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, 2002
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 October 31, 2002, 14,940,314 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,
---------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
Net Sales ...................................................... $ 132.7 $ 123.4 $ 380.6 $ 372.8
Cost of products sold ..................................... 105.4 97.3 298.9 300.2
------- ------- ------- -------
Gross Profit ................................................... 27.3 26.1 81.7 72.6
Selling expense ........................................... 4.9 4.5 14.8 14.5
Research expense .......................................... 2.0 2.1 5.5 6.0
General expense ........................................... 5.1 4.3 16.0 14.6
Restructuring Charge (See Note 8) ......................... -- 0.5 -- 5.1
------- ------- ------- -------
Operating Profit .............................................. 15.3 14.7 45.4 32.4
Interest expense .......................................... 0.8 1.2 2.9 3.6
Other income, net ......................................... 1.0 1.0 1.9 2.1
------- ------- ------- -------
Income Before Income Taxes and Minority Interest ............... 15.5 14.5 44.4 30.9
Provision for income taxes ................................ 5.3 5.1 15.2 11.3
------- ------- ------- -------
Income Before Minority Interest ................................ 10.2 9.4 29.2 19.6
Minority interest in earnings of subsidiaries ............. 1.5 1.2 3.6 2.9
------- ------- ------- -------
Net Income...................................................... $ 8.7 $ 8.2 $ 25.6 $ 16.7
======= ======= ======= =======
Net Income per Common Share:
Basic...................................................... $ .58 $ .55 $ 1.72 $ 1.13
======= ======= ======= =======
Diluted.................................................... $ .57 $ .54 $ 1.68 $ 1.11
======= ======= ======= =======
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,
2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents .............................................................. $ 16.7 $ 50.9
Accounts receivable .................................................................... 73.2 74.5
Inventories ............................................................................ 67.6 62.7
Current income tax refunds receivable .................................................. 0.2 0.3
Deferred income tax benefits ........................................................... 3.7 3.0
Prepaid expenses ....................................................................... 2.6 2.3
------ ------
Total Current Assets ............................................................... 164.0 193.7
------ ------
Gross Property ............................................................................. 534.7 509.5
Less accumulated depreciation .......................................................... 244.0 221.9
------ ------
Net Property ....................................................................... 290.7 287.6
------ ------
Noncurrent Deferred Income Tax Benefits ..................................................... 0.9 1.3
------ ------
Deferred Charges and Other Assets ........................................................... 15.0 15.3
------ ------
Total Assets ................................................................................ $470.6 $497.9
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt ...................................................... $ 13.8 $ 41.4
Other short-term debt .................................................................. 2.3 5.1
Accounts payable ....................................................................... 39.4 44.1
Accrued expenses ....................................................................... 53.7 48.8
Current deferred revenue ............................................................... 5.6 6.1
------ ------
Total Current Liabilities .......................................................... 114.8 145.5
------ ------
Long-Term Debt .............................................................................. 36.6 56.4
------ ------
Noncurrent Deferred Income Tax Liabilities .................................................. 23.8 15.4
------ ------
Noncurrent Deferred Revenue ................................................................. 48.9 53.1
------ ------
Other Noncurrent Liabilities ................................................................ 40.3 41.5
------ ------
Minority Interest ........................................................................... 11.1 6.5
------ ------
Contingencies (See Notes 4 and 5)
Stockholders' Equity
Preferred Stock -$.10 par value - 10,000,000 shares authorized, none issued ............ -- --
Common Stock -$.10 par value - 100,000,000 shares authorized,
16,078,733 shares issued at both September 30, 2002 and December 31,
2001 (14,939,531 and 14,835,984 shares outstanding at September 30,
2002 and
December 31, 2001, respectively) ................................................... l.6 1.6
Additional paid-in capital ............................................................. 60.9 60.6
Common stock in treasury, at cost - 1,139,202 and 1,242,749 shares at
September 30, 2002 and December 31, 2001, respectively ............................. (18.1) (19.8)
Retained earnings ...................................................................... 209.8 190.9
Unearned compensation .................................................................. (0.5) (0.5)
Accumulated other comprehensive loss ................................................... (58.6) (53.3)
------ ------
Total Stockholders' Equity ......................................................... 195.1 179.5
------ ------
Total Liabilities and Stockholders' Equity .................................................. $470.6 $497.9
====== ======
See Notes to Unaudited Consolidated Financial Statements
3
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
COMMON STOCK ISSUED ADDITIONAL TREASURY STOCK
-------------------- PAID-IN -------------------- RETAINED UNEARNED
SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS COMPENSATION
---------- ------ ---------- --------- ------ -------- ------------
BALANCE, DECEMBER 31, 2000 .................. 16,078,73 $1.6 $60.5 1,288,471 $(20.5) $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 .................. 0.1 (20,000) 0.3 (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 ................. 16,078,73 1.6 60.6 1,243,403 (19.8) 185.3 (0.6)
Net income for the three months
ended December 31, 2001 .................. 7.8
Adjustments to minimum
pension liability ........................
Change in unrealized fair value
of derivative instruments ................
Adjustments to unrealized foreign
currency translation .....................
Comprehensive income ........................
Dividends declared ($0.15 per share) ........ (2.2)
Amortization of unearned compensation ....... 0.1
Stock issued to directors as compensation ... -- -- -- (654) -- -- --
--------- ---- ----- --------- ------ ------ -----
BALANCE, DECEMBER 31, 2001 .................. 16,078,73 1.6 60.6 1,242,749 (19.8) 190.9 (0.5)
Net income for the nine months
ended September 30, 2002 ................. 25.6
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 .................. (10,000) 0.2 (0.2)
Amortization of unearned compensation ....... 0.2
Stock issued to directors as compensation ... (1,947)
Issuance of shares for options exercised .... -- -- 0.3 (91,600) 1.5 -- --
--------- ---- ----- --------- ------ ------ -----
BALANCE, SEPTEMBER 30, 2002 ................. 16,078,73 $1.6 $60.9 1,139,202 $(18.1) $209.8 $(0.5)
========= ==== ===== ========= ====== ====== =====
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS) TOTAL
------------- ------
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
Net income for the three months
ended December 31, 2001 .................. 7.8
Adjustments to minimum
pension liability ........................ (3.8) (3.8)
Change in unrealized fair value
of derivative instruments ................ 0.4 0.4
Adjustments to unrealized foreign
currency translation ..................... 2.8 2.8
------
Comprehensive income ........................ 7.2
Dividends declared ($0.15 per share) ........ (2.2)
Amortization of unearned compensation ....... 0.1
Stock issued to directors as compensation ... -- --
------ ------
BALANCE, DECEMBER 31, 2001 .................. (53.3) 179.5
Net income for the nine months
ended September 30, 2002 ................. 25.6
Change in unrealized fair value
of derivative instruments ................ 0.5 0.5
Adjustments to unrealized foreign
currency translation ..................... (5.8) (5.8)
------
Comprehensive income ........................ 20.3
Dividends declared ($0.45 per share) ........ (6.7)
Restricted stock issuances .................. --
Amortization of unearned compensation ....... 0.2
Stock issued to directors as compensation ... --
Issuance of shares for options exercised .... -- 1.8
------ ------
BALANCE, SEPTEMBER 30, 2002 ................. $(58.6) $195.1
====== ======
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,
---------------------
2002 2001
------ ------
Operations
Net income $ 25.6 $ 16.7
Non-cash items included in net income:
Depreciation and amortization 19.8 16.0
Amortization of deferred revenue (4.2) --
Deferred income tax provision 6.5 3.8
Minority interest in earnings of subsidiaries 3.6 2.9
Other items (2.3) 1.9
Advance payments from customers -- 43.0
Changes in operating working capital (3.6) (9.4)
------ ------
Cash Provided by Operations 45.4 74.9
------ ------
Investing
Capital spending (17.3) (55.9)
Capitalized software costs (0.8) (0.6)
Other (4.7) 2.6
------ ------
Cash Used for Investing (22.8) (53.9)
------ ------
Financing
Cash dividends paid to SWM stockholders (6.7) (6.7)
Cash dividends paid to minority owner -- (3.4)
Changes in short-term debt (2.8) (1.6)
Proceeds from issuances of long-term debt 47.3 3.8
Payments on long-term debt (96.4) (4.0)
Proceeds from exercise of stock options 1.8 0.3
------ ------
Cash Used for Financing (56.8) (11.6)
------ ------
Increase (Decrease) in Cash and Cash Equivalents (34.2) 9.4
Cash and Cash Equivalents at Beginning of Period 50.9 23.6
------ ------
Cash and Cash Equivalents at End of Period $ 16.7 $ 33.0
====== ======
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 2001 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 2001
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, 2002
were approximately 14,879,500 and 14,840,400, respectively, and for the three
and nine month periods ended September 30, 2001 were approximately 14,785,300
and 14,774,200, 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, 2002 were
approximately 15,196,600 and 15,228,100, respectively, and for the three and
nine month periods ended September 30, 2001 were approximately 15,106,300 and
15,018,800, respectively. Potential common shares are those related to stock
options and restricted stock outstanding and directors' accumulated deferred
stock compensation during the respective periods. A reconciliation of the
average number of common shares outstanding used in the calculations of basic
and diluted net income per share follows (in 000's):
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Average number of common shares outstanding............... 14,879.5 14,785.3 14,840.4 14,774.2
Dilutive effect of:
- stock options................................. 245.5 263.1 317.0 187.7
- restricted stock.............................. 60.0 50.0 60.0 50.0
- directors' deferred stock compensation........ 11.6 7.9 10.7 6.9
-------- -------- -------- --------
Average number of common and potential
common shares outstanding......................... 15,196.6 15,106.3 15,228.1 15,018.8
======== ======== ======== ========
Certain stock options outstanding during the periods presented were
not included in the calculations of diluted net income per share because the
exercise prices of the options were greater than the average market prices of
the common shares during the respective periods. The average number of share
equivalents
6
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
resulting from these anti-dilutive stock options not included in the
computations of diluted net income per share for the three and nine month
periods ended September 30, 2002 were approximately 255,600 and 103,600,
respectively, and for the three and nine month periods ended September 30, 2001
were approximately 13,900 and 419,600, respectively.
NOTE 3. INVENTORIES
The following schedule details inventories by major class:
September 30, December 31,
2002 2001
------------- ------------
At the lower of cost on the First-In, First-Out (FIFO)
and weighted average methods or market:
Raw materials ............................................... $ 26.4 $ 26.9
Work in process ............................................. 8.2 7.2
Finished goods .............................................. 27.2 22.6
Supplies and other .......................................... 12.3 11.7
-------- --------
74.1 68.4
Excess of FIFO cost over Last-In, First-Out (LIFO) cost .......... (6.5) (5.7)
-------- --------
Total ..................................................... $ 67.6 $ 62.7
======== ========
NOTE 4. 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 2001 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 $5 to $6 in each of the full-years 2002 and 2003 and
approximately $3 in 2004, of which no material amount is the result of
environmental fines or settlements. The major projects included in these
estimates are $3.3 to upgrade wastewater treatment facilities and $1.3 for
installation of ink solvent treatment equipment, both in France, and wastewater
treatment facility upgrade projects in connection with capacity expansions, one
each in France and the United States of $3.8 and $3.0, respectively. 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.
7
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 5. 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, related to tax periods that predated 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 ("Assessment 1"). The remainder of the Assessment pertains exclusively
to periods that SWM-B owned the Pirahy mill ("Assessment 2"). While SWM-B is
primarily responsible for the full payment of the Assessment in the event of an
ultimate unfavorable outcome, SWM-B is not aware of any difficulties that would
be encountered in obtaining reimbursement of that portion of any payment
resulting from Assessment 1 from the previous owner under the indemnification.
SWM-B contests the Assessment based on Article 150, VI of the
Brazilian Federal Constitution of 1988, which grants immunity from ICMS taxes
to papers used in the production of books, newspapers and periodicals ("immune
papers") and the raw material inputs used to produce immune papers. SWM-B
further contends that the statutory provision relied on by the State of Rio de
Janeiro to argue that ICMS tax credits generated in the course of the
production of immune papers must be reversed rather than applied to other ICMS
taxes owed violates the Brazilian Federal Constitution and the legal principle
of "non-cumulativity" for ICMS tax set forth in Article 155, Section 2, II, of
the Brazilian Federal Constitution of 1988. Additionally, SWM-B contends that
the statutory provisions relied on by the government do not address "immunity"
from the incidence of the ICMS tax, but are addressed to "exception" from the
tax. This distinction is central to SWM-B's further contention that the only
exceptions permitted to the constitutionally mandated principle of
non-cumulativity are for exemptions from tax and no exceptions from this
principle are permitted in cases of immunity from tax.
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 based on SWM-B'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, which were upheld on appeal,
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 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. Based on the foreign currency exchange rate at December 31, 2001, the
Assessment totaled approximately $10.8 as of December 31, 2001, of which
approximately $4.7 is covered by the above discussed indemnification. No
liability has been recorded in the Company's consolidated 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.
8
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
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 6. 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 location. 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 90 to 93 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. Sales of products between segments are made at market prices and
elimination of these sales are referred to in the following tables as
intersegment sales. Expense amounts not associated with segments are referred
to as unallocated expenses. Assets reported by segment represent assets which
are directly used by that segment. Unallocated items and eliminations, net
include immaterial balances of the Company's holding company in Spain.
FOR THE THREE MONTHS ENDED
---------------------------- % OF CONSOLIDATED
SEPTEMBER 30, SEPTEMBER 30, % CHANGE -------------------
NET SALES 2002 2001 VS. 2001 2002 2001
- --------- ------------- ------------- -------- ---- ----
United States ............ $ 46.5 $ 41.3 +12.6% 35.0% 33.5%
France ................... 78.4 70.5 +11.2 59.1 57.1
Brazil ................... 11.1 12.1 - 8.3 8.4 9.8
------ ------
Subtotal ........ 136.0 123.9
Intersegment sales by:
France .............. (1.7) (1.3) --
Brazil .............. (1.6) (0.5) (1.2) (0.4)
------ ------ ----- ----- -----
Consolidated .... $132.7 $123.4 + 7.5% 100.0% 100.0%
====== ====== ===== ===== =====
FOR THE THREE MONTHS ENDED
---------------------------- % OF CONSOLIDATED % RETURN ON SALES
SEPTEMBER 30, SEPTEMBER 30, % CHANGE ------------------- -------------------
OPERATING PROFIT 2002 2001 VS. 2001 2002 2001 2002 2001
- ---------------- ------------- ------------- -------- ---- ---- ---- ----
United States............. $ (0.9) $ (0.3) N.M. (5.9)% (2.0)% (1.9)% (0.7)%
France.................... 14.9 14.7 + 1.4% 97.4 100.0 19.0 20.9
Brazil.................... 2.9 1.7 +70.6 19.0 11.5 26.1 14.0
Unallocated expenses...... (1.6) (1.4) (10.5) (9.5)
------ ------ ----- -----
Consolidated..... $ 15.3 $ 14.7 + 4.1% 100.0% 100.0% 11.5% 11.9%
======= ====== ===== =====
N.M. - Not Meaningful.
9
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
FOR THE NINE MONTHS ENDED
---------------------------- % OF CONSOLIDATED
SEPTEMBER 30, SEPTEMBER 30, % CHANGE --------------------
NET SALES 2002 2001 VS. 2001 2002 2001
- --------- ------------- ------------- ------- ----- -----
United States ............ $136.3 $128.5 + 6.1% 35.8% 34.5%
France ................... 215.3 206.8 + 4.1 56.6 55.5
Brazil ................... 34.7 41.7 -16.8 9.1 11.2
------ ------
Subtotal ........ 386.3 377.0
Intersegment sales by:
France .............. (2.6) (1.8) (0.7) (0.5)
Brazil .............. (3.1) (2.4) (0.8) (0.7)
------ ------ ----- -----
Consolidated .... $380.6 $372.8 + 2.1% 100.0% 100.0%
====== ====== ===== =====
FOR THE NINE MONTHS ENDED
----------------------------- %OF CONSOLIDATED % RETURN ON SALES
SEPTEMBER 30, SEPTEMBER 30, % CHANGE ------------------ -----------------
OPERATING PROFIT 2002 2001 VS. 2001 2002 2001 2002 2001
- ---------------- ------------- ------------- -------- ----- ----- ---- -----
United States ........... $ 2.3 $ 1.8 +27.8% 5.1% 5.5% 1.7% 1.4%
France .................. 40.5 36.6 +10.7 89.2 113.0 18.8 17.7
Brazil .................. 7.6 (1.2) N.M. 16.7 (3.7) 21.9 (2.9)
Unallocated expenses .... (5.0) (4.8) (11.0) (14.8)
----- ----- ----- -----
Consolidated ... $45.4 $32.4 +40.1% 100.0% 100.0% 11.9% 8.7%
===== ===== ===== =====
N.M. - Not Meaningful
% OF CONSOLIDATED
SEPTEMBER 30, DECEMBER 31, --------------------
TOTAL ASSETS 2002 2001 2002 2001
------------- ------------ ----- -----
United States ............................... $203.9 $246.5 43.3% 49.5%
France ...................................... 239.2 209.5 50.8 42.1
Brazil ...................................... 28.3 42.4 6.0 8.5
Unallocated items and eliminations, net ..... (0.8) (0.5) (0.1) (0.1)
------ ------ ------ ------
Consolidated ....................... $470.6 $497.9 100.0% 100.0%
====== ====== ====== ======
More than 50 percent of the Company's assets and liabilities were
outside of the United States, substantially all of which were 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. Unfavorable unrealized
foreign currency translation adjustments during the nine month period ended
September 30, 2002 were due to a weaker Brazilian real against the U.S. dollar,
partially offset by a stronger euro against the U.S. dollar, at September 30,
2002 versus December 31, 2001, which decreased total assets in Brazil and
increased total assets in France at September 30, 2002. Total assets in the
United States were lower at September 30, 2002 versus December 31, 2001
primarily due to reduced cash from repayment of bank debt.
NOTE 7. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 ceases upon adoption of SFAS No. 142. The Company adopted SFAS No.
142 effective January 1, 2002. The adoption of these new accounting standards
had no material effect on the Company's financial statements.
10
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
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 expects no material effect on its
financial statements as a result of this new accounting standard.
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 ("APB")
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. The
Company adopted SFAS No. 144 effective January 1, 2002. The adoption of this
new accounting standard had no material effect on the Company's financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," SFAS
No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" and
the amendments of SFAS No. 13, "Accounting for Leases" are all changes in
accounting standards with no current implications on the Company's accounting
and reporting.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which is effective for such
activities initiated after December 31, 2002. SFAS No. 146 bases accrual of an
exit or disposal cost on the existence of a liability that constitutes an
"obligation" as defined in FASB Concept Statement No. 6, "Elements of Financial
Statements", which is different from the concept of an expected cost that was
the underpinning of Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No.
146, which is effective for the Company beginning January 1, 2003, will be used
to establish the timing of recognition of costs in connection with exit or
disposal activities, if any, initiated after December 31, 2002.
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 2001 pre-tax charge. The balance of the second quarter 2001 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.
11
ITEM 2. SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management believes that the following commentary and the tables
presented in Note 6 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 $9.3 million in the three month period ended
September 30, 2002 compared with the corresponding period of the preceding
year. This increase was a result of favorable effects of changes in currency
exchange rates and sales volumes, partially offset by lower average selling
prices. Effects of changes in currency exchange rates increased net sales by
$5.8 million as a result of a stronger euro versus the U.S. dollar, partially
offset by a weaker Brazilian real versus the U.S. dollar, compared with the
same quarter of the prior year. Although the Company's total worldwide sales
volumes declined by two percent in the quarter compared with the same quarter
of the prior year, changes in sales volumes had a favorable $4.8 million impact
on the net sales comparison, as the favorable impact of increased sales of
tobacco-related papers more than offset the unfavorable impact of lower sales
of commercial and industrial papers. For the Brazilian business unit, sales
volumes declined by six percent, primarily due to lower sales of commercial and
industrial papers as a result of a decision in mid-2001 to exit the printing
and writing uncoated papers market in Brazil. Sales volumes for the quarter
decreased at the U.S. business unit by four percent, with increased sales of
tobacco-related papers more than offset by lower sales of commercial and
industrial papers. For the French business unit, sales volumes were essentially
unchanged. Lower average selling prices in the quarter unfavorably impacted the
net sales comparison by $1.3 million, with lower average selling prices in the
Company's French and Brazilian businesses.
Net sales increased by $7.8 million in the nine month period ended
September 30, 2002 compared with the corresponding period of the preceding
year. This increase was a result of favorable effects of changes in sales
volumes and currency exchange rates, partially offset by lower average selling
prices. Although the Company's total worldwide sales volumes declined by three
percent in the nine month period compared with the corresponding period of the
prior year, changes in sales volumes had a favorable $5.4 million impact on the
net sales comparison, as the favorable impact of increased sales of
tobacco-related papers more than offset the unfavorable impact of lower sales
of commercial and industrial papers. For the Brazilian business unit, sales
volumes declined by 25 percent, primarily due to lower sales of commercial and
industrial papers as a result of exiting the printing and writing uncoated
papers market in Brazil in mid-2001. For the French business unit, sales
volumes increased by three percent, with higher sales of both tobacco-related
papers and reconstituted tobacco leaf products. For the U.S. business unit,
sales volumes for the nine month period were essentially unchanged. Effects of
changes in currency exchange rates increased net sales by $3.1 million as a
result of a stronger euro versus the U.S. dollar, partially offset by a weaker
Brazilian real versus the U.S. dollar, compared with the same period of the
prior year. Somewhat lower average selling prices, primarily in the French
business unit, had a $0.7 million unfavorable impact on the net sales
comparison.
Operating Profit
Operating profit increased by $0.6 million in the three month period
ended September 30, 2002 compared with the corresponding period of the
preceding year. Operating profit in the third quarter of 2002 was unfavorably
affected by approximately $2 million related to a strike at the Company's
Spotswood, New Jersey mill. The third quarter of 2001 included a restructuring
charge of $0.5 million recorded by the Company's Brazilian business (see
"Brazilian Restructuring" below). Excluding the impacts of the current-year
Spotswood strike and the prior-year restructuring charge on the operating
profit comparison, the improvement of approximately $2.1 million in operating
profit was primarily attributable to an improved mix of products sold in each
business unit, better mill operations in the United States and favorable
effects of
12
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
exchange rate changes in Brazil and France, partially offset by inflationary
cost increases and higher nonmanufacturing expenses. Nonmanufacturing expenses
were $1.1 million higher than in the comparable period of the prior year,
primarily due to increased general and selling expenses in France.
The hourly employees at the Spotswood mill initiated a strike on June
24, 2002 following the expiration of their previous five-year collective
bargaining agreement on June 15, 2002. The Company utilized salary employees
from its various U.S. locations as well as some replacement workers to start-up
the mill during the strike and operated the mill successfully under a reduced
machine schedule. A new collective bargaining agreement was ratified by the
Spotswood hourly employees on July 26, 2002. Utilizing finished product
inventories, which had been increased above normal levels as part of
contingency planning in advance of the labor negotiations, and product produced
during the strike, as well as the ability to source product for the North
American market from both its French and Brazilian operations, the Company was
able to satisfy all of its customers' requirements during the strike. Due
primarily to unabsorbed fixed costs and initially lower productivity following
start-up of the mill by the team of salary employees and replacement workers,
the strike had an unfavorable pre-tax impact of approximately $1 million during
the second quarter of 2002 and an additional approximately $2 million during
the third quarter of 2002.
Operating profit in Brazil increased by $1.2 million in the three
month period ended September 30, 2002 compared with the corresponding period of
the prior year, with the prior-year restructuring charge accounting for $0.5
million of the improvement. Operating profit in Brazil also benefited from an
improved mix of products sold and favorable impacts of changes in currency
exchange rates. Operating profit for the French business unit increased by $0.2
million as a result of an improved mix of products sold, lower purchased energy
costs and favorable effects of exchange rate changes, partially offset by
inflationary cost increases and higher nonmanufacturing expenses. Operating
profit in the United States decreased by $0.6 million as a result of the strike
at the Spotswood mill and inflationary cost increases. Excluding the strike
impact, operating profit in the United States improved by approximately $1.4
million as a result of an improved mix of products sold, better mill operations
and lower purchased energy costs.
Operating profit increased by $13.0 million in the nine month period
ended September 30, 2002 compared with the corresponding period of the
preceding year, with improvement in each of the three business segments.
Operating profit in Brazil increased by $8.8 million. Excluding the total $5.1
million of second and third quarter 2001 restructuring charges, operating
profit in Brazil improved by $3.7 million as a result of an improved mix of
products sold, lower per ton wood pulp costs, lower local business taxes and
somewhat higher average selling prices. Operating profit for the French
business unit increased by $3.9 million as a result of higher sales volumes,
lower per ton wood pulp and energy costs and an improved mix of products sold,
partially offset by inflationary cost increases and higher nonmanufacturing
expenses. Operating profit in the United States increased by $0.5 million as a
result of an improved mix of products sold, lower per ton wood pulp and
purchased energy costs and improved mill operations, partially offset by the
approximately $3 million impact of the Spotswood strike and inflationary cost
increases. Lower per ton wood pulp costs in all three business segments reduced
operating expenses by a total of $8.1 million, although this benefit was
partially offset by certain contractual selling price reductions related to the
decline in per ton wood pulp costs. Purchased energy costs declined by $1.8
million as the effects of lower energy rates in France and the United States
were partially offset by increased electricity rates in Brazil.
Nonmanufacturing expenses increased by $1.2 million primarily as a result of
increased general expense in France.
13
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 in late 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 mandated 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.
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 permitted 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 $0.7 million for the
three and nine month periods ended September 30, 2002, respectively, compared
with the corresponding periods of the preceding year, as a result of favorable
effects of lower average interest rates and lower average amounts of debt
outstanding. These favorable effects were partially offset by a lesser amount
of interest capitalized to capital projects in the 2002 periods than during the
comparable periods of 2001. Other income, net consisted primarily of interest
income, royalty income and foreign currency transaction gains and losses in
each of the periods presented.
INCOME TAXES
The effective income tax rates for the three and nine month periods
ended September 30, 2002 were both 34.2 percent compared with 35.2 percent and
36.6 percent for the respective corresponding periods of 2001. The effective
income tax rates for the three and nine month periods of 2002 benefited from a
decrease in the French corporate income tax rate from 36.3 percent for 2001 to
35.3 percent for 2002 and from increased profitability in Brazil which has the
Company's lowest income tax rate.
During 2002, the United States Internal Revenue Service ("IRS")
conducted a review of the Company's U.S. federal income tax returns for the
years 1996 through 1998. No adjustments were proposed by the IRS auditors as a
result of their review. Additionally, the French tax authorities are in the
process of auditing the Company's consolidated French tax group for the years
1990 through 2000, including companies formerly part of that consolidated
French tax group prior to the Company's 1995 spin-off from Kimberly-Clark
Corporation. The French tax authorities have completed most of their work at
certain entities while work at other entities is still to be conducted. As a
result of the work conducted to date, the Company has received certain
notifications of preliminary findings, to which the Company has responded to
the French tax authorities in disagreement over most of the preliminary
findings. While the outcome of the French tax audits is uncertain, the Company
believes that any resulting adjustments would not likely result in any material
cash payments, but rather would likely reduce the French tax group's net
operating loss carryforwards. The Company continues to believe that its net
deferred income tax balances, including those of its French tax group, are
appropriately stated in its accompanying consolidated balance sheets.
14
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): 2002 2001
- ---------------------------- ------ ------
Operations ............................. $ 45.4 $ 74.9
Changes in operating working capital ... (3.6) (9.4)
Advance payments from customers ........ -- 43.0
Capital spending ....................... (17.3) (55.9)
Changes in debt ........................ (51.9) (1.8)
Dividends to SWM stockholders .......... (6.7) (6.7)
The Company's primary source of liquidity is cash flow from
operations, which is principally obtained through operating earnings. While
quarterly fluctuations occur, the Company's annual cash flow from operations
has been relatively stable historically, reflecting typically consistent demand
for its products. The Company's annual cash flow from operations in each of the
last five years has exceeded its requirements for capital spending and
dividends to stockholders by at least $15 million.
The Company's net cash provided by operations decreased from $74.9
million for the nine months ended September 30, 2001 to $45.4 million for the
nine months ended September 30, 2002, due to $43.0 million obtained in the 2001
period from advance payments from customers for future product purchases for
which the Company recorded deferred revenue, which is being 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 $3.6 million and $9.4 million in the
nine month periods ended September 30, 2002 and 2001, respectively, due
primarily to a decrease in accounts payable in the 2002 and 2001 periods and an
increase in inventories in the 2002 period. The Company typically experiences
seasonal variations such that operating working capital increases during the
first half of each year and decreases in the latter half of each year. The
increase in inventories in the 2002 period was primarily attributable to the
Company's building of inventories in the United States in advance of labor
negotiations. The decrease in accounts payable in each period was primarily due
to payments of accounts payable balances related to higher than normal levels
of capital project activity in the latter months of each of the respective
prior years, part of which was reflected in the December 31, 2001 and December
31, 2000 accounts payable balances.
Following a strike that began June 24, 2002, hourly employees at the
Company's Spotswood cigarette paper mill ratified a new collective bargaining
agreement on July 26, 2002. Hourly employees began to return to work on July
28, 2002 and the mill was fully operational by the end of July. The term of the
new two-year agreement is through July 28, 2004.
During the third quarter, a new collective bargaining agreement was
ratified at the Company's Lee, Massachusetts mills without incurring a work
stoppage. The term of the new three-year agreement is through July 31, 2005.
Collective bargaining agreements are now in place effective at least
through the remainder of 2002 at each of the Company's mills. Existing labor
agreements subject to negotiation in 2003 are scheduled to expire on February
28, 2003 in Spay, France, on May 31, 2003 in Santanesia, Brazil and on December
31, 2003 in both Malaucene and Quimperle, France. Other labor agreements are
scheduled to expire on April 30, 2004 in Saint-Girons, France, on July 28, 2004
in Spotswood, New Jersey, on September 30, 2004 in Ancram, New York and on July
31, 2005 in Lee, Massachusetts.
On April 25, 2002, the Company announced that a project was authorized
to install a new reconstituted tobacco leaf ("RTL") production line at the
Spay, France mill of LTR Industries, S.A. ("LTRI"), the Company's 72 percent
indirectly owned French subsidiary. This capital project, originally authorized
in an amount of $59 million, is now expected to total approximately $65 million
due to the strengthening of the euro versus the U.S. dollar. This project will
provide for a third RTL production line and supporting
15
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
equipment with anticipated annual production capacity of approximately 33,000
metric tons, which will increase the total annual production capacity at the
Spay mill to approximately 80,000 metric tons. Work began on the project during
the second quarter of 2002, with start-up of the new production line
anticipated during the first quarter of 2004. Capital spending for the project
is currently expected to total approximately $7 million in 2002, $40 million in
2003 and the remainder in 2004. Funding for the project is expected to come
from the Company's internally generated funds and existing bank credit
facilities.
Capital spending in the nine month period ended September 30, 2002
included $4.3 million toward the new reconstituted tobacco leaf production line
at the Spay mill, $1.3 million toward a permanent flax decortication facility
in Canada and $1.0 million toward a wastewater treatment station upgrade at the
Spay mill. 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.
Effective January 31, 2002, the Company entered into a new unsecured
credit facility with a group of banks ("Credit Agreement") refinancing the
amounts outstanding under its former credit agreement that consisted of term
loan and 364-day revolver facilities. The Credit Agreement includes five-year
revolving loan facilities totaling up to $45 million and 50 million euros and
364-day revolving loan facilities totaling up to $15 million and 20 million
euros. The terms of the Credit Agreement are similar to the former credit
agreement, except that it (i) provides for five-year revolving loans in place
of term loan facilities, which gives the Company the flexibility to utilize
cash balances to pay down the five-year revolving loans and subsequently draw
on those facilities again when needed, (ii) provides somewhat higher available
amounts for euro borrowings, (iii) extends the maturities of the five-year
revolvers to January 31, 2007 and (iv) renews the Company's 364-day revolving
loan facilities to January 30, 2003.
Under the Credit Agreement, interest rates are based on the London
interbank offered rate for U.S. dollar deposits ("LIBOR") for the U.S. dollar
borrowings and the euro zone interbank offered rate for euro deposits
("EURIBOR") for the euro borrowings plus either (a) for 364-day revolver
borrowings, applicable margin of either 0.65 percent per annum or 0.75 percent
per annum, or (b) for five-year revolver borrowings, applicable margin of
either 0.70 percent per annum or 0.80 percent per annum. The applicable margin
is determined in each instance by reference to the Company's Net Debt to Equity
Ratio, as defined in the Credit Agreement.
The Credit Agreement contains representations and warranties which are
customary for facilities of this type and covenants and provisions that, among
other things, require the Company maintain certain defined financial ratios (as
disclosed in Note 5 to the Company's Consolidated Financial Statements in its
2001 Annual Report on Form 10-K, wherein the Credit Agreement is more fully
described). The Company does not currently anticipate any change in business
conditions of a nature that would cause the Company to violate its covenants
under the Credit Agreement.
On January 31, 2002, the Company repaid the full amounts outstanding
under its old credit agreement which consisted of U.S. and French term loan
facilities ($45 million and 38.1 million euros, respectively) and borrowed $30
million under the Credit Agreement utilizing a five-year U.S. dollar revolver
and 15 million euros under a five-year euro revolver. Through September 30,
2002, the Company repaid 15 million euros under the five-year revolvers,
leaving no outstanding balance under the five-year euro revolver and a balance
of $30 million as of September 30, 2002 under the five-year U.S. dollar
revolver. During October 2002, the Company repaid $10 million under the
five-year U.S. dollar revolver, which amount was included in Current Portion of
Long-Term Debt on the Company's consolidated balance sheet as of September 30,
2002.
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 million, which declined to $30
million effective January 31, 2002, and declined again to $15 million effective
July 31, 2002 through the remainder of the contract terms ending January 31,
2003. These interest rate swap agreements fix the LIBOR at 5.42 percent. This
had the
16
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
effect of fixing the Company's interest rate including margin at 5.72 percent
on $45 million of its debt through January 31, 2002, the effective date of its
new credit facilities, 6.12 percent on $30 million of its debt from February 1,
2002 through July 31, 2002, and 6.12 percent on $15 million of its debt from
August 1, 2002 through January 31, 2003. These interest rate swap contracts
were designated as cash flow hedges and qualified for short-cut method
treatment under SFAS No. 133, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities." 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
other interest rate-related derivative contract agreements entered into by the
Company during 2001 or to-date in 2002.
On October 31, 2002, 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 16, 2002 to stockholders of
record on November 18, 2002.
The Company has declared and paid quarterly dividends of fifteen cents
per share since the second quarter of 1996. Management currently expects to
continue this level of quarterly dividend. None of the Credit Agreement
covenants, under normal business conditions, materially limit the Company's
ability to pay such dividends, and the Company does not currently anticipate
any change in business conditions of a nature that would cause future
restrictions on dividend payments as a result of its need to maintain these
financial ratios.
During 1998, Papeteries de Mauduit S.A.S. ("PdM"), a wholly-owned
indirect French subsidiary of the Company, entered into an agreement with one
of its vendors in connection with PdM's purchases of calcium carbonate, a raw
material used in the manufacturing of some paper products. The vendor agreed to
construct and operate an on-site plant at the Quimperle, France mill at a
capital cost of approximately 40 million French franc ($6.0 million at the
September 30, 2002 exchange rate). If PdM buys less than the minimum purchase
commitments under the agreement, for reasons not permitted under the agreement,
the vendor can terminate the contract and require PdM to pay the vendor the
then net book value of the building and equipment, determined using a
straight-line method of depreciation over the life of the agreement, which
amount was approximately $4.4 million at September 30, 2002, as well as costs
to dismantle the mill and severance pay for the employees, together estimated
at approximately $0.4 million. During the first six months of 2002, PdM
determined that the slurry form calcium carbonate produced by the on-site plant
was causing variations in some of its products. The agreement provides
generally that use of the slurry-form calcium carbonate will not have a notable
effect on PdM's products compared to their production using the dry form of
calcium carbonate provided by the same vendor. As a result of the product
variation it was detecting, PdM purchased less than the minimum purchase
commitments of slurry-form calcium carbonate produced by the on-site plant
during the first six months of 2002 and substituted dry form calcium carbonate
from the same vendor in its place. The on-site plant continues to operate and
supply a portion of PdM's calcium carbonate requirements and PdM is working to
develop alternative solutions to address the quality issues associated with
calcium carbonate produced by the on-site plant. The quality problems with the
slurry form calcium carbonate continued in the third quarter, but PdM has
undertaken efforts to mitigate the issues associated with use of the slurry,
which may allow it to increase its consumption of the slurry. As a result of
these efforts, during the third quarter, PdM purchased more than the minimum
purchase commitments under the contract and also expects to do so during the
fourth quarter, but PdM may be under the minimum purchase commitments for the
full year 2002. Since the amount of slurry form calcium carbonate purchased from
the vendor has been less than the original amount contemplated, the vendor has
requested payment for a reduction in the contractual quantity discounts that had
been provided to PdM, to which PdM disagrees. While the outcome is uncertain,
the Company currently expects this matter to be resolved without any material
impact on the results and financial position of the Company on a consolidated
basis and of the French business segment.
17
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Primarily as a result of reduced market values of the Company's U.S.
pension plan assets, the Company contributed $3.9 million to its U.S. pension
plan trust during the third quarter of 2002. The Company currently anticipates
that additional funds may be contributed over the next year or more in order to
restore the plan to an improved funded status as it relates to the associated
pension benefit obligations.
The Company's ongoing requirements for cash are expected to consist
principally of amounts required for capital expenditures, stockholder
dividends, pension plan contributions and working capital. Other than
expenditures associated with capital projects, the Company had no material
outstanding commitments as of September 30, 2002.
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.
NEW ACCOUNTING STANDARDS
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 ceases upon
adoption of SFAS No. 142. The Company adopted SFAS No. 142 effective January 1,
2002. The adoption of these new accounting standards had no material effect on
the Company's financial statements.
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 expects no material effect on its
financial statements as a result of this new accounting standard.
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 APB 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. The Company adopted SFAS No. 144 effective January 1, 2002. The
adoption of this new accounting standard had no material effect on the
Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," SFAS
No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" and
the amendments of SFAS No. 13, "Accounting for Leases" are all changes in
accounting standards with no current implications on the Company's accounting
and reporting.
18
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which is effective for such
activities initiated after December 31, 2002. SFAS No. 146 bases accrual of an
exit or disposal cost on the existence of a liability that constitutes an
"obligation" as defined in FASB Concept Statement No. 6, "Elements of Financial
Statements", which is different from the concept of an expected cost that was
the underpinning of Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No.
146, which is effective for the Company beginning January 1, 2003, will be used
to establish the timing of recognition of costs in connection with exit or
disposal activities, if any, initiated after December 31, 2002.
OUTLOOK
The markets for the Company's products are expected to remain
relatively stable through the remainder of 2002. Cigarette production in the
United States is expected to continue to decline as a result of lower domestic
cigarette consumption and expected declines in exports of cigarettes
manufactured in the United States. Sales volumes of tobacco-related papers of
the Company's U.S. business segment appear to have somewhat stabilized as the
negative impact of lower U.S. cigarette production is being partially offset by
the Company's increased market share within the North American market. For the
French business segment, trends of improvement are expected to continue in
tobacco-related paper sales in several key markets. Sales of tobacco-related
papers within the Brazilian market appear to be relatively stable, and the
Company's Brazilian business continues to benefit from increased sales to Latin
American countries outside of Brazil.
Total sales volumes of the Company's Brazilian business are expected
to be relatively stable in the fourth quarter of 2002 compared with the
comparable period of 2001 following the exit of the printing and writing
uncoated papers market in Brazil in mid-2001. Without the sale of the
marginally profitable printing and writing uncoated papers, an improved mix of
products sold and better operating results are expected for full-year 2002
compared with 2001 as a result of the restructuring of the Brazilian
operations.
In July 2002, the Company was advised by Souza Cruz S.A., SWM-B's
largest customer, that the exclusive supply agreements for tobacco-related
papers and for coated papers will not be renewed under their existing terms.
The current agreements are scheduled to expire in February 2004, at which
point, in accordance with the terms of the respective contracts, phase-out
periods would commence. Although this notification was necessary in order for
the tobacco-related papers agreement to not automatically renew for an
additional three-year term, the Company believes it is the expectation of both
parties to maintain a mutually beneficial commercial relationship for both
tobacco-related and coated papers.
If the strengthening of the euro versus the U.S. dollar, which
occurred during the first half of 2002, is maintained or continues, there
should be a positive impact on the Company's reported net sales in future
periods, however, this is not expected to have an immediate material impact on
the Company's profitability. The benefits of translating the Company's French
business unit's financial results into U.S. dollars at a more favorable
exchange rate are essentially offset by the decline in profit margin in France
for sales that are denominated in U.S. dollars. Continued strengthening of the
euro could, however, support a firming of industry sales pricing in the future.
The per ton cost of wood pulp appears to have reached the bottom of
the pulp price cycle and, during the fourth quarter of 2002, per ton wood pulp
costs are expected to be somewhat above the level of the comparable period of
the prior year.
In the first nine months of 2002, the Company's energy costs in France
and in the United States were lower than in the comparable period of 2001,
while electricity rates were somewhat higher in Brazil. The Company expects
this trend to continue for the remainder of 2002, although the positive benefit
in the fourth quarter is expected to be less than in the prior quarters of the
year. The Company expects its energy costs
19
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
overall to be lower in 2002 than in 2001, although this benefit is expected to
be largely offset by higher insurance expenses, primarily property insurance,
and increased compensation and benefit costs, including higher medical and
pension expenses.
During the fourth quarter of 2001, the Company completed the
construction phase of the banded cigarette paper project to modify certain of
the Company's paper machines and related manufacturing equipment at the
Spotswood mill to produce commercial quantities of a new proprietary banded
cigarette paper for Philip Morris. The banded cigarette paper project had a
negative impact on 2001 financial results because of additional expenses
associated with its implementation. Except for costs incurred in connection
with the strike, Spotswood mill operating costs are expected to continue to
improve in 2002 compared with 2001.
In recent years, certain governmental entities in the United States
have considered or proposed actions that would require cigarettes to meet
specifications aimed at reducing their likelihood of igniting fires when
cigarettes are not being actively smoked. The State of New York enacted a law
directing that such a set of requirements be implemented beginning in mid-2003.
Legislation was proposed in the U.S. Congress during April 2002 for the
development of a national standard for reduced ignition propensity cigarettes.
Cigarette manufacturers are in varying stages of development of cigarettes
having such characteristics and have not finalized their plans. While the joint
development effort by the Company and Philip Morris of banded cigarette paper
was undertaken in advance of legislative initiatives, this product may make a
cigarette less likely to ignite certain fabrics. The Company's banded cigarette
paper project is expected to benefit future periods, although it is not
expected to result in a significant increase in the production and sale of
banded cigarette paper during 2002. In addition to banded cigarette paper, the
Company is actively involved in the development of a print-banded reduced fire
risk technology based on a number of patents it holds or sublicenses concerning
that technology and has taken steps to make limited commercial capacity
available for this product.
The Company expects its consolidated effective income tax rate to be
approximately 34 percent during the fourth quarter of 2002 and in 2003,
primarily as a result of a decline in the French corporate income tax rate from
36.3 percent for 2001 to 35.3 percent for 2002 and from increased profitability
in Brazil which has the Company's lowest income tax rate.
Including capital spending associated with the RTL production
expansion project at LTRI, the Company expects its capital spending to total
approximately $32 million for full-year 2002 and approximately $60 million in
2003.
During 2000, the Company's Board of Directors authorized the
repurchase of 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. Through
September 30, 2002, the Company had made no repurchases of its common stock
under this program. However, to the extent that funds are available, the
Company may consider purchases of Company stock during the fourth quarter of
2002 dependent upon various factors, including cash availability, the stock
price and strategic opportunities.
20
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, but not limited to,
phrases such as "the Company expects" or "the Company anticipates", as well as
by use of words of similar effect, such as "appears", "could", "should", "may"
and "typically". This report contains many such forward-looking statements,
including statements regarding management's expectations of future selling
prices for the Company's products, the Company's anticipated market shares,
future market prices for wood pulp used by the Company, expected sales volumes
trends, expected declines in export sales by domestic cigarette manufacturers,
expected banded cigarette paper sales volumes, new product introductions, mill
operations, pension plan contributions, anticipated energy, compensation,
benefit and insurance costs, anticipated financial and operational results,
anticipated capital spending, RTL production capacity, amount of internally
generated funds, available bank credit facility borrowing capacity, anticipated
effective income tax rate, anticipated tax and other governmental actions,
foreign currency exchange impacts, 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. The above-mentioned important
factors, among others, in some cases have affected, and in the future could
affect, the Company's actual results and could cause the Company's actual
results for 2002 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 2001 Annual Report on Form 10-K, Part
II, Item 7, under the headings "Critical Accounting Policies" and "Factors That
May Affect Future Results."
ITEM 4. SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's Chairman of
the Board and Chief Executive Officer and its Chief Financial Officer and
Treasurer have evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under
the Securities Exchange Act of 1934) within 90 days prior to the filing of this
report. Based on this evaluation, they have concluded that the Company's
disclosure controls system is functioning effectively to provide reasonable
assurance that the information required to be disclosed is accumulated and
communicated to management, including the Company's Chairman of the Board and
Chief Executive Officer and its Chief Financial Officer and Treasurer, as
appropriate, to allow timely decisions regarding disclosure. The Company's
disclosure controls system is based upon a chain of financial and general
business reporting lines that converge in the headquarters of the Company. The
reporting process is designed to ensure that information required to be
disclosed by the Company in the reports it files or submits to the Securities
and Exchange Commission is recorded, processed, summarized and reported within
the time periods specified in the Commission's rules and forms.
(b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date of the evaluation described above,
including any corrective actions with regard to significant deficiencies or
material weaknesses.
21
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders of
Schweitzer-Mauduit International, Inc.
Alpharetta, Georgia
We have reviewed the accompanying consolidated balance sheet of
Schweitzer-Mauduit International, Inc. and subsidiaries as of September 30,
2002, the related consolidated statements of income for the three-month and
nine-month periods ended September 30, 2002 and 2001, and the related
statements of changes in stockholders' equity and cash flows for the nine-month
periods ended September 30, 2002 and 2001. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States
of America, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Schweitzer-Mauduit International, Inc. and subsidiaries as of December 31, 2001
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the year then ended (not presented herein); and in
our report dated January 25, 2002 (January 31, 2002 as to Note 5), we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 2001 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
October 28, 2002
22
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Effective November 1, 2002, Mr. Thierry Bellanger was appointed
President, French Operations for the Company, reporting to Mr. Jean-Pierre Le
Hetet, Chief Operating Officer. Formerly, both of these positions were held by
Mr. Le Hetet. Mr. Bellanger was formerly Director of Paper Operations for the
French business unit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
15. Letter from Deloitte & Touche LLP regarding unaudited interim
financial information.
(b) Reports on Form 8-K:
The registrant did not file any reports on Form 8-K during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Schweitzer-Mauduit International, Inc.
(Registrant)
By: /s/ PAUL C. ROBERTS By: /s/ WAYNE L. GRUNEWALD
-------------------------------- -------------------------------
Paul C. Roberts Wayne L. Grunewald
Chief Financial Officer and Controller
Treasurer (principal accounting officer)
(duly authorized officer and
principal financial officer)
November 13, 2002 November 13, 2002
23
CERTIFICATIONS
I, Wayne H. Deitrich, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Schweitzer-Mauduit
International, Inc. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ WAYNE H. DEITRICH
----------------------------
Wayne H. Deitrich
Chairman of the Board and
Chief Executive Officer
24
CERTIFICATIONS (Continued)
I, Paul C. Roberts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Schweitzer-Mauduit
International, Inc. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ PAUL C. ROBERTS
---------------------------
Paul C. Roberts
Chief Financial Officer and
Treasurer
25
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
15. --- Letter from Deloitte & Touche LLP regarding unaudited interim
financial information.