to exit the printing and writing uncoated
papers market in Brazil 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
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. The combination of these interest
rate swap agreements began with a notional amount of $45, declining to $30
effective January 31, 2002, and declining again to $15 effective July 31, 2002
through the remainder of the contract terms ending January 31, 2003. These
interest rate swap agreements fix the London interbank offered rate for U.S.
dollar deposits at 5.42 percent, thus fixing the Company's interest rate
including margin at 5.72 percent through the maturity dates of its U.S. dollar
denominated term loans. 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 or third quarters of 2001.
NOTE 10. NEW ACCOUNTING STANDARDS
In June 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.
Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The statement is effective for the Company's
financial statements for the period beginning January 1, 2003, with earlier
application encouraged. The Company is evaluating the effects of this new
accounting standard, however the Company does not anticipate any material effect
on its financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Although SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", it retains most of the concepts of that
standard, except that it eliminates the requirement to allocate goodwill to
long-lived assets for impairment testing purposes and it requires that a
long-lived asset to be abandoned or exchanged for a similar asset be considered
held and used until it is disposed, i.e. the depreciable life should be revised
until the asset is actually abandoned or exchanged. Also, the new standard
includes the basic provisions of Accounting
11
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for presentation of
discontinued operations in the income statement but broadens that presentation
to include a component of an entity rather than a segment of a business, where
that component can be clearly distinguished from the rest of the entity. This
statement is effective for the Company's financial statements for the period
beginning January 1, 2002, with earlier application encouraged. The provisions
of this new statement generally are to be applied prospectively. The Company is
evaluating the effects of this new accounting standard, however the Company does
not anticipate any material effect on its financial statements.
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 decreased by $3.4 million in the three month period ended
September 30, 2001 compared with the corresponding period of the preceding year.
This decrease was a result of unfavorable changes in currency exchange rates and
lower average selling prices, partially offset by the net favorable effects of
changes in sales volumes. Changes in currency exchange rates had an unfavorable
impact of $3.7 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
quarter of the prior year. Lower average selling prices unfavorably impacted the
net sales comparison by $2.5 million. Lower average selling prices were
experienced in the French and U.S. businesses, while the Brazilian business
experienced slightly higher average selling prices. Although sales volumes for
the quarter decreased in total by five percent compared with the same quarter of
the prior year, changes in the mix of sales volumes contributed favorably to the
net sales comparison by $2.8 million in the quarter. Sales volumes for the
quarter increased by 15 percent for the French business unit, with higher sales
of both tobacco-related papers and reconstituted tobacco leaf products. Sales
volumes decreased by four percent for the U.S. business unit and by 40 percent
for the Brazilian business unit, both primarily as a result of declines in sales
of commercial and industrial papers. Lower sales of commercial and industrial
papers in Brazil were the result of decisions made in the second quarter of 2001
to exit the Brazilian printing and writing uncoated papers market and to shut
down one of its paper machines.
Net sales increased by $6.3 million in the nine month period ended
September 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 nine month period decreased in total by
one percent compared with the same period of the prior year, changes in the mix
of sales volumes contributed favorably to the net sales comparison by $16.7
million. Sales volumes increased at the French business unit by nine percent,
with higher sales of both tobacco-related papers and reconstituted tobacco leaf
products. Sales volumes of the U.S. business unit increased by one percent. For
the Brazilian business unit, sales volumes declined by 23 percent, with lower
sales of commercial and industrial papers (see further comments regarding the
decline in sales of Brazilian commercial and industrial papers in the previous
paragraph) more than offsetting improvements in tobacco-related papers. 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 $2.0 million impact on the net sales
comparison. Changes in currency exchange rates had an unfavorable impact of
$12.4 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.
13
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Operating Profit
Operating profit increased by $0.4 million in the three month period
ended September 30, 2001 compared with the corresponding period of the preceding
year. Excluding a $0.5 million pre-tax restructuring charge recorded by the
Company's Brazilian business (see "Brazilian Restructuring" below), operating
profit for the quarter improved by $0.9 million, with improvements in the French
and Brazilian business segments more than offsetting a decline in the U.S.
business segment. All three business segments experienced lower per ton wood
pulp costs, favorably impacting operating profit by $5.1 million in total.
Operating profit for the French business unit increased by $2.0 million as a
result of higher sales volumes and lower per ton wood pulp costs, partially
offset by lower average selling prices, higher chemical prices and increased
selling expense. Operating profit in Brazil, excluding the $0.5 million
restructuring charge, increased by $0.8 million as the favorable effects of
lower per ton wood pulp costs and somewhat higher average selling prices more
than offset the unfavorable effects of lower sales volumes. Operating profit in
the United States decreased by $1.6 million primarily as a result of increased
operating expenses at the Spotswood, New Jersey mill. The banded cigarette paper
project continued to have significant unfavorable impacts on mill operations at
Spotswood, where operating costs were $2.0 million unfavorable for the quarter
compared with the comparable quarter of the prior year. Additionally, the U.S.
business unit experienced lower sales volumes, lower average selling prices,
higher purchased energy costs and increased research expenses in support of new
product development efforts. These unfavorable factors in the United States were
partially offset by lower per ton wood pulp costs. Total nonmanufacturing
expenses increased by $0.7 million during the quarter as a result of higher
selling expense in France, higher research expense, primarily in the United
States, and higher general expense, primarily due to increased benefit costs.
Operating profit decreased by $4.4 million in the nine month period
ended September 30, 2001 compared with the corresponding period of the preceding
year. Excluding the total $5.1 million of pre-tax restructuring charges recorded
by the Company's Brazilian business (see "Brazilian Restructuring" below),
operating profit increased by $0.7 million, with an improvement in the French
business segment more than offsetting decreases in the Brazilian and U.S.
business segments. Lower per ton wood pulp costs in all three business segments
favorably impacted operating profit by $5.1 million. Operating profit was
unfavorably impacted in all three business segments by increased energy prices
having a $4.0 million effect in total. Operating profit for the French business
unit increased by $3.4 million as a result of higher sales volumes, higher
average selling prices and lower per ton wood pulp costs partially offset by
increased costs of energy and other materials, as well as increased
nonmanufacturing expenses. Excluding the $5.1 million restructuring charge,
operating profit in Brazil decreased by $0.3 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, higher average selling prices and lower per ton wood pulp
costs. Operating profit in the United States declined by $1.3 million as a
result of increased operating expenses at the Spotswood mill, which have been
unfavorable by $5.4 million for the year-to-date period compared with the same
period of the prior year, and higher purchased energy and nonmanufacturing
expenses. These unfavorable effects were partially offset by the effects of
lower per ton wood pulp costs, increased sales volumes, somewhat higher average
selling prices and improved mill operations other than at the Spotswood mill.
Total nonmanufacturing expenses increased by $3.5 million for the nine month
period comparison as a result of higher general, research and selling expenses.
Higher general expense was caused primarily by increased benefit costs. Research
expense increased in the United States and Brazil in support of new product
development activities. Higher selling expense was incurred in France as a
result of increased employee and agent compensation.
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 had shown
weakness at the end of 2000 and through the first half of 2001 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 had been the least profitable product line in Brazil while also being
the largest energy user. The duration of the government's electricity reduction
directive was, and still is, uncertain, although it was expected to initially
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
during the second quarter of 2001 to exit the printing and writing uncoated
papers business in Brazil, which permits 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 million was recorded in the third
quarter of 2001, primarily related to employee termination and severance costs,
after determining which employees would be affected and providing notice to such
affected employees.
NON-OPERATING EXPENSES
Interest expense was lower by $0.4 million and $1.1 million for the
three and nine month periods ended September 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 nine month period of 2000
related to a prior-period claim.
INCOME TAXES
The effective income tax rates for the three and nine month periods
ended September 30, 2001 were 35.2 percent and 36.6 percent, respectively,
compared with 31.8 percent and 30.5 percent for the respective corresponding
periods of 2000. The three and nine month periods ended September 30, 2000
benefited from a favorable $0.8 million income tax adjustment associated with
repatriations from Schweitzer-Mauduit Spain, S.L., a wholly-owned subsidiary of
the Company, to the parent. The nine month period ended September 30, 2000 also
benefited from a $1.0 million favorable adjustment to reduce Spanish deferred
income tax valuation allowances and a favorable tax benefit of $0.4 million
related to settlement of a prior-period claim. The effective income tax rates
for the three and nine 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.
15
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended September 30,
-------------------------------
(U.S. $ in millions)
Cash Provided by (Used for): 2001 2000
Changes in operating working capital.............................................. $ (9.4) $ (6.9)
Advance payments from customers................................................... 43.0 4.0
Operations........................................................................ 74.9 43.3
Capital spending.................................................................. (55.9) (14.0)
Purchases of treasury stock....................................................... - (10.1)
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 $43.3 million to $74.9 million for the
nine month periods ended September 30, 2000 and September 30, 2001,
respectively, primarily due to $43.0 million obtained in the 2001 period from
advance payments from customers compared with $4.0 million of advance payments
in the corresponding period of 2000. These advance payments are for future
product purchases for which the Company has recorded 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. The Company
estimates that approximately $8.7 million of the Deferred Revenue will be
amortized to Net Sales during the next 12 months and thus has classified such
amount in Current Liabilities. Changes in operating working capital contributed
unfavorably to cash flow by $9.4 million and $6.9 million in the nine month
periods ended September 30, 2001 and 2000, respectively. The 2001 increase in
working capital was primarily due to a decrease in accounts payable, mainly due
to the banded cigarette paper capital project at the Spotswood mill. The 2000
increase in working capital was primarily due to an increase in accounts
receivable.
Capital spending in the nine month period ended September 30, 2001
included $45.1 million toward the implementation of the banded cigarette paper
project at the Spotswood mill. During the first nine months of 2000, capital
spending included $3.0 million toward the banded cigarette paper project and
$2.9 million toward a new high-speed slitter, both at the Spotswood mill. Also
included in the total capital spending for the nine months ended September 30,
2000 was $1.3 million toward improvement of a reconstituted tobacco leaf machine
in the Spay, France mill.
During the nine month period ended September 30, 2000, the Company
repurchased a total of 706,200 shares of its common stock for $10.1 million.
During 2000, the Company's Board of Directors authorized the repurchase of
additional shares of the Company's common stock for the period January 1, 2001
through December 31, 2002 in an amount not to exceed $20 million. During the
first nine 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 October 25, 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 December 10, 2001 to stockholders of
record on November 12, 2001.
The Company's ongoing requirements for cash are expected to consist
principally of amounts required for capital expenditures, 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 September 30, 2001.
The Company believes its cash flow from operations, together with
borrowings available under its revolving credit and other credit facilities,
will be sufficient to fund its ongoing cash requirements.
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 two
installment payments totaling $53.1 million in Current Liabilities on its
consolidated balance sheet as of September 30, 2001. However, the Company
intends, and is currently engaged in activities, to refinance such loans with
long-term bank 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 June 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.
Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The statement is effective for the Company's
financial statements for the period beginning January 1, 2003, with earlier
application encouraged. The Company is evaluating the effects of this new
accounting standard, however the Company does not anticipate any material effect
on its financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Although SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", it retains most of the concepts of that
standard, except that it eliminates the requirement to allocate goodwill to
long-lived assets for impairment testing purposes and it requires that a
long-lived asset to be abandoned or exchanged for a similar asset be considered
held and used until it is disposed, i.e. the depreciable life should be revised
until the asset is actually abandoned or exchanged. Also, the new standard
includes the basic provisions of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for presentation of discontinued operations in the
income statement but broadens that presentation to include a component of an
entity rather than a segment of a business, where that component can be clearly
distinguished from the rest of the entity. This statement is effective for the
Company's financial statements for the period beginning January 1, 2002, with
earlier application encouraged. The provisions of this new statement generally
are to be applied prospectively. The Company is evaluating the effects of this
new accounting standard, however the Company does not anticipate any material
effect on its financial statements.
17
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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 has been 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.
The Company's Brazilian business is expected to experience a
significant decline in its net sales in the fourth quarter of 2001 compared with
the comparable period of the prior year as a result of a decision to exit the
Brazilian printing and writing uncoated papers market (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. 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
following the Company's decision to shut down one of its paper machines (see
"Brazilian Restructuring" above). 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
implemented as part of the restructuring have proceeded as expected and the exit
of the Brazilian printing and writing uncoated papers market and resulting
restructuring of the Brazilian business is expected to have a favorable impact
on the ongoing financial results of the Company.
The fourth quarter of 2001 is expected to be unfavorably affected by
typical seasonal fluctuations in customer orders in the United States and Brazil
and by maintenance work that was delayed from earlier in the year.
Tobacco-related paper volumes could be favorably impacted in the fourth quarter
by a strike at the Company's sole domestic competitor, RFS Ecusta Inc. The union
workforce of Ecusta's paper mill went on strike on October 15, 2001, but it is
too soon to determine what impact, if any, this strike might have on the
Company's business.
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 will essentially be
completed in the fourth quarter and is currently expected to total approximately
$48 million for the full year 2001. Process checkouts, machine trials and
product qualifications will be occurring in future quarters. 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.
Excluding capital spending associated with the banded cigarette paper
project, the Company expects to control its capital spending to approximately
$25 million for 2001.
18
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Company experienced higher energy costs in the first nine months of
2001 compared with the comparable period of the prior year. Higher energy costs
may persist through the balance of 2001. However, the per ton cost of wood pulp
declined during the first nine months of 2001 compared with the comparable
period of 2000. Per ton wood pulp costs appear to have stabilized and are
expected to provide a positive quarter-to-quarter comparison in the fourth
quarter of 2001.
Worldwide demand for tobacco-related papers remains below worldwide
capacity for such papers despite actions by suppliers to shut-down less
efficient machines. Continuing excess worldwide capacity for tobacco-related
papers, declining per ton wood pulp costs and the strong U.S. dollar versus
European and other foreign currencies continue to make it difficult to increase
selling prices. Somewhat lower average selling prices are anticipated during the
fourth quarter of 2001 compared with the comparable period of the prior year.
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.
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 impacts, anticipated
effects of the RFS Ecusta Inc. paper mill strike, anticipated financial and
operational results, anticipated capital spending, anticipated effective income
tax rates and tax and other governmental actions, contingencies, 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."
19
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
15. Independent Accountants' Report, dated October 19, 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.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Schweitzer-Mauduit International, Inc.
(Registrant)
By: /s/ PAUL C. ROBERTS By: /s/ WAYNE L. GRUNEWALD
-------------------------------- ----------------------------------
Paul C. Roberts Wayne L. Grunewald
Chief Financial Officer and Controller
Treasurer (principal accounting officer)
(duly authorized officer and
principal financial officer)
November 13, 2001 November 13, 2001
21
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
15. --- Independent Accountants' Report, dated October 19, 2001 from
Deloitte & Touche LLP to Schweitzer-Mauduit International, Inc.
23. --- Independent Accountants' Consent.