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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
TO
COMMISSION FILE NUMBER 1-13948
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1612879
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 NORTH POINT CENTER EAST, SUITE 600 30022-8246
ALPHARETTA, GEORGIA (Zip Code)
(Address of principal executive offices)
1-800-514-0186
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
-------------------- ------------------------------------------
Common stock, par value $.10 per share (together with New York Stock Exchange, Inc.
associated preferred stock purchase rights)
Securities registered pursuant to Section 12(g) of the Act:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 31, 1999, 15,636,888 shares of the Corporation's common
stock, par value $.10 per share, together with preferred stock purchase rights
associated therewith, were outstanding, and the aggregate market value of the
common stock on such date (based on the closing price of these shares on the New
York Stock Exchange) held by non-affiliates was approximately $210 million.
(Continued)
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DOCUMENTS INCORPORATED BY REFERENCE
Schweitzer-Mauduit International, Inc.'s 2000 Proxy Statement, filed with
the Commission dated March 14, 2000, contains certain of the information
required in this Form 10-K, and portions of that document are incorporated by
reference herein from the applicable sections thereof. The following chart
identifies the sections of this Form 10-K which incorporate by reference
portions of the Company's 2000 Proxy Statement. The Items of this Form 10-K,
where applicable, specify which portions of such document are incorporated by
reference. The portions of such document that are not incorporated by reference
shall not be deemed to be filed with the Commission as part of this Form 10-K.
DOCUMENT OF WHICH PORTIONS ITEMS OF THIS FORM 10-K
ARE INCORPORATED BY REFERENCE IN WHICH INCORPORATED
- ----------------------------- -----------------------
2000 Proxy Statement Part III
Item 10. Directors and Executive Officers of the
Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related
Transactions
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PART I
ITEM 1. BUSINESS
BACKGROUND
Schweitzer-Mauduit International, Inc. ("SWM") was incorporated in Delaware
on August 21, 1995 as a wholly-owned subsidiary of Kimberly-Clark Corporation
("Kimberly-Clark") for the purpose of effectuating the tax-free spin-off of
Kimberly-Clark's U.S., French and Canadian business operations that manufacture
and sell tobacco-related papers and other specialty paper products (the
"Businesses"). Pursuant to a distribution agreement dated October 23, 1995,
Kimberly-Clark agreed to distribute in the form of a dividend to its
stockholders all of the common stock of SWM and on November 30, 1995, each
Kimberly-Clark stockholder of record on November 13, 1995 received one share of
SWM common stock for every ten shares of Kimberly-Clark common stock held on the
date of record (the "Distribution"). As a result of the Distribution, SWM became
an independent public company. (As used herein, the Company means SWM, SWM and
its several subsidiaries or, as determined by the context, one or more of its
several subsidiaries.)
On February 2, 1998, Schweitzer-Mauduit Spain, S.L. ("SM-Spain"), a
wholly-owned subsidiary of SWM, acquired 99.97 percent of the outstanding shares
of Companhia Industrial de Papel Pirahy ("Pirahy"), a specialty paper
manufacturer located in Santanesia, Brazil, near Rio de Janeiro. Pirahy,
subsequently renamed Schweitzer-Mauduit do Brasil, S.A. ("SWM-B"), is the
largest supplier of tobacco-related papers to the South American market. It also
produces printing and writing papers as well as papers for packaging and
labeling applications.
Additionally, on February 11, 1998, the Company's second tier subsidiary,
Schweitzer-Mauduit Enterprises S.A. ("SM-Enterprises"), wholly-owned by
Schweitzer-Mauduit France, S.A.R.L. ("SMF"), acquired all of the outstanding
shares of Ingefico, S.A. and 97.1 percent of the outstanding shares of its pulp
and specialty paper manufacturing subsidiaries, Groupe SAPAM S.A. ("Groupe
SAPAM") and Papeteries de la Moulasse S.A., located in Saint-Girons in the
southwestern part of France. Subsequently, SM-Enterprises acquired all the
remaining shares of Groupe SAPAM. SM-Enterprises and Ingefico, S.A. were then
merged into Groupe SAPAM. Papeteries de la Moulasse S.A. was renamed Papeteries
de Saint-Girons S.A. ("PdStG"). Approximately 90 percent of the net sales of
PdStG are of fine papers to the tobacco industry.
Financial information about foreign and domestic operations, contained
under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" appearing in Part II, Item 7 herein and in Note 13 to
Consolidated Financial Statements contained in "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" appearing in Part II, Item 8 herein, are incorporated in
this Item 1 by reference.
DESCRIPTION OF THE BUSINESS
GENERAL. The Company manufactures and sells paper and reconstituted
tobacco products to the tobacco industry as well as specialized paper products
for use in other applications. Tobacco industry products, which comprised 89
percent of the Company's 1999 consolidated net sales, include cigarette, plug
wrap and tipping papers used to wrap various parts of a cigarette ("Cigarette
Papers"), reconstituted tobacco leaf ("RTL") for use as filler in cigarettes and
cigars, reconstituted tobacco wrappers and binders for cigars, and paper
products used in cigarette packaging. These products are sold directly to the
major tobacco companies or their designated converters in North and South
America, Eastern and Western Europe, China and elsewhere.
Non-tobacco industry products include drinking straw wrap, filter papers,
lightweight printing and writing papers, coated papers for packaging and
labeling applications, business forms, furniture laminates, battery separator
paper and other specialized papers primarily for the North American, Western
European and Brazilian markets. These products are generally sold directly to
converters and other end-users in North America and Western Europe and through
brokers in Brazil. The non-tobacco industry products are a diverse mix of
products, certain of which represent commodity paper grades produced to maximize
machine operations.
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PRODUCTS. Each of the three principal types of paper used in
cigarettes -- cigarette, plug wrap and tipping papers -- serves a distinct
purpose in the function of a cigarette.
Cigarette paper wraps the column of tobacco in a cigarette. Certain
properties of cigarette paper, such as basis weight, porosity, opacity, tensile
strength, texture and whiteness must be closely controlled to tight tolerances.
Many of these characteristics are critical to meet runnability standards of the
high-speed production processes utilized by premium cigarette manufacturers.
Plug wrap paper forms the outer layer of a cigarette filter and is used to
hold the filter materials in a cylindrical form. Conventional plug wrap is
manufactured on flat wire paper machines using wood pulp. Porous plug wrap, a
highly porous paper, is manufactured on inclined wire paper machines using a
furnish consisting of "long fibers", such as abaca, and wood pulp. Porosity, a
measure of air permeability, ranges from a typical level of less than 100
Coresta on conventional plug wrap to 35,000 Coresta on high porosity papers.
High porosity plug wrap is sold under the registered trademark POROWRAP(R) and
is used on filter-ventilated cigarettes. High porosity papers can also be used
for such specialty products as battery separator paper.
Tipping paper, produced in white or buff color, joins the filter element to
the tobacco section of the cigarette. The ability to produce tipping paper which
is both printable and glueable at high speeds is critical to producing a
cigarette with a distinctive finished appearance.
Reconstituted tobacco is used by manufacturers of cigarettes, cigars and
other tobacco products primarily as a filler that is blended with virgin tobacco
in order to utilize otherwise wasted parts of the tobacco leaf. The Company
currently produces reconstituted tobacco in two forms: leaf in France and
wrapper and binder in the United States.
BUSINESS SEGMENTS. The Company is operated and managed based on the
geographical location of its manufacturing operations: the United States, France
and Brazil. As such, these geographical operations also represent the Company's
business segments for reporting purposes. While the products are comparable in
each segment, they vary based on the technological capabilities of each of the
manufacturing operations and the respective markets and customers served. Sales
by a segment into markets primarily served by a different segment occur where
specific product needs cannot be cost-effectively met by the manufacturing
operations domiciled in that segment.
MARKETS AND CUSTOMERS. The Company's U.S. business primarily supplies the
major, and many of the smaller, cigarette manufacturers in North America, and
also has significant sales in South America and Japan. The customer base for the
U.S. operations consists of approximately 60 customers in approximately 30
countries. The Company's French businesses rely predominantly on worldwide
exports, primarily to Western Europe, China, Eastern Europe and the former
Commonwealth of Independent States, and, in lesser but substantial amounts, to
Asia (excluding China), Africa, the Middle East and Australia. The customer base
for the French operations consists of a diverse group of over 200 customers in
more than 80 countries. The Company's Brazilian business primarily supplies
customers in Brazil, but with increasing sales to other South American
countries. The current customer base of the Brazilian operations consists of the
cigarette manufacturers in Brazil, as well as approximately 20 customers in
approximately ten countries outside Brazil. Customers of all three units include
international tobacco companies, regional tobacco manufacturers and government
monopolies.
Philip Morris Incorporated ("Philip Morris"), including its subsidiaries,
and B.A.T. Industries PLC ("BAT"), including its U.S. subsidiary Brown &
Williamson Tobacco Corporation, its Brazilian subsidiary Souza Cruz S.A. ("Souza
Cruz") and its other subsidiaries, are the Company's two largest customers.
Philip Morris and BAT, together with their respective affiliates and designated
converters, accounted for approximately 30 percent and 18 percent, respectively,
of the Company's 1999 consolidated net sales.
The Company's French paper businesses, together, are the largest exporter
of cigarette paper to China with an estimated 45 to 50 percent share of that
country's cigarette paper imports. However, as cigarette paper manufacturers in
China continue to increase capacity, the total volume of cigarette paper imports
into China is expected to continue to decline.
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LTR Industries, S.A. ("LTRI") is a 72-percent owned second tier subsidiary
of the Company which manufactures RTL in France. LTRI has many customers,
consisting primarily of the large cigarette manufacturers in Eastern and Western
Europe. A small number of these large customers account for a substantial
portion of LTRI's net sales. The loss of any one or more of these large
customers could have a significant adverse effect on LTRI's and the Company's
results of operations.
The Company exited the RTL business in the United States in the second
quarter of 1996. In the fourth quarter of 1997, the U.S. business temporarily
restarted operation of the U.S. RTL production line, but only to support the
growth of the French RTL business while alternatives for additional capacity
were being considered. The U.S. RTL production line ceased operations in the
fourth quarter of 1998.
PHILIP MORRIS SUPPLY AGREEMENT. In 1992, the Company's U.S. unit was
chosen to be the single source of supply of Cigarette Papers to Philip Morris'
U.S. operations. The initial five-year term of the supply agreement (the "Supply
Agreement") was extended by mutual agreement. In July 1998, Philip Morris and
the Company signed an Amended and Restated Supply Agreement for Fine Paper
Supply ("Amended Supply Agreement"). The Amended Supply Agreement extends the
Company's position as the supplier of Cigarette Papers to Philip Morris' U.S.
operations until June 30, 2002, except that Philip Morris has the right,
commencing in 1999 and continuing thereafter, to acquire up to ten percent of
its prior year purchases of Cigarette Papers from other suppliers, although
to-date it has chosen not to do so. By its terms, the Amended Supply Agreement
automatically renews for three successive terms of two years each unless either
party gives notice of non-renewal 24 months before the end of the then current
term. A supplement to the Amended Supply Agreement creates the potential for a
seven-year exclusive supply arrangement with Philip Morris U.S.A. for an
experimental new paper product currently being jointly developed. In January
2000, Philip Morris announced that it would conduct consumer testing of this new
product, a new type of cigarette paper that may make a cigarette less likely to
ignite certain fabrics. Philip Morris and the Company also have entered into a
licensing and royalty agreement covering future commercialization of this new
paper product, the commercial viability of which has not yet been determined.
SOUZA CRUZ SUPPLY AGREEMENT. On February 2, 1998, as part of the Company's
agreement to purchase Pirahy, the Brazilian operations entered into two
exclusive supply agreements with its former owner and its largest customer,
Souza Cruz, to supply all of Souza Cruz's needs for papers which SWM-B is
capable of producing. The supply agreement for tobacco-related papers, as
amended in February 2000, has an initial term of six years until February 2,
2004 and automatically renews for additional three-year terms unless either
party provides notice of phase-out prior to the date of expiration. The supply
agreement for coated paper used in the packaging of cigarette products, as
amended in February 2000, has an initial term of six years until February 2,
2004, with extensions to be negotiated prior to the date of expiration.
EMPLOYEE AND LABOR RELATIONS. As of December 31, 1999, the Company had
3,402 regular full-time active employees of whom 611 hourly employees and 281
salaried employees were located in the United States and Canada, 1,096 hourly
employees and 643 salaried employees were located in France and 728 hourly
employees and 43 salaried employees were located in Brazil.
North American Operations -- Hourly employees at the Lee, Massachusetts,
Spotswood, New Jersey and Ancram, New York mills are represented by locals of
the PACE International Union. During 1999, the Spotswood bargaining agreement
was modified to provide for lump sum payments in lieu of general wage increases
for 1999 through 2001. The current collective bargaining agreements expire at
the Ancram mill on September 30, 2001, at the Spotswood mill on June 15, 2002
and at the Lee mills on August 1, 2002. There have been no strikes or work
stoppages at any of these locations for approximately 20 years, and the Company
believes employee and union relations are positive.
The fiber operations of the Company's Canadian subsidiary are non-union.
The Company believes that employee relations are positive.
French Operations -- Hourly employees at the Company's mills in Quimperle,
Malaucene, Saint-Girons and Spay, France are union represented. The most recent
two-year collective bargaining agreements for each of the mills expired on
December 31, 1999. The French subsidiaries are in the process of negotiating new
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contracts at all of the mills. Over the years, there have been intermittent work
stoppages lasting from a few hours to several days. The Company believes that,
overall, employee relations are positive and comparable to similar French
manufacturing operations.
Brazilian Operations -- Hourly employees at the Pirahy mill are represented
by a union. The current collective bargaining agreement expires on May 31, 2000.
The Company believes that, overall, employee relations are positive and
comparable to similar Brazilian manufacturing operations.
RAW MATERIALS. Wood pulp is the primary fiber used in the Company's
operations. These operations consumed approximately 107,000 and 112,000 metric
tons of wood pulp in 1999 and 1998, respectively, all of which was purchased.
Company operations also use other cellulose fibers, the most significant of
which are in the form of flax fiber and tobacco stems and scraps, as the primary
raw materials for the Company's paper and reconstituted tobacco products,
respectively. While tobacco stems and scraps are generally the property of the
cigarette manufacturer for whom the reconstitution is contracted, the Company
and LTRI purchase some tobacco materials for use in the production of RTL and
wrapper and binder products.
Flax straw is purchased and subsequently processed into flax tow at
processing facilities in Canada and France. The flax tow is then converted into
flax pulp at pulping facilities in the United States and France. Flax tow and
flax pulp are also purchased externally, but these purchases only represent
approximately 30 percent of the flax pulp currently consumed by the Company's
U.S. and French operations.
Certain specialty papers are manufactured with other cellulose fibers, such
as abaca, and small amounts of secondary and recycled fibers. All of these
secondary and recycled fibers are purchased.
The Company believes that the raw materials purchased by the Company are
readily available from several sources and that the loss of a single supplier
would not have a material adverse effect on the Company's ability to procure
needed raw materials.
COMPETITION. The Company is the leading producer of Cigarette Papers in
the world. LTRI is the leading independent producer of RTL for use in
cigarettes. The Company does not sell its products directly to consumers or
advertise its products in consumer media. The specialized nature of these
tobacco-related papers requires research and development capability to develop
them and special papermaking equipment and skills to meet exacting customer
specifications. These factors have limited the number of competitors in each of
the tobacco-related paper categories discussed separately below.
Cigarette Paper -- Management believes that the Company has between 55 and
60 percent share of the North American cigarette paper market. The Ecusta
division of P.H. Glatfelter Company ("Ecusta") is the Company's major competitor
in the sale of cigarette paper in North America. European suppliers, such as
Miquel y Costas & Miquel S.A., a Spanish corporation ("Miquel y Costas"), also
compete in this market but, to date, have achieved no more than an estimated 10
percent market share. Management believes that the bases of cigarette paper
competition are price, consistent quality, level of technical service and
performance requirements of the customer's cigarette-making equipment.
The principal competitors of the Company's French cigarette paper
businesses are Wattens GmbH ("Wattens"), an Austrian subsidiary of Trierenberg
Holding ("Trierenberg"), Schoeller & Hoesch GmbH ("Schoeller & Hoesch"), a
German company acquired by P.H. Glatfelter Company in January 1998, Robert
Fletcher (Greenfield) Limited, Miquel y Costas and Julius Glatz GmbH. Papeteries
de Mauduit, S.A. ("PdM"), an indirect wholly-owned subsidiary of the Company in
France, sells approximately 65 to 70 percent of its products (cigarette paper
and porous and conventional plug wrap) in Western Europe and China. Management
believes that the bases of competition for PdM's products are the same as for
the Company's U.S. business.
The principal competitors of the Company's Brazilian cigarette paper
business are Ecusta (including Schoeller & Hoesch), Miquel y Costas and Wattens.
SWM-B has an estimated 75 percent market share of cigarette paper in Brazil and
an estimated 50 percent market share of cigarette paper in South America.
Management believes that the bases of cigarette paper competition for SWM-B are
the same as for the Company's U.S. business.
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Plug Wrap Paper -- Management believes that the Company's U.S. business has
between 70 and 75 percent share of the North American market for plug wrap
papers. The remainder of the North American market is shared by three
competitors: Ecusta (including Schoeller & Hoesch), Miquel y Costas and Wattens.
The Company's French businesses hold an estimated 65 percent of the Western
European high porosity plug wrap market. Schoeller & Hoesch is the Company's
principal competitor in that market along with Wattens. Through the Brazilian
business' supply of conventional plug wrap papers and the U.S. business' supply
of porous plug wrap papers, the Company has an estimated 75 percent share of the
South American market for plug wrap papers. Ecusta (including Schoeller &
Hoesch), Miquel y Costas and Wattens are the Company's principal competitors in
that market.
Management believes that the primary basis of competition for high porosity
plug wrap is technical capability with price being a less important
consideration. On the other hand, conventional plug wrap entails less technical
capability with the result that price and quality are the primary bases of
competition.
Tipping Paper -- Management believes that the Company's U.S. business has
between 60 and 65 percent share of the North American market for base tipping
paper which is subsequently printed by converters. Its principal competitors in
these markets are Ecusta and Tervakoski Oy, a Finnish subsidiary of Trierenberg.
Management believes that the bases for competition are consistent quality, price
and, most importantly, the ability to meet the runnability and printability
requirements of converting equipment and high-speed cigarette-making machines.
Papeteries de Malaucene S.A. ("PdMal"), another of the Company's indirect
wholly-owned French subsidiaries, operates a tipping paper mill in Malaucene,
France, and ranks among the largest converted tipping paper producers in Western
Europe, with an estimated 15 percent market share. PdMal produces printed and
unprinted, and laser and electrostatically perforated tipping papers. PdMal's
principal European competitors are Tann-Papier GmbH, an Austrian subsidiary of
Trierenberg, Benkert GmbH (Germany) and Miquel y Costas. Management believes
that the bases of competition for perforated tipping paper in Europe are
perforation technology, consistent quality and price.
The Company's Brazilian business has between 55 and 60 percent share of the
South American market for base tipping paper which is subsequently printed by
converters. The Company's principal competitors in Latin America are Ecusta
(including Schoeller & Hoesch) and Miquel y Costas. Management believes that the
bases of tipping paper competition for SWM-B are the same as for the Company's
U.S. business.
Reconstituted Tobacco -- LTRI is the leading independent producer of RTL.
Management believes that the basis of competition in this market is primarily
quality. However, sales volumes are influenced by worldwide virgin tobacco
prices (lower prices of virgin tobacco may result in lower reconstituted tobacco
sales volumes).
LTRI's principal competitors are (i) R.J. Reynolds Tobacco Company, which
produces RTL for both internal and external use, (ii) Yelets, an affiliate of
Japan Tobacco Inc. which operates in Russia, (iii) B.V. Deli-HTL Tabak
Maatschappiji B.V., an independent producer which operates in Holland, and (iv)
cigarette companies such as Philip Morris and BAT, which produce RTL primarily
for internal use.
Management estimates that approximately 50 percent of reconstituted cigar
wrapper and binder used in the U.S. market is produced internally by domestic
cigar manufacturers. The Company's Ancram mill and Nuway Microflake Partnership,
a cast process manufacturer, produce the balance.
Other Products -- As noted above, the Company and its subsidiaries produce
wrapping paper for drinking straws, filter papers, as well as papers for
lightweight printing and writing, coated papers for packaging and labeling
applications, business forms, furniture laminates and battery separators.
Management believes that price is the primary basis of competition for drinking
straw wrap, printing and writing and filter papers (collectively, "Filler
Papers"), while consistent quality and customer service are believed to be the
primary competitive factors for battery separator and business forms papers. The
Company does not possess a significant market share in any of the above
segments, except for battery separator papers, where it holds approximately 25
percent of the worldwide market. The Company continues, to the extent feasible,
to convert its production of less profitable Filler Papers to more profitable
niche applications.
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RESEARCH AND DEVELOPMENT; PATENTS AND TRADEMARKS. The Company has research
and laboratory facilities in Spay, France, Santanesia, Brazil and Alpharetta,
Georgia and employs more than 40 research personnel. The Company is dedicated to
developing Cigarette Papers and reconstituted tobacco product innovations and
improvements to meet the needs of individual customers. The development of new
components for tobacco products is the primary focus of these research and
development functions, which are working on several development projects for the
Company's major customers. The Company spent in the aggregate on product
research and development $6.7 million, $6.5 million and $6.4 million in 1999,
1998 and 1997, respectively.
The Company believes that its research and product development capabilities
are unsurpassed in the industry and have played an important role in
establishing the Company's reputation for high quality, superior products. The
Company's commitment to research and development has enabled the Company, for
example, to (i) produce high-performance papers designed to run on the
high-speed manufacturing machines of its customers, (ii) produce papers to
exacting specifications with very high uniformity, (iii) produce cigarette paper
with extremely low basis weights, and (iv) have an acceptance rate by its
customers in excess of 99 percent. The Company also believes it is in the
forefront of the manufacturing process, having invested heavily in modern
technology, including laser technology and modern paper-slitting equipment. The
Company believes that its commitment to research and development, coupled with
its investment in new technology and equipment, has positioned the Company to
take advantage of growth opportunities abroad where the demand for
American-style premium cigarettes continues to increase.
As of December 31, 1999, the Company and its subsidiaries collectively
owned 82 patents and had pending 52 patent applications covering a variety of
Cigarette Papers, RTL and cigar wrapper and binder products and processes in the
United States, Western Europe and several other countries. The Company believes
that such patents, together with its papermaking expertise and technical sales
support, have been instrumental in establishing it as the leading worldwide
supplier of Cigarette Papers, RTL and reconstituted wrapper and binder made by
the papermaking process.
Management believes that the Company's "POROWRAP(R)" trademark for highly
porous plug wrap paper, the "PDM" logo and the "JOB PAPIER A CIGARETTES",
"PAPETERIES DE MAUDUIT" and "SCHWEITZER" trade names also have been significant
contributors to the marketing of the Company's products.
BACKLOG; SEASONALITY. The Company has historically experienced a steady
flow of orders. Its mills typically receive and ship orders within a 30-day
period, except in the case of RTL where orders are generally placed well in
advance of delivery. The Company plans its manufacturing schedules and raw
material purchases based on its evaluation of customer forecasts and current
market conditions.
The U.S. business does not calculate or maintain records of order backlogs.
Philip Morris, its largest customer, provides forecasts of future demand, but
actual orders for Cigarette Papers are typically placed two weeks in advance of
shipment.
The French businesses do maintain records of order backlogs. For Cigarette
Papers, the order backlog was approximately $22 million and $24 million on
December 31, 1999 and 1998, respectively. This represented approximately 40 and
44 days of Cigarette Paper sales for the French businesses in 1999 and 1998,
respectively. LTRI's RTL business operates under a number of annual supply
agreements. The order backlog for RTL was approximately $44 million and $56
million on December 31, 1999 and 1998, respectively.
The Brazilian business does not calculate or maintain records of order
backlogs. Approximately 40 percent of its sales are on a consignment basis with
Souza Cruz, its largest customer. Souza Cruz also provides forecasts of future
demand in order for the Brazilian operations to manage levels of consignment
inventories.
Sales of the Company's products are not subject to seasonal fluctuations,
except in the United States where customer shutdowns of one to two weeks in
duration typically occur in July and December, and in Brazil where customer
orders are typically lower in December due to a January and February holiday
season.
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SALES AND DISTRIBUTION. Essentially all sales of tobacco-related products
by the U.S. and French businesses are sold by the Company's marketing, sales and
customer service organizations directly to cigarette manufacturers or their
designated converters, and to cigar manufacturers, except in China where sales
are generally made to trading companies for resale to cigarette producers. The
Brazilian business' tobacco-related products are sold by the Brazilian marketing
and sales organization directly to cigarette manufacturers, and through brokers
for non-tobacco related products. Most of the Company's U.S. and French
businesses' non-tobacco related products are sold on a direct basis.
ENVIRONMENTAL MATTERS. Capital expenditures for environmental controls 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 are estimated to be approximately $2 million to $4 million annually in
2000 and 2001. These expenditures are not expected to have a material adverse
effect on the Company's financial condition, results of operations or
competitive position; however, these estimates could be modified as a result of
changes in the Company's plans, changes in legal requirements or other factors.
RISKS FOR FOREIGN OPERATIONS. In addition to its U.S. operations, the
Company has manufacturing facilities in France, Brazil and Canada. Products made
in France, Brazil or in the United States are marketed in more than 90
countries. Because these countries are so numerous, it is not feasible to
generally characterize the risks involved. Such risks vary from country to
country and include such factors as tariffs, trade restrictions, monetary
exchange controls, changes in currency value, economic conditions and
international relations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Factors That May Affect Future Results"
appearing in Part II, Item 7 herein.
INSURANCE. The Company maintains coverage for most insurable risks that
are incident to its operations.
ITEM 2. PROPERTIES
As of December 31, 1999, the Company operated eight mills (which include
four fiber pulping operations) in the United States, France and Brazil that
produce specialty papers or reconstituted tobacco products. The Company also
operates flax fiber processing operations in France and Canada. The Company or
one of its subsidiaries owns each of these facilities except for a flax tow
storage facility in Killarney, Manitoba, which is leased. The Company and its
subsidiaries maintain administrative and sales offices in Alpharetta, Georgia,
in Quimperle and Paris, France, in Hong Kong, China, in Santanesia and Rio de
Janeiro, Brazil, and in Madrid, Spain. The Company's world headquarters are also
located in Alpharetta. All of these offices are leased except for the Quimperle
and Santanesia offices, which are owned by PdM and SWM-B, respectively.
Management believes that each of these facilities is well-maintained,
suitable for conducting the Company's operations and business, and adequately
insured.
The Company's U.S., French and Brazilian paper operations experienced
downtime on certain machines during 1999 because of reduced demand. Additional
paper production downtime is likely to be taken in 2000 in each of the Company's
three operations but to a lesser extent than in 1999. The U.S. RTL production
line had been temporarily restarted during the fourth quarter of 1997, in
support of increased sales volumes of LTRI while alternatives for additional
capacity were considered. During the fourth quarter of 1998, the Company
announced an expansion project for the French RTL business, and the U.S. RTL
production line ceased operations.
In addition to the operating equipment listed on the following page, the
Company and its subsidiaries have additional equipment which has been taken out
of service. These pieces of equipment are in various states of condition and may
or may not be usable should the Company need additional capacity. Further, it
may not be cost-effective to make upgrades which may be necessary to bring this
equipment back into service.
9
10
The following are locations of the Company's principal facilities and
operating equipment as of December 31, 1999:
PRODUCTION LOCATIONS EQUIPMENT PRODUCTS
- -------------------- --------- --------
Lee Mills 4 Paper Machines Base Tipping and Specialty Papers
Lee, Massachusetts Pulping Equipment Plug Wrap Paper
(4 mill sites)
Spotswood Mill 4 Paper Machines Cigarette Paper, Straw Wrap Paper
Spotswood, New Jersey Pulping Equipment
Ancram Mill 1 Paper Machine Reconstituted Tobacco Wrapper and
Ancram, New York 1 Reconstituted Tobacco Binder and Porous Plug Wrap Paper
Wrapper and Binder
Machine
Fiber Operations 5 Movable Fiber Mills Flax Fiber Processing
Manitoba, Canada
Papeteries de Mauduit Mill 10 Paper Machines Cigarette Paper, Plug Wrap Paper
Quimperle, France Pulping Equipment and Long Fiber Specialties
Papeteries de Malaucene Mill 1 Paper Machine Tipping and Specialty Papers
Malaucene, France 4 Printing Presses
11 Laser Perforating Lines
1 Electrostatic Perforating
Line
Papeteries de Saint-Girons Mill 3 Paper Machines Cigarette Paper, Plug Wrap Paper,
Saint-Girons, France Pulping Equipment Base Tipping and Specialty
Papers, Flax Pulp
LTR Industries Mill 2 Reconstituted Tobacco Reconstituted Tobacco Leaf, Flax
Spay, France Leaf Machines Fiber Processing, Research &
1 Fiber Mill Development
Pirahy Mill 4 Paper Machines Cigarette Paper, Plug Wrap Paper,
Santanesia, Brazil 1 Coating Machine Base Tipping and Specialty Papers
ADMINISTRATIVE LOCATIONS OFFICE SPACE FUNCTION
- ------------------------ ------------ --------
Alpharetta, Georgia Leased Office Space Company World Headquarters,
Research & Development, and
Administrative and Sales
-- U.S. Business
Madrid, Spain Leased Office Space Administrative Office for
International Investments
Quimperle, France Owned Office Space Administrative Offices for
French Businesses
Paris, France Leased Office Space Administrative and Sales Offices
for French Businesses
Hong Kong, China Leased Office Space Sales Office for French
Businesses
Santanesia, Brazil Owned Office Space Administrative Offices for
Brazilian Business, Research &
Development
Rio de Janeiro, Brazil Leased Office Space Administrative and Sales Offices
for Brazilian Business
10
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ITEM 3. LEGAL PROCEEDINGS
The following is a brief description of potentially material legal
proceedings to which the Company or any of its subsidiaries is a party, or of
which any of their properties is subject:
LITIGATION
Under the terms of the Distribution, the Company assumed liability for and
agreed to indemnify Kimberly-Clark from litigation arising out of the operation
of the Businesses, including certain tobacco industry class action and
individual lawsuits in which certain component suppliers to the tobacco industry
were named, including Kimberly Clark and in some cases LTRI. During 1999,
Kimberly-Clark and LTRI were dismissed from all tobacco-related litigation
pending against them.
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.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws,
regulations and ordinances relating to various environmental matters. The nature
of the Company's operations expose it to the risk of claims with respect to
environmental matters, and there can be no assurance that material costs or
liabilities will not be incurred in connection with such claims. Based on the
Company's experience to date, the Company believes that its future cost of
compliance with environmental laws, regulations and ordinances, and its exposure
to liability for environmental claims, will not have a material adverse effect
on the Company's financial condition or results of operations. However, future
events, such as changes in existing laws and regulations, or unknown
contamination of sites owned, operated or used for waste disposal by the Company
(including contamination caused by prior owners and operators of such sites or
other waste generators) may give rise to additional costs which could have a
material adverse effect on the Company's financial condition or results of
operations.
Prior to the Distribution, Kimberly-Clark was named a potentially
responsible party ("PRP") under the provisions of the U.S. Comprehensive
Environmental Response, Compensation and Liability Act and analogous New Jersey
statutes in connection with the Global Landfill Reclaiming Corporation ("Global
Landfill") waste disposal site in Old Bridge, New Jersey. The Global Landfill
was utilized by Kimberly-Clark's Spotswood mill. The Company has assumed
Kimberly-Clark's liabilities for the Global Landfill site. The Company continues
to participate in the remediation of the Global Landfill as a member of a group
of PRP's that entered into a consent decree with the state of New Jersey in
1993. The Company previously recorded its pro-rata portion of the estimated
liability for remediation of this site, the remainder of which is not material.
The Company also assumed responsibility to administer a consent order
between Kimberly-Clark and the Massachusetts Department of Environmental
Protection ("MDEP") governing the post-closure care of the Willow Hill Landfill
in Lee, Massachusetts. Recent test results show that the Company has achieved
compliance with the consent order and has reduced the concentration of landfill
gases to the levels specified in the consent order at 30 feet below ground level
in all of the gas monitoring wells. The Company will continue its current
remediation activities on a reduced monitoring schedule approved by MDEP for
this landfill, the remaining cost of which was previously accrued and is not
material.
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 incurred total capital expenditures of $0.5 million in 1999, and
anticipates that it will incur approximately $2 million to $4 million annually
in 2000 and 2001. The major projects included in these estimates include
upgrading wastewater treatment facilities at various locations and installation
of ink solvent treatment equipment in France. The foregoing capital expenditures
are not expected to reduce the Company's ability to invest in capacity
expansion, quality improvements, capital replacements, productivity
improvements, or cost containment projects, and are not expected to have a
material adverse effect on the Company's financial condition or results of
operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the executive officers of the Company as of March 1,
2000, together with certain biographical information, are as follows:
NAME POSITION
---- --------
Wayne H. Deitrich............................ Chief Executive Officer
Jean-Pierre Le Hetet......................... Chief Operating Officer and
President -- French Operations
Peter J. Thompson............................ President -- U.S. Operations
Otto R. Herbst............................... President -- Brazilian Operations
Paul C. Roberts.............................. Chief Financial Officer and Treasurer
John W. Rumely, Jr........................... General Counsel and Secretary
Wayne L. Grunewald........................... Controller
MR. WAYNE H. DEITRICH, 56, has served as Chief Executive Officer of the
Company since August 1995 and was elected Chairman of the Board of Directors
immediately after the Distribution. From June 1995 through August 1995, Mr.
Deitrich served as President -- Specialty Products Sector of Kimberly-Clark.
From 1993 through May 1995, Mr. Deitrich was the President -- Paper and
Specialty Products Sector of Kimberly-Clark, and from 1992 to 1993, he was
President -- Paper Sector of Kimberly-Clark. From 1988 through 1992, Mr.
Deitrich served as the President of Neenah Paper, a business unit of
Kimberly-Clark.
MR. JEAN-PIERRE LE HETET, 56, has served as Chief Operating Officer of the
Company since April 1998 in addition to having served as President -- French
Operations of the Company since August 1995. Mr. Le Hetet was elected to the
Board of Directors immediately after the Distribution. From 1991 through August
1995, Mr. Le Hetet was the President of Specialty Products, France, a business
unit of Kimberly-Clark. Prior to that time, Mr. Le Hetet served as General
Manager of Specialty Products, France.
MR. PETER J. THOMPSON, 37, has served as President -- U.S. Operations of
the Company since November 1998. From April 1998 through November 1998, Mr.
Thompson was Director -- Sales and Marketing for the U.S. Operations of the
Company. Mr. Thompson joined the Company in January 1997 as a Marketing Manager
in the U.S. Operations. Prior to joining the Company, he was employed by Tape,
Inc. from May 1995 through January 1997, where he held several senior management
positions in marketing, sales and finance. Mr. Thompson was employed by
Kimberly-Clark from June 1984 through May 1995 in a variety of financial
positions.
MR. OTTO R. HERBST, 40, has served as President -- Brazilian Operations of
the Company since April 1999. Prior to April 1999, he served as General Manager
for New Business and Services from 1997 through March 1999 for Interprint, a
manufacturer of security documents, telephone cards and business forms. From
1990 through 1997, Mr. Herbst served as Director of Agaprint, a manufacturer of
packaging materials, business forms, commercial printing papers, personalized
documents and envelopes.
MR. PAUL C. ROBERTS, 51, has served as Chief Financial Officer and
Treasurer of the Company since August 1995. From June 1995 through August 1995,
he served as Chief Financial Officer -- Specialty Products Sector of
Kimberly-Clark. From January 1995 through May 1995, he was Director -- Corporate
Strategic Analysis of Kimberly-Clark, and from 1988 through 1994, Mr. Roberts
was Director -- Operations Analysis and Control, Pulp and Paper Sector of
Kimberly-Clark.
MR. JOHN W. RUMELY, JR., 46, has served as General Counsel and Secretary of
the Company since January 1, 2000. From March 1998 through December 31, 1999, he
served as Associate General Counsel of the Company. From May 1989 through
February 1998, Mr. Rumely was Assistant General Counsel of Alumax Inc.
MR. WAYNE L. GRUNEWALD, 48, has served as Controller of the Company since
August 1995. From July 1995 through August 1995, he served as
Controller -- Specialty Products Sector of Kimberly-Clark. From December 1989
through June 1995, he was Controller -- U.S. Pulp and Newsprint, a business unit
of Kimberly-Clark.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
PRINCIPAL MARKET
Since the Distribution of the Company's Common Stock by Kimberly-Clark on
November 30, 1995, the Common Stock has been listed on the New York Stock
Exchange under the trading symbol "SWM".
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
As of March 1, 2000, there were 6,561 stockholders of record of the
Company's Common Stock. This number does not include shares held in "nominee" or
"street" name.
STOCK PRICE AND DIVIDEND INFORMATION
The dividend and market price data included in Note 15 to Consolidated
Financial Statements contained in "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA"
appearing in Part II, Item 8 herein is incorporated in this Item 5 by reference.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are qualified in their entirety by
reference to, and should be read in conjunction with, the Consolidated Financial
Statements of the Company and the notes thereto included elsewhere in this
Annual Report. The financial statement data as of and for the years ended
December 31, 1999, 1998, 1997 and 1996 and the balance sheet data as of December
31, 1995 are on a consolidated basis. The income statement data for the year
ended December 31, 1995, which has been audited by Deloitte & Touche LLP,
independent auditors, has been derived from historical combined financial
statements for the eleven months ended November 30, 1995, and the consolidated
results of the Company for the one month ended December 31, 1995. The historical
combined financial statements of SWM and its predecessors for 1995 do not
reflect the results of operations or financial position that would have been
obtained had SWM been a separate, independent company and are not indicative of
SWM's future performance as a separate, independent company.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Net Sales........................................... $504.4 $546.7 $460.6 $471.3 $462.9
Gross Profit........................................ 110.4 106.1 121.9 114.2 101.2
Operating Profit.................................... 64.6 59.1 81.9 74.0 58.7
Interest income from affiliates, net(1)............. -- -- -- -- 3.3
Net Income.......................................... 31.4 31.0 45.3 38.7 36.8
Net Income Per Share:
Basic............................................ $ 1.99 $ 1.94 $ 2.82 $ 2.41
Diluted.......................................... $ 1.99 $ 1.92 $ 2.77 $ 2.38
Unaudited Pro Forma Basic and Diluted
Net Income Per Share(2).......................... $ 1.81
Cash Dividends Declared and Paid Per Share.......... $ .60 $ .60 $ .60 $ .45
CASH FLOW AND BALANCE SHEET DATA:
Capital Spending.................................... $ 26.3 $ 36.7 $ 35.8 $ 51.5 $ 22.5
Depreciation and amortization....................... 22.2 24.8 14.4 13.4 13.4
Cash Provided By Operations......................... 60.7 67.1 67.3 90.4 64.9
Total Assets........................................ 436.6 474.7 391.0 380.6 347.0
Long-Term Debt...................................... 100.9 108.4 80.8 86.6 91.6
Equity.............................................. 184.2 197.0 179.5 156.0 129.9
- ---------------
(1) Prior to the Distribution, SMF acted as the financing entity in connection
with the Kimberly-Clark European cash management program. Interest income
from affiliates reflects financing activities related to other operations of
Kimberly-Clark and certain of its affiliates until November 30, 1995, the
date of the Distribution, at which time the Company became a separate
independent company.
(2) Pro forma net income per share is presented based on data prepared under
assumptions as to the effects on the Company's financial statements of
certain intercompany, equity and operating transactions related to the
Distribution as though those transactions occurred at the beginning of 1995.
The pro forma financial data is unaudited, is presented for informational
purposes only and does not reflect the future earnings or results of
operations of the Company or what the earnings or results of operations of
the Company would have been had the Businesses been operated as a separate,
independent company for 1995. Pro forma net income per common share has been
computed based on the assumption that pro forma average shares outstanding
for all periods prior to the Distribution Date were the actual number of
shares issued and distributed in the Distribution.
14
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN BACKGROUND INFORMATION
Schweitzer-Mauduit International, Inc. was incorporated on August 21, 1995
as a wholly-owned subsidiary of Kimberly-Clark Corporation for the purpose of
effectuating the tax-free spin-off of Kimberly-Clark's U.S., French and Canadian
business operations that manufactured and sold tobacco-related papers and other
specialty paper products. Through the November 30, 1995 Distribution date, the
Businesses in the United States and Canada were conducted as operating divisions
of Kimberly-Clark and one of its Canadian subsidiaries, respectively. The
Businesses in France were conducted by LTRI, a 72 percent-owned subsidiary of
Kimberly-Clark, and two indirect wholly-owned Kimberly-Clark subsidiaries, PdM
and PdMal. These latter two companies are owned by SMF, which prior to the
Distribution was a wholly-owned subsidiary of Kimberly-Clark.
On February 2, 1998, Schweitzer-Mauduit Spain, S.L., a wholly-owned Spanish
holding company established in 1997, acquired Companhia Industrial de Papel
Pirahy, a Brazilian specialty paper manufacturer. On February 11, 1998,
Schweitzer-Mauduit Enterprises, a second-tier French subsidiary of the Company,
acquired a French business named Ingefico, S.A. and its pulp and specialty paper
manufacturing subsidiaries.
Management believes that the following commentary and tables appropriately
discuss and analyze the comparative results of operations and the financial
condition of the Company for the periods covered.
OVERVIEW
The Company operates principally in the tobacco industry, manufacturing and
selling papers used in the manufacturing of cigarettes, paper products used in
cigarette packaging and reconstituted tobacco products. The Company's
non-tobacco industry products represented eleven percent of the Company's net
sales in 1999. The non-tobacco industry products are a diverse mix of products,
certain of which represent commodity paper grades produced to maximize machine
operations.
The Company is operated and managed based on the geographical location of
its manufacturing operations: the United States, France and Brazil. While the
products are comparable in each segment, they vary based on the technological
capabilities of each of the manufacturing operations and the respective markets
and customers served. Sales by a segment into markets primarily served by a
different segment occur where specific product needs cannot be cost-effectively
met by the manufacturing operations domiciled in that segment.
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. The Company's Brazilian operations, acquired on February 2, 1998,
and the operations of the French business acquired on February 11, 1998, are
included in the Company's Consolidated Financial Statements since the beginning
of February 1998.
Adjustments to net sales set forth in the following tables consist of
eliminations of intercompany sales of products between segments. Adjustments to
operating profit consist of unallocated overhead expenses not associated with a
segment and eliminations of inter-segment transactions.
This section should be read in conjunction with the Company's Consolidated
Financial Statements included herein.
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16
RESULTS OF OPERATIONS
1999 Compared to 1998
By Segment for the Years Ended December 31, 1999 and 1998
(U.S. $ in millions)
% OF CONSOLIDATED
% CHANGE ------------------
NET SALES 1999 1998 VS. 1998 1999 1998
- --------- ------ ------ -------- ------- -------
United States................................ $166.3 $186.0 -10.6% 33.0% 34.0%
France....................................... 284.6 312.0 -8.8 56.4 57.1
Brazil....................................... 54.0 57.9 -6.7 10.7 10.6
Eliminations................................. (0.5) (9.2) (0.1) (1.7)
------ ------ ----- -----
Consolidated....................... $504.4 $546.7 -7.7% 100.0% 100.0%
====== ====== ===== =====
% RETURN
% OF CONSOLIDATED ON SALES
% CHANGE ------------------ ------------
OPERATING PROFIT 1999 1998 VS. 1998 1999 1998 1999 1998
- ---------------- ----- ----- -------- ------- ------- ---- ----
United States..................... $ 9.3 $ 6.2 +50.0% 14.4% 10.5% 5.6% 3.3%
France............................ 55.2 60.3 -8.5 85.4 102.0 19.4 19.3
Brazil............................ 5.2 (2.3) N.M. 8.1 (3.9) 9.6 (4.0)
Unallocated/Eliminations.......... (5.1) (5.1) (7.9) (8.6)
----- ----- ----- -----
Consolidated............ $64.6 $59.1 +9.3% 100.0% 100.0% 12.8% 10.8%
===== ===== ===== =====
- ---------------
N.M. -- Not meaningful
Net Sales
Net sales decreased by $42.3 million as a result of lower average selling
prices, unfavorable currency exchange rates and reduced sales volumes. Lower
world-wide selling prices and unfavorable sales mix had an unfavorable effect of
$18.4 million. The net sales comparison was unfavorably affected by $12.6
million from changes in currency exchange rates, primarily related to a
strengthened U.S. dollar versus the French franc and the Brazilian real.
Worldwide sales volumes declined by one percent, which unfavorably affected net
sales by $11.3 million. Sales volumes from the U.S. and French business units
declined by seven and two percent, respectively, while sales volumes of the
Brazilian business unit improved by eight percent. U.S. and French business unit
volumes declined in most major product lines. The improvement in the Brazilian
business' sales volumes was primarily in nontobacco-related papers and sales
outside Brazil. Sales volumes in 1999 benefited in each of the three business
units from sales related to Year 2000 concerns as certain customers increased
their year-end inventories.
Operating Profit
Despite lower net sales, operating profit increased by $5.5 million, with
higher operating profit in Brazil and the United States more than offsetting a
decline in France. The impact of sales volumes related to customers' Year 2000
concerns may have benefited 1999 operating profit by as much as $1.3 million to
$1.8 million. Operating profit in 1998 was negatively affected by one-time
pre-tax charges of $1.7 million and $4.2 million in the second and fourth
quarters, respectively.
In Brazil, operating profit improved by $7.5 million for the year as a
result of cost reduction activities, improved mill operations, increased sales
volumes, the lack of its portion of the fourth quarter 1998 charge and the
positive impact of the Brazilian currency devaluation which occurred in the
first quarter of 1999. These favorable items were partially offset by lower
average selling prices. The currency devaluation was a positive impact for the
Brazilian business unit since a portion of its sales are tied to the U.S.
dollar.
16
17
The U.S. business unit's operating profit improved by $3.1 million as a
result of the benefits of cost savings programs and the lack of its portion of
the 1998 charges, which more than offset the effects of lower selling prices,
unfavorable sales mix and lower sales and production volumes.
In France, operating profit declined by $5.1 million as a result of lower
selling prices, unfavorable sales mix and lower sales and production volumes.
These negative effects were partially offset by the benefits of the French
business unit's cost reduction activities, improved mill operations and the lack
of its portion of the fourth quarter 1998 charge.
Non-manufacturing expenses decreased by $1.2 million, primarily due to a
reduction in selling expenses of the French business unit. Changes in the
average per ton wood pulp costs compared with the prior year favorably impacted
operating expenses by $2.7 million, although this benefit was offset by changes
in selling prices.
1998 Compared to 1997
By Segment for the Years Ended December 31, 1998 and 1997
(U.S. $ in millions)
% OF CONSOLIDATED
% CHANGE ------------------
NET SALES 1998 1997 VS. 1997 1998 1997
- --------- ------ ------ -------- ------- -------
United States................................ $186.0 $195.5 -4.9% 34.0% 42.4%
France....................................... 312.0 268.8 +16.1 57.1 58.4
Brazil....................................... 57.9 N.A. 10.6
Eliminations................................. (9.2) (3.7) (1.7) (0.8)
------ ------ ----- -----
Consolidated....................... $546.7 $460.6 +18.7% 100.0% 100.0%
====== ====== ===== =====
% RETURN
% OF CONSOLIDATED ON SALES
% CHANGE ------------------ ------------
OPERATING PROFIT 1998 1997 VS. 1997 1998 1997 1998 1997
- ---------------- ----- ----- -------- ------- ------- ---- ----
United States................... $ 6.2 $21.2 -70.8% 10.5% 25.9% 3.3% 10.8%
France.......................... 60.3 66.4 -9.2 102.0 81.1 19.3 24.7
Brazil.......................... (2.3) N.A. (3.9) (4.0)
Unallocated/Eliminations........ (5.1) (5.7) (8.6) (7.0)
----- ----- ----- -----
Consolidated.......... $59.1 $81.9 -27.8% 100.0% 100.0% 10.8% 17.8%
===== ===== ===== =====
- ---------------
N.A. -- Not applicable
Net Sales
Net sales increased by $86.1 million due primarily to sales at the two
newly-acquired companies, whose results are included in the Company's
consolidated results beginning in February 1998, and stronger sales volumes in
France. Net sales of the newly-acquired companies contributed $90.9 million in
the period. Excluding the acquisitions, worldwide sales volumes increased by
three percent, favorably affecting net sales by $11.7 million. Sales volumes
from the French businesses grew by nine percent, excluding the French
acquisition. Although unit sales volumes at the French paper operations
increased during the year, excluding the French acquisition, sales volumes over
the second half of the year for those operations were lower compared with the
prior year period. This second semester decline in French paper unit sales was
primarily due to reduced shipments to China, Russia and southeast Asia because
of import controls, currency convertibility and decreased demand as a result of
economic conditions in those countries. RTL volumes in France improved versus
the prior year, supported in part by production from the U.S. business unit's
RTL operation at its Spotswood mill, which ceased operation in the fourth
quarter of 1998. Sales volumes at the U.S. business unit, excluding its RTL
production for the French business, declined by a total of six percent due to
reduced domestic cigarette production by the Company's customers. Changes in
average world-wide selling prices and sales mix had an unfavorable effect of
$10.2 million. The net sales comparison was
17
18
unfavorably affected by $6.3 million from changes in currency exchange rates,
primarily related to a strengthened U.S. dollar versus the French franc.
Operating Profit
Operating profit decreased by $22.8 million, with lower operating profit in
the United States and France and an operating loss in Brazil. Operating profit
in 1998 included pre-tax charges of $1.7 million and $4.2 million in the second
and fourth quarters, respectively. The second quarter 1998 charge was for a
voluntary retirement program in connection with an agreement with the labor
union at the Company's Spotswood mill to modify work rules and eliminate 67
hourly positions. The fourth quarter 1998 pre-tax charge consisted of non-cash
write-downs of assets related primarily to idled equipment that was no longer
expected to be used due to changed market conditions and one-time labor
payments, the majority of which related to operational changes. Additionally,
production downtime was taken in the United States, France and Brazil to control
inventory levels.
The U.S. business unit's operating profit declined by $15.0 million
primarily as a result of the one-time charges, lower sales and production
volumes, increased computer systems expenses, unfavorable sales mix and lower
selling prices. Amortization of capitalized software costs related to the new
integrated computer systems in the United States and associated incremental
operating expenses began in January 1998 and totaled $3.6 million for the year.
Additionally, start-up costs of $1.2 million were incurred in the first quarter
related to the new U.S. computer systems.
In France, operating profit declined by $6.1 million as a result of its
portion of the fourth quarter one-time charge, machine downtime at its paper
operations to control inventory levels, unfavorable changes in average selling
prices and sales mix, higher cost of RTL manufactured at and shipped from the
Spotswood mill and changes in currency exchange rates, partially offset by
higher sales volumes. Changes in currency exchange rates had an unfavorable
impact of approximately $1.1 million.
The Brazilian operations had an operating loss of $2.3 million for the year
primarily because of unfavorable second quarter results and one-time labor
payments.
Non-manufacturing expenses increased by $7.0 million solely caused by
expenses at the two acquired companies. Excluding expenses of the acquired
companies, non-manufacturing expenses were the same as the prior year. Per ton
wood pulp cost decreases compared with the prior year favorably impacted
operating expenses by $2.8 million, although this benefit was offset by changes
in selling prices.
NON-OPERATING EXPENSES
The decline in interest expense in 1999 compared to 1998 was primarily due
to lower average interest rates, changes in currency exchange rates and a lower
average amount of debt outstanding. The increase in interest expense in 1998
compared to 1997 was primarily a result of increased debt related to
acquisitions in Brazil and France in February 1998 and higher interest rates.
Interest expense in 1997 was primarily associated with debt incurred in
connection with the Distribution (see "Liquidity and Capital Resources"). The
weighted average effective interest rate on the Company's term loans was
approximately 4.5 percent in 1999, 5.1 percent in 1998 and 4.7 percent in 1997.
Other income, net consisted primarily of interest income, royalty income and
foreign currency transaction gains and losses in each of the years presented and
recovery of prior period business taxes in 1999.
INCOME TAXES
The noncurrent deferred income tax asset is primarily due to net operating
loss carryforwards ("NOLs") incurred through December 31, 1994 by other
businesses of Kimberly-Clark in France previously owned by SMF. Prior to the
spin-off, those other Kimberly-Clark businesses were merged and dividended to
Kimberly-Clark. Under French tax law, the NOLs of those other businesses were
retained by SMF. The SMF consolidated tax group in France has not paid income
taxes, except nominal amounts of minimum required income taxes, in the periods
presented in the financial statements and is not expected to pay normal income
18
19
taxes until the NOLs have been fully utilized. Additionally, the noncurrent
deferred income tax asset beginning in 1998 includes amounts related to NOLs of
SWM-B, some of which were obtained in the 1998 acquisition of this Brazilian
business. Additional information concerning these NOLs is disclosed in Note 6 to
the Consolidated Financial Statements.
The effective tax rates for the years ended December 31, 1999, 1998 and
1997 were 39.0 percent, 32.1 percent and 36.0 percent, respectively.
The provision for income taxes in 1998 included the benefit of a reduction
in the valuation allowance recorded against certain French deferred income tax
assets arising from NOLs. This adjustment reduced the deferred provision for
income taxes by $5.2 million. The reduction in the valuation allowance was
recorded because of continued earnings and projected future earnings at the
French businesses that utilize the NOLs, reducing the uncertainty that these
NOLs will be fully utilized in the future. Excluding the impact of this
adjustment, the effective income tax rate for the year ended December 31, 1998
would have been 41.7 percent. The decrease from this adjusted 1998 effective
income tax rate of 41.7 percent to 39.0 percent in 1999 was due to the reduction
in the French statutory income tax rate from 41.7 percent in 1998 to 40.0
percent in 1999 and due to a greater proportion of the Company's 1999 earnings
being in Brazil and the United States, which had lower income tax rates than
France.
The provision for income taxes in 1997 was impacted by an increase in the
effective statutory income tax rate enacted in France during November 1997 from
36.7 percent to 41.7 percent for 1997 and 1998, retroactive to January 1, 1997,
and to 40.0 percent for 1999. The unfavorable effect on current taxes of the tax
rate increase, including a retroactive adjustment for the eleven-month period
ended November 30, 1997, was offset by the favorable effect on the deferred
provision for income taxes due to the increased value of the tax benefits to be
recognized from the NOLs retained by SMF estimated to be realized during 1997,
1998 and 1999, the periods of the higher income tax rates. The impact in 1997
attributable to deferred tax assets, net of liabilities, was a favorable $2.0
million on the deferred provision for income taxes. Also impacting the 1997
provision for income taxes was the enactment in France during December 1997 of a
law that eliminated taxation of a "provision for the fluctuating value of raw
materials" that had been included in French deferred taxes. Cancellation of this
deferred tax liability reduced the provision for income taxes by $2.1 million,
which was partially offset by establishment of a $1.0 million reserve for a
previously reported tax claim in France. (See additional information concerning
this tax claim in Note 6 to the Consolidated Financial Statements.) Including
the effect of the change in French income tax rates on the 1997 current
provision for income taxes, but excluding the effect on the deferred provision
for income taxes, and excluding the effect of the elimination of taxation of a
"provision for fluctuating value of raw materials" and the reserve for the tax
claim, the effective 1997 income tax rate would have been 39.9 percent. The
increase from this adjusted 1997 rate of 39.9 percent to the above-adjusted 41.7
percent 1998 effective income tax rate was due to a greater proportion of the
Company's 1998 earnings being in France, which had higher income tax rates than
other countries in which the Company operates.
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998 1997
------ ------ -------
(U.S. $ IN MILLIONS)
Cash Provided by (Used for):
Changes in operating working capital...................... $(9.0) $(1.9) $(10.8)
Operations................................................ 60.7 67.1 67.3
Capital spending.......................................... (26.3) (36.7) (35.8)
Capitalized software costs................................ (3.1) (4.0) (7.6)
The Company's primary source of liquidity is cash flow from operations,
which is principally obtained through operating earnings. Impacting the cash
flow from operations are changes in operating working capital. In 1999, changes
in operating working capital contributed unfavorably to cash flow by $9.0
million due primarily to lower accounts payable. Accounts payable were lower in
1999 compared to 1998 as a result of
19
20
payments in early 1999 for several large capital costs included in accounts
payable at December 31, 1998. In 1998, changes in operating working capital
contributed unfavorably to cash flow by $1.9 million, excluding the acquired
working capital balances of the Brazilian and French businesses acquired in
1998. In 1997, changes in operating working capital contributed unfavorably to
cash flow by $10.8 million due principally to lower accounts payable. Accounts
payable were lower in 1997 compared to 1996 as a result of payments in early
1997 for several large capital and purchased software costs included in accounts
payable at December 31, 1996. During 1997, the cash flow impact of lower
accounts receivable, due to the timing of collections, offset the impact of
higher inventory levels.
Cash flow from operations during these periods exceeded the level of
capital spending. Capital spending in 1999 included (i) $8.1 million toward the
speed-up of two machines in the French mills, (ii) $3.2 million toward the
expansion of converted tipping paper capacity at the Malaucene, France mill, and
(iii) $1.1 million toward replacement of a yankee dryer in the Spay, France
mill. Capital spending in 1998 included (i) $3.9 million toward the expansion of
the Malaucene mill, (ii) $3.0 million toward speed-ups of both RTL machines and
replacement of a yankee dryer hood at the Spay mill, (iii) $2.3 million for
speed-up of a paper machine at the Quimperle, France mill, (iv) $1.4 million to
modify a paper machine at the newly-acquired Saint-Girons mill, (v) $1.2 million
toward upgrades to a paper machine at the Spotswood mill, (vi) $1.0 million to
upgrade a coating machine at the newly-acquired Pirahy mill, and (vii) $1.0
million toward improvements at the Quimperle pulping facility. Capital spending
in 1997 included (i) $3.6 million to complete the new long fiber paper machine
at the Quimperle mill, (ii) $2.9 million at the Ancram mill toward upgrading the
forming section of a long fiber paper machine, (iii) $2.3 million for equipment
necessary to temporarily restart operation of the RTL production line at the
Spotswood mill, (iv) $1.5 million toward an effluent biological treatment
station at the Quimperle mill, (v) $1.0 million to complete upgrading the flax
pulping operations at the Spotswood mill, and (vi) $1.0 million toward a paper
machine upgrade project at the Spotswood mill.
In addition to capital spending, the Company incurred, and deferred on the
balance sheet, additional software development costs of $3.1 million in 1999.
These costs were incurred primarily in France, related to new integrated
information systems, and in Brazil to replace certain modules of its integrated
computer systems used by its former Brazilian parent company.
In February 1998, two acquisitions of tobacco-related paper suppliers were
completed. On February 2, 1998, SM-Spain paid approximately $62.0 million in
cash for 99.97 percent ownership interest in Pirahy. In connection with the
acquisition of Pirahy, the Company modified its existing credit agreement to
provide a $20.0 million term loan to SM-Spain. SM-Spain borrowed the remaining
funds for the transaction from SMF, which in turn utilized its existing cash
balances and borrowings from its revolving credit facilities. Additionally, on
February 11, 1998, SM-Enterprises paid 37.2 million French francs (approximately
$6.1 million) in cash and assumed approximately $5.8 million in existing net
debt for all of the outstanding shares of Ingefico, S.A. and 97.1 percent of the
outstanding shares of its pulp and specialty paper manufacturing subsidiaries,
Groupe SAPAM and Papeteries de la Moulasse S.A. Subsequently, SM-Enterprises
acquired all the remaining shares of Groupe SAPAM for $0.2 million in cash.
In December 1998, the Company announced that the Board of Directors had
authorized the repurchase of shares of the Company's common stock during the
period January 1, 1999 through December 31, 2000 in an amount not to exceed $20
million. The Company repurchased a total of 294,350 shares of its common stock
during 1999 for $4.3 million. The Company repurchased 155,700 shares of its
common stock during 1998 for $3.8 million under a previous program which was
effective through December 31, 1998.
On January 27, 2000, 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 March 13, 2000 to stockholders of record on
February 14, 2000.
The Company's ongoing requirements for cash are expected to consist
principally of amounts required for capital expenditures, stockholder dividends
and working capital. 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. Other than expenditures
associated with environmental matters
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(see Note 12 of the Notes to Consolidated Financial Statements), as of December
31, 1999 the Company had unrecorded outstanding commitments for capital
expenditures of approximately $0.6 million. In addition to capital spending, the
Company is incurring software development costs related to new integrated
computer systems. The portion of software development costs which were
capitalized beginning in 1996 totaled $17.4 million through 1999 and were
deferred on the balance sheet until such systems are placed in service (see Note
3 of the Notes to Consolidated Financial Statements). In the United States,
where the largest portion of the costs to-date have been incurred, most of the
deferred costs began amortizing at the beginning of 1998 over a period of seven
years using the straight-line method. In France, a large portion of the
installation of its new systems has been completed and successfully began
operation during 1999 without significant start-up expenses. The Company will
continue to incur costs in 2000, but to a lesser extent, primarily in France and
Brazil, as additional software modules are purchased, designed and installed.
As of December 31, 1999, the Company had approximately $27 million still
available under its revolving credit facilities in the United States and France,
and on January 7, 2000, the Company renewed these facilities to January 26,
2001. The Company also has other bank credit facilities available in the United
States, France and Brazil.
The Company believes its cash flow from operations, together with
borrowings still available under its revolving and other credit facilities, will
be sufficient to fund its ongoing cash requirements.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which will require that all
derivative financial instruments be recognized as either assets or liabilities
on the balance sheet. In July 1999, the FASB issued SFAS No. 137, which delays
the effective date for the new requirements of SFAS No. 133 by one year. As a
result, SFAS No. 133 will be effective no later than for the Company's first
quarter of 2001. The Company is evaluating the effects of this new statement and
when to implement the new requirements.
OUTLOOK
Cigarette consumption and production in both the United States and Brazil
were lower in 1999 than in the prior year. U.S. cigarette consumption was
impacted by adverse publicity and by increases in the retail selling price of
cigarettes. The export of cigarettes manufactured in the United States also
declined in 1999 from prior year levels. These trends are expected to continue
in 2000. There appear to be signs of recovery in the Russian, Eastern European
and Asian cigarette markets as these economies are improving. The Company's
Brazilian business also expects to continue to increase its sales to Latin
American countries outside of Brazil. Worldwide cigarette production is expected
to increase approximately one percent in 2000, driven by growth in emerging
markets as well as growth in the ventilated and blended cigarette segments.
There continues to be excess worldwide manufacturing capacity for
tobacco-related papers, however, the amount of excess capacity is decreasing as
paper manufacturers, including the Company, are shutting down unneeded and less
efficient capacity. Pricing appears to be stabilizing in most key markets and
there may be opportunities for price increases as pulp prices rise.
Some production downtime was experienced on certain machines during 1999 in
the Company's U.S., French and Brazilian paper operations because of reduced
demand. Additional paper production downtime is likely to be taken in 2000 in
each of the Company's three operations but to a lesser extent than in 1999.
Fourth quarter 1999 sales benefited in each of the Company's three business
units from sales to certain customers that increased their year-end inventories
related to concerns of possible Year 2000 issues. This may have improved the
Company's consolidated fourth quarter operating profit by as much as $1.3 to
$1.8 million. Sales and operating results in the first quarter of 2000 are
expected to be negatively impacted by the positive timing impact experienced in
the fourth quarter of 1999.
21
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Cost savings are expected to continue from recently implemented capital
projects and from various cost savings programs, including the Company's
headcount reductions in the United States during 1999. With current market
conditions, cost reduction continues to be a priority in each of the Company's
business units.
The per ton costs of wood pulp have steadily increased during the latter
half of 1999 and a further increase was effective at the beginning of 2000. The
Company expects further increases in the per ton cost of wood pulp during 2000.
The French corporate income tax rate was scheduled to decline from 40.0
percent for 1999 to 36.7 percent for 2000. However, as a result of a tax law
enacted in December 1999, the rate applicable to the Company's French businesses
will be approximately 37.7 percent effective beginning January 1, 2000.
The company expects capital spending for 2000 to be approximately $20 to
$25 million, focused primarily on product quality improvements and cost
reduction opportunities. Capitalized software costs in 2000 are expected to
total approximately $2 million.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Many factors outside the control of the Company could impact the Company's
results. The following important factors, among others, in some cases have
affected, and in the future could affect, the Company's actual results and could
cause the Company's actual results for 2000 and beyond, to differ materially
from those expressed in any forward-looking statements made by, or on behalf of,
the Company.
Year 2000 Compliance
Historically, many computer systems and other equipment with embedded chips
or processors utilized computer programs written using two digits to represent
the year rather than four digits. These programs may not properly recognize a
year "20XX". As a result, these programs may be unable to accurately process
certain data before, during or after the year 2000 and could result in
governmental and business systems failures or miscalculations causing
disruptions in operations. This problem has been commonly referred to as the
"Year 2000" issue.
Because of the numerous information systems, mill process controls and
operating systems, and vendors and service providers that the Company uses, as
well as the Company's many customers and customer locations around the world,
the Company could not exclude the possibility that some disruption in its
business due to the Year 2000 issue could occur. Therefore, the Company
developed and implemented plans to minimize the adverse effect of any such
potential business disruptions.
Prior to the end of 1999, each of the Company's business segments
inventoried its business operations, assessed its susceptibility to system
failures or processing errors as a result of Year 2000 issues and developed
plans to address those issues. The plans focused on three elements: information
systems software and hardware, mill process controls and operating systems, and
vendors and service providers. Each element was subdivided according to risk
potential. Those issues which were considered most critical to continuing
operations were given the highest priority. Plans were implemented and, where
necessary, modifications or corrective actions were completed in each of the
Company's businesses for all high risk issues identified, as well as most of the
medium risk issues identified.
In addition to the costs of new integrated computer systems which were
necessary irrespective of the approach to Year 2000, the Company's cost of
implementing its Year 2000 compliance plans totaled approximately $1.5 million.
Approximately two-thirds of the total cost was expensed and one-third included
in capital projects.
The Company has not experienced any business disruptions related to the
Year 2000 issue to-date. The Company is also not aware of any such issues with
respect to its information systems, mill process controls or operating systems.
Furthermore, the Company is not aware of any such issues at its many customers,
vendors and service providers. However, until the potential for such issues
arising has been eliminated by the passage
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of time, it is not possible to state with certainty that the Company's
operations will not be disrupted by Year 2000 issues.
Euro Currency Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing currencies
("legal currencies") and one common currency -- the euro. The euro now trades on
currency exchanges and may be used in business transactions. Beginning in
January 2002, new euro-denominated bills and coins will be issued, and legal
currencies will be withdrawn from circulation by no later than June 2002. The
Company established a committee to identify and implement changes necessary to
address the systems and business issues raised by the euro currency conversion.
These issues include, among others, the need to adapt computer and other
business systems and equipment to accommodate euro-denominated transactions,
competitive implications of increased price transparency within European Union
countries, changes in currency exchange costs and rate exposures, continuity of
contracts that require payment in a legal currency and tax implications of the
conversion.
The Company's French subsidiaries currently utilize multi-currency software
that was capable of euro-denominated sales and purchase transactions on January
1, 1999. Consideration has also been given to other potential issues in
connection with the conversion, including those mentioned above. The Company's
French subsidiaries are in the process of implementing already-purchased
software capable of translating current and historical data into euro currency
data, which implementation will be fully completed no later than January 1,
2002, at which time the euro will become the functional currency of the French
subsidiaries. The Company does not anticipate any significant negative
consequences of these issues and does not anticipate that the euro conversion
will have a material adverse impact on its financial condition or results of
operations.
International Business Risks
The Company and its subsidiaries are subject to international business
risks, including unsettled political and economic conditions, expropriation,
import and export controls and restrictions, exchange controls, inflationary
economies, currency risks and risks related to the restrictions of repatriation
of earnings or proceeds from liquidated assets of foreign subsidiaries.
Tax and Repatriation Matters
The Company and its subsidiaries are subject to income tax laws in each of
the countries in which it does business through wholly-owned subsidiaries and
through affiliates. The Company makes a comprehensive review of the income tax
requirements of each of its operations, files appropriate returns and makes
appropriate income tax planning analyses directed toward the minimization of its
income tax obligations in these countries. Appropriate income tax provisions are
determined on an individual subsidiary level and at the corporate level on both
an interim and annual basis. These processes are followed using an appropriate
combination of internal staff at both the subsidiary and corporate levels as
well as independent outside advisors in review of the various tax laws and in
compliance reporting for the various operations.
Dividend distributions are regularly made to the United States from certain
foreign subsidiaries and are appropriately considered in the provision for U.S.
income taxes. The Company intends for the undistributed earnings of certain
other foreign subsidiaries to be reinvested indefinitely. These undistributed
earnings are not subject to either additional foreign income taxes or U.S.
income taxes unless remitted as dividends. Accordingly, no provision has been
made for U.S. taxes on those earnings. The Company regularly reviews the status
of the accumulated earnings of each of its foreign subsidiaries and reevaluates
the aforementioned dividend policy as part of its overall financing plans.
Hedging Activities and Foreign Currency Exchange Risks
Management selectively hedges the Company's foreign currency risks, as well
as its exposure to interest rate increases on its variable rate long-term debt,
when it is practical and economical to do so. The instruments used to hedge
foreign currency risks are forward contracts and, to a lesser extent, option
contracts. The
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Company utilizes various forms of interest rate hedge agreements, including
interest rate swap agreements and forward rate agreements. These instruments are
purchased from well-known money center banks, insurance companies or government
agencies (counterparties). Usually, the contracts extend for no more than 12
months, although their contractual term has been as long as 18 months.
Management believes that credit risks with respect to the counterparties and the
foreign currency risks that would not be hedged, were the counterparties to fail
to fulfill their obligations under the contracts, are minimal in view of the
financial strength of the counterparties.
In addition to the effect of changes in currency exchange rates on
operating profit, foreign currency gains and losses have arisen from the
remeasurement of non-local currency denominated monetary assets and liabilities
into the currency of the country in which the operation is domiciled. These
gains and losses, related primarily to trade receivable and payable balances,
are included in other income, net.
Additional information concerning foreign currency related matters is
disclosed in Note 9 of the Notes to Consolidated Financial Statements.
Inflation
In recent years, inflation has not had a significant impact on the
Company's cost structure.
Effect of Changing Pulp Costs
Per ton pulp costs tend to be cyclical in nature and are a large component
of product costs. The Company consumed approximately 107,000 and 112,000 metric
tons of wood pulp in 1999 and 1998, respectively, including requirements of the
two companies acquired in 1998, and 71,000 metric tons of wood pulp in 1997.
During the period from January 1997 through December 1999, the U.S. list price
of the primary pulp grade used by the Company, northern bleached softwood kraft
pulp, ranged from a low of $500 per metric ton to a high of $610 per metric ton,
and increased to $640 per metric ton in January 2000. Generally, over time, the
Company has been able to increase its selling prices in response to increased
per ton pulp costs and has generally reduced them when pulp costs have
significantly declined. The Company may or may not be able to fully recover
future pulp cost increases, or fully retain future pulp cost decreases, in its
sales pricing structure.
Seasonality
Sales of the Company's products are not subject to seasonal fluctuations,
except in the United States and Brazil. In the United States, customer shutdowns
typically occur in July and December and typically have resulted in reduced net
sales and operating profit during those two months. Additionally, the U.S. mills
shut down equipment to perform additional maintenance during these months,
resulting in higher product costs and reduced operating profit. In Brazil,
customer orders are typically lower in December due to a holiday season through
much of January and February.
Environmental Matters
The Company is subject to federal, state, local and foreign environmental
protection laws and regulations with respect to the environmental impact of air,
water and other emissions from its mills as well as its disposal of solid waste
generated by its operations. The Company believes it is operating in compliance
with, or is taking action aimed at ensuring compliance with, such laws and
regulations. While the Company has incurred in the past several years, and will
continue to incur, capital and operating expenditures in order to comply with
these laws and regulations, these costs are not expected to materially affect
the Company's business or results of operations. The Company, or its
predecessor, has been named as a potentially responsible party at several waste
disposal sites, none of which, individually, or in the aggregate, in
management's opinion, is likely to have a material adverse effect on the
Company's financial condition, results of operations or liquidity. However,
there can be no assurance that such an effect will not occur at some future
time. Additional information concerning environmental matters is disclosed in
Note 12 of the Notes to Consolidated Financial Statements and in Part I, Item 3
"LEGAL PROCEEDINGS" herein.
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Legal Proceedings
Information concerning legal proceedings is disclosed in Note 11 of the
Notes to Consolidated Financial Statements and in Part I, Item 3 "LEGAL
PROCEEDINGS" herein. In addition, the Company and its subsidiaries are involved
in legal actions and claims arising in the ordinary course of business.
Litigation is subject to many uncertainties and, while it is not possible to
predict the outcome of the litigation pending against the Company and its
subsidiaries, management believes that such actions and claims will be resolved
without a material adverse effect on the Company's financial statements.
Reliance on Significant Customers
Most of the Company's customers are manufacturers of tobacco products
located in more than 90 countries around the world. Two such customers have
accounted for a significant portion of the Company's net sales in each of the
last several years, and the loss of one or both such customers, or a significant
reduction in one or both of these customers' purchases, could have a material
adverse effect on the Company's results of operations. See Note 14 of the Notes
to Consolidated Financial Statements.
Tobacco Products and Governmental Actions
In recent years, governmental entities, particularly in the United States,
have taken or have proposed actions that may have the effect of reducing
consumption of tobacco products. Reports and speculation with respect to the
alleged harmful physical effects of cigarette smoking and use of tobacco
products have been publicized for many years and, together with actions to
restrict or prohibit advertising and promotion of cigarettes or other tobacco
products and to increase taxes on such products, are intended to discourage the
consumption of cigarettes and other such products. In the fourth quarter of
1998, the major U.S. cigarette manufacturers reached agreement with all 50 U.S.
states and several commonwealths and territories to settle health care cost
recovery and other claims. In anticipation of these settlements and as a direct
result of these settlements, most of the U.S. cigarette manufacturers have
increased prices of cigarettes significantly. Domestic cigarette consumption has
declined, in part due to these price increases which, in turn, decreases demand
for the Company's products. During 1999, the U.S. Department of Justice filed a
multi-billion dollar civil suit against the tobacco industry. In addition,
litigation is pending against the major manufacturers of consumer tobacco
products seeking damages for health problems allegedly resulting from the use of
tobacco in various forms and for alleged violations of antitrust laws. It is not
possible to predict the outcome of such litigation or what effect adverse
developments in pending or future litigation may have on the tobacco industry,
its financial liquidity or relationships with its suppliers. Nor is it possible
to predict what additional legislation or regulations relating to tobacco
products will be enacted, or to what extent, if any, such legislation or
regulations might affect the consumer tobacco products industry in general.
Approximately 89 to 90 percent of the Company's net sales are from products
used by the tobacco industry in the making and packaging of cigarettes or other
tobacco products. Management is unable to predict the effects that the
above-described legal and governmental actions might have on the Company's
results of operations and financial condition.
FORWARD-LOOKING STATEMENTS
Certain sections of this report, particularly the foregoing discussion
regarding the "Outlook" of the Company and "Factors That May Affect Future
Results", contain certain forward-looking statements, generally identified by
phrases such as "the Company expects" or words of similar effect.
Forward-looking statements are made based upon management's expectations and
beliefs concerning future events impacting the Company. There can be no
assurances that such events will occur or that the results of the Company will
be as estimated. Many factors outside the control of the Company also could
impact the realization of such estimates. The above-mentioned important factors,
among others, in some cases have affected, and in the future could affect, the
Company's actual results and could cause the Company's actual results for 2000
and beyond, to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Consolidated Financial Statements:
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997...................... 27
Consolidated Balance Sheets as of December 31, 1999 and
1998.................................................. 28
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1999, 1998
and 1997.............................................. 29
Consolidated Statements of Cash Flow for the years
ended December 31, 1999, 1998 and 1997................ 30
Notes to Consolidated Financial Statements............. 31
Report of Independent Auditors.............................. 54
Management's Responsibility for Financial Reporting......... 55
Schedules have been omitted because they are either not required, not
applicable or the required information is included in the financial statements
or notes thereto.
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SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
--------- --------- ---------
(U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net Sales.................................... $504.4 $546.7 $460.6
Cost of products sold...................... 394.0 440.6 338.7
------ ------ ------
Gross Profit................................. 110.4 106.1 121.9
Selling expense............................ 19.5 21.0 17.4
Research expense........................... 6.7 6.5 6.4
General expense............................ 19.6 19.5 16.2
------ ------ ------
Operating Profit............................. 64.6 59.1 81.9
Interest expense........................... (5.8) (6.4) (4.1)
Other income, net.......................... 1.9 1.2 1.6
------ ------ ------
Income Before Income Taxes and Minority
Interest................................... 60.7 53.9 79.4
Provision for income taxes................. 23.7 17.3 28.6
------ ------ ------
Income Before Minority Interest.............. 37.0 36.6 50.8
Minority interest in earnings of
subsidiaries............................ 5.6 5.6 5.5
------ ------ ------
Net Income................................... $ 31.4 $ 31.0 $ 45.3
====== ====== ======
Net Income Per Common Share:
Basic...................................... $ 1.99 $ 1.94 $ 2.82
====== ====== ======
Diluted.................................... $ 1.99 $ 1.92 $ 2.77
====== ====== ======
See Notes to Consolidated Financial Statements
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28
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
--------------------
1999 1998
------- -------
(U.S. $ IN MILLIONS)
ASSETS
Current Assets
Cash and cash equivalents................................. $ 15.1 $ 6.7
Accounts receivable....................................... 72.1 69.5
Inventories............................................... 62.9 69.4
Current income tax refunds receivable..................... 2.2 2.8
Deferred income tax benefits.............................. 4.1 5.2
Prepaid expenses.......................................... 2.8 2.7
------ ------
Total Current Assets............................... 159.2 156.3
------ ------
Property
Land and improvements..................................... 7.0 7.2
Buildings and improvements................................ 63.4 69.0
Machinery and equipment................................... 370.9 379.6
Construction in progress.................................. 10.6 23.5
------ ------
Gross Property.......................................... 451.9 479.3
Less accumulated depreciation............................. 199.8 196.1
------ ------
Net Property....................................... 252.1 283.2
------ ------
Noncurrent Deferred Income Tax Benefits..................... 6.9 19.7
------ ------
Deferred Charges and Other Assets........................... 18.4 15.5
------ ------
Total Assets....................................... $436.6 $474.7
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt......................... $ 3.2 $ 4.4
Other short-term debt..................................... 8.8 11.3
Accounts payable.......................................... 46.3 58.1
Accrued expenses.......................................... 49.1 50.7
------ ------
Total Current Liabilities.......................... 107.4 124.5
------ ------
Long-Term Debt.............................................. 100.9 108.4
------ ------
Deferred Income Taxes....................................... 13.1 12.7
------ ------
Other Noncurrent Liabilities................................ 23.9 24.1
------ ------
Minority Interest........................................... 7.1 8.0
------ ------
Contingencies (See Notes 6, 10, 11 and 12)
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 December
31, 1999 and 1998, respectively......................... 1.6 1.6
Additional paid-in capital................................ 60.7 60.7
Common stock in treasury, at cost -- 441,845 and 154,668
shares at December 31, 1999 and 1998, respectively...... (8.0) (3.8)
Retained earnings......................................... 156.7 134.8
Accumulated other comprehensive income (loss) --
Unrealized foreign currency translation adjustments..... (26.8) 3.7
------ ------
Total Stockholders' Equity......................... 184.2 197.0
------ ------
Total Liabilities and Stockholders' Equity................ $436.6 $474.7
====== ======
See Notes to Consolidated Financial Statements
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29
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
---------------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK ISSUED TREASURY STOCK ADDITIONAL OTHER
------------------- ---------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) TOTAL
---------- ------ ------- ------ ---------- -------- ------------- ------
(U.S. $ IN MILLIONS)
BALANCE, DECEMBER 31, 1996.............. 16,052,621 $1.6 $60.0 $ 77.8 $ 16.6 $156.0
Net income............................ 45.3 45.3
Adjustments to unrealized foreign
currency translation................ (12.5) (12.5)
------
Comprehensive income.................. 32.8
------
Dividends declared ($0.60 per
share).............................. (9.6) (9.6)
Stock issued to directors as
compensation........................ 1,182 --
Stock issued for options exercised.... 11,640 0.3 0.3
---------- ---- ----- ------ ------ ------
BALANCE, DECEMBER 31, 1997.............. 16,065,443 1.6 60.3 113.5 4.1 179.5
Net income............................ 31.0 31.0
Adjustments to unrealized foreign
currency translation................ (0.4) (0.4)
------
Comprehensive income.................. 30.6
------
Dividends declared ($0.60 per
share).............................. (9.6) (9.6)
Purchases of treasury stock.