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Schweitzer-Mauduit International 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-15
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32
  6. Ex-32

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

 

For the quarterly period ended March 31, 2005

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

 

For the transition period from                        to                       

 

1-13948

(Commission file number)

 


 

SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

62-1612879

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

100 North Point Center East, Suite 600
Atlanta, Georgia

 

30022

(Address of principal executive offices)

 

(Zip code)

 

 

 

1-800-514-0186

(Registrant’s telephone number, including area code)

 


 

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 ý No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

 

There were 15,191,257 shares of Common Stock, par value $0.10 per share, of the registrant outstanding as of May 2, 2005.

 

 



 

TABLE OF CONTENTS

 

Part I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Item 4.

Controls and Procedures

 

 

Report of Independent Registered Public Accounting Firm

 

 

 

 

Part II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Item 3.

Defaults Upon Senior Securities

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

Item 5.

Other Information

 

Item 6.

Exhibits

 

 

 

 

SIGNATURES

 

 

 

 

EXHIBIT INDEX

 

EX 15

Letter from Deloitte & Touch LLP regarding unaudited interim financial information

 

EX 31.1

Section 302 Certification of CEO

 

EX 31.2

Section 302 Certification of CFO

 

EX 32

Section 906 Certification of CEO and CFO

 

 



 

PART I

 

ITEM 1.     FINANCIAL STATEMENTS

 

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 (dollars in millions, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,
2005

 

March 31,
2004

 

 

 

 

 

 

 

Net Sales

 

$

160.6

 

$

159.9

 

Cost of products sold

 

136.5

 

130.8

 

 

 

 

 

 

 

Gross Profit

 

24.1

 

29.1

 

 

 

 

 

 

 

Selling expense

 

6.2

 

7.3

 

Research expense

 

2.5

 

2.4

 

General expense

 

5.8

 

7.2

 

Total nonmanufacturing expenses

 

14.5

 

16.9

 

 

 

 

 

 

 

Operating Profit

 

9.6

 

12.2

 

 

 

 

 

 

 

Interest expense

 

1.3

 

1.0

 

Other income, net

 

0.6

 

 

 

 

 

 

 

 

Income Before Income Taxes and Minority Interest

 

8.9

 

11.2

 

 

 

 

 

 

 

Provision for income taxes

 

2.6

 

2.9

 

 

 

 

 

 

 

Income Before Minority Interest

 

6.3

 

8.3

 

 

 

 

 

 

 

Minority interest in earnings of subsidiaries

 

1.3

 

1.8

 

 

 

 

 

 

 

Net Income

 

$

5.0

 

$

6.5

 

 

 

 

 

 

 

Net Income Per Share

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

$

0.44

 

 

 

 

 

 

 

Diluted

 

$

0.32

 

$

0.42

 

 

 

 

 

 

 

Cash Dividends Declared Per Share

 

$

0.15

 

$

0.15

 

 

 

 

 

 

 

Weighted Average Shares Outstanding

 

 

 

 

 

 

 

 

 

 

 

Basic

 

15,010,100

 

14,823,300

 

 

 

 

 

 

 

Diluted

 

15,503,600

 

15,484,400

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1



 

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in millions, except per share amounts)

 

 

 

March 31,
2005

 

December 31,
2004

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

2.0

 

$

4.5

 

Accounts receivable

 

95.1

 

97.7

 

Inventories

 

134.7

 

119.6

 

Other current assets

 

11.4

 

9.9

 

Total Current Assets

 

243.2

 

231.7

 

 

 

 

 

 

 

Property, Plant and Equipment, net

 

435.4

 

453.2

 

Other Assets

 

32.1

 

32.2

 

 

 

 

 

 

 

Total Assets

 

$

710.7

 

$

717.1

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current debt

 

$

67.0

 

$

50.9

 

Accounts payable

 

57.7

 

71.3

 

Accrued expenses

 

76.5

 

76.7

 

Current deferred revenue

 

7.1

 

7.5

 

Total Current Liabilities

 

208.3

 

206.4

 

 

 

 

 

 

 

Long-Term Debt

 

62.0

 

63.0

 

Pension and Other Postretirement Benefits

 

44.5

 

47.8

 

Deferred Income Tax Liabilities

 

39.4

 

39.3

 

Deferred Revenue

 

34.2

 

35.9

 

Other Liabilities

 

16.8

 

18.7

 

Minority Interest

 

14.1

 

13.4

 

 

 

 

 

 

 

Total Liabilities

 

419.3

 

424.5

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Preferred stock, $0.10 par value; 10,000,000 shares authorized; none issued or outstanding

 

 

 

Common stock, $0.10 par value; 100,000,000 shares authorized; 16,078,733 shares issued; 15,161,953 and 14,946,650 shares outstanding at March 31, 2005 and December 31, 2004, respectively)

 

1.6

 

1.6

 

Additional paid-in-capital

 

63.7

 

63.3

 

Common stock in treasury, at cost, 916,780 and 1,132,083 shares at March 31, 2005 and December 31, 2004, respectively

 

(18.5

)

(22.3

)

Retained earnings

 

274.2

 

271.5

 

Unearned compensation on restricted stock

 

(0.4

)

(0.5

)

Accumulated other comprehensive loss, net of tax

 

(29.2

)

(21.0

)

 

 

 

 

 

 

Total Stockholders’ Equity

 

291.4

 

292.6

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

710.7

 

$

717.1

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2



 

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’

EQUITY AND COMPREHENSIVE INCOME (LOSS)

(dollars in millions, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common Stock Issued

 

Paid-In

 

Treasury Stock

 

Retained

 

Unearned

 

Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Shares

 

Amount

 

Earnings

 

Compensation

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2003

 

16,078,733

 

$

1.6

 

$

61.5

 

1,275,465

 

$

(21.9

)

$

244.0

 

$

(0.7

)

$

(34.3

)

$

250.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the three months ended March 31, 2004

 

 

 

 

 

 

 

 

 

 

 

6.5

 

 

 

 

 

6.5

 

Adjustments to unrealized foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3.6

)

(3.6

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared ($0.15 per share)

 

 

 

 

 

 

 

 

 

 

 

(2.2

)

 

 

 

 

(2.2

)

Restricted stock issuances

 

 

 

 

 

0.1

 

(7,000

)

0.1

 

 

 

(0.1

)

 

 

0.1

 

Amortization of unearned compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

0.1

 

 

 

0.1

 

Stock issued to directors as compensation

 

 

 

 

 

 

 

(672

)

 

 

 

 

 

 

 

 

Tax benefit of options exercised

 

 

 

 

 

0.3

 

 

 

 

 

 

 

 

 

 

 

0.3

 

Issuance of shares for options exercised

 

 

 

0.6

 

(183,826

)

3.2

 

 

 

 

3.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2004

 

16,078,733

 

1.6

 

62.5

 

1,083,967

 

(18.6

)

248.3

 

(0.7

)

(37.9

)

255.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the nine months ended December 31, 2004

 

 

 

 

 

 

 

 

 

 

 

29.9

 

 

 

 

 

29.9

 

Adjustments to minimum pension liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3.1

)

(3.1

)

Changes in fair value of derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.1

 

0.1

 

Adjustments to unrealized foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19.9

 

19.9

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared ($0.45 per share)

 

 

 

 

 

 

 

 

 

 

 

(6.7

)

 

 

 

 

(6.7

)

Purchases of treasury stock

 

 

 

 

 

 

 

273,356

 

(8.0

)

 

 

 

 

 

 

(8.0

)

Restricted stock issuances

 

 

 

 

 

 

 

1,000

 

 

 

 

 

 

 

 

 

 

Amortization of unearned compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

0.2

 

 

 

0.2

 

Stock issued to directors as compensation

 

 

 

 

 

 

 

(1,920

)

0.1

 

 

 

 

 

 

 

0.1

 

Tax benefit of options exercised

 

 

 

 

 

0.7

 

 

 

 

 

 

 

 

 

 

 

0.7

 

Tax benefit of restricted stock vesting

 

 

 

 

 

0.2

 

 

 

 

 

 

 

 

 

 

 

0.2

 

Issuance of shares for options exercised

 

 

 

(0.1

)

(224,320

)

4.2

 

 

 

 

4.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2004

 

16,078,733

 

1.6

 

63.3

 

1,132,083

 

(22.3

)

271.5

 

(0.5

)

(21.0

)

292.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the three months ended March 31, 2005

 

 

 

 

 

 

 

 

 

 

 

5.0

 

 

 

 

 

5.0

 

Adjustments to unrealized foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8.2

)

(8.2

)

Comprehensive (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared ($0.15 per share)

 

 

 

 

 

 

 

 

 

 

 

(2.3

)

 

 

 

 

(2.3

)

Purchases of treasury stock

 

 

 

 

 

 

 

29,270

 

(1.0

)

 

 

 

 

 

 

(1.0

)

Restricted stock issuances

 

 

 

 

 

 

 

(3,500

)

0.1

 

 

 

 

 

 

 

0.1

 

Amortization of unearned compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

0.1

 

 

 

0.1

 

Stock issued to directors as compensation

 

 

 

 

 

 

 

(792

)

 

 

 

 

 

 

 

 

Stock issued to directors from deferred compensation

 

 

 

 

 

0.1

 

(4,511

)

0.1

 

 

 

 

 

 

 

0.2

 

Tax benefit of options exercised

 

 

 

 

 

0.5

 

 

 

 

 

 

 

 

 

 

 

0.5

 

Tax benefit of restricted stock vesting

 

 

 

 

 

0.1

 

 

 

 

 

 

 

 

 

 

 

0.1

 

Issuance of shares for options exercised

 

 

 

(0.3

)

(235,770

)

4.6

 

 

 

 

4.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2005

 

16,078,733

 

$

1.6

 

$

63.7

 

916,780

 

$

(18.5

)

$

274.2

 

$

(0.4

)

$

(29.2

)

$

291.4

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



 

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(dollars in millions)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,
2005

 

March 31,
2004

 

Operations

 

 

 

 

 

Net income

 

$

5.0

 

$

6.5

 

Non-cash items included in net income

 

 

 

 

 

Depreciation and amortization

 

9.8

 

8.8

 

Amortization of deferred revenue

 

(2.1

)

(1.3

)

Deferred income tax provision

 

(0.5

)

0.8

 

Minority interest in earnings of subsidiaries

 

1.3

 

1.8

 

Other items

 

(0.7

)

(3.8

)

Net changes in operating working capital, excluding effects of acquisition

 

(27.0

)

(27.3

)

 

 

 

 

 

 

Cash Used for Operations

 

(14.2

)

(14.5

)

 

 

 

 

 

 

Investing

 

 

 

 

 

Capital spending

 

(3.5

)

(8.0

)

Capitalized software costs

 

 

(0.9

)

Acquisitions, net of cash acquired

 

 

(8.4

)

Other

 

(3.4

)

(0.4

)

Cash Used for Investing

 

(6.9

)

(17.7

)

 

 

 

 

 

 

Financing

 

 

 

 

 

Cash dividends paid to SWM stockholders

 

(2.3

)

(2.2

)

Changes in short-term debt

 

11.0

 

23.4

 

Proceeds from issuances of long-term debt

 

7.0

 

6.7

 

Payments on long-term debt

 

(0.4

)

(0.4

)

Purchases of treasury stock

 

(1.0

)

 

Proceeds from exercise of stock options

 

4.3

 

3.8

 

Cash Provided by Financing

 

18.6

 

31.3

 

 

 

 

 

 

 

Decrease in Cash and Cash Equivalents

 

(2.5

)

(0.9

)

 

 

 

 

 

 

Cash and Cash Equivalents at beginning of period

 

4.5

 

3.7

 

 

 

 

 

 

 

Cash and Cash Equivalents at end of period

 

$

2.0

 

$

2.8

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



 

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.       GENERAL

 

Nature of Business

 

We are a multinational diversified producer of premium specialty papers headquartered in the United States of America and are the world’s largest supplier of fine papers to the tobacco industry. We manufacture and sell paper and reconstituted tobacco products to the tobacco industry as well as specialized paper products for use in other applications.  The primary products include cigarette, plug wrap and tipping papers used to wrap various parts of a cigarette, and reconstituted tobacco leaf, or RTL, which is used as a blend with virgin tobacco in cigarettes, reconstituted tobacco wrappers and binders for cigars and paper products used in cigarette packaging.  These products are sold directly to the major tobacco companies or their designated converters in North and South America, western and eastern Europe, Asia and elsewhere.

 

We are the premier manufacturer of high porosity papers, which are used in manufacturing ventilated cigarettes, and the leading independent producer of RTL used in producing blended cigarettes.  We conduct business in over 90 countries and currently operate 10 production locations worldwide, with mills in the United States, France, Brazil and Indonesia.

 

Our manufacturing facilities have a long history of producing paper, which dates back to 1545. Our domestic mills led the development of the North American tobacco-related papers manufacturing industry, which was originated by Peter J. Schweitzer, Inc. and began as an importer of cigarette papers from France in 1908.

 

As used in this Quarterly Report on Form 10-Q, unless the context indicates otherwise, references to “we,” “us,” “our,” “SWM,” “Schweitzer-Mauduit” or similar terms include Schweitzer-Mauduit International, Inc. and our consolidated subsidiaries.

 

These interim results are not necessarily indicative of the results that should be expected for the full year. For a better understanding of Schweitzer-Mauduit International, Inc. and our financial statements, we recommend reading these interim financial statements in conjunction with the audited financial statements for the year ended December 31, 2004, which are included in our 2004 Annual Report on Form 10-K, filed with the Securities and Exchange Commission.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements and the notes thereto have been prepared in accordance with the instructions of Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission, or the SEC, and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America.  However, such information reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the interim periods.

 

The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year.  The unaudited consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004 as filed with the SEC on March 7, 2005.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Schweitzer-Mauduit International, Inc. and our wholly owned, controlled majority-owned and financially controlled subsidiaries.  Minority interest represents minority stockholders’ proportionate share of the equity in LTRI Industries, or LTRI, and Schweitzer-Mauduit do Brasil S.A., or SWM-B.  All significant intercompany balances and transactions have been eliminated.

 

5



 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, inventory valuation, depreciable lives, sales returns, receivables valuation, pension, postretirement and other benefits, taxes and contingencies. Actual results could differ materially from those estimates.

 

Share-Based Incentive Compensation

 

Statement of Financial Accounting Standards, or SFAS, No. 123 “Accounting for Stock Based Compensation” defines a fair value based method of accounting for stock compensation, including stock options, to employees.  This statement provides entities a choice of recognizing related compensation expense by adopting the fair value method or to measure compensation using the intrinsic value method under Accounting Principles Bulletin, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees”.  We have elected to continue to measure compensation cost for stock compensation based on the intrinsic value method under APB Opinion No. 25.  Payments in the form of our shares made to third parties, including our outside directors, are recorded at fair value based on the market value of our common stock at the time of payment.  Under APB Opinion No. 25, because the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.  SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” requires presentation of pro forma net income and earnings per share as if we had accounted for our employee stock compensation under the fair value method of that statement.

 

For purposes of the pro forma disclosures, the estimated fair value of the stock compensation is amortized to expense over the vesting period.  Under the fair value method, our net income and earnings per share would have been the pro forma amounts indicated below (dollars in millions):

 

 

 

Three Months Ended,

 

 

 

March 31,
2005

 

March 31,
2004

 

Net Income

 

 

 

 

 

As reported

 

$

5.0

 

$

6.5

 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related income tax effects

 

0.3

 

0.3

 

Pro forma

 

$

4.7

 

$

6.2

 

Basic net income per share

 

 

 

 

 

As reported

 

$

0.33

 

$

0.44

 

Pro forma

 

$

0.31

 

$

0.42

 

Diluted net income per share

 

 

 

 

 

As reported

 

$

0.32

 

$

0.42

 

Pro forma

 

$

0.30

 

$

0.40

 

 

Recent Accounting Pronouncements

 

In December 2004, Financial Accounting Standards Board, or FASB, issued SFAS No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123R, which revises SFAS No. 123 and supersedes APB Opinion No. 25.  SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income.  SFAS 123R is effective for the first annual reporting period beginning after June 15, 2005.  See “Share-Based Incentive Compensation” above for the pro forma net income and net income per share amounts for the three months ended March 31, 2005 and 2004, where we used a fair-value-based method under SFAS 123 to measure compensation expense for employee stock incentive awards.  We are evaluating the requirements under SFAS 123R and expect to begin expensing stock options in 2006.

 

6



 

NOTE 2.  EARNINGS PER SHARE

 

Basic net income per common share is computed based on net income divided by the weighted average number of common shares outstanding.  The average numbers of common shares used in the calculations of basic net income per common share for the three month periods ended March 31, 2005 and 2004 were approximately 15,010,100 and 14,823,300, respectively.  Diluted net income per common share is computed based on net income divided by the weighted average number of common and potential common shares outstanding.  The average numbers of common and potential common shares used in the calculations of diluted net income per common share for the three month periods ended March 31, 2005 and 2004 were approximately 15,503,600 and 15,484,400, respectively.  Potential common shares during the respective periods are those related to stock options and restricted stock outstanding and directors’ accumulated deferred stock compensation, which may be received by the directors in the form of stock or cash.  A reconciliation of the average number of common shares outstanding used in the calculations of basic and diluted net income per share follows (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,
2005

 

March 31,
2004

 

Average number of common shares outstanding

 

15,010.1

 

14,823.3

 

Dilutive effect of:

 

 

 

 

 

- stock options

 

429.4

 

565.6

 

- restricted stock

 

48.2

 

77.8

 

- directors’ deferred stock compensation

 

15.9

 

17.7

 

Average number of common and potential common shares

 

15,503.6

 

15,484.4

 

 

Certain stock options outstanding during the periods presented were not included in the calculations of diluted net income per share because the exercise prices of the options were greater than the average market prices of the common shares during the respective periods.  The average number of share equivalents resulting from these anti-dilutive stock options not included in the computations of diluted net income per share for the three month periods ended March 31, 2005 and 2004 were approximately 183,600 and 3,500, respectively.

 

NOTE 3.    INVENTORIES

 

The following schedule details inventories by major class (dollars in millions):

 

 

 

March 31,
2005

 

December 31,
2004

 

Raw materials

 

$

45.5

 

$

47.8

 

Work in process

 

14.7

 

12.9

 

Finished goods

 

54.2

 

40.1

 

Supplies and other

 

20.3

 

18.8

 

Total

 

$

134.7

 

$

119.6

 

 

NOTE 4.    COMMITMENTS AND CONTINGENCIES

 

Litigation

 

We are involved in various legal proceedings and disputes (see Note 7, Commitments and Contingencies, of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2004).  There have been no material developments to these matters as described in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

7



 

Environmental Matters

 

Our operations are subject to federal, state and local laws, regulations and ordinances relating to various environmental matters.  The nature of our operations expose us 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.  While we have incurred in the past several years, and will continue to incur, capital and operating expenditures in order to comply with environmental laws and regulations, we believe that our future cost of compliance with environmental laws, regulations and ordinances, and our exposure to liability for environmental claims and our obligation to participate in the remediation and monitoring of certain hazardous waste disposal sites, will not have a material adverse effect on our 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 us (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 our financial condition or results of operations.

 

We incur spending necessary to meet legal requirements and otherwise relating to the protection of the environment at our facilities in the United States, France, Brazil, Indonesia and Canada.  For these purposes, we anticipate that we will incur capital expenditures of approximately $1 million in both 2005 and 2006, of which no material amount is the result of environmental fines or settlements.  The foregoing capital expenditures are not expected to reduce our ability to invest in other appropriate and necessary capital projects and are not expected to have a material adverse effect on our financial condition or results of operations.

 

NOTE 5.    POSTRETIREMENT AND OTHER BENEFITS

 

We sponsor pension benefits in the United States, France and Canada and postretirement healthcare and life insurance benefits in the United States and Canada.  Our Canadian pension and postretirement benefits are not significant and therefore are not included in the following disclosures.

 

The components of net pension and postretirement healthcare and life insurance benefit costs for U.S. employees for the three month periods ended March 31, 2005 and 2004 were as follows (dollars in millions):

 

 

 

Pension Benefits

 

Healthcare and Life Insurance Benefits

 

 

 

2005

 

2004

 

2005

 

2004

 

Service cost

 

$

0.7

 

$

0.8

 

$

0.1

 

$

0.1

 

Interest cost

 

1.5

 

1.4

 

0.2

 

0.2

 

Expected return on plan assets

 

(1.6

)

(1.6

)

 

 

Amortizations and other

 

0.6

 

0.2

 

 

 

Net periodic benefit cost

 

$

1.2

 

$

0.8

 

$

0.3

 

$

0.3

 

 

The components of net pension costs in France for the three month periods ended March 31, 2005 and 2004 were as follows (dollars in millions):

 

 

 

2005

 

2004

 

Service cost

 

$

0.4

 

$

0.4

 

Interest cost

 

0.4

 

0.4

 

Expected return on plan assets

 

(0.2

)

(0.2

)

Amortizations and other

 

0.2

 

0.2

 

Net periodic benefit cost

 

$

0.8

 

$

0.8

 

 

We made a total of $3.0 million of contributions to our pension plans through the first three months of 2005 and currently expect to make additional pension contributions during the remainder of 2005 of approximately $12 million.  We also made a total of $0.5 million of payments in the first three months of 2005 related to our U.S. postretirement healthcare and life insurance benefits, and expect to make additional payments during the remainder of 2005 of approximately $1 million.

 

8



 

NOTE 6.  SEGMENT INFORMATION

 

We operate and manage our businesses based on the geographical location of our primary manufacturing operations: the United States, France and Brazil.  These business segments manufacture and sell cigarette, plug wrap and tipping papers, used to wrap various parts of a cigarette, reconstituted tobacco products and paper products used in cigarette packaging.  While the products are similar in each segment, they vary based on customer requirements and the manufacturing capabilities of each location.  Sales by a segment into markets primarily served by a different segment occur where specific product needs cannot be cost-effectively met by the manufacturing operations domiciled in that segment.

 

Tobacco industry products comprised 91 and 93 percent of our consolidated net sales for the periods ended March 31, 2005 and 2004, respectively.  The non-tobacco industry products are a diverse mix of products, certain of which represent commodity paper grades produced to maximize machine operations.

 

For purposes of the segment disclosure in the following tables, the term “United States” includes operations in the United States and Canada.  The Canadian operation only produces flax fiber used as raw material in the U.S. operations.  The term “France” includes operations in France and Indonesia because the results of the Indonesian operation are not material for segment reporting purposes and since sales of the Indonesian business are primarily of products sold under a trademark of one of our French businesses and are coordinated with sales of our French operations in southeast Asia.  Sales of products between segments are made at market prices and elimination of these sales is referred to in the following tables as intersegment sales.  Expense amounts not associated with segments are referred to as unallocated expenses.

 

Net Sales

(dollars in millions)

 

 

 

Three Months Ended

 

 

 

March 31,
2005

 

March 31,
2004

 

France

 

$

102.1

 

63.6

%

$

104.8

 

65.5

%

United States

 

51.9

 

32.3

 

46.0

 

28.8

 

Brazil

 

13.5

 

8.4

 

11.9

 

7.4

 

Subtotal

 

167.5

 

104.3

 

162.7

 

101.7

 

 

 

 

 

 

 

 

 

 

 

Intersegment sales by

 

 

 

 

 

 

 

 

 

France

 

(5.5

)

(3.4

)

(2.4

)

(1.5

)

United States

 

(0.3

)

(0.2

)

(0.1

)

 

Brazil

 

(1.1

)

(0.7

)

(0.3

)

(0.2

)

Subtotal

 

(6.9

)

(4.3

)

(2.8

)

(1.7

)

Consolidated

 

$

160.6

 

100.0

%

$

159.9

 

100.0

%

 

Operating Profit

(dollars in millions)

 

 

 

Three Months Ended

 

 

 

March 31,
2005

 

March 31,
2004

 

France

 

$

10.8

 

112.5

%

$

13.9

 

113.9

%

United States

 

(0.4

)

(4.2

)

(1.1

)

(9.0

)

Brazil

 

0.3

 

3.1

 

1.2

 

9.8

 

Unallocated

 

(1.1

)

(11.4

)

(1.8

)

(14.7

)

Consolidated

 

$

9.6

 

100.0

%

$

12.2

 

100.0

%

 

9



 

ITEM 2.                                                     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is a discussion of our results of operations and current financial position. This discussion should be read in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this report and the audited consolidated financial statements and related notes and the selected financial data included in Item 6 of our Annual Report on Form 10-K for the year ended December 31, 2004. Our discussion of our results of operations and financial position includes various forward-looking statements about our markets, the demand for our products, and our future results. These statements are based on certain assumptions that we consider reasonable. For information about risks and exposures relating to our business and our company, you should read the section entitled “Factors That May Effect Future Results” included in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

The accompanying unaudited consolidated financial statements set forth certain information with respect to our financial position, results of operations and cash flows which should be read in conjunction with the following discussion and analysis.

 

Introduction

 

This management’s discussion and analysis of financial condition and results of operations is intended to provide you with an understanding of our recent performance, our financial condition and our prospects.  The following will be discussed and analyzed:

                  Executive Summary

                  Recent Developments

                  Results of Operations

                  Liquidity and Capital Resources

                  Other Factors Affecting Liquidity and Capital Resources

                  Outlook

                  Forward-Looking Statements

 

Executive Summary

 

Our first quarter 2005 net income was $5.0 million compared with net income of $6.5 million in the first quarter of 2004, a decline of 23 percent.  Diluted earnings per share were $0.32 compared with diluted earnings per share of $0.42 in the prior-year quarter, a 24 percent decrease.

 

Operating profit was $9.6 million, a decline of $2.6 million, or 21 percent, from the prior-year quarter.

 

Our gross profit margin was 15.0 percent compared with 18.2 percent in the prior-year quarter.

 

The decline in earnings compared with the first quarter of 2004 was the result of lower sales volumes, primarily related to the timing of reconstituted tobacco leaf sales, the inability to fully offset inflationary cost increases through either improved mill operations or higher selling prices, unfavorable currency impacts and a higher effective income tax rate.

 

Net sales totaled $160.6 million, essentially unchanged from the prior-year quarter.  The positive net sales impacts of currency exchange rates and changes in average selling prices were largely offset by the effects of lower sales volumes.

 

Capital spending totaled $3.5 million, compared with $8.0 million spent during the prior-year quarter.  Capital spending to implement our new cigarette paper manufacturing strategy has been completed.

 

Recent Developments

 

Philippines Acquisition

 

In November 2004, we announced that an agreement had been finalized whereby one of our subsidiaries will acquire the tobacco-related paper manufacturing assets of KCPI, a Philippines company.  The assets to be acquired include land, buildings, production equipment and related utilities and support assets.  The purchase price will be $11.3

 

10



 

million, subject to working capital adjustments. This transaction is subject to various governmental permitting and authorizations and is expected to close during the second quarter of 2005.

 

The acquisition of the tobacco-related paper manufacturing assets in the Philippines is consistent with our long-term strategy for operations in Asia.  This purchase will improve our ability to address the needs of our customers in both the Philippines and the southeast Asian market.  We plan to upgrade the production capabilities of the manufacturing equipment and the quality of the products being produced to better support the demand for tobacco-related papers in the region.  This acquisition is not expected to have a material impact on our financial results this year.

 

Lower Ignition Propensity Cigarettes

 

Regulations are being implemented in Canada that would require lower cigarette ignition propensity properties similar to regulations enacted last year in New York and proposed in several other states.  Canada’s regulations mandate an ignition propensity standard for all cigarettes manufactured or imported into Canada on or after October 1, 2005.  As a result, sales of cigarette papers for lower ignition propensity cigarettes are expected to increase mid-year in support of the Canadian introduction.

 

Jobs Creation Act

 

The American Jobs Creation Act of 2004, or AJCA, introduced a limited time 85 percent dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, or Repatriation Provision, provided certain criteria are met.  We do not expect to be able to complete our evaluation of the Repatriation Provision until after Congress or the Treasury Department provides additional clarifying language on key elements of the provision.  In January 2005, the Treasury Department issued the first of a series of clarifying guidance documents related to this provision.  The range of possible amounts that we are considering for repatriation under this provision is between $0 and $30 million.  While we estimate that the related potential range of additional income tax is between $0 and $2 million, this estimate is subject to change following technical correction legislation that we believe is forthcoming from Congress.

 

Share-Based Payment

 

In December 2004, FASB, issued SFAS 123R, which revises SFAS No. 123 and supersedes APB Opinion No. 25.  SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income.  SFAS 123R is effective for the first annual reporting period beginning after June 15, 2005.  See “Share-Based Incentive Compensation” above for the pro forma net income and net income per share amounts for the three months ended March 31, 2005 and 2004, where we used a fair-value-based method under SFAS 123 to measure compensation expense for employee stock incentive awards.  We are evaluating the requirements under SFAS 123R and expect to begin expensing stock options in 2006.

 

11



 

Results of Operations

 

This section presents a discussion and analysis of our first quarter 2005 net sales, operating profit and other information relevant to an understanding of the results of operations.  The following table represents the unaudited consolidated statements of operations for the periods indicated (dollars in millions)

 

 

 

Three Months Ended

 

 

 

March 31,
2005

 

March 31,
2004

 

 

 

 

 

 

 

Net Sales

 

$

160.6

 

$

159.9

 

Cost of products sold

 

136.5

 

130.8

 

 

 

 

 

 

 

Gross Profit

 

24.1

 

29.1

 

 

 

 

 

 

 

Selling expense

 

6.2

 

7.3

 

Research expense

 

2.5

 

2.4

 

General expense

 

5.8

 

7.2

 

Total nonmanufacturing expenses

 

14.5

 

16.9

 

 

 

 

 

 

 

Operating Profit

 

9.6

 

12.2

 

 

 

 

 

 

 

Interest expense

 

1.3

 

1.0

 

Other income, net

 

0.6

 

 

 

 

 

 

 

 

Income Before Income Taxes and Minority Interest

 

8.9

 

11.2

 

Provision for income taxes

 

2.6

 

2.9

 

 

 

 

 

 

 

Income Before Minority Interest

 

6.3

 

8.3

 

Minority interest in earnings of subsidiaries

 

1.3

 

1.8

 

 

 

 

 

 

 

Net Income

 

$

5.0

 

$

6.5

 

 

 

 

 

 

 

Net Income Per Share

 

 

 

 

 

Basic

 

$

0.33

 

$

0.44

 

Diluted

 

$

0.32

 

$

0.42

 

 

Three Months Ended March 31, 2005 Compared with the Three Months Ended March 31, 2004

 

 

 

Three Months Ended

 

Consolidated

 

Net Sales
(dollars in millions)

 

March 31,
2005

 

March 31,
2004

 

Percent
Change

 

Sales
Volume
Change

 

 

 

 

 

 

 

 

 

 

 

France

 

$

102.1

 

$

104.8

 

(2.6

)%

(12.1

)%

United States

 

51.9

 

46.0

 

12.8

 

4.0

 

Brazil

 

13.5

 

11.9

 

13.4

 

6.7

 

Subtotal

 

167.5

 

162.7

 

 

 

 

 

Intersegment

 

(6.9

)

(2.8

)

 

 

 

 

Total

 

$

160.6

 

$

159.9

 

0.4

%

(5.8

)%

 

We reported net sales of $160.6 million in 2005 compared with $159.9 million in 2004.  The increase of $0.7 million consisted of the following (dollars in millions):

 

 

 

Amount

 

Percent

 

Changes in currency exchange rates

 

$

5.2

 

3.3

%

Changes in selling prices and product mix

 

1.2

 

0.7

 

Changes in sales volumes (acquisition)

 

0.6

 

0.4

 

Changes in sales volumes (internal growth)

 

(6.3

)

(4.0

)

Total

 

$

0.7

 

0.4

%

 

12



 

      An increase of $5.2 million, or 3 percent, in net sales relating to changes in currency exchange rates.  This was a direct result of a stronger euro versus the U.S. dollar.  The euro was approximately 5 percent stronger against the U.S. dollar, averaging 1.31 dollars per euro in 2005 as compared with 1.24 during 2004.  The Brazilian real was on average approximately 9 percent stronger versus the dollar.

 

      Higher average selling prices had a favorable $1.2 million, or 1 percent, impact on the net sales comparison.  The improvement in average selling prices was primarily due to the mix of products sold, which more than offset lower individual product selling prices, primarily in our French operations.

 

      Unit sales volumes declined by 6 percent compared with last year, having an unfavorable $5.7 million, or 4 percent, impact on the net sales comparison.

 

      Sales volumes of the French segment declined 12 percent year-over-year, primarily as a result of lower sales of RTL products.  The decline in RTL sales volumes was caused by differences in the timing of customer orders.  First quarter of 2004 volumes included, in-part, a restocking of customer RTL inventories following start-up of new RTL production capacity at the end of 2003.

 

      Brazil experienced increased sales volumes of 7 percent, compared with the first quarter of 2004.  This improvement was the result of increased sales of both tobacco-related and commercial and industrial papers.  Higher sales volumes were achieved in both the domestic Brazilian market and in exports.

 

      Sales volumes in the United States increased by 4 percent due to increased sales volumes of commercial and industrial papers.  Sales of cigarette paper for lower ignition propensity cigarettes continued during the quarter.

 

Sales of tobacco-related products accounted for 91 percent of net sales for the quarter ended March 31, 2005, compared with the 93 percent for the prior-year quarter.

 

French segment net sales declined $2.7 million, or 3 percent, from 2004 to 2005.  The decline in sales volumes, in large part due to lower sales of RTL products, provided the majority of this decline.  The decline in RTL sales volumes was caused by differences in the timing of customer orders.  Lower sales volumes and lower product selling prices were partially offset by favorable currency exchange rates, a direct result of a stronger euro versus the U.S. dollar.

 

The U.S. segment realized increased net sales of $5.9 million, or 13 percent, compared with 2004.  Net sales of the U.S. segment increased as a result of increased sales volumes and higher selling prices, due to a partial recovery of inflationary cost increases and a more favorable mix of products sold.

 

Brazil realized an increase in net sales of $1.6 million, or 13 percent, compared with 2004.  The Brazilian segment’s sales increase was primarily due to increased sales volumes of tobacco-related and commercial and industrial papers.

 

Operating Expenses

(dollars in millions)

 

 

 

Three Months Ended

 

 

 

 

 

Percent of Net Sales

 

 

 

March 31,
2005

 

March 31,
2004

 

Change

 

Percent
Change

 

2005

 

2004

 

Net Sales

 

$

160.6

 

$

159.9

 

$

0.7

 

0.4

%

 

 

 

 

Cost of products sold

 

136.5

 

130.8

 

5.7

 

4.3

 

85.0

%

81.8

%

Gross Profit

 

$

24.1

 

$

29.1

 

$

(5.0

)

(17.2

)%

15.0

%

18.2

%

 

Gross profit was $24.1 million, a decrease of $5.0 million, or 17 percent, from the prior-year quarter.  The gross profit margin was 15.0 percent, declining from 18.2 percent in the first quarter of 2004.  The decline in both gross profit and gross profit margin was attributable to the decrease in sales volumes and significant inflationary cost increases.  Higher costs were incurred for purchased energy, wood pulp, purchased materials, labor rate and employee benefit expenses.  The weaker U.S. dollar versus both the euro and the Brazilian real also put pressure on the gross profit margin, since costs in both France and Brazil are primarily incurred in local currencies while selling prices are often linked to the U.S. dollar.

 

Higher purchased energy and increased wood pulp costs had an unfavorable $2.9 million impact during the quarter.  Purchased energy costs increased by $1.8 million compared with the first quarter of 2004, with higher energy costs experienced in all business units, primarily related to higher electricity, fuel oil and natural gas costs.  The U.S. list price of northern bleached softwood kraft pulp, a bell-weather pulp grade, increased from an average market list price of $600 per metric ton in the first quarter of 2004 to $670 per metric ton in the first quarter of 2005, a 12 percent increase.  The increase in per ton wood pulp costs increased our operating expenses by $1.1 million compared with the prior-year quarter.

 

13



 

percent increase.  The increase in per ton wood pulp costs increased our operating expenses by $1.1 million compared with the prior-year quarter.

 

Start-up costs totaling $0.6 million were incurred in the United States and Brazil related to rebuilt paper machines in support of our global sourcing strategy for cigarette papers compared with $0.4 million of start-up costs incurred in France during the prior-year quarter associated with a new RTL production line.

 

Nonmanufacturing Expenses

(dollars in millions)

 

 

 

Three Months Ended

 

 

 

 

 

Percent of Net Sales

 

 

 

March 31,
2005

 

March 31,
2004

 

Change

 

Percent
Change

 

2005

 

2004

 

Selling expense

 

$

6.2

 

$

7.3

 

$

(1.1

)

(15.1

)%

3.8

%

4.6

%

Research expense

 

2.5

 

2.4

 

0.1

 

4.2

 

1.6

 

1.5

 

General expense

 

5.8

 

7.2

 

(1.4

)

(19.4

)

3.6

 

4.5

 

Nonmanufacturing expenses

 

$

14.5

 

$

16.9

 

$

(2.4

)

(14.2

)%

9.0

%

10.6

%

 

Nonmanufacturing costs declined by $2.4 million, or 14 percent, with lower general and selling expenses.  Nonmanufacturing expenses declined from 10.6 percent of net sales in the first quarter of 2004 to 9.0 percent in the current year quarter.  General expense was $1.4 million lower compared with the first quarter of 2004 as a result of decreases in compensation costs.  Selling expense declined by $1.1 million as a result of lower sales commissions in France associated with the drop in sales volumes and $0.9 million of expenses incurred in the prior-year quarter to close an administrative and sales office in Paris, France.

 

Operating Profit

(dollars in millions)

 

 

 

Three Months Ended

 

 

 

Return on Net Sales

 

 

 

March 31,
2005

 

March 31,
2004

 

Percent
Change

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

France

 

$

10.8

 

$

13.9

 

(22.3

)%

10.6

%

13.3

%

United States

 

(0.4

)

(1.1

)

N.M.

 

N.M.

 

N.M.

 

Brazil

 

0.3

 

1.2

 

(75.0

)

2.2

 

10.1

 

Subtotal

 

10.7

 

14.0

 

 

 

 

 

 

 

Unallocated expenses

 

(1.1

)

(1.8

)

 

 

 

 

 

 

Total

 

$

9.6

 

$

12.2

 

(21.3

)%

6.0

%

7.6

%

 


N.M.       Not Meaningful

 

Operating profit was $9.6 million for the quarter, a decline of $2.6 million, or 21 percent, from $12.2 million operating profit for the first quarter of 2004.  Operating profit return on sales was 6.0 percent compared with 7.6 percent in the first quarter of last year.  During the quarter, improved profitability in our U.S. operations was more than offset by lower operating profit in the French and Brazilian segments.

 

The French segment’s operating profit was $10.8 million for the quarter, $3.1 million, or 22 percent, less than the $13.9 million realized in the first quarter of 2004.  The decline was primarily due to:

      Lower sales volumes, primarily related to the timing of RTL shipments.

      Lower product selling prices and a less favorable sales mix.

      Increased wood pulp, purchased energy, labor and purchased materials expenses.

      Unfavorable currency impacts.

These factors were partially offset by:

      Improved mill operations, including the absence of $0.4 million in start-up expense in the first quarter of 2004 associated with the RTL production line.

      Lower nonmanufacturing costs, including the absence of $0.9 million in expense incurred in the first quarter of 2004 to close an administrative and sales office in Paris.

 

The U.S. business unit had a $0.4 million operating loss during the quarter, a $0.7 million improvement over the first quarter of 2004.  This improvement was related to:

      Improved mill operations.

      A better mix of products sold.

These gains were partially offset by:

      Higher purchased energy, wood pulp, labor and employee benefit expenses.

      Start-up expenses totaling $0.3 million incurred related to the operation of a cigarette paper machine at the Spotswood, New Jersey Mill that was rebuilt as part of our new cigarette paper manufacturing strategy and

 

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a rebuilt tipping paper machine at the Lee, Massachusetts mill that recommenced operations during the fourth quarter of 2004.

 

Brazil’s operating profit was $0.3 million during the quarter, a decline of $0.9 million from the first quarter of 2004.  This decrease was related to:

 

                  Unfavorable currency impacts.

                  Increased cost of sales, including increased purchased energy and labor expenses.

                  Start-up costs of $0.3 million related to a rebuilt cigarette paper machine, which began operation in January of 2005.

 

These unfavorable items were partially offset by:

                  Higher production and sales volumes.

                  Lower nonmanufacturing expenses.

 

Non-Operating Expenses

 

Interest expense was $0.3 million higher during 2005 compared with the prior-year quarter because of higher interest rates and a higher average balance of debt outstanding.  The weighted average effective interest rates on our long-term revolving debt facilities were approximately 3.2 and 2.3 percent on March 31, 2005 and 2004, respectively.

 

Other income, net in 2005 consisted primarily of a gain on the sale of property to the Indonesian government, interest income, royalty income and foreign currency transaction gains and losses.

 

Income Taxes

 

Provision for income taxes reflected an effective income tax rate of 29 percent for the first quarter of 2005 compared with 26 percent for the first quarter of 2004.  The prior-year quarter benefited from utilization of foreign tax credits in the United States.

 

Minority Interest

 

Minority interest declined to $1.3 million from $1.8 million in 2004.  This $0.5 million, or 28 percent, decrease reflected lower earnings at LTRI, due to differences in the timing of customer orders.  LTRI is a French subsidiary which produces reconstituted tobacco leaf products and has a 28 percent minority owner.

 

Net Income and Earnings Per Share

 

Net income for 2005 was $5.0 million, a decline of $1.5 million, or 23 percent, from net income of $6.5 million in the first quarter of 2004.  Diluted earnings per share decreased by 24 percent to $0.32 compared with diluted earnings per share of $0.42 for the prior-year quarter.  The decline in both net income and diluted earnings per share was caused primarily by the lower operating profit and the higher effective income tax rate, partially offset by lower minority interest.

 

Liquidity and Capital Resources

 

A major factor in our liquidity and capital resource planning is our generation of cash flow from operations, which is sensitive to changes in the pricing for our products, cost increases and changes in working capital.  While quarterly fluctuations occur, our annual cash flow from operations has been relatively stable historically, reflecting typically consistent demand for our products.  Our annual cash flow from operations has historically exceeded our requirements for capital spending and dividends to stockholders by at least $15 million each year, however, this was not the case in 2003 and 2004 due to capital spending and working capital requirements.

 

Cash Requirements

 

At March 31, 2005, we had net operating working capital of $100.3 million and cash and cash equivalents of $2.0 million, compared with net operating working capital of $73.3 million and cash and cash equivalents of $4.5 million at December 31, 2004. The increase in net operating working capital was primarily a result of increased inventories and decreased accounts payable. Based upon our existing cash and operating working capital levels, expected operating cash flows and capital spending, and availability of borrowings under our Credit Agreement and other

 

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credit facilities, we believe we have the necessary financial resources to satisfy our liquidity needs for the foreseeable future.

 

Cash Flows from Operating Activities

(dollars in millions)

 

 

 

Three Months Ended

 

 

 

March 31,
2005

 

March 31,
2004