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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, 2000
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, 2000, 14,790,262 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 $283 million.
(Continued)
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DOCUMENTS INCORPORATED BY REFERENCE
Schweitzer-Mauduit International, Inc.'s 2001 Proxy Statement, filed with
the Commission dated March 13, 2001, 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 2001 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
- ----------------------------- -----------------------
2001 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. As a result of cumulative purchases of outstanding
minority shares, SM-Spain now owns 99.99 percent of the outstanding shares of
SWM-B.
Additionally, on February 11, 1998, Schweitzer-Mauduit Enterprises S.A.
("SM-Enterprises"), a wholly-owned subsidiary of 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") and
Groupe SAPAM was then merged into 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 88
percent of the Company's 2000 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,
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, Western and
Eastern Europe, China and elsewhere.
Non-tobacco industry products include lightweight printing and writing
papers, coated papers for packaging and labeling applications, business forms,
furniture laminates, battery separator paper, drinking straw wrap, filter papers
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
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mix of products, certain of which represent commodity paper grades produced to
maximize machine utilization.
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 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. The Company currently produces reconstituted tobacco in
two forms: leaf in France and wrapper and binder in the United States.
Reconstituted tobacco leaf is used by manufacturers of cigarettes primarily as a
filler that is blended with virgin tobacco in order to cost-effectively utilize
tobacco leaf by-products. Wrapper and binder are reconstituted tobacco products
used by manufacturers of machine-made cigars. Binder is used to hold the tobacco
leaves in a cylindrical shape during the production process. Wrapper is used to
wrap around the outside of the cigar, providing a uniform, finished appearance.
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 more than 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 business
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 17 percent, respectively,
of the Company's 2000 consolidated net sales.
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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 have continued to increase capacity, the total volume of cigarette paper
imports into China has declined.
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 Western and Eastern
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.
PHILIP MORRIS SUPPLY AGREEMENT. Since 1992, the Company's U.S. unit has
been the single source of supply of Cigarette Papers to Philip Morris' U.S.
operations. In May 2000, Philip Morris and the Company reached agreement on a
Second Amended and Restated Supply Agreement for Fine Paper Supply ("Second
Amended Supply Agreement"). The Second Amended Supply Agreement extends the
Company's position as the supplier of Cigarette Papers to Philip Morris' U.S.
operations through December 31, 2004, except that Philip Morris has the
continuing right 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 Second 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 contract term. Further,
a June 2000 notice to proceed, given in accordance with the terms of an addendum
to the Second Amended Supply Agreement, initiated a seven-year exclusive supply
arrangement with Philip Morris U.S.A. for a new jointly developed banded
cigarette paper that may make a cigarette less likely to ignite certain fabrics.
In January 2000, Philip Morris began consumer testing of cigarettes made with
this new paper. Philip Morris and the Company also have entered into a licensing
and royalty agreement covering future commercialization of this new paper, 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, 2000, the Company had
3,490 regular full-time active employees of whom 650 hourly employees and 288
salaried employees were located in the United States and Canada, 1,097 hourly
employees and 642 salaried employees were located in France and 768 hourly
employees and 45 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. 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. New labor
agreements were signed during 2000 for each of these mills. The new agreements
in Quimperle, Spay and Saint-Girons are two-year agreements expiring on December
31, 2001, February 28, 2002 and April 30, 2002, respectively, while the new
agreement in Malaucene was for a one-year term which expired on December 31,
2000. The Company's French management is in the process of negotiating a new
contract at the Malaucene mill and expects to reach
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agreement during the first quarter of 2001. 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 annual collective bargaining agreement expires on May
31, 2001. 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 116,000 and 107,000 metric
tons of wood pulp in 2000 and 1999, 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 leaf by-products, as the primary
raw materials for the Company's Cigarette Papers and reconstituted tobacco
products, respectively. While tobacco leaf by-products are generally the
property of the cigarette manufacturer for whom the reconstitution is
contracted, the Company and LTRI purchase some tobacco leaf by-products 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 an estimated 60
to 65 percent share of the North American cigarette paper market. The Ecusta
division of P.H. Glatfelter Company ("Ecusta") is the Company's major domestic
competitor in the sale of cigarette paper in North America. European suppliers,
such as Wattens GmbH ("Wattens"), an Austrian subsidiary of Trierenberg Holding
("Trierenberg"), and Miquel y Costas & Miquel S.A., a Spanish corporation
("Miquel y Costas"), also compete in this market but, to date, their market
share has not exceeded an estimated 10 percent. 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, Schoeller & Hoesch GmbH ("Schoeller & Hoesch"), a German
subsidiary of P.H. Glatfelter Company, Robert Fletcher (Greenfield) Limited,
Miquel y Costas and Julius Glatz GmbH. Papeteries de Mauduit, S.A. ("PdM") and
PdStG, indirect wholly-owned subsidiaries of the Company in France, sell
approximately 65 to 70 percent of their products (cigarette paper and porous and
conventional plug wrap) in Western Europe and China. Management believes that
the bases of competition for PdM's and PdStG'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 share of the cigarette paper market in Brazil
and an estimated 60 percent share of the cigarette paper market 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
an estimated 70 to 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
an estimated 60 to 65 percent share of the North American market for base
tipping paper which is subsequently printed by converters. Its principal
competitors in this market 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 an estimated 60 to 65 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 as 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
papers for lightweight printing and writing, coated papers for packaging and
labeling applications, business forms, furniture laminates, battery separator
papers, wrapping paper for drinking straws, filter papers and other specialized
papers. 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,
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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.
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 50 research personnel. The Company is dedicated to
developing Cigarette Papers, reconstituted tobacco and non-tobacco paper product
innovations and improvements to meet the needs of individual customers. The
development of new components for tobacco products and the development of new
non-tobacco paper products are the primary focuses of these research and
development functions, including several development projects for the Company's
major customers. The Company expensed $6.3 million, $6.7 million and $6.5
million in 2000, 1999 and 1998, respectively, on product research and
development.
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 specialty paper 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, 2000, the Company and its subsidiaries collectively
owned 85 patents and had pending 68 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 $31 million and $22 million on
December 31, 2000 and 1999, respectively. This represented approximately 50 and
40 days of Cigarette Paper sales for the French businesses in 2000 and 1999,
respectively. LTRI's RTL business operates under a number of annual supply
agreements. The order backlog for RTL was approximately $48 million and $44
million on December 31, 2000 and 1999, 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.
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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.
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 $3 million annually in
2001 and 2002. 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 business and income taxes, 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, 2000, 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. and French paper operations experienced limited downtime
on certain machines during 2000 because of reduced demand. In the latter half of
2000, machine schedules at all locations were at or near capacity. Currently no
market-related production downtime is expected in 2001.
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, 2000:
PRODUCTION LOCATIONS EQUIPMENT PRODUCTS
- -------------------- --------- --------
Lee Mills 4 Paper Machines Base Tipping and Specialty
Lee, Massachusetts Pulping Equipment Papers,
(4 mill sites) Plug Wrap Paper and Straw Wrap
Paper
Spotswood Mill 5 Paper Machines Cigarette Paper and Straw Wrap
Spotswood, New Jersey Pulping Equipment Paper
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 11 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
and Flax Pulp
LTR Industries Mill 2 Reconstituted Tobacco Reconstituted Tobacco Leaf, Flax
Spay, France Leaf Fiber Processing and Research &
Machines Development
1 Fiber Mill
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 and Research &
Development
Rio de Janeiro, Brazil Leased Office Space Administrative and Sales Offices
for
Brazilian Business
10
11
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
On December 27, 2000, SWM-B received two assessments from the tax
authorities of the State of Rio de Janeiro, Brazil concerning Imposto sobre
Circulacao de Mercadorias e Servicos ("ICMS"), a form of value-added tax,
consisting of unpaid ICMS taxes from January 1995 through November 2000,
together with interest and penalties in the total amount of approximately $13.6
million, based on the foreign currency exchange rate at December 31, 2000 (the
"Assessment"). The Assessment concerned the accrual and use by SWM-B of ICMS tax
credits generated from the production and sale of certain non-tobacco related
grades of paper sold domestically that are immune from the tax to offset ICMS
taxes otherwise owed on the sale of products that are not immune. A portion of
the Assessment, estimated at approximately $6.9 million, relates to tax periods
that predate the Company's acquisition of Pirahy, the predecessor in name to
SWM-B, and is covered by an indemnification from the sellers of Pirahy. SWM-B is
vigorously contesting the Assessment on both procedural and constitutional
grounds and believes that the Assessment will ultimately be resolved in its
favor. However, the final resolution of this matter will most likely entail both
administrative and judicial proceedings up to and including presentation of the
matter to the Supreme Court of Brazil and is not likely to be finally resolved
for several years. No liability has been recorded in the Company's financial
statements for the Assessment. Pending final resolution of this matter,
beginning in December 2000, SWM-B suspended the further accrual and application
of ICMS tax credits generated on immune products to reduce its possible exposure
to future ICMS tax assessments. A reserve of $1.1 million was recorded for the
entire asset balance of unused ICMS tax credits as of December 31, 2000.
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 and its obligation to participate in the
remediation or the monitoring of certain hazardous waste disposal sites, will
not have a material adverse effect on the Company's financial condition or
results of operations. However, future events, such as changes in existing laws
and regulations, or unknown contamination of sites owned, operated or used for
waste disposal by the Company (including contamination caused by prior owners
and operators of such sites or other waste generators) may give rise to
additional costs which could have a material adverse effect on the Company's
financial condition or results of operations.
The Company is a party to an administrative consent order with the
Massachusetts Department of Environmental Protection ("MDEP") governing the
post-closure care of the Willow Hill Landfill in Lee, Massachusetts. The consent
order required the Company to perform certain remedial measures and to reduce
the concentration of landfill gases to specified levels at all monitoring points
by September 15, 1998, or the Company could be liable for stipulated penalties.
Results of monitoring tests conducted in October 2000 and thereafter show that
the Company has reduced the concentration of landfill gases at all monitoring
points to the levels specified in the consent order. MDEP previously advised the
Company informally that stipulated penalties would not be assessed based on a
delay in complying with the consent order because of the Company's ongoing
efforts to resolve the issue and no sanctions have been imposed to date. The
Company must continue bimonthly monitoring and remain in compliance at all
monitoring points for twelve months.
11
12
Costs of these measures were previously accrued and are not material. The
Company does not believe that this matter will have a material adverse effect on
the Company's business or financial condition.
At Distribution, the Company assumed Kimberly-Clark's liabilities as 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 Company continues to participate in the remediation of the Global Landfill
as a member of a group of PRPs 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 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 $1.2 million in 2000, and
anticipates that it will incur approximately $2 million to $3 million annually
in 2001 and 2002. The major projects included in these estimates include
upgrading wastewater treatment facilities at various locations and installation
of ink solvent treatment equipment in France. The foregoing capital expenditures
are not expected to reduce the Company's ability to invest in 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 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the executive officers of the Company as of February
27, 2001, 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, 57, 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, 57, 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, 38, 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, 41, 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, 52, 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., 47, 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, 49, 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 February 27, 2001, there were 5,834 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.
COMPANY WEB SITE
The Company currently has a web site under development and anticipates that
it will be operational approximately April 1, 2001. The web site address is
http://www.schweitzer-mauduit.com. The web site will provide background
information about the Company, including information on the Company's history,
products, locations and employment opportunities. The web site will also allow
access to the Company's historical financial information, press releases and
quarterly earnings conference calls. The Company's quarterly earnings conference
calls will be available via a webcast accessible through the Company's web site.
The tentative dates for the Company's quarterly earnings conference calls
related to 2001 financial results are April 26, 2001, July 26, 2001, October 25,
2001 and January 31, 2002. These dates are subject to change. When the web site
is available, instructions on how to listen to the webcasts and updated
information on times and actual dates will be available through the web site.
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15
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 is presented on a consolidated
basis.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Net Sales........................................... $496.8 $504.4 $546.7 $460.6 $471.3
Gross Profit........................................ 91.9 110.4 106.1 121.9 114.2
Operating Profit.................................... 49.7 64.6 59.1 81.9 74.0
Net Income.......................................... 27.8 31.4 31.0 45.3 38.7
Net Income Per Share:
Basic............................................ $ 1.82 $ 1.99 $ 1.94 $ 2.82 $ 2.41
Diluted.......................................... $ 1.82 $ 1.99 $ 1.92 $ 2.77 $ 2.38
Cash Dividends Declared and Paid Per Share.......... $ .60 $ .60 $ .60 $ .60 $ .45
CASH FLOW AND BALANCE SHEET DATA:
Capital Spending.................................... $ 29.4 $ 26.3 $ 36.7 $ 35.8 $ 51.5
Depreciation and amortization....................... 22.1 22.2 24.8 14.4 13.4
Cash Provided By Operations......................... 71.7 60.7 67.1 67.3 90.4
Total Assets........................................ 441.7 436.6 474.7 391.0 380.6
Long-Term Debt...................................... 97.7 100.9 108.4 80.8 86.6
Equity.............................................. 179.9 184.2 197.0 179.5 156.0
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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, which occurred effective at the close of business on
November 30, 1995.
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 12 percent of the Company's net sales
in 2000. The non-tobacco industry products are a diverse mix of products,
certain of which represent commodity paper grades produced to maximize machine
utilization.
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.
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. This section should be read in
conjunction with the Company's Consolidated Financial Statements included
herein.
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16
RESULTS OF OPERATIONS
2000 Compared to 1999
By Segment for the Years Ended December 31, 2000 and 1999
(U.S. $ in millions)
% OF CONSOLIDATED
% CHANGE ------------------
NET SALES 2000 1999 VS. 1999 2000 1999
- --------- ------ ------ -------- ------- -------
United States................................ $163.7 $166.3 -1.6% 33.0% 33.0%
France....................................... 264.9 284.6 -6.9 53.3 56.4
Brazil....................................... 70.0 54.0 +29.6 14.1 10.7
Eliminations................................. (1.8) (0.5) (0.4) (0.1)
------ ------ ----- -----
Consolidated....................... $496.8 $504.4 -1.5% 100.0% 100.0%
====== ====== ===== =====
% RETURN
% OF CONSOLIDATED ON SALES
% CHANGE ------------------ ------------
OPERATING PROFIT 2000 1999 VS. 1999 2000 1999 2000 1999
---------------- ----- ----- -------- ------- ------- ---- ----
United States................... $ 2.6 $ 9.3 -72.0% 5.2% 14.4% 1.6% 5.6%
France.......................... 47.2 55.2 -14.5 95.0 85.4 17.8 19.4
Brazil.......................... 4.5 5.2 -13.5 9.1 8.1 6.4 9.6
Unallocated/Eliminations........ (4.6) (5.1) (9.3) (7.9)
----- ----- ----- -----
Consolidated.......... $49.7 $64.6 -23.1% 100.0% 100.0% 10.0% 12.8%
===== ===== ===== =====
Net Sales
Net sales decreased by $7.6 million as a result of unfavorable currency
exchange rates and lower average selling prices, partially offset by higher
sales volumes. The net sales comparison was unfavorably affected by $31.0
million from changes in currency exchange rates, primarily related to a
strengthened U.S. dollar versus the French franc. Lower average selling prices
and changes in sales mix had an unfavorable effect of $3.9 million, as the
impact of increased average selling prices of the Brazilian business was more
than offset by the effects of lower average selling prices of the French
businesses. Worldwide sales volumes increased by three percent, which favorably
affected net sales by $27.3 million. Sales volumes of the Brazilian business
increased by 15 percent, primarily as a result of increased sales of
nontobacco-related papers and sales outside Brazil. Sales volumes of the French
businesses increased by one percent. Sales volumes of the U.S. business unit
declined by three percent.
Operating Profit
Operating profit decreased by $14.9 million, with lower operating profit in
all three business segments, primarily as a result of higher wood pulp and
energy costs, which in total increased operating expenses by $22.1 million.
Changes in the average per ton wood pulp costs compared with the prior year
unfavorably impacted operating expenses by $17.5 million. Partially offsetting
these higher operating expenses were the favorable effects of increased sales
volumes, improved mill operations and lower nonmanufacturing expenses.
In France, operating profit declined by $8.0 million primarily as a result
of higher wood pulp and energy costs and lower average selling prices. These
negative effects were partially offset by the benefits of the French business
unit's increased sales volumes, cost reduction activities and improved mill
operations.
The U.S. business unit's operating profit declined by $6.7 million
primarily due to the higher wood pulp and energy costs and additional expenses
associated with implementation of the banded cigarette paper project at the
Spotswood, New Jersey mill. The effects of the decline in sales volumes were
offset by cost reduction activities and lower nonmanufacturing expenses.
In Brazil, operating profit declined by $0.7 million for the year as a
result of higher wood pulp, energy and other material costs and increased
business taxes. These negative factors were partially offset by the effects of
increased sales volumes, higher average selling prices, cost reduction
activities and improved mill operations.
16
17
Nonmanufacturing expenses decreased by $3.6 million, primarily due to a
reduction in selling expenses of the French business unit and lower general
expenses, in part from personnel reductions implemented during 1999.
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%
====== ====== ===== =====
% OF % RETURN
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
worldwide 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 to $1.8
million. 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. Operating profit in 1998 was
negatively affected by one-time pre-tax charges totaling $5.9 million related to
a voluntary retirement program at the Company's Spotswood mill which eliminated
67 hourly positions, 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.
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 1998 charges and the positive impact of
the Brazilian currency devaluation which occurred in the first quarter of 1999.
These favorable items
17
18
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.
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 1998 charges.
Nonmanufacturing expenses decreased by $1.2 million, primarily due to a
reduction in selling expenses of the French business unit.
NON-OPERATING EXPENSES
The increase in interest expense in 2000 compared with 1999 was primarily
due to higher average interest rates, partially offset by a lower average amount
of debt outstanding and the effects of changes in currency exchange rates. The
decline in interest expense in 1999 compared with 1998 was primarily due to
lower average interest rates, changes in currency exchange rates and a lower
average amount of debt outstanding. The weighted average effective interest rate
on the Company's term loans was approximately 5.7 percent in 2000, 4.5 percent
in 1999 and 5.1 percent in 1998. Other income, net consisted primarily of
interest income, royalty income and foreign currency transaction gains and
losses in each of the years presented, as well as a favorable settlement related
to a prior-period claim in 2000 and recovery of prior-period business taxes in
1999.
INCOME TAXES
The effective income tax rates for the years ended December 31, 2000, 1999
and 1998 were 31.4 percent, 39.0 percent and 32.1 percent, respectively.
The lower effective income tax rate in 2000 compared with 1999 was in part
a result of a decrease in the French corporate income tax rate from 40.0 percent
for 1999 to 37.7 percent for 2000 and a decline in the Brazilian corporate
income tax rate from 37.0 percent for most of 1999 to 34.0 percent for most of
2000. Additionally, the lower effective income tax rate in 2000 was due to
several items, including a $1.0 million favorable adjustment to reduce Spanish
deferred income tax valuation allowances, favorable income tax treatment of a
settlement related to a prior-period claim and an equity-related payment from
Brazil and income tax benefits associated with treatment of certain
repatriations during the year. Excluding the effects of these four items, the
effective income tax rate for 2000 would have been 37.0 percent.
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 net operating loss carryforwards ("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.
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19
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31,
------------------------
2000 1999 1998
------ ------ ------
(U.S. $ IN MILLIONS)
Cash Provided by (Used for):
Changes in operating working capital...................... $ 2.6 $ (9.0) $ (1.9)
Operations................................................ 71.7 60.7 67.1
Capital spending.......................................... (29.4) (26.3) (36.7)
Purchases of treasury stock............................... (13.2) (4.3) (3.8)
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 2000, changes
in operating working capital contributed favorably to cash flow by $2.6 million
due primarily to higher accounts payable and accrued expenses, partially offset
by higher accounts receivable. Accounts payable and accrued expenses were higher
in 2000 compared with 1999 as a result of recorded liabilities associated with
capital projects and maintenance costs at December 31, 2000. Accounts receivable
was higher in 2000 compared with 1999 primarily because of increased French
business unit export sales having longer payment terms. In 1999, changes in
operating working capital contributed unfavorably to cash flow by $9.0 million
due primarily to lower accounts payable. Accounts payable was lower in 1999
compared with 1998 as a result of payments in early 1999 for capital projects
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.
During 2000, the Company and Philip Morris reached agreement to proceed
with the modification of paper machines and related manufacturing equipment at
the Company's Spotswood mill to produce commercial quantities of a new
proprietary banded cigarette paper for Philip Morris. Capital spending to
implement the banded cigarette paper project was $12.7 million in 2000 and is
currently expected to be approximately $40 million in 2001. The Company does not
expect this project to impair its ability to pursue other appropriate business
opportunities. Funding for the Spotswood mill conversion and increased working
capital requirements is coming from internal sources and from advance payments
by Philip Morris against future product purchases.
Capital spending in 2000 included $16.5 million toward three projects at
the Spotswood mill: the banded cigarette paper project, a high-speed slitter and
a project for mill effluent solids removal. Also included in the total capital
spending for 2000 was $1.3 million toward improvement of a reconstituted tobacco
leaf machine in the Spay mill. 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 mill, and (iii) $1.1 million toward replacement of a yankee dryer in
the Spay 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 mill, (iv) $1.4 million
to modify a paper machine at the 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 Pirahy mill, and (vii) $1.0 million toward improvements
at the Quimperle pulping facility.
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. Under this program the Company repurchased a total of 1,177,050 shares
of its common stock for $17.5 million, of which 882,700 shares were purchased
during 2000 for $13.2 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.
During 2000, the Company's Board of Directors authorized the further
repurchase of shares of the Company's common stock during the period January 1,
2001 through December 31, 2002 in an amount not to exceed $20 million.
19
20
On January 25, 2001, the Company announced that the Board of Directors had
declared a quarterly cash dividend of fifteen cents per share of common stock.
The dividend will be payable on March 12, 2001 to stockholders of record on
February 12, 2001.
The Company's ongoing requirements for cash are expected to consist
principally of amounts required for capital expenditures, including the banded
cigarette paper project, stockholder dividends, purchases of Company stock and
working capital. 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 (see Note 12 of the Notes to Consolidated
Financial Statements), as of December 31, 2000 the Company had unrecorded
outstanding commitments for capital expenditures of approximately $13.9 million.
As of December 31, 2000, the Company had approximately $33 million
available under its revolving credit facilities in the United States and France,
and on January 19, 2001, the Company renewed these facilities to January 25,
2002. The Company also has other bank credit facilities available in the United
States, France and Brazil.
The Company believes its cash flow from operations, including advance
payments from customers for future product purchases, 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 for the Company's first quarter of 2001.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amends and clarifies certain
requirements of SFAS No. 133. The Company's adoption of these new accounting
rules is not expected to have a material effect on the Company's financial
condition or results of operations.
OUTLOOK
Although cigarette consumption and production in the United States were
lower in 2000 than in the prior year as a result of declines in domestic
cigarette consumption and exports of cigarettes manufactured in the United
States, the declines were less than in 1998 and 1999 and sales volumes of the
Company's U.S. business segment appear to be stabilizing. The negative impact of
lower U.S. cigarette production is being partially offset by the Company's
increased market share within the North American market and this trend is
expected to continue. Outside the United States, recent improvements in the
Company's sales volumes to several key markets compared with prior-year levels,
including Eastern Europe and Russia, are also expected to continue. Growth in
French reconstituted tobacco leaf volumes is anticipated in 2001 compared with
2000. Sales of tobacco-related papers within the Brazilian market appear to be
stabilizing. The Company's Brazilian business continues to benefit from
increased sales to Latin American countries outside of Brazil, although the
level of these exports is being unfavorably impacted by the implementation of an
export tax on some raw materials used in the manufacturing of cigarettes.
The new Brazilian export tax, which was enacted in the third quarter of
2000, is a 150 percent tax which applies to tobacco-related papers manufactured
by the Company's Brazilian business and exported from Brazil to other Latin
American countries. This new tax was apparently enacted by the Brazilian
government in an attempt to reduce the quantity of contraband or smuggled
cigarettes being sold in Brazil. Modifications to the new export tax were
enacted during the fourth quarter of 2000 and are expected to reduce the
negative impact on our Brazilian operation's exports from Brazil; however, even
as modified, the new tax is expected to unfavorably impact the Company's
financial results by approximately $.01 to $.02 per share per quarter, as it did
beginning in the fourth quarter of 2000. Cost of sales of certain products in
Brazil are also being unfavorably impacted by a recent change in the treatment
of ICMS taxes (see "Litigation" under the caption "LEGAL PROCEEDINGS" in Part I,
Item 3), which may reduce earnings by up to $.05 per share per
20
21
quarter, as it did during the fourth quarter of 2000. SWM-B is evaluating
possible changes in its business, including a possible change in its product
mix, to minimize the impact of this matter on its financial results.
Worldwide demand for tobacco-related papers remains below worldwide
capacity for such papers despite actions by suppliers to shut-down less
efficient machines. The combination of this continuing excess worldwide capacity
for tobacco-related papers and the strong U.S. dollar versus European and other
foreign currencies is making it difficult to increase selling prices to offset
the Company's negative cost pressures since several competitors have cost
structures that are based upon currencies that have weakened versus the U.S.
dollar.
Cost reduction continues to be a priority in each of the Company's business
segments. Future periods are expected to benefit from various cost savings
programs and certain past and future capital projects.
The per ton cost of wood pulp steadily increased during the latter half of
1999 and the first three quarters of 2000. Additionally, higher energy costs
were experienced throughout 2000 in each of the Company's business segments. The
Company has not been able to offset these cost increases with higher selling
prices. However, it appears that the cost of wood pulp has stabilized. The
Company expects the per ton cost of wood pulp to decline in the first half of
2001 from its level at the end of 2000 which could provide an opportunity to
regain some of the loss in gross profit margin experienced during 2000.
In December 2000, the French government enacted a reduction in the French
corporate income tax rate from 37.7 percent for 2000 to 36.3 percent for 2001
and 35.3 percent for 2002 and beyond. Considering this recent change, the
Company expects its consolidated effective income tax rate to be approximately
35 to 36 percent for 2001 and to decline to approximately 34 to 35 percent for
2002.
During the second quarter of 2000, the Company and Philip Morris reached
agreement to proceed with the modification of paper machines and related
manufacturing equipment at the Spotswood mill to produce commercial quantities
of a new proprietary banded cigarette paper for Philip Morris. This new
cigarette paper was jointly developed by the Company and Philip Morris and may
make a cigarette less likely to ignite certain fabrics. Capital spending to
implement the banded cigarette paper project is currently expected to total
approximately $40 million in 2001, in addition to amounts already incurred by
the Company as of December 31, 2000. The Company does not expect this project to
impair its ability to pursue other appropriate business opportunities. The
banded cigarette paper operations are expected to have a negative impact on 2001
financial results because of additional expenses associated with implementation.
Excluding capital spending associated with the banded cigarette paper
project, the Company expects to control its capital spending to approximately
$20 to $25 million for 2001, focused primarily on product quality improvements
and cost reduction opportunities.
During 2000, the Company's Board of Directors authorized the repurchase of
shares of the Company's common stock during the period January 1, 2001 through
December 31, 2002 in an amount not to exceed $20 million. Common stock
repurchases in 2001 will be dependent upon various factors, including cash
availability, the stock price and strategic opportunities.
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 2001 and beyond, to differ materially
from those expressed in any forward-looking statements made by, or on behalf of,
the Company.
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, changes in business and income tax regulations and
risks related to the restrictions of repatriation of earnings or proceeds from
liquidated assets of foreign subsidiaries.
Euro Currency Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing currencies ("legal
currencies") and one common currency - the euro. The euro
21
22
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
February 15, 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.
Tax and Repatriation Matters
The Company and its subsidiaries are subject to various business and 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 business and income tax requirements of each of its operations, files
appropriate returns and makes appropriate tax planning analyses directed toward
the minimization of its tax obligations in these countries. Appropriate business
and 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 a 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 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 24 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.
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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 116,000, 107,000 and
112,000 metric tons of wood pulp in 2000, 1999 and 1998, respectively. During
the period from January 1998 through December 2000, the U.S. list price of
northern bleached softwood kraft pulp, a representative pulp grade used by the
Company, ranged from a low of $500 per metric ton to a high of $710 per metric
ton in the third and fourth quarters of 2000. Generally, over time, the Company
has been able to increase its selling prices in response to increased per ton
pulp costs, although this was not the case in 2000 as a result of other
marketplace factors, and has generally reduced its selling prices 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, is currently named as a potentially responsible party at two waste
disposal sites, neither 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.
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.
23
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Tobacco Products and Governmental Actions
In recent years, governmental entities around the world, 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.
Also in recent years, certain governmental entities, particularly in the
United States, have considered or proposed actions that would require cigarettes
to meet specifications aimed at reducing their likelihood of igniting fires when
the cigarettes are not actively being smoked. The state of New York has enacted
such a set of requirements scheduled to take effect beginning in 2003. Cigarette
manufacturers are in varying stages of development of cigarettes with such
characteristics. Philip Morris and the Company previously announced the joint
development of a banded cigarette paper that may make a cigarette less likely to
ignite certain fabrics and have entered into a licensing and royalty agreement
covering future commercialization of this new paper, the commercial viability of
which has not yet been determined. The Company also continues to work on other
possible innovations with other customers and on its own as the cigarette
industry faces these evolving requirements.
It is not 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.
During 2000, 88 percent of the Company's net sales were 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 matters discussed in this report, particularly in the foregoing
discussion regarding the "Outlook" of the Company and "Factors That May Affect
Future Results", constitute forward-looking statements, generally identified by,
but not limited to, phrases such as "the Company expects" or "the Company
anticipates", as well as by use of words of similar effect, such as "appears",
"could", "should", "may" and "typically". This report contains many such
forward-looking statements, including statements regarding management's
expectations of future selling prices for the Company's products, the Company's
anticipated market shares, future market prices for wood pulp used by the
Company, expected sales volumes trends, new product introductions, anticipated
cost savings, anticipated financial and operational results, anticipated capital
spending, anticipated tax and other governmental actions, contingencies,
anticipated common stock share repurchases and other expected transactions of
the Company. Forward-looking statements are made based upon management's
expectations and beliefs concerning future events impacting the Company. There
can be no assurances that such events will occur or that the results of the
Company will be as estimated. Many factors outside the control of the Company
also could impact the realization of such estimates. 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 2001 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, 2000, 1999 and 1998..................... 26
Consolidated Balance Sheets as of December 31, 2000 and
1999.................................................. 27
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2000, 1999 and
1998.................................................. 28
Consolidated Statements of Cash Flow for the years
ended December 31, 2000, 1999 and 1998................ 29
Notes to Consolidated Financial Statements............. 30
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.
25
26
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
--------- --------- ---------
(U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net Sales.................................... $496.8 $504.4 $546.7
Cost of products sold...................... 404.9 394.0 440.6
------ ------ ------
Gross Profit................................. 91.9 110.4 106.1
Selling expense............................ 18.5 19.5 21.0
Research expense........................... 6.3 6.7 6.5
General expense............................ 17.4 19.6 19.5
------ ------ ------
Operating Profit............................. 49.7 64.6 59.1
Interest expense........................... (6.1) (5.8) (6.4)
Other income, net.......................... 3.2 1.9 1.2
------ ------ ------
Income Before Income Taxes and Minority
Interest................................... 46.8 60.7 53.9
Provision for income taxes................. 14.7 23.7 17.3
------ ------ ------
Income Before Minority Interest.............. 32.1 37.0 36.6
Minority interest in earnings of
subsidiaries............................ 4.3 5.6 5.6
------ ------ ------
Net Income................................... $ 27.8 $ 31.4 $ 31.0
====== ====== ======
Net Income Per Common Share:
Basic...................................... $ 1.82 $ 1.99 $ 1.94
====== ====== ======
Diluted.................................... $ 1.82 $ 1.99 $ 1.92
====== ====== ======
See Notes to Consolidated Financial Statements
26
27
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
--------------------
2000 1999
------- -------
(U.S. $ IN MILLIONS)
ASSETS
Current Assets
Cash and cash equivalents................................. $ 23.6 $ 15.1
Accounts receivable....................................... 77.7 72.1
Inventories............................................... 64.5 62.9
Current income tax refunds receivable..................... 2.9 2.2
Deferred income tax benefits.............................. 4.8 4.1
Prepaid expenses.......................................... 1.7 2.8
------ ------
Total Current Assets............................... 175.2 159.2
------ ------
Property
Land and improvements..................................... 7.0 7.0
Buildings and improvements................................ 61.5 63.4
Machinery and equipment................................... 368.7 370.9
Construction in progress.................................. 24.8 10.6
------ ------
Gross Property.......................................... 462.0 451.9
Less accumulated depreciation............................. 212.5 199.8
------ ------
Net Property....................................... 249.5 252.1
------ ------
Noncurrent Deferred Income Tax Benefits..................... 1.0 6.9
------ ------
Deferred Charges and Other Assets........................... 16.0 18.4
------ ------
Total Assets................................. $441.7 $436.6
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt......................... $ 3.6 $ 3.2
Other short-term debt..................................... 2.0 8.8
Accounts payable.......................................... 52.7 46.3
Accrued expenses.......................................... 52.1 49.1
------ ------
Total Current Liabilities.......................... 110.4 107.4
------ ------
Long-Term Debt.............................................. 97.7 100.9
------ ------
Noncurrent Deferred Income Tax Liabilities.................. 14.9 13.1
------ ------
Noncurrent Deferred Revenue................................. 10.0 2.0
------ ------
Other Noncurrent Liabilities................................ 22.4 21.9
------ ------
Minority Interest........................................... 6.4 7.1
------ ------
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, 2000 and 1999, respectively................ 1.6 1.6
Additional paid-in capital................................ 60.5 60.7
Common stock in treasury, at cost - 1,288,471 and 441,845
shares at December 31, 2000 and 1999, respectively...... (20.5) (8.0)
Retained earnings......................................... 175.3 156.7
Unearned compensation..................................... (0.3) --
Accumulated other comprehensive income (loss) -
Unrealized foreign currency translation adjustments..... (36.7) (26.8)
------ ------
Total Stockholders' Equity......................... 179.9 184.2
------ ------
Total Liabilities and Stockholders' Equity... $441.7 $436.6
====== ======
See Notes to Consolidated Financial Statements
27
28
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK ISSUED TREASURY STOCK ADDITIONAL OTHER
------------------- ------------------ PAID-IN RETAINED UNEARNED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS COMPENSATION INCOME (LOSS) TOTAL
---------- ------ --------- ------ ---------- -------- ------------ ------------- ------
(U.S. $ IN MILLIONS)
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................. 155,700 $(3.8) (3.8)
Stock issued to
directors as
compensation.......... 1,350 (1,032) --
Stock issued for options
exercised............. 11,940 0.3 0.3
Adjustments due to
rounding.............. 0.1 (0.1) --
---------- ---- --------- ------ ----- ------ ------ ------
BALANCE, DECEMBER 31,
1998.................... 16,078,733 1.6 154,668 (3.8) 60.7 134.8 3.7 197.0
Net income.............. 31.4 31.4
Adjustments to
unrealized foreign
currency
translation........... (30.5) (30.5)
------
Comprehensive income.... 0.9
------
Dividends declared
($0.60 per share)..... (9.5) (9.5)
Purchases of treasury
stock................. 294,350 (4.3) (4.3)
Stock issued to
directors as
compensation.......... (7,173) 0.1 0.1
---------- ---- --------- ------ ----- ------ ------ ------
BALANCE, DECEMBER 31,
1999.................... 16,078,733 1.6 441,845 (8.0) 60.7 156.7 (26.8) 184.2
Net income.............. 27.8 27.8
Adjustments to
unrealized foreign
currency
translation........... (9.9) (9.9)
------
Comprehensive income.... 17.9
------
Dividends declared
($0.60 per share)..... (9.2) (9.2)
Purchases of treasury
stock................. 882,700 (13.2) (13.2)
Restricted stock
issuances............. (30,000) 0.6 (0.2) $(0.4) --
Amortization of unearned
compensation.......... 0.1 0.1
Stock issued to
directors as
compensation.......... (5,474) 0.1 0.1
Issuance of shares for
options exercised..... (600) --
---------- ---- --------- ------ ----- ------ ----- ------ ------
BALANCE, DECEMBER 31,
2000.................... 16,078,733 $1.6 1,288,471 $(20.