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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, 1997
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, 1997, 16,065,443 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 $598 million.
(Continued)
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DOCUMENTS INCORPORATED BY REFERENCE
Schweitzer-Mauduit International, Inc.'s 1998 Proxy Statement, filed with
the Commission dated March 13, 1998, 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 1998 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
- ----------------------------- -----------------------
1998 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 and/or one
or more of its several subsidiaries, as determined by the context.)
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 15 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 94
percent of the Company's 1997 net sales, include cigarette, tipping and plug
wrap papers used to wrap various parts of a cigarette ("Cigarette Papers"),
reconstituted tobacco wrappers and binders for cigars, and reconstituted tobacco
leaf ("RTL") for use as filler in cigarettes and cigars. These products are sold
directly to the major tobacco companies or their designated converters in North
America, Western Europe, China, and elsewhere.
Non-tobacco industry products accounted for six to seven percent of the
Company's net sales in 1997, 1996 and 1995. These products included drinking
straw wrap, lightweight printing papers, tea bag, coffee and other filter
papers, battery separator paper and other specialized papers primarily for the
North American and Western European markets. These products are generally sold
directly to converters and other end-users. In 1996, the Company phased out its
U.S. production of tea bag and coffee filter papers to focus on its core market
growth opportunities.
PRODUCTS. Each of the three principal types of paper used in
cigarettes -- cigarette, tipping and plug wrap 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 cigarette machines utilized by premium cigarette manufacturers.
Plug wrap paper forms the outer layer of a cigarette filter and is used to
hold the filter materials in a cylindrical form. Conventional plug wrap is
manufactured on flat wire paper machines using wood pulp. Porous plug wrap, a
highly porous paper, is manufactured on inclined wire paper machines from "long
fibers", such as abaca and wood pulp. Porosity 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.
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Tipping paper, produced in white or buff color, joins the cigarette's
filter element to the tobacco section of the cigarette. The ability to produce
tipping paper which is both printable and glueable at high speeds is critical to
producing a cigarette with a distinctive finished appearance.
Reconstituted tobacco is used by manufacturers of cigarettes, cigars and
other tobacco products primarily as a filler that is blended with virgin tobacco
in order to utilize otherwise wasted parts of the tobacco leaf. The Company
currently produces reconstituted tobacco in two forms: leaf in France and
wrapper and binder in the U.S. The Company exited the RTL product line in the
U.S. at the beginning of the second quarter of 1996. (See "Markets and
Customers" below.) The Company's decision to exit the U.S. RTL business has not
impacted its U.S. wrapper and binder business, its RTL business in France, or
the Company's commitment to reconstituted tobacco worldwide. During the fourth
quarter of 1997, the U.S. RTL production line was restarted for an undetermined
period of time to support the growth of the French RTL business while
alternatives for additional capacity are being considered.
MARKETS AND CUSTOMERS. The Company's U.S. business primarily supplies
customers in North America, but also has substantial sales in South America and
Japan. The customer base for the U.S. operations consists of most of the major,
and many of the smaller, cigarette manufacturers in North America, several cigar
manufacturers and approximately 70 manufacturers in 30 countries outside North
America. The Company's French operations rely predominantly on worldwide
exports, primarily to Western Europe, China, Eastern Europe and the Commonwealth
of Independent States, and, in lesser but substantial amounts, to Asia other
than China, Africa, the Middle East and Australia. The customer base for the
French operations consists of a diverse group of approximately 180 customers in
88 countries. Customers of both units include international tobacco companies,
regional tobacco manufacturers and government monopolies.
Between the U.S. and France, Philip Morris accounts for approximately 36
percent of the Company's net sales.
Philip Morris and B.A.T. Industries PLC ("B.A.T."), including its U.S.
subsidiary Brown & Williamson Tobacco Corporation ("Brown & Williamson"), are
the Company's two largest customers of Cigarette Papers.
The Company's French operations are the largest exporter of cigarette paper
to China with an estimated 40 percent share of that country's cigarette paper
imports.
LTR Industries, S.A. ("LTRI") is a 72-percent owned subsidiary of the
Company which manufactures RTL in France. LTRI's three largest customers for RTL
are Tekel, Philip Morris, and Rothmans Companies in Europe, each representing 10
percent or more of LTRI's sales volumes.
In December 1995, the Company made the decision to exit the U.S. RTL
business because of the loss of its two largest RTL customers in the U.S. and
ceased operations early in the second quarter of 1996. (See discussion regarding
the financial impact of this decision under the caption "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" appearing in Part
II, Item 7 herein.)
PHILIP MORRIS SUPPLY AGREEMENT. In 1992, Philip Morris decided to form
strategic supply arrangements with some of its U.S. suppliers. With respect to
Cigarette Papers, the Company's U.S. unit was chosen to be the single source of
supply to Philip Morris' U.S. operations. The initial five year term of the
supply agreement (the "Supply Agreement") would have ended on December 31, 1997,
but, as part of the assignment of the Supply Agreement from Kimberly-Clark to
SWM, Philip Morris and SWM agreed to extend the initial term of the Supply
Agreement until December 31, 1998. By its terms, the Supply Agreement
automatically renews for successive terms of three years each unless either
party gives notice of non-renewal 24 months before the end of the then current
term. On December 20, 1996, the Company announced that Philip Morris and the
Company had agreed to extend the initial term of the Supply Agreement for an
additional six months until June 30, 1999, and, subsequently, the two companies
have twice more agreed to extend the initial term of the Supply Agreement until
March 31, 2000, thereby extending the December 31, 1996 deadline for notice of
non-renewal to March 31, 1998. The extensions were intended to allow both
parties additional time to reach agreement on changes to the Supply Agreement
which will make it acceptable to both parties. The Company
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has no reason to believe that the Supply Agreement will not be renewed but can
give no assurances that it will be so renewed. While the Company has no reason
to believe that it would lose Philip Morris as a customer in the U.S., such loss
would have a material adverse effect on the Company.
EMPLOYEE AND LABOR RELATIONS. As of December 31, 1997, the Company had
approximately 2,465 regular full-time active employees of whom approximately 760
hourly employees and 315 salaried employees were located in the U.S. and Canada,
and approximately 855 hourly employees and 535 salaried employees were located
in France.
North American Operations -- Hourly employees at the Lee, Massachusetts,
Spotswood, New Jersey and Ancram, New York mills are represented by locals of
the United Paperworkers International Union. During 1997, new five-year
collective bargaining agreements were reached at the Spotswood and Lee mills.
The current five-year collective bargaining agreements expire at the Spotswood
mill on June 15, 2002, at the Lee mills on August 1, 2002, and at the Ancram
mill on September 30, 1998. There have been no strikes or work stoppages at any
of these locations for approximately 18 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 mills of the Company's
subsidiaries in Quimperle, Malaucene, and Spay, France are union represented.
During 1996, these subsidiaries entered into new collective bargaining
agreements at Quimperle and Malaucene which expired on December 31, 1997. During
February 1997, a new collective bargaining agreement was entered into at Spay
which expired on February 24, 1998. The French subsidiaries are in the process
of negotiating new contracts at all three mills. Over the years, there have been
intermittent work stoppages lasting from a few hours to several days. The
Company believes that, overall, employee relations are positive and comparable
to similar French manufacturing operations.
RAW MATERIALS. Wood pulp is the primary fiber used in the Company's
operations. These operations consumed approximately 71,000 and 65,000 metric
tons of wood pulp in 1997 and 1996, respectively, all of which was purchased.
Company operations also use other cellulose fibers, the most significant of
which are in the form of flax fiber and tobacco stems and scraps, as the primary
raw materials for the Company's paper and reconstituted tobacco products. While
tobacco stems and scraps are generally the property of the cigarette
manufacturer for whom the reconstitution is contracted, the Company and LTRI do
purchase some tobacco materials for use in the production of RTL and wrapper and
binder products.
Flax straw is purchased and subsequently processed into flax tow at
processing facilities in Canada and France. The flax tow is then converted into
flax pulp at pulping facilities in the U.S. and France. Flax tow and flax pulp
are also purchased externally but these purchases only represent approximately
20 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 sisal fibers and small amounts of secondary and recycled fibers.
All of these secondary and recycled fibers are purchased.
To ensure an adequate supply of wood pulp at competitive prices, the
Company and Kimberly-Clark agreed that Kimberly-Clark will, for a fee, make
available to the Company its pulp sourcing services. The Company continues to
utilize these services.
The Company believes that the fibers identified above and the remaining 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, together with its subsidiaries, is the leading
producer of Cigarette Papers in the world. It also 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.
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Cigarette Paper -- Management believes that the Company has an estimated 58
percent share of the U.S. and Canadian cigarette paper markets. The Ecusta
division of P.H. Glatfelter Company ("Ecusta") is the Company's major competitor
in the sale of cigarette paper in the U.S. and Canada. European suppliers, such
as Miquel y Costas & Miquel S.A., a Spanish corporation ("Miquel y Costas"),
also compete in this market but, to-date, have achieved no more than an
estimated 10 percent market share. The Company's U.S. operations are in the
process of expanding their efforts related to sales of cigarette paper to Asia.
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
operations are Wattens, Schoeller & Hoesch GmbH ("Schoeller & Hoesch"), acquired
by P.H. Glatfelter Company in January, 1998, Robert Fletcher (Greenfield)
Limited, Miquel y Costas, and Julius Glatz GmbH. Papeteries de Mauduit, S.A.
("PdM"), an indirect wholly-owned subsidiary of the Company in France, sells
approximately 70 percent of its products (cigarette paper and porous and
conventional plug wrap) in Western Europe and China. Management believes that
the bases of competition for PdM's products are the same as for the Company's
U.S. operations.
Plug Wrap Paper -- Management believes that the Company's U.S. operations
have a 75 percent share of the North American plug wrap market. The remaining 25
percent is shared by three competitors: Ecusta (including Schoeller & Hoesch),
Miquel y Costas, and Wattens. The Company's French operations hold an estimated
56 percent of the Western European high porosity plug wrap market. Schoeller &
Hoesch is the Company's principal competitor in that market.
Management believes that the primary basis of competition for high porosity
plug wrap is technical capability with price being a secondary 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. operations
have an estimated 58 percent share of the U.S. and Canadian markets for base
tipping paper which is subsequently printed by converters. Its principal
competitors in North America are Ecusta and Tervakoski Oy, a Finnish exporter.
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 is among the largest converted tipping paper producers in Europe.
PdMal produces printed and unprinted, and laser and electrostatically perforated
tipping papers. PdMal's principal European competitors are Tann-Papier GmbH
(Austria), 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.
Reconstituted Tobacco -- LTRI is the leading independent producer of RTL.
Management believes that the basis of competition in this market is primarily
quality. However, sales volumes are influenced by worldwide virgin tobacco
prices (lower prices of virgin tobacco may result in lower reconstituted tobacco
sales volumes).
LTRI's principal competitors are (i) B.V. Deli-HTL Tabak Maatschappiji
B.V., an independent producer which operates in Holland, (ii) R.J. Reynolds
Tobacco Company, which produces RTL for both internal and external use, (iii)
Elets, an affiliate of R.J. Reynolds which operates in the Commonwealth of
Independent States, and (iv) cigarette companies such as Philip Morris and Brown
& Williamson, which produce RTL primarily for internal use.
The Company exited the RTL business in the U.S. at the beginning of the
second quarter of 1996 (see "Markets and Customers"), where its operations had
previously produced an estimated 10-15 percent of the reconstituted tobacco used
in U.S. cigarette production. The remaining 85-90 percent had been produced
internally by U.S. cigarette companies for use in U.S. produced cigarettes and
for export to their overseas affiliates. After the Company's exit of this
business in the U.S., virtually all of the reconstituted tobacco used
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in U.S. cigarette production is being produced by U.S. cigarette companies. In
the fourth quarter of 1997, the U.S. operations temporarily restarted operation
of the U.S. RTL production line, but only in support of the increased sales
volumes of LTRI.
Management estimates that 85-90 percent of 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 French subsidiaries
produce wrapping paper for drinking straws, filter papers, as well as papers for
lightweight printing, business forms and battery separators. Management believes
that price is the primary basis of competition for drinking straw wrap 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. Neither the Company nor its French
subsidiaries possess a significant market share in any of the above segments,
except for battery separator papers, where they collectively hold approximately
20 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 and its
French subsidiaries have research and laboratory facilities in Spay, France and
Alpharetta, Georgia and employ 47 research personnel. The Company is dedicated
to developing Cigarette Papers and reconstituted tobacco product innovations and
improvements to meet the needs of individual customers. The development of new
components for tobacco products is the primary focus of these research and
development functions, which are working on several development projects for
their major customers. The Company's U.S. and French operations spent in the
aggregate on product research and development $4.5 million in 1995, $6.0 million
in 1996 and $6.4 million in 1997. Research expenses were lower in 1995 due to an
increased amount of machine time and other trial expenses shared with customers.
The actual staffing for research activity was comparable to the level in the
other periods.
The Company believes that the research and product development capabilities
of its U.S. and French operations are unsurpassed in the industry and have
played an important role in establishing the Company's reputation for high
quality, superior products. The Company's commitment to research and development
has enabled the Company, for example, to (i) produce high-performance papers
designed to run on the high-speed manufacturing machines of its customers, (ii)
produce papers to exacting specifications with very high uniformity, (iii)
produce cigarette paper with extremely low basis weights, and (iv) have an
acceptance rate by its customers in excess of 99 percent. The Company also
believes it is in the forefront of the manufacturing process, having invested
heavily in modern technology, including laser technology and modern paper
slitting equipment. The Company believes that its commitment to research and
development, coupled with its investment in new technology and equipment, has
positioned the Company to take advantage of growth opportunities abroad where
the demand for American-style premium cigarettes continues to increase.
As of December 31, 1997, the Company owned approximately 73 patents and had
pending 49 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, the "PdM"
logo and the 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 enjoyed 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.
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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 paper are typically placed two weeks in advance of
shipment. Approximately 5 percent of the U.S. sales are on a consignment basis.
The French business units do maintain records of order backlogs. For
Cigarette Papers, the order backlog was approximately $21 million and $24
million on December 31, 1997 and December 31, 1996, respectively. This
represented approximately 50 days of Cigarette Paper sales in 1997 and between
40 and 50 days of Cigarette Paper sales in 1996. LTRI's RTL business operates
under a number of annual supply agreements. The order backlog for RTL was
approximately $57 million and $33 million on December 31, 1997 and December 31,
1996, respectively.
Sales of the Company's products are not subject to seasonal fluctuations,
except in the U.S. where customer shutdowns of one to two weeks in duration
typically occur in July and December.
SALES AND DISTRIBUTION. Essentially all tobacco-related products are sold
by the U.S. and French 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. Most of the Company's non-tobacco
related products are also 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 and Canada
are estimated to be approximately $3 million to $5 million annually in 1998 and
1999. These estimates include amounts associated with the first phase of the
Cluster Rules. The 1998 and 1999 estimates include amounts previously planned
for earlier periods but which have been postponed in order to ensure compliance
with final governmental regulations, once published, and to take advantage of
emerging enhanced technologies. These expenditures have been anticipated for
several years and 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, 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 and Canada. Products made in
France or in the U.S. are marketed in 88 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, 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.
RECENT ACQUISITIONS. 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 provides the Company with a manufacturing facility on a third continent.
Pirahy 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. Pirahy, together with the Company's
existing business, will increase the Company's market share of tobacco-related
papers in South America to approximately 51 percent. As part of the purchase
agreement, Pirahy has exclusive supply agreements with its former owner and its
largest customer in Brazil, Souza Cruz S.A. ("Souza Cruz"), to supply all of its
needs for papers which Pirahy is capable of producing.
Additionally, on February 11, 1998, the Company's second tier subsidiary,
Schweitzer-Mauduit Enterprises S.A. ("SM-Enterprises"), wholly-owned by
Schweitzer-Mauduit France, S.A.R.L. ("SMF"), acquired all of the outstanding
shares of Ingefico, S.A. and 97.1 percent of the outstanding shares of its pulp
and
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specialty paper manufacturing subsidiaries, Groupe SAPAM and Papeteries de la
Moulasse (collectively referred to hereafter as "Ingefico"), located in St.
Girons in the southwestern part of France. Approximately 90 percent of the net
sales of Ingefico are of fine papers to the tobacco industry.
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ITEM 2. PROPERTIES
As of December 31, 1997, the Company operated six mills (which include two
fiber pulping operations) in the U.S. and France that produce specialty papers
and 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 French
subsidiaries respectively maintain administrative and sales offices in
Alpharetta, Georgia and in Quimperle and Paris, France. The Company's world
headquarters are also located in Alpharetta. All of these offices are leased
except for the Quimperle office, which is owned by PdM.
Management believes that each of these facilities is well-maintained,
suitable for conducting the Company's operations and business, and adequately
insured.
The mills are operating at or close to capacity, except for the wrapper and
binder operations in the U.S. Additionally, the U.S. operations experienced
selective downtime on certain machines during the fourth quarter of 1997 in
order to reduce cigarette paper inventories which had built up as a result of
reduced demand in the U.S. A new paper machine at the Quimperle, France mill
began operation during March 1997, increasing the capacity for production of
long fiber products, such as highly porous plug wrap papers, alkaline battery
separators, and liners for vacuum cleaner bags. During the fourth quarter of
1997, the U.S. operations temporarily restarted operation of the U.S. RTL
production line, previously shut down at the beginning of the second quarter of
1996, in support of increased sales volumes of LTRI.
The February 2, 1998 acquisition of Pirahy, a second tier subsidiary in
Brazil, provides the Company with a manufacturing facility on a third continent.
Pirahy has approximately 63,000 metric tons of annual paper capacity.
Additionally, the February 11, 1998 acquisition of Ingefico, located in the
southwestern part of France, provides approximately 14,000 metric tons of annual
paper capacity and approximately 6,000 metric tons of annual pulp capacity, most
of which is used internally.
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The following are the locations of the Company's principal facilities as of
December 31, 1997:
LOCATION EQUIPMENT/OFFICE SPACE PRODUCTS/FUNCTION
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Lee Mills 4 Paper Machines Base Tipping and Specialty Papers,
Lee, Massachusetts Pulping Equipment Plug Wrap Paper
(4 Mill Sites)
Spotswood Mill 6 Paper Machines Cigarette Paper, Plug Wrap Paper,
Spotswood, New Jersey 1 Reconstituted Tobacco Reconstituted Tobacco Leaf (in
Leaf Machine support of the French business)
Pulping Equipment
Ancram Mill 1 Paper Machine Reconstituted Tobacco Wrapper and
Ancram, New York 1 Reconstituted Tobacco Binder, Porous Plug Wrap and
Wrapper and Binder Specialty Papers
Machine
Fiber Operations 5 Movable Fiber Mills Flax Fiber Processing
Manitoba, Canada
Alpharetta, Georgia Leased Office Space Company World Headquarters,
Administration, Sales and Research
& Development -- U.S. Operations
Papeteries de Mauduit Mill 11 Paper Machines Cigarette Paper, Plug Wrap Paper
Quimperle, France Pulping Equipment and Long Fiber Specialties
Quimperle, France Owned Office Space Administrative Offices for French
Operations
Papeteries de Malaucene Mill 1 Paper Machine Tipping and Specialty Papers
Malaucene, France 3 Printing Presses
11 Laser Perforating Lines
1 Electrostatic Perforating
Line
LTR Industries 2 Reconstituted Tobacco Reconstituted Tobacco Leaf, Flax
Spay, France Leaf Machines Fiber Processing, Research &
1 Fiber Mill Development
Paris, France Leased Office Space Administrative and Sales Offices
for French Operations
The announced acquisition of Pirahy in Santanesia, Brazil provides the
Company with five additional paper machines and a coating machine. Pirahy's
products include tobacco-related papers, as well as printing and writing papers
and papers for packaging and labeling applications.
The announced acquisition of Ingefico in St. Girons, France provides the
Company with three additional paper machines and pulping equipment. Ingefico's
products are primarily tobacco-related papers.
11
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ITEM 3. LEGAL PROCEEDINGS
The following is a brief description of potentially material legal
proceedings to which the Company or any of its subsidiaries is a party, or of
which any of their properties is subject:
LITIGATION
Under the terms of the Distribution, the Company assumed liability for and
agreed to indemnify Kimberly-Clark from litigation arising out of the operation
of the Businesses, including the following cases:
- In January 1997, James E. McCune on behalf of himself and other "nicotine
dependent" West Virginia cigarette smokers filed, in the Circuit Court of
Kanawha County, West Virginia, a purported class action against several
tobacco companies, industry trade associations and consultants, tobacco
wholesalers and cigarette component manufacturers, including
Kimberly-Clark, seeking equitable relief and compensatory and punitive
damages in an unspecified amount for mental suffering and physical
injuries allegedly sustained as a result of having smoked cigarettes. The
nine-count complaint sets forth several theories of liability, including
intentional and negligent misrepresentation, negligence, product
liability, breach of warranty and conspiracy. Among other things, the
complaint alleges that nicotine is an addictive substance, that the
tobacco companies, by using reconstituted tobacco, are able to control the
precise amount of nicotine in their cigarettes and that LTRI specializes
in the reconstitution process to help the tobacco companies control
nicotine levels.
- On February 13, 1998, Cleo Huffman, on behalf of herself and her deceased
husband, filed a complaint in the Circuit Court of Kanawha County, West
Virginia, against several tobacco companies, industry trade associations
and consultants, tobacco wholesalers, Kimberly-Clark, LTRI and others,
seeking equitable relief, $2 million in compensatory damages and $3
million in punitive damages allegedly sustained as a result of the death
of her husband which plaintiff contends was caused by his "addiction" to
smoking Camel cigarettes. The fourteen-count complaint sets forth several
theories of liability, including intentional and negligent
misrepresentation, breach of express and implied warranties, intentional
infliction of emotional distress, product liability, sale of an
unreasonably dangerous product and conspiracy.
As a component supplier, the Company believes that it has meritorious
defenses to each of these cases, but due to the uncertainties of litigation, the
Company cannot predict their outcome. The Company is unable to make a meaningful
estimate of the amount or range of loss which could result from an unfavorable
outcome of these actions. These cases will be vigorously defended.
Also, 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 effect on the
Company's consolidated financial statements.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws,
regulations and ordinances relating to various environmental matters. The nature
of the Company's operations expose it to the risk of claims with respect to
environmental matters and there can be no assurance that material costs or
liabilities will not be incurred in connection with such claims. Based on the
Company's experience to date, the Company believes that its future cost of
compliance with environmental laws, regulations and ordinances, and its exposure
to liability for environmental claims, will not have a material adverse effect
on the Company's financial condition or results of operations. However, future
events, such as changes in existing laws and regulations, or unknown
contamination of sites owned, operated or used for waste disposal by the Company
(including contamination caused by prior owners and operators of such sites or
other waste generators) may give rise to additional costs which could have a
material adverse effect on the Company's financial condition or results of
operations.
Prior to the Distribution, Kimberly-Clark was named a potentially
responsible party ("PRP") under the provisions of the U.S. Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), or analogous
state statutes, in connection with two waste disposal sites utilized by the
Company's Spotswood mill and one site used by the Company's former Mt. Holly
Springs, Pennsylvania mill. Prior to the
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Distribution, the Spotswood mill also responded to an information request by the
New Jersey Department of Environmental Protection and Energy with respect to
another landfill site allegedly used by the Spotswood mill. The Company has
assumed Kimberly-Clark's liabilities at each of these sites but does not believe
that any of these proceedings will result in the imposition of monetary
sanctions or have a material adverse effect on the Company's business or
financial condition.
In December 1997, the Company received notification from the Environmental
Protection Agency ("EPA") that, pursuant to CERCLA, it may be named as a PRP in
connection with a 1986 shipment of transformer oil containing polychlorinated
biphenyl ("PCB's") for which the Company's Lee mills had contracted to have
transported to a disposal site by a transporter. The Company expects to be
indemnified by the transporter for any liability connected with such shipment.
The Company also assumed responsibility to administer a consent order
between Kimberly-Clark and the Massachusetts Department of Environmental
Protection ("MDEP") governing the post-closure care of the Willow Hill Landfill
in Lee, Massachusetts. The Company is obligated to maintain the integrity of the
cover and to sample groundwater by means of monitoring wells, in addition to
other long-term maintenance responsibilities for this former non-hazardous waste
disposal facility. Under the terms of a consent order signed on January 24, 1997
with MDEP resulting from a Comprehensive Site Assessment and a Corrective Action
Alternative Assessment ("CAAA") submitted by the Company to MDEP, the Company
had until September 10, 1997 to correct a gas migration problem by means of a
passive gas venting system. Since the passive venting system did not bring the
site into compliance by mid-September 1997, the Company submitted to MDEP a
revised compliance plan which employs an active gas collection system. The
Company expects that the required permits for such system will be issued in the
first quarter of 1998. The Company must activate the system no later than 120
days after issuance of such permits. The estimated total cost of such plan,
including annual operating expenses, is $0.5 million, which amount has been
accrued as of December 31, 1997.
All of the Company's U.S. facilities may be affected by revised air
emissions and wastewater discharge standards under rules commonly known as the
"Cluster Rules". Although the EPA originally indicated that the proposed rules
would be finalized in 1996, final rules have just recently been "issued".
However the final rules have not yet been published. The first phase of the
Cluster Rules would affect only wastewater discharges from the Ancram and Lee
mills and would require compliance within three years after the issuance of the
new rules. The Spotswood mill discharges its effluent to a publicly-owned
treatment works and therefore is not impacted by this first phase of the Cluster
Rules. Capital expenditures for compliance with the first phase of the Cluster
Rules at the Ancram and Lee mills are estimated to be between $4 million and $7
million in the aggregate. However, due to uncertainty concerning applicable
requirements under the final Cluster Rules, the Company can give no assurance
that this estimate will accurately reflect the actual cost of compliance. In
addition, the later phases of the Cluster Rules (and/or Title V of the Clean Air
Act Amendments of 1990) may further regulate air emissions and wastewater
discharges from the Spotswood mill and require the Company to install additional
air pollution controls at its other U.S. facilities sometime after the year
2000. Potential capital expenditures to comply with this subsequent phase of the
Cluster Rules and/or Title V of the Clean Air Act Amendments cannot be estimated
until after the EPA proposes applicable requirements, if any.
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 and Canada, including the aforementioned
Cluster Rules. For these purposes, the Company incurred total capital
expenditures of $2.7 million in 1997, and anticipates that it will incur
approximately $3 million to $5 million annually in 1998 and 1999. The major
projects included in these estimates include upgrading wastewater treatment
facilities at various locations and installation of equipment to treat volatile
organic compound emissions in France. Approximately $2 million of the total
environmental capital spending estimates for 1998 and 1999 relate to projects
anticipated as necessary to comply with the wastewater discharge requirements of
the initial phase of the Cluster Rules. The balance of expenditures required for
compliance with the initial phase of the Cluster Rules is expected to occur in
2000. 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 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the executive officers of the Company as of February
26, 1998, together with certain biographical information, are as follows:
NAME POSITION
---- --------
Wayne H. Deitrich................................ Chief Executive Officer
Jean-Pierre Le Hetet............................. President -- French Operations
N. Daniel Whitfield.............................. President -- U.S. Operations
Luiz Jose de Saboia e Silva...................... President -- Brazilian Operations
Paul C. Roberts.................................. Chief Financial Officer and Treasurer
William J. Sharkey............................... General Counsel and Secretary
Wayne L. Grunewald............................... Controller
MR. WAYNE H. DEITRICH, 54, has served as Chief Executive Officer of the
Company since August 1995 and was elected Chairman of the Board of Directors
immediately after the spin-off of the Company from Kimberly-Clark. 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, 54, has served as President -- French Operations
of the Company since August 1995 and was elected to the Board of Directors
immediately after the spin-off of the Company from Kimberly-Clark. 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. N. DANIEL WHITFIELD, 50, has served as President -- U.S. Operations of
the Company since August 1995. From May 1995 through August 1995, Mr. Whitfield
served as President -- Specialty Products U.S. of Kimberly-Clark. From 1991
through April 1995, he was Director -- Business Planning and Analysis, Pulp and
Paper Sector of Kimberly-Clark. From 1989 through 1990, Mr. Whitfield was
Director -- Operations Analysis and Control, Household Products Sector of
Kimberly-Clark.
MR. LUIZ JOSE DE SABOIA E SILVA, 55, has served as President -- Brazilian
Operations of the Company since February 2, 1998, the date of the closing of the
Pirahy acquisition. He served as a consultant to the Company effective January
1, 1998 through the closing date. Prior to January 1, 1998, but subsequent to
his retirement from Souza Cruz in March 1995, Mr. Saboia worked on various
production consultant projects with B.A.T. Before his retirement from Souza
Cruz, Mr. Saboia had served as Industrial Director of Souza Cruz from 1991 to
1995, President -- Cigarette Division of Souza Cruz from 1987 to 1991,
Production Director of Souza Cruz from 1983 to 1987 and Production
Director -- B.A.T.-Spain from 1980 to 1983.
MR. PAUL C. ROBERTS, 49, 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. WILLIAM J. SHARKEY, 66, has served as General Counsel and Secretary of
the Company since August 1995. Prior to that time, Mr. Sharkey was Senior
Counsel for Kimberly-Clark.
MR. WAYNE L. GRUNEWALD, 46, 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 traded on the New York Stock
Exchange ("NYSE") under the trading symbol "SWM".
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
As of February 26, 1998, there were 8,487 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 18 to Consolidated
Financial Statements contained in "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA"
appearing in Part II, Item 8 herein is incorporated in this Item 5 by reference.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are qualified in their entirety by
reference to, and should be read in conjunction with, the consolidated financial
statements of the Company and the notes thereto included elsewhere in this
Annual Report. The financial statement data as of and for the years ended
December 31, 1997 and 1996 and the balance sheet data as of December 31, 1995
are on a consolidated basis. The income statement data for the year ended
December 31, 1995 has been derived from historical combined financial statements
for the eleven months ended November 30, 1995, and the consolidated results of
the Company for the one month ended December 31, 1995, which have been audited
by Deloitte & Touche LLP, independent auditors. The income statement data for
the years ended December 31, 1994 and 1993 and balance sheet data as of December
31, 1994 and 1993 have been derived from historical combined financial
statements audited by Deloitte & Touche LLP. The historical combined financial
statements of SWM and predecessors do not reflect the results of operations or
financial position that would have been obtained had SWM been a separate,
independent company and are not indicative of SWM's future performance as a
separate, independent company.
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Income Statement Data:
Net Sales.................................... $460.6 $471.3 $462.9 $404.2 $376.2
Gross Profit................................. 121.9 114.2 101.2 92.1 89.0
Operating Profit............................. 81.9 74.0 58.7 58.7 57.8
Interest income (expense) from affiliates,
net(1).................................... -- -- 3.3 5.1 6.1
Net Income................................... 45.3 38.7 36.8 35.1 31.9
Per Share Basis
Net Income:
Basic..................................... $ 2.82 $ 2.41
Diluted................................... $ 2.77 $ 2.38
Unaudited Pro Forma Net Income --
Basic and Diluted(2)...................... 1.81 1.66
Cash Dividends Declared and Paid............. .60 .45
Cash Flow and Balance Sheet Data:
Capital Spending............................. $ 35.8 $ 51.5 $ 22.5 $ 16.8 $ 30.0
Depreciation................................. 14.4 13.4 13.4 11.7 10.3
Cash Provided By Operations.................. 67.3 90.4 64.9 53.7 55.5
Receivables from affiliated
companies(1)(3)........................... -- -- -- 210.1 161.1
Payables to affiliated companies(1).......... -- -- -- 157.9 128.2
Total Assets(3).............................. 391.0 380.6 347.0 527.3 436.6
Long-Term Debt(3)............................ 80.8 86.6 91.6 13.4 13.2
Equity(3).................................... 179.5 156.0 129.9 245.1 196.9
- ---------------
(1) Receivables and payables with affiliates and related interest income and
expense with affiliates reflect financing activities related to other
operations of Kimberly-Clark and certain of its affiliates, primarily in
France, up to November 30, 1995, the date of the spin-off, at which time the
Company became a separate independent company. See Note 1 of the Notes to
Consolidated Financial Statements.
(2) See Note 2 of the Notes to Consolidated Financial Statements.
(3) On July 27, 1995, the stockholders of Schweitzer-Mauduit France S.A.R.L., a
wholly-owned subsidiary of Kimberly-Clark, approved the conversion of $65.0
million of receivables due from an affiliated company to an equity
investment. Such affiliated company was merged with another Kimberly-Clark
wholly-owned consumer and service products subsidiary, and the shares of the
merged entity were distributed to Kimberly-Clark prior to the Distribution.
Balances at December 31, 1995, reflect this transaction as a reduction of
receivables and deduction from owners' equity. Additionally, various
payments were made to and debt was assumed from Kimberly-Clark in connection
with the Distribution, totaling $89.2 million, that also reduced the amount
of equity. See Notes 1 and 5 of the Notes to Consolidated Financial
Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN BACKGROUND INFORMATION
Schweitzer-Mauduit International, Inc. was incorporated on August 21, 1995
as a wholly-owned subsidiary of Kimberly-Clark Corporation for the purpose of
effectuating the tax-free spin-off of Kimberly-Clark's U.S., French and Canadian
business operations that manufacture and sell tobacco-related papers and other
specialty paper products. Through the November 30, 1995 Distribution date, the
Businesses in the U.S. and Canada were conducted as operating divisions of
Kimberly-Clark and one of its Canadian subsidiaries, respectively. The
Businesses in France were conducted by LTRI, a 72 percent-owned subsidiary of
Kimberly-Clark, and two indirect wholly-owned Kimberly-Clark subsidiaries, PdM
and PdMal. These latter two companies are owned by SMF, previously named
Kimberly-Clark France S.A.R.L., which prior to the Distribution was a
wholly-owned subsidiary of Kimberly-Clark.
Two Kimberly-Clark consumer and service products ("C&S") businesses located
in France, which were unrelated to the Company and the Businesses, were also
subsidiaries of SMF's predecessor. The French C&S subsidiaries were merged
together and the shares of the merged entity were distributed to Kimberly-Clark
prior to the Distribution. SMF, however, remained part of the Company in order
to permit PdM and PdMal to utilize substantial net operating loss carryforwards
previously generated by the French C&S operations.
The French C&S businesses were operated and managed independently of the
Businesses, with totally separate facilities, no common sales forces or
purchasing functions, no substantive intercompany transactions (except in the
ordinary course of managing Kimberly-Clark's intercompany financing activities)
and no other commonalities. Accordingly, the French C&S operations have been
excluded from the consolidated financial statements of the Company included
herein and from the following discussion of results of operations.
Management believes that the following commentary and tables appropriately
discuss and analyze the comparative results of operations and the financial
condition of the Company for the periods covered.
OVERVIEW
The Company operates principally in one industry segment, which consists of
papers used in the tobacco industry and reconstituted tobacco products. The
Company's non-tobacco industry products represented six percent of the Company's
net sales in 1997.
Interest expense, interest income and other nonoperating expenses reported
for the periods prior to the Distribution relate primarily to financing
activities associated with the French C&S operations. See Note 10 of the Notes
to Consolidated Financial Statements.
For purposes of the geographic disclosure in the following tables, the term
"United States" includes operations in the U.S. and Canada. The Canadian
operations exist solely to produce flax fiber used as raw material in the U.S.
operations and have no material effect on such geographic disclosure.
Adjustments to net sales set forth in the following tables consist of
eliminations of intercompany sales of products between geographic areas.
Adjustments to operating profit consist of unallocated overhead expenses not
associated with geographic areas and eliminations of intercompany transactions.
This section should be read in conjunction with the Company's consolidated
financial statements included herein.
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RESULTS OF OPERATIONS
1997 Compared to 1996
By Geography for the Years Ended December 31, 1997 and 1996
(U.S. $ in millions)
% OF CONSOLIDATED
% CHANGE ------------------
NET SALES 1997 1996 VS. 1996 1997 1996
- --------- ------ ------ -------- ------- -------
United States................................ $195.5 $212.3 -7.9% 42.4% 45.0%
Outside United States........................ 268.8 263.5 +2.0 58.4 55.9
Eliminations................................. (3.7) (4.5) (0.8) (0.9)
------ ------ ----- -----
Consolidated....................... $460.6 $471.3 -2.3% 100.0% 100.0%
====== ====== ===== =====
% RETURN
% OF CONSOLIDATED ON SALES
% CHANGE ------------------ ------------
OPERATING PROFIT 1997 1996 VS. 1996 1997 1996 1997 1996
- ---------------- ----- ----- -------- ------- ------- ---- ----
United States..................... $21.2 $23.7 -10.5% 25.9% 32.0% 10.8% 11.2%
Outside United States............. 66.4 55.5 +19.6 81.1 75.0 24.7 21.1
Unallocated/Eliminations.......... (5.7) (5.2) (7.0) (7.0)
----- ----- ----- -----
Consolidated............ $81.9 $74.0 +10.7% 100.0% 100.0% 17.8% 15.7%
===== ===== ===== =====
Net Sales
Net sales decreased by $10.7 million due primarily to unfavorable changes
in currency exchange rates, which decreased net sales by $26.4 million. Exiting
the U.S. RTL product line in early 1996 (see "Restructuring Charge" in the
following discussion related to the "Results of Operations -- 1996 Compared to
1995" below) had an unfavorable effect of $2.9 million on the net sales
comparison. Without these two unfavorable effects, net sales in 1997 would have
increased by $18.6 million or four percent. Worldwide sales volumes increased by
three percent, adding $8.7 million to net sales. Excluding RTL volumes in the
U.S. in the first quarter of 1996, worldwide sales volumes increased by four
percent. Sales volumes increased in every major product line in France, with
total volumes from the French businesses up 14 percent for the year. Excluding
RTL volumes in the U.S. in the first quarter of 1996, sales volumes declined at
the U.S. business unit by eight percent primarily as a result of lower domestic
shipments, relating to a reduction in the export of cigarettes by U.S. cigarette
manufacturers, and changes in the Company's internal sourcing of selected
customers from the U.S. to France. Changes in average worldwide selling prices
and sales mix had a favorable effect of $7.0 million for the year. Average
selling prices increased in the U.S. compared to the prior year as a result of
an improved mix of products, offsetting contractual price reductions related to
a decline in the per ton cost of wood pulp. Average worldwide selling prices
increased in France compared to the prior year because of an improved mix of
products, offsetting slight price decreases on certain products.
Operating Profit
Operating profit improved by $7.9 million for 1997 compared to 1996. The
improvement was primarily a result of the increased French sales volumes,
improved sales mix, better mill operations and a decline in per ton wood pulp
costs. Decreases in per ton wood pulp costs favorably impacted operating profit
by $4.2 million compared to the prior year. Non-manufacturing expenses were $0.2
million less than in 1996.
The above favorable effects for the year were partially offset by lower
U.S. sales volumes, non-recurring U.S. manufacturing costs in 1997 and changes
in currency exchange rates. During the fourth quarter of 1997, U.S. operating
profit decreased by approximately $1.8 million from reduced operating schedules
to reduce inventories. In addition, $0.7 million in start-up costs were incurred
to restart operation of the U.S. RTL production line in support of the increased
French sales volumes. Changes in currency exchange rates had an unfavorable
impact of $2.4 million on the operating profit change.
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1996 Compared to 1995
By Geography for the Years Ended December 31, 1996 and 1995
(U.S. $ in millions)
% OF CONSOLIDATED
% CHANGE ------------------
NET SALES 1996 1995 VS. 1995 1996 1995
- --------- ------ ------ -------- ------- -------
United States.................................. $212.3 $219.9 -3.5% 45.0% 47.5%
Outside United States.......................... 263.5 251.7 +4.7 55.9 54.4
Eliminations................................... (4.5) (8.7) (0.9) (1.9)
------ ------ ------- -------
Consolidated......................... $471.3 $462.9 +1.8% 100.0% 100.0%
====== ====== ======= =======
% RETURN
% OF CONSOLIDATED ON SALES
% CHANGE ------------------ ------------
OPERATING PROFIT 1996 1995 VS. 1995 1996 1995 1996 1995
- ---------------- ----- ----- -------- ------- ------- ---- ----
United States......................... $23.7 $16.1 +47.2% 32.0% 27.4% 11.2% 7.3%
Outside United States................. 55.5 44.3 +25.3 75.0 75.5 21.1 17.6
Unallocated/Eliminations.............. (5.2) (1.7) (7.0) (2.9)
----- ----- ------- -------
Consolidated................ $74.0 $58.7 +26.1% 100.0% 100.0% 15.7% 12.7%
===== ===== ======= =======
Net Sales
Net sales increased by $8.4 million due primarily to changes in sales
volumes. However, 1996 net sales were unfavorably affected by exiting the RTL
product line in the U.S. at the beginning of the second quarter of 1996 ($10.4
million). Excluding the U.S. RTL product line, sales volumes increased in every
major product line and worldwide sales volumes increased by seven percent,
thereby adding $24.7 million to net sales. Excluding RTL volumes in the U.S.,
sales volumes improved at the U.S. business unit by six percent, with volumes
from the French businesses up seven percent for the year. Changes in currency
exchange rates decreased net sales by $4.7 million. Additionally, changes in
average worldwide selling prices and sales mix had an unfavorable effect of $1.2
million for the year. Average selling prices declined in the U.S. compared to
the prior year primarily because of contractual price reductions related to a
decline in the per ton cost of wood pulp. Average worldwide selling prices
increased for most major product lines produced in France compared to the prior
year because of price increases implemented in late 1995 and the early part of
1996.
Operating Profit
Operating profit improved by $15.3 million for 1996 compared to 1995. The
improvement was primarily a result of the increased worldwide sales volumes in
product lines other than RTL in the U.S., higher selling prices in France, a
decline in per ton wood pulp costs and a one-time $7.3 million restructuring
charge taken in 1995 (see "Restructuring Charge" below). Decreases in per ton
wood pulp costs favorably impacted operating profit by $16.2 million compared to
the prior year.
The above favorable effects for the year were partially offset by lower
selling prices in the U.S. and higher research and general expenses. Research
expenses were higher primarily because of differences in the amount of machine
time and other trial costs shared with customers. General expenses increased due
to additional administrative costs incurred to operate as an independent
company. These stand-alone costs are primarily reflected in the above table as
Unallocated expenses. Changes in currency exchange rates had a nominal impact on
the operating profit change.
Restructuring Charge
In December 1995, the Company decided to exit the RTL product line in the
U.S. The Company's decision was driven by the loss of its two largest RTL
customers in the U.S., which represented 85 percent of the U.S. RTL revenues.
One of the customers elected to utilize available internal RTL capacity obtained
19
20
through an acquisition. Due to the other customer's concern over the Company's
loss of this RTL volume, the other of its two largest customers decided to phase
out its RTL purchases from the Company. A pre-tax charge of $5.9 million and an
associated reserve were recorded in 1995 to exit the U.S. RTL product line, of
which $4.7 million was utilized for a 1996 non-cash write-down of assets related
to the manufacture of this product in the U.S. Annual net sales were reduced by
$13.3 million ($10.4 million reduction in 1996 and $2.9 million reduction in
1997).
The Company also restructured its manufacturing facility at Malaucene,
France. This restructuring streamlined operations, improved productivity,
reduced manufacturing costs and increased sales volumes. A pre-tax charge of
$1.4 million and an associated reserve were recorded in 1995 to implement this
restructuring program, which was fully in place by mid-1996. Annual pre-tax
savings as a result of this restructuring program are approximately $2.0
million.
The Company incurred all costs associated with these restructuring plans
during 1996, and the associated reserves were closed out.
NON-OPERATING EXPENSES
Interest expense in 1997 and 1996 was primarily associated with debt
incurred in connection with the Distribution (see "Liquidity and Capital
Resources"). The decline in interest expense in 1997 as compared to 1996 was
primarily due to lower interest rates in France, currency translation rate
changes and a lower average amount of debt outstanding. The weighted average
effective interest rate on the Company's term loans decreased from approximately
5.2 percent in 1996 to approximately 4.7 percent in 1997. Prior to the
Distribution, overall net interest income principally resulted from the
Company's financing activities in connection with the Kimberly-Clark European
cash management program (see Note 10 of the Notes to Consolidated Financial
Statements). Other income, net in 1997 and 1996 consisted primarily of interest
income from investment of cash generated by operations of the Company.
INCOME TAXES
The noncurrent deferred income tax asset is principally due to the
previously mentioned net operating loss carryforwards incurred through December
31, 1994 by the C&S operations in France. Under French tax law, these net
operating losses were retained by SMF. The SMF consolidated tax group in France
has not paid income taxes, except nominal amounts of minimum required income
taxes, in the periods presented in the financial statements and is not expected
to pay normal income taxes until the net operating loss carryforwards have been
fully utilized. Additional information concerning these net operating loss
carryforwards is disclosed in Note 6 to the Consolidated Financial Statements.
The effective tax rates for the years ended December 31, 1997, 1996 and
1995 were 36.0 percent, 37.2 percent and 30.1 percent, respectively.
The provision for income taxes in 1997 was impacted by an increase in the
effective statutory income tax rate enacted in France during November 1997 from
36.67 percent to 41.67 percent for 1997 and 1998, retroactive to January 1,
1997, and to 40.00 percent for 1999. The unfavorable effect on current taxes of
the tax rate increase, including a retroactive adjustment for the eleven-month
period ended November 30, 1997, was offset by the favorable effect on the
deferred provision for income taxes due to the increased value of the tax
benefits to be recognized from the net operating loss carryforwards retained by
SMF estimated to be realized during 1997, 1998 and 1999, the periods of the
higher income tax rates. The impact in 1997 attributable to deferred tax assets,
net of liabilities, was a favorable $2.0 million on the deferred provision for
income taxes. Also impacting the 1997 provision for income taxes was the
enactment in France during December 1997 of a law that eliminated taxation of a
"provision for the fluctuating value of raw materials" that had been included in
French deferred taxes. Cancellation of this deferred tax liability reduced the
provision for income taxes by $2.1 million, which was partially offset by
establishment of a $1.0 million reserve for a previously reported tax claim in
France.
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The provision for income taxes was higher in 1996 and lower in 1995
primarily due to an increase in the effective statutory income tax rate enacted
in France during July 1995 from 33.33 percent to 36.67 percent, retroactive to
January 1, 1995. The net effect of the tax rate increase was favorable for 1995
because it increased the value of the tax benefits to be recognized from the net
operating loss carryforwards retained by SMF. The impact in 1995 attributable to
deferred tax assets, net of liabilities, was a favorable $4.5 million on the
deferred provision for income taxes, partially offset by an unfavorable impact
on the current provision for income taxes of $1.3 million, including a
retroactive adjustment for the six-month period ended June 30, 1995.
Along with numerous other companies and banks in France, PdM is subject to
a tax claim with respect to its purchase of certain bonds in 1988 which were
represented by the two selling banks as carrying specific tax benefits. A $1.0
million reserve was established during 1997 for this tax claim. See additional
information concerning this claim in Note 6 to the Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations, that portion attributable to changes in
operating working capital, and the amount of cash used for capital spending and
capitalized software costs for the years ended December 31, 1997, 1996 and 1995
were as follows:
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------ ------
(U.S. $ IN MILLIONS)
Net cash provided by operations............................. $ 67.3 $90.4 $64.9
Decrease (increase) in operating working capital............ (10.8) 18.5 10.4
Capital spending............................................ 35.8 51.5 22.5
Capitalized software costs.................................. 7.6 2.7 --
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 1997, changes
in operating working capital contributed unfavorably to cash flow by $10.8
million due principally to lower accounts payable. Accounts payable were lower
in 1997 compared to 1996 as a result of payments in early 1997 for several large
capital and purchased software costs included in accounts payable at December
31, 1996. During 1997, the cash flow impact of lower accounts receivable, due to
the timing of collections, offset the impact of higher inventory levels. In
1996, changes in operating working capital contributed favorably to cash flow by
$18.5 million primarily due to decreases in inventories as a result of lower
inventory levels and lower per ton wood pulp costs, decreases in accounts
receivable due to the timing of collections, and increases in accounts payable
primarily for several large capital expenditures included in accounts payable at
December 31, 1996. In 1995, changes in operating working capital contributed
favorably to cash flow by $10.4 million due principally to increases in accrued
expenses and accounts payable primarily associated with the establishment of a
restructuring reserve, spin-off related activities settled after the 1995
year-end, higher raw material purchase costs and increased capital expenditures,
partially offset by increases in inventories from reduced December 1995 sales
and higher raw material costs, and in accounts receivable.
Cash flow from operations during these periods exceeded the level of
capital spending. Capital spending for 1997 and 1996 were higher than the
historical level of 1995 as the Company upgraded equipment to enhance capacity
and efficiency at its U.S. and French mills. Capital spending in 1997 included
(i) $3.6 million to complete the new $23 million long fiber paper machine in
France, (ii) $2.9 million at the Ancram mill toward upgrading the forming
section of a long fiber paper machine, (iii) $2.3 million for equipment
necessary to restart operation of the RTL production line at the Spotswood mill,
(iv) $1.5 million toward an effluent biological treatment station at the
Quimperle, France mill, (v) $1.0 million to complete upgrading the flax pulping
operations at the Spotswood mill, and (vi) $1.0 million toward a paper machine
upgrade project at the Spotswood mill. Capital spending in 1996 included (i)
$18.8 million for the new long fiber paper machine in France, (ii) $3.6 million
at the Quimperle, France mill for the production reorganization project, (iii)
$3.4 million to complete the installation of new high-speed cigarette paper
converting equipment at the
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Spotswood mill, (iv) $2.7 million toward upgrading the flax pulping operations
at the Spotswood mill, and (v) $2.1 million to furnish the Company's newly
leased corporate and U.S. business unit headquarters and U.S. research
facilities. Capital spending in 1995 included (i) $2.5 million toward
installation of new high-speed cigarette paper converting equipment at the
Spotswood mill, (ii) $1.7 million for upgrades to a tipping paper machine at the
Lee mills, (iii) $0.6 million of initial spending for the mill production
reorganization project at Quimperle, and (iv) $0.5 million toward the new paper
machine in France.
The Company's ongoing requirements for cash consist principally of amounts
required for capital expenditures, stockholder dividends and working capital.
The Company has declared and paid quarterly dividends, each amounting to $2.4
million ($0.15 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 14 of the Notes to
Consolidated Financial Statements), as of December 31, 1997 the Company had
unrecorded outstanding commitments for capital expenditures of approximately
$4.9 million. In addition to capital spending, the Company is incurring software
development costs related to a new company-wide integrated computer system that
replaced in the U.S. the formerly used Kimberly-Clark systems beginning January
1998. The portion of software development costs which were capitalized totaled
$7.6 million in 1997 and, together with $2.7 million capitalized in 1996, were
deferred on the balance sheet until such systems are placed in service (see Note
3 of the Notes to Consolidated Financial Statements). In the U.S., where the
largest portion of the costs to-date have been incurred, most of the deferred
costs will begin amortizing at the beginning of 1998 over a period of seven
years using the straight-line method. The Company will continue to incur costs
in France and, to a much lesser degree, in the U.S. in 1998 and 1999 as software
modules are designed and installed.
As discussed in greater detail in Note 5 of the Notes to Consolidated
Financial Statements, the Company and its subsidiaries, SMF and PdM Industries,
entered into a "Credit Agreement" dated November 27, 1995 which provides for
term and revolving credit loans then totaling approximately $75 million and $40
million, respectively. On the Distribution date, the Company assumed $25 million
of Kimberly-Clark debt, which it repaid with borrowings of the full amount under
the U.S. term loan facility. Immediately prior to the Distribution, SMF made a
cash payment to Kimberly-Clark of approximately $56 million, principally
financed by borrowings of the full amount (approximately $50 million) by SMF
under the French term loan facility. Additionally, in connection with the
Distribution (i) SMF also retained $10.8 million of debt related to other
Kimberly-Clark businesses, and (ii) LTRI paid an $8.2 million cash dividend to
Kimberly-Clark.
On February 2, 1998, SM-Spain, the Company's wholly-owned subsidiary,
established in 1997 under the Spanish holding company regime, paid approximately
$62.0 million in cash for 99.97 percent ownership interest in Pirahy , a
specialty paper manufacturer located near Rio de Janeiro, Brazil. In connection
with the acquisition of Pirahy, the Company modified its existing Credit
Agreement in order to ensure sufficient funds for the transaction and to retain
availability of funds sufficient to meet its ongoing cash requirements. The
terms of the amended and restated Credit Agreement entered into on January 30,
1998 are substantially the same as in the prior Credit Agreement, except that it
(i) provides an additional $20.0 million term loan to SM-Spain, (ii) extends the
maturities of the term loan facilities by approximately two years, and (iii)
extends the expiration date of the revolving credit facilities to January 29,
1999. SM-Spain borrowed the remaining funds for the transaction from SMF, which
in turn utilized its existing cash balances and borrowings from its revolving
credit facilities.
Additionally, on February 11, 1998, SM-Enterprises, a wholly-owned
subsidiary of SMF, paid approximately $6.1 million for all of the outstanding
shares of Ingefico, S.A. and 97.1 percent of the outstanding shares of its pulp
and specialty paper manufacturing subsidiaries, Groupe SAPAM and Papeteries de
la Moulasse, located in St. Girons in the southwestern part of France. Total net
debt of approximately $5.8 million was also retained by the acquired companies.
This acquisition, while important to the strategic growth of the Company and its
ability to meet the demands of its customers, is not considered material to the
consolidated financial statements.
The Company believes its cash flow from operations, together with
borrowings still available under its revolving credit facilities, will be
sufficient to fund its ongoing cash requirements.
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NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
statements, Statement of Financial Accounting Standard ("SFAS") No. 130,
"Reporting of Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which will both be effective
for the Company's 1998 Annual Report to Stockholders. These two new statements
will affect the Company's financial statement disclosures. The Company is
evaluating how to implement these new disclosure requirements.
OUTLOOK
During 1998, the Company expects to benefit from continued growth in sales
volumes outside the U.S., reflecting increased demand for the Company's
products, and from cost savings as a result of recently implemented capital
projects. However, the higher corporate income tax rate in France is expected to
negatively impact 1998 earnings by $.15 to $.20 per share compared with 1997.
Amortization of capitalized software costs related to the new integrated
computer systems in the U.S. will begin and is expected to reduce earnings by
approximately $.05 per share in 1998 compared to 1997. Additionally, operating
expenses for the new computer network in the U.S. over and above the amount
previously paid to Kimberly-Clark for utilization of its systems are expected to
have an unfavorable effect of approximately $.07 per share in 1998 compared to
1997. Start-up costs in the first quarter of 1998 related to the new U.S.
computer systems will further reduce earnings by approximately $.04 per share.
The Company will be integrating the Brazilian and French acquisitions,
which occurred in February 1998, into SWM during 1998 but does not expect either
to begin contributing positively to earnings until 1999. Also, the direction of
the U.S. cigarette market remains unclear at this time, given the potential
tobacco settlement legislation, the effect of lower exports of cigarettes by the
Company's customers in the U.S. and the continuing adverse publicity for the
tobacco industry.
The per ton cost of wood pulp was relatively stable throughout 1997, but
the wood pulp market is weakening entering 1998. The Company does not expect
significant increases or decreases in the per ton cost of wood pulp during 1998
although per ton wood pulp costs may be somewhat lower during the first six
months of the year. The Company expects to continue incurring due diligence
costs, as it did in 1997, as potential external growth opportunities are
explored. These kinds of costs vary significantly and cannot necessarily be
predicted. In summary, the Company does not anticipate for 1998 the earnings
increases experienced in 1996 and 1997.
The Company expects capital spending for 1998 to be approximately $35 to
$40 million in total. Capital spending for 1998, excluding that of acquired
businesses, is estimated at approximately $30 million, focused primarily on
internal capacity expansion, cost reduction opportunities and upgrades to
environmental treatment facilities (see Note 14 of the Notes to Consolidated
Financial Statements). In addition to capital spending, the Company expects to
incur approximately $4 million of additional capitalized software costs in 1998
in the U.S., France and Canada.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain sections of this report, particularly the foregoing discussion
regarding the "Outlook" of the Company, contain certain forward-looking
statements, generally identified by phrases such as "the Company expects" or
words of similar effect. Forward-looking statements are made based upon
management's expectations and beliefs concerning future events impacting the
Company. There can be no assurances that such events will occur or that the
results of the Company will be as estimated. Many factors outside the control of
the Company also could impact the realization of such estimates. The 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 1998 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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24
Year 2000 Compliance
The Year 2000 compliance issue creates risk for the Company from unforeseen
problems in its own software and hardware systems and from third parties with
whom the Company transacts business around the world. Failure of the Company or
third parties to effectively handle the Year 2000 issue could have a material
impact on the Company's ability to conduct business after December 31, 1999.
Although the aforementioned company-wide integrated corporate information
systems project was initiated as a result of the Company's need to replace the
Kimberly-Clark systems formerly used in the U.S., a benefit of the new systems
is that they provide Year 2000 compliance in the area of corporate information
systems. The Company is in the process of developing a comprehensive plan to
ensure that its manufacturing process systems, administrative systems,
interfaces with vendor and customer systems and other areas will be ready for
the Year 2000. Other than the costs related to the corporate information
systems, management does not expect the costs which the Company will incur to be
Year 2000 compliant to be material to the Company's business, operations or
financial condition.
International Business Risks
The Company's international operations are subject to international
business risks, including unsettled political conditions, expropriation, import
and export restrictions, exchange controls, inflationary economies, currency
risks and risks related to the restrictions of repatriation of earnings or
proceeds from liquidated assets of foreign subsidiaries.
Tax and Repatriation Matters
The Company and its subsidiaries are subject to income tax laws in each of
the countries in which it does business through wholly-owned subsidiaries and
through affiliates. The Company makes a comprehensive review of the income tax
requirements of each of its operations, files appropriate returns and makes
appropriate income tax planning analyses directed toward the minimization of its
income tax obligations in these countries. Appropriate income tax provisions are
determined on an individual subsidiary level and at the corporate level on both
an interim and annual basis. These processes are followed using an appropriate
combination of internal staff at both the subsidiary and corporate levels as
well as independent outside advisors in review of the various tax laws and in
compliance reporting for the various operations.
Dividend distributions are regularly made to the U.S. 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
18 months. Management believes that credit risks with respect to the
counterparties and the foreign currency risks that would not be hedged, were the
counterparties to fail to fulfill their obligations under the contracts, are
minimal in view of the financial strength of the counterparties.
In addition to the effect of changes in currency exchange rates on
operating profit, foreign currency losses have arisen from the remeasurement of
non-local currency denominated monetary assets and liabilities into
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the currency of the country in which the operation is domiciled. These losses,
most of which related to receivables from and payables to affiliated companies
unrelated to the Businesses prior to the spin-off, are included in other income
(expense) net. These receivables from and payables to such affiliated companies
were settled as of the Distribution date.
Additional information concerning foreign currency related matters is
disclosed in Note 11 of the Notes to Consolidated Financial Statements.
Inflation
In recent years, inflation has not had a significant impact on the
Company's cost structure.
Effect of Changing Pulp Costs
Pulp costs tend to be cyclical in nature and are a large component of
product costs. The Company consumed approximately 71,000, 65,000 and 68,000
metric tons of wood pulp in 1997, 1996 and 1995, respectively. During the period
from January 1995 through December 1997, the U.S. list price of the primary pulp
grade used by the Company, northern bleached softwood kraft pulp, ranged from a
low of $520 per metric ton to a high of $970 per metric ton. Generally, over
time, the Company has been able to increase its selling prices in response to
increased pulp costs and has generally reduced them when pulp costs have
significantly declined. The Company may or may not be able to fully recover
future pulp cost increases, or fully retain future pulp cost decreases, in its
sales pricing structure.
Seasonality
Sales of the Company's products are not subject to seasonal fluctuations,
except in the U.S. where customer shutdowns typically occurring in July and
December 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.
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
and water emissions and noise from its mills as well as its disposal of solid
waste generated by its operations. The Company believes it is operating in
compliance with, or is taking action aimed at ensuring compliance with, such
laws and regulations. While the Company has incurred in the past several years,
and will continue to incur, capital and operating expenditures in order to
comply with these laws and regulations, these costs are not expected to
materially affect the Company's business or results of operations. The Company,
or its predecessor, has been named as a potentially responsible party at several
waste disposal sites, none of which, individually, or in the aggregate, in
management's opinion, is likely to have a material adverse effect on the
Company's financial condition, results of operations or liquidity. However,
there can be no assurance that such an effect will not occur at some future
time. Additional information concerning environmental matters is disclosed in
Note 14 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 13 of the
Notes to Consolidated Financial Statements and in Part I, Item 3 "LEGAL
PROCEEDINGS" herein. In addition, the Company is involved in legal actions and
claims arising in the ordinary course of business. Management believes that such
actions and claims will be resolved without a material effect on the Company's
financial statements.
Reliance on Significant Customers
Most of the Company's customers are manufacturers of tobacco products
located in 88 countries around the world. One such customer has accounted for a
significant portion of the Company's net sales in each of the
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last several years, and the loss of such customer, or a significant reduction in
that customer's purchases, could, at least temporarily, have a material adverse
effect on the Company's results of operations. See Note 17 of the Notes to
Consolidated Financial Statements.
Tobacco Products and Governmental Actions
In recent years, governmental entities, particularly in the U.S., 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 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. The
possibility of a legislative settlement of such litigation in the United States
may affect demand for the Company's products. 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. Nor is it possible to
predict what additional legislation or regulations relating to tobacco products
will be enacted, or to what extent, if any, such legislation or regulations
might affect the consumer tobacco products industry in general.
Approximately 94 percent of the Company's net sales are from products used
by the tobacco industry in the making 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.
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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, 1997, 1996 and 1995...................... 29
Consolidated Balance Sheets as of December 31, 1997 and
1996.................................................. 30
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995................ 31
Notes to Consolidated Financial Statements............. 32
Report of Independent Auditors.............................. 58
Management's Responsibility for Financial Reporting......... 59
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.
27
28
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28
29
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
---------- ---------- ----------
(U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net Sales................................................ $460.6 $471.3 $462.9
Cost of products sold.................................. 338.7 357.1 361.7
------ ------ ------
Gross Profit............................................. 121.9 114.2 101.2
Selling expense........................................ 17.4 18.2 17.4
Research expense....................................... 6.4 6.0 4.5
General expense........................................ 16.2 16.0 13.3
Restructuring charge................................... -- -- 7.3
------ ------ ------
Operating Profit......................................... 81.9 74.0 58.7
Interest expense....................................... (4.1) (5.3) (3.1)
Interest expense to affiliated companies............... -- -- (10.4)
Interest income from affiliated companies.............. -- -- 13.7
Other income (expense), net............................ 1.6 1.2 (0.4)
------ ------ ------
Income Before Income Taxes and Minority Interest......... 79.4 69.9 58.5
Provision for income taxes............................. 28.6 26.0 17.6
------ ------ ------
Income Before Minority Interest.......................... 50.8 43.9 40.9
Minority interest in earnings of subsidiary............ 5.5 5.2 4.1
------ ------ ------
Net Income............................................... $ 45.3 $ 38.7 $ 36.8
====== ====== ======
Net Income Per Common Share:
Basic.................................................. $ 2.82 $ 2.41
====== ======
Diluted................................................ $ 2.77 $ 2.38
====== ======
Unaudited Pro Forma -- Basic and Diluted (See Note
2).................................................. $ 1.81
======
See Notes to Consolidated Financial Statements
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30
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
--------------------
1997 1996
------- -------
(U.S. $ IN MILLIONS)
ASSETS
Current Assets
Cash and cash equivalents................................. $ 37.2 $ 30.9
Accounts receivable....................................... 57.0 65.1
Inventories............................................... 56.3 49.2
Deferred income tax benefits.............................. 3.3 3.3
Prepaid expenses.......................................... 3.8 2.1
------ ------
Total Current Assets.............................. 157.6 150.6
------ ------
Property
Land and improvements..................................... 5.9 5.4
Buildings and improvements................................ 45.6 42.2
Machinery and equipment................................... 296.1 272.0
Construction in progress.................................. 22.4 41.4
------ ------
Gross Property......................................... 370.0 361.0
Less accumulated depreciation............................. 168.9 166.8
------ ------
Net Property...................................... 201.1 194.2
------ ------
Noncurrent Deferred Income Tax Benefits..................... 18.4 30.2
------ ------
Deferred Charges and Other Assets........................... 13.9 5.6
------ ------
Total Assets................................................ $391.0 $380.6
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt......................... $ 2.5 $ 2.9
Other short-term debt..................................... 0.5 1.3
Accounts payable.......................................... 43.4 54.5
Accrued expenses.......................................... 43.0 42.5
Income taxes payable...................................... 1.1 0.6
------ ------
Total Current Liabilities......................... 90.5 101.8
------ ------
Long-Term Debt.............................................. 80.8 86.6
------ ------
Deferred Income Taxes....................................... 11.2 9.5
------ ------
Other Noncurrent Liabilities................................ 21.9 19.7
------ ------
Minority Interest........................................... 7.1 7.0
------ ------
Contingencies (See Notes 6, 13 and 14)
Stockholders' Equity
Preferred Stock -- $.10 par value -- 10,000,000 shares
authorized, none issued................................ -- --
Common Stock -- $.10 par value -- 100,000,000 shares
authorized, 16,065,443 and 16,052,621 shares issued and
outstanding at December 31, 1997 and 1996,
respectively........................................... 1.6 1.6
Additional paid-in capital................................ 60.3 60.0
Retained earnings......................................... 113.5 77.8
Unrealized currency translation adjustments............... 4.1 16.6
------ ------
Total Stockholders' Equity........................ 179.5 156.0
------ ------
Total Liabilities and Stockholders' Equity.................. $391.0 $380.6
====== ======
See Notes to Consolidated Financial Statements
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31
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
(U.S. $ IN MILLIONS)
Operations
Net income................................................ $ 45.3 $ 38.7 $ 36.8
Depreciation.............................................. 14.4 13.4 13.4
Deferred income tax provision (benefit)................... 9.9 8.6 (0.1)
Minority interest in earnings of subsidiary............... 5.5 5.2 4.1
Non-cash utilization of restructuring reserve............. -- 4.7 --
Other..................................................... 3.0 1.3 0.3
Changes in operating working capital:
Accounts receivable.................................... 8.1 4.4 (5.1)
Inventories............................................ (7.1) 6.8 (7.9)
Accounts payable....................................... (11.1) 10.2 8.5
Accrued expenses....................................... 0.5 (1.1) 12.2
Prepaid expenses....................................... (1.7) (1.1) 1.4
Income taxes payable................................... 0.5 (0.7) 1.3
------ ------ ------
Net changes in operating working capital............. (10.8) 18.5 10.4
------ ------ ------
Cash Provided by Operations....................... 67.3 90.4 64.9
------ ------ ------
Investing
Capital spending.......................................... (35.8) (51.5) (22.5)
Capitalized software costs................................ (7.6) (2.7) --
Advances to affiliates.................................... -- -- (2.5)
Other..................................................... (4.7) (1.7) 3.6
------ ------ ------
Cash Used for Investing........................... (48.1) (55.9) (21.4)
------ ------ ------
Financing
Cash dividends paid to SWM stockholders................... (9.6) (7.2) --
Cash dividends paid to minority owner..................... (4.5) (0.9) (7.2)
Cash dividends paid to affiliates......................... -- -- (18.5)
Return of capital......................................... -- -- (56.0)
Changes in receivables from affiliates.................... -- -- 144.7
Changes in short-term debt................................ (0.8) (1.2) 1.8
Changes in debt payable to affiliates within one year..... -- -- (155.7)
Proceeds from issuances of long-term debt................. 5.6 5.4 81.4
Payments on long-term debt................................ (3.9) (5.6) (28.7)
Issuance of capital stock................................. 0.3 -- --
------ ------ ------
Cash Used for Financing........................... (12.9) (9.5) (38.2)
------ ------ ------
Increase in Cash and Cash Equivalents....................... 6.3 25.0 5.3
Cash and Cash Equivalents at beginning of year.............. 30.9 5.9 0.6
------ ------ ------
Cash and Cash Equivalents at end of year.................... $ 37.2 $ 30.9 $ 5.9
====== ====== ======
See Notes to Consolidated Financial Statements
31
32
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. $ IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NOTE 1. BACKGROUND
In April 1995, the Board of Directors of Kimberly-Clark Corporation
("Kimberly-Clark") approved a plan providing for a distribution (the
"Distribution") to its stockholders through a tax-free spin-off of its U.S.,
French and Canadian business operations that manufacture and sell
tobacco-related papers and other specialty paper products (the "Businesses").
In order to effectuate the spin-off of the Businesses, on August 21, 1995
and July 31, 1995, respectively, Schweitzer-Mauduit International, Inc. ("SWM")
and Schweitzer-Mauduit Canada, Inc. ("SM-Canada") were incorporated and
nominally capitalized. Prior to the Distribution, Kimberly-Clark transferred to
SWM (the "Transfer") (i) the assets and liabilities of its U.S.-based specialty
products business; (ii) all of the issued and outstanding shares of SM-Canada
and of Schweitzer-Mauduit France, S.A.R.L., (previously named Kimberly-Clark
France S.A.R.L., or "S.A.R.L.") a French corporation ("SMF"); and (iii) 72
percent of the issued and outstanding shares of LTR Industries, S.A., a French
corporation ("LTRI"). After the Transfer, the Company consisted of the operating
assets and liabilities of Kimberly-Clark's U.S. specialty products business and
investments in SM-Canada (100 percent owned), SMF (100 percent owned) and LTRI
(72 percent owned). SMF, directly or indirectly, owns 100 percent of two
principal French operating subsidiaries, Papeteries de Mauduit S.A. ("PdM") and
Papeteries de Malaucene S.A. ("PdMal"), and a French holding company,
Schweitzer-Mauduit Enterprises S.A. ("SM-Enterprises"). The Transfer was
accounted for at historical cost in a manner similar to that in pooling of
interests accounting as the entities were all under common control. (As used
herein, the Company means SWM and/or one or more of its several subsidiaries, as
determined by the context.)
In July 1995, the stockholders of SMF, then a wholly-owned subsidiary of
Kimberly-Clark, approved the conversion of $65.4 of receivables from an
affiliated company to an equity investment in such company. Such affiliated
company was one of two wholly-owned consumer and service products ("C&S")
subsidiaries (unrelated to the tobacco-related and specialty pape