Schweitzer-Mauduit 4th Quarter income Falls
Jan. 26, 2006 - Schweitzer-Mauduit International, Inc. today reported that
fourth quarter 2005 net income was $2.8 million compared with net income of
$10.9 million in the fourth quarter of 2004, a decrease of 74 percent.
Diluted earnings per share were $0.19 compared with diluted earnings per share
of $0.71 in the fourth quarter of 2004, a 73 percent decline.
For full-year 2005, the Company reported net income of $19.4 million, a
decrease of 47 percent compared with net income of $36.4 million in 2004.
Diluted earnings per share for full-year 2005 were $1.26 compared with diluted
earnings per share of $2.36 for full-year 2004, also a 47 percent decline.
Fourth Quarter 2005 Results
Wayne H. Deitrich, Chairman of the Board and Chief Executive Officer,
commented that, "Schweitzer-Mauduit's financial results for the fourth quarter
of 2005 were consistent with our recent earnings guidance but significantly
below the prior-year level. Compared with the prior-year quarter, the
financial results reflected higher purchased energy, purchased materials,
employee labor rates and benefits, lower paper production volumes to control
inventories, unfavorable currency exchange rate impacts in Brazil, increased
interest expense and a higher effective income tax rate. These unfavorable
factors were partially offset by lower nonmanufacturing expenses, somewhat
higher average selling prices, increased sales volumes and lower minority
interest earnings. Throughout 2005, we have been unable to pass inflationary
cost increases on to customers through higher selling prices."
Consolidated net sales were $175.3 million for the quarter compared with
$171.9 million in the same period a year ago, an increase of 2 percent. The
improvement in net sales was the result of somewhat higher average selling
prices, primarily related to the mix of products sold, that improved net sales
by $4.5 million and increased sales volumes that contributed $2.6 million to
net sales. Changes in currency exchange rates had an unfavorable $3.7 million
impact on the net sales comparison as the unfavorable effects of a weaker euro
compared with the U.S. dollar more than offset the impacts of the stronger
Total sales volumes increased by 5 percent for the quarter compared with
the fourth quarter of 2004. Excluding sales of the recently acquired
Philippines operation, sales volumes increased by 3 percent. Sales volumes
for the Brazilian business improved by 30 percent, attributable to increased
sales of tobacco-related and commercial and industrial papers. Sales volumes
for the French segment increased by 2 percent, with increased sales of both
reconstituted tobacco leaf products and tobacco-related papers. Sales volumes
in the United States decreased by 3 percent, with lower sales of commercial
and industrial papers.
Operating profit was $8.3 million for the quarter, a decrease of
$6.5 million, or 44 percent, from the $14.8 million operating profit for the
fourth quarter of 2004.
Inflationary cost increases unfavorably impacted operating results by
$10.1 million in the quarter. Purchased energy costs increased by
$5.8 million compared with the fourth quarter of 2004, with higher costs
experienced in all business units, related to natural gas, fuel oil and
electricity. Inflationary increases for purchased materials other than wood
pulp had an unfavorable impact on the operating results of $3.2 million,
driven largely by increased chemical costs. Higher labor rates increased
manufacturing expenses by $0.6 million during the quarter. Changes in per ton
wood pulp costs increased the Company's operating expenses by $0.5 million
compared with the prior-year quarter. The average per ton list price of
northern bleached softwood kraft pulp in the United States was $640 per metric
ton in the fourth quarter of 2005 compared with $630 per metric ton in the
fourth quarter of 2004.
Reduced paper machine operating schedules, primarily to lower inventory
levels, increased operating expenses during the quarter by $2.1 million
compared with the prior-year quarter, with this unfavorable impact largely in
the French and Brazilian operations.
Operating profit for the French segment totaled $10.6 million in the
quarter, $6.5 million less than in the fourth quarter of 2004. Inflationary
cost increases accounted for $5.3 million of the operating profit decline,
with increased purchased energy, purchased materials and labor expenses. The
operating results were also unfavorably impacted by lower paper production
volumes and lower average selling prices. These unfavorable factors were
partially offset by lower nonmanufacturing expenses and positive exchange rate
impacts related to a weaker euro versus the U.S. dollar.
The U.S. business unit had a $1.1 million operating loss during the
quarter, $0.2 million worse than the prior-year quarter. The benefits of
higher average selling prices, lower research expense, increased paper
production volumes and lack of paper machine start-up costs were more than
offset by increased purchased energy, purchased materials, employee benefits
and labor rates and costs associated with the fourth quarter 2005 shutdown of
the cigarette paper booklets operation. Inflationary cost increases had an
unfavorable $3.9 million impact in the quarter. During the fourth quarter of
2004, start-up costs totaling $1.1 million were incurred related to the
operation of rebuilt paper machines at the Spotswood, New Jersey and Lee,
The Brazilian business unit had a $0.5 million operating loss in the
fourth quarter of 2005, compared with $0.8 million operating profit in the
prior-year quarter, a $1.3 million decline. The stronger Brazilian real
versus the U.S. dollar had an unfavorable currency impact of $1.2 million on
operating profit during the quarter, while inflationary cost increases totaled
$0.9 million, related to increased wood pulp and purchased energy expenses.
Paper machine downtime also had an unfavorable impact on the quarter. These
unfavorable factors were partially offset by increased sales volumes.
Nonmanufacturing expenses were $2.7 million lower than in the prior-year
quarter, primarily due to decreases in general and research expenses. The
general expense decline of $2.0 million primarily reflected lower salaried
employee compensation expenses.
Interest expense was $1.1 million unfavorable compared with the fourth
quarter of 2004, primarily attributable to increased interest rates and a
higher average level of debt outstanding during the quarter.
The effective income tax rate was 37 percent for the quarter compared with
10 percent in the fourth quarter of 2004. The effective income tax rate in
the fourth quarter of 2004 benefited from a decrease in French statutory tax
rates enacted in December 2004 for years beginning in 2005 that reduced the
net deferred income tax liability, the Company's ability to utilize previously
reserved foreign tax credits in the United States and the recovery of prior-
year income taxes in France related to a favorable court ruling. The
effective income tax rate in 2005 reflected higher than expected taxable
losses in the United States and the need to provide valuation allowances
against certain of the resulting U.S. income tax assets.
Minority interest in earnings of subsidiaries decreased by $1.0 million
compared with the prior-year quarter. This decrease reflected lower earnings
at LTR Industries S.A. (LTRI), a French subsidiary of the Company, which has a
minority owner that owns 28 percent of the shares of LTRI.
Full-Year 2005 Results
Net sales totaled $669.8 million for full-year 2005, a $12.3 million, or 2
percent, improvement compared with 2004. Changes in currency exchange rates,
primarily related to the stronger euro and Brazilian real versus the U.S.
dollar, increased net sales by $7.4 million. Increased sales volumes
contributed $2.6 million to net sales and somewhat higher average selling
prices improved net sales by $2.3 million. Total sales volumes increased by 1
percent compared with the prior year. Excluding sales of the recently
acquired Philippines operation, total sales volumes were unchanged from 2004.
Sales volumes for the Brazilian business increased by 12 percent, U.S. sales
volumes increased by 3 percent while sales volumes for the French segment
declined by 2 percent.
Operating profit was $39.3 million for 2005, an $18.4 million, or 32
percent, decrease from $57.7 million in 2004. Operating profit in 2005 was
unfavorably affected by the mix of products sold, lower average selling
prices, unfavorable currency impacts of $3.6 million and increased purchased
energy, wood pulp, purchased materials, employee benefits and labor expenses.
Inflationary cost increases unfavorably impacted operating expenses by
$24.9 million during the year. These negative factors were partially offset
by improved mill operations and $6.4 million of lower nonmanufacturing
expenses. During 2004, $1.2 million of Paris, France office closure expenses
were incurred in addition to $3.7 million of pre-operating and start-up costs
related to rebuilt or new paper machines in the United States, Brazil and
France. Start-up costs totaling $0.8 million were incurred during 2005
related to the start-up of paper manufacturing equipment in Brazil and the
Interest expense was $2.5 million higher during 2005 compared with the
prior year because of increased debt levels and higher interest rates. Other
income was $1.0 million favorable in 2005 compared with 2004 primarily as a
result of foreign currency gains in Brazil and a gain on the sale of property
The effective income tax rate was 29 percent for 2005 compared with 22
percent for 2004. The effective income tax rate in 2004 was favorably
affected by the utilization of foreign tax credits in the United States and
non-recurring tax items in France.
Minority interest in earnings of subsidiaries decreased by $1.2 million
from 2004 because of decreased profitability at LTRI.
Net income for 2005 was $19.4 million, a 47 percent decrease compared with
net income of $36.4 million in 2004. Diluted earnings per share also declined
by 47 percent to $1.26 compared with earnings per share of $2.36 for the prior
Cash Flow Items and Quarterly Dividend
Capital spending was $5.4 million during the fourth quarter of 2005
compared with $12.8 million during the prior-year quarter. For the full year,
capital spending was $18.8 million compared with $46.7 million in 2004.
During 2005, $0.8 million was spent in Brazil to complete installation of
a new cigarette paper machine, with none of this capital spending occurring
during the fourth quarter. During the fourth quarter of 2004, $2.9 million of
capital spending was incurred in Brazil related to the new cigarette paper
machine installation. Capital spending for this machine and for cigarette
paper machine modifications in the United States totaled $13.6 million for
full-year 2004. During the fourth quarter of 2004, $0.5 million was spent
related to the new reconstituted tobacco leaf production line in France, with
$7.2 million spent for the full year. The Company's capital spending is
currently expected to total approximately $20 million in 2006.
During the fourth quarter of 2005, the Company made cash pension
contributions totaling $4.2 million, with pension contributions for the full
year of $13.6 million.
During the fourth quarter, Schweitzer-Mauduit did not repurchase any
shares of its common stock. Future common stock repurchases will be dependent
on various factors, including stock price, strategic opportunities and cash
Schweitzer-Mauduit also announced a quarterly common stock dividend of
$0.15 per share. The dividend will be payable on March 13, 2006 to
stockholders of record on February 13, 2006.
Business Comments and Outlook
Mr. Deitrich added, "Schweitzer-Mauduit's 2005 diluted earnings per share
of $1.26 were within the earnings guidance range of $1.25 to $1.30 provided in
October 2005. This level of earnings was well below the financial results
obtained in 2004, reflecting more challenging market conditions. We were
unable to offset significant inflationary cost increases through improved mill
operations or higher selling prices. The financial results were also
unfavorably impacted by currency exchange rate changes, higher interest
expense and a higher effective income tax rate.
"Inflationary cost increases had an unfavorable impact on full-year 2005
of $24.9 million or $1.05 per share, with purchased energy accounting for
roughly one-half of this amount. The weakened dollar continued to put
pressure on our operating profit, primarily in Brazil, where costs are largely
tied to the local currency while selling prices are typically linked to the
dollar. The Brazilian real remained strong versus the dollar and for the full
year, the unfavorable currency impact on operating profit in Brazil was
$4.1 million or $0.18 per share. The Company's effective income tax rate was
29 percent in 2005 compared with 22 percent in 2004. The prior-year effective
income tax rate benefited from utilization of foreign tax credits in the
United States and other non-recurring tax items in France. The higher
effective income tax rate had a negative impact of $0.16 per share compared
with the prior year. Interest expense was also an unfavorable factor during
2005, increasing by $2.5 million, or $0.11 per share.
"Cost pressures are expected to continue in 2006, reflected in higher
purchased energy, purchased materials, labor and employee benefit expenses. A
portion of these cost increases will be offset through cost reduction efforts
in our operations and through somewhat higher selling prices. The weakened
dollar is expected to continue to put pressure on our profitability in Brazil,
similar to 2005. The Company's effective income tax rate is expected to be 27
to 29 percent in 2006, approximately at the 2005 level. Interest expense is
expected to be marginally higher in 2006 than in 2005, reflecting higher
average interest rates.
"In addition, continued weakness is expected in Schweitzer-Mauduit's sales
of conventional tobacco-related papers in our French and U.S. operations.
This anticipated weakness in both sales volumes and selling prices is the
result of reduced cigarette consumption, in part due to increased taxes, and a
surplus of cigarette paper manufacturing capacity as a result of capacity
additions by European competitors in 2003 and 2004. As a result of this
market weakness, we will continue to incur paper machine downtime in each of
our business segments. The weakness in tobacco-related paper sales is
expected to be partially offset by increased sales of reconstituted tobacco
"Sales of cigarette papers for lower ignition propensity cigarettes are
expected to contribute positively to operating results in 2006, as momentum
continues to build for these products. Canada implemented a requirement for
lower cigarette ignition propensity properties for all cigarettes manufactured
or imported into Canada on or after October 1, 2005. Accordingly, a full year
of sales of these products in Canada is expected during 2006. In addition,
the State of California enacted legislation that requires lower ignition
propensity cigarettes for all cigarettes sold in California beginning in
January 2007. We expect to begin supporting the California requirements
during the fourth quarter of this year.
"During 2006, we will continue to upgrade, expand and integrate the
operations that we acquired during the past two years in the Philippines and
Indonesia. We will also embark upon the construction of our tobacco-related
papers joint venture mill in China. Governmental approval for the Chinese
joint venture was obtained in late 2005 and we are in the process of
finalizing project financing and obtaining various governmental permits. The
mill is expected to begin operations in early 2008.
"With the current market conditions and inflationary cost increases, it is
difficult to project how successful we will be in improving our operating
margins during 2006. We are pursuing selling price increases and
opportunities for increased sales volumes. We are evaluating how to operate
our production facilities more effectively with reduced tobacco-related papers
volume, while lowering the manufacturing cost of cigarette paper for lower
ignition propensity cigarettes. We are also controlling nonmanufacturing and
operating expenses to partially offset the inflationary cost increases. Our
capital spending is being managed at a reduced level, with an emphasis on
projects that will most immediately contribute to improved earnings. In the
current environment, it is likely that earnings per share in 2006 will be in
the same range as in 2005. This will be dependent upon our ability to
maintain operating profit margins. Better visibility is expected as we
proceed through 2006 and updated earnings guidance will be provided when the
first quarter 2006 financial results are released in April."
About Schweitzer-Mauduit International
Schweitzer-Mauduit International, Inc. is a diversified producer of
premium specialty papers and the world's largest supplier of fine papers to
the tobacco industry. It also manufactures specialty papers for use in
alkaline batteries, vacuum cleaner bags, overlay products, saturating base
papers, business forms and printing and packaging applications. Schweitzer-
Mauduit and its subsidiaries conduct business in over 90 countries and employ
3,700 people worldwide, with operations in the United States, France, Brazil,
the Philippines, Indonesia and Canada.
SOURCE: Schweitzer-Mauduit International, Inc.