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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1994
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 No. 1-2267
THE MEAD CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-0535759
(State of Incorporation) (I.R.S. Employer Identification No.)
MEAD WORLD HEADQUARTERS
COURTHOUSE PLAZA NORTHEAST
DAYTON, OHIO 45463
(Address of principal executive offices)
Registrant's telephone number, including area code: 513-495-6323
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 .
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The number of Common Shares outstanding at April 3, 1994 was 59,278,185.
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THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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QUARTERLY PERIOD ENDED APRIL 3, 1994
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PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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BALANCE SHEETS
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(All dollar amounts in millions)
April 3, Dec. 31,
1994 1993
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ASSETS
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Current assets:
Cash and cash equivalents $ 10.9 $ 9.3
Accounts receivable 633.1 598.2
Inventories 491.9 446.8
Other current assets 74.2 77.0
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Total current assets 1,210.1 1,131.3
Investments and other assets:
Investees 72.9 65.1
Other assets 562.0 555.2
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634.9 620.3
Property, plant and equipment 4,452.9 4,382.6
Less accumulated depreciation and
amortization (2,018.7) (1,969.7)
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2,434.2 2,412.9
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Total assets $4,279.2 $4,164.5
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LIABILITIES AND SHAREOWNERS' EQUITY
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Current liabilities:
Notes payable $ 164.2 $
Accounts payable 292.0 350.3
Accrued liabilities 321.1 348.7
Current maturities of long-term debt 13.6 12.5
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Total current liabilities 790.9 711.5
Long-term debt 1,368.8 1,368.8
Deferred items 527.1 506.2
Shareowners' equity:
Common shares 176.8 176.5
Additional paid-in capital 29.4 26.3
Foreign currency translation adjustment (7.2) (7.7)
Net unrealized gain on securities 6.8 9.1
Retained earnings 1,386.6 1,373.8
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1,592.4 1,578.0
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Total liabilities and
shareowners' equity $4,279.2 $4,164.5
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See notes to financial statements
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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STATEMENTS OF EARNINGS
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(All amounts in millions, except per share amounts)
First Quarter Ended
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April 3, April 4,
1994 1993
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Net sales $1,155.6 $1,135.5
Cost of products sold 919.4 910.6
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Gross profit 236.2 224.9
Selling, administrative and
research expenses 176.5 170.8
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Earnings from operations 59.7 54.1
Other revenues (expenses) - net (7.9) .8
Interest and debt expense (24.6) (24.4)
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Earnings before income taxes 27.2 30.5
Income taxes 11.0 11.7
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Earnings before equity in net
earnings of investees 16.2 18.8
Equity in net earnings of investees 11.4 6.8
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Net earnings $ 27.6 $ 25.6
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Net earnings per common and
common equivalent share $ .46 $ .43
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Cash dividends per common share $ .25 $ .25
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Average common and common equivalent
shares outstanding (millions) 59.8 59.4
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See notes to financial statements
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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STATEMENTS OF CASH FLOWS
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(All dollar amounts in millions)
First Quarter Ended
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April 3, April 4,
1994 1993
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Cash flows from operating activities:
Net earnings $ 27.6 $ 25.6
Adjustments to reconcile net earnings to
net cash (used in) operating activities:
Depreciation, amortization and depletion of
property, plant and equipment 57.4 63.7
Depreciation and amortization of other assets 12.6 13.2
Deferred income taxes 10.1 12.5
Investees-earnings and dividends (9.0) (5.0)
Other 9.1 (4.1)
Change in assets and liabilities:
Accounts receivable (34.9) (26.4)
Inventories (45.1) (55.2)
Other current assets (2.7) 13.1
Accounts payable and accrued liabilities (85.9) (84.9)
Cash provided by (used in) discontinued operations (.9) .3
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Net cash (used in) operating activities (61.7) (47.2)
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Cash flows from investing activities:
Capital expenditures (80.7) (52.4)
Additions to equipment rented to others (13.1) (9.8)
Investments in and advances to investees (.3) (.3)
Other 3.8 (3.5)
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Net cash (used in) investing activities (90.3) (66.0)
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Cash flows from financing activities:
Additional borrowings 168.6 187.9
Payments on borrowings (167.8) (187.3)
Notes payable 164.2 120.4
Cash dividends paid (14.8) (14.7)
Common shares issued 3.4 5.4
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Net cash provided by financing activities 153.6 111.7
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Increase (decrease) in cash and cash equivalents 1.6 (1.5)
Cash and cash equivalents at beginning of year 9.3 18.4
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Cash and cash equivalents at end of quarter $ 10.9 $ 16.9
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See notes to financial statements
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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NOTES TO FINANCIAL STATEMENTS
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(All dollar amounts in millions)
A - FINANCIAL STATEMENTS
The balance sheet at December 31, 1993 is condensed financial
information taken from the audited balance sheet. The interim
financial statements are unaudited. In the opinion of management,
all adjustments (which consist only of normal recurring
adjustments) necessary to present fairly the financial position and
results of operations for the interim periods presented have been
made.
B - ACCOUNTING POLICIES
On an interim basis, all costs subject to recurring year-end
adjustments have been estimated and allocated ratably to the
quarters. Income taxes have been provided based on the estimated
tax rate for the respective years after excluding infrequently
occurring items whose specific tax effect is reported during the
same interim period as the related transaction.
C - INVENTORIES
The amount of inventories is (principally last-in, first-out
method):
April 3, Dec. 31,
1994 1993
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Finished and semi-finished products $354.3 $301.3
Raw materials 73.7 81.0
Stores and supplies 63.9 64.5
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$491.9 $446.8
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D - INVESTEES
Summarized operating data for Northwood Forest Industries, Ltd. are
in the following table and Mead's 50% share of net earnings is
included in the financial statements:
First Quarter Ended
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April 3, April 4,
1994 1993
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Revenues $130.5 $131.9
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Gross profit $ 29.5 $ 16.7
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Net earnings $ 16.7 $ 6.9
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E - ADDITIONAL INFORMATION ON CASH FLOWS
First Quarter Ended
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April 3, April 4,
1994 1993
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Cash paid for:
Interest $ 32.6 $ 30.9
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Income taxes $ 1.8
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F - LONG-TERM DEBT
Long-term debt at April 3, 1994, includes $244.6 million of
short-term borrowings which have been classified as long-term debt
since the company has the intent to consummate these transactions
on a long-term basis and has the ability to do so under the
existing $550 million bank credit agreement. After reduction for
these financings, the company has unused lines of credit of $305.4
million.
G - CHANGE IN ACCOUNTING ESTIMATE
Effective January 1, 1994, the depreciable lives of certain paper
mill equipment were changed to 20 years from 16 years to more
closely reflect the current service lives of the assets. The
effect of the change was to increase net earnings by $6.5 million
($.11 per share) in the first quarter of 1994.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
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Net Sales
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Net sales for the first quarter of 1994 were $1.156 billion, up
slightly from $1.136 billion for the same period of 1993. Weak,
and in some instances declining prices, in most of Mead's markets
along with excess capacity in several product lines affected sales
for the period. Additionally, the general economic recovery has
been slow and uneven. The European and Japanese economies continue
to be depressed.
Operating Costs and Expenses
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Gross profit as a percentage of sales improved to 20.4% in the
first quarter of 1994 from 19.8% a year earlier. In the first
quarter of 1994, Mead decided to lengthen the depreciable life of
certain paper mill equipment to 20 years from 16 years, a change
that more closely reflects the current life of these assets and
brings Mead in line with common practice in the industry. This
change had the effect of increasing net earnings by $10.7 million
($6.5 million after tax, or 11 cents per share). Without this
change, gross profit as a percent of sales would have declined
slightly to 19.5% in the first quarter of 1994. The pressures on
selling prices were almost totally offset by productivity
improvements throughout the company.
Selling, administrative and research expenses for the first quarter
of 1994 were $176.5 million, a $5.7 million increase over the
comparable period of 1993. The increase is due primarily to
efforts at Mead Packaging to penetrate new markets, and additional
expenses related to cost reduction activities at several divisions,
most notably Zellerbach. These additional expenses were partially
offset by lower expenses at Mead Data Central. During the first
quarter of last year, MDC had invested significant amounts in its
sales, marketing and research programs.
Other Revenues (Expenses) - Net
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Other (expenses) were $(7.9) million in the first quarter of 1994
compared to other revenues of $.8 million in the first quarter of
1993. During the first quarter of 1994, the Federal Reserve
increased the federal funds rate causing a decline in the bond
market. The company had interest rate options which were
correlated to the yields on long-term bonds. As a result, other
revenues (expenses) - net for 1994 includes $12.1 million ($7.4
million after tax, or 12 cents per share) in losses relating to
adjustments to market for these financial instruments, principally
resulting from a one-time loss on the close-out of a leveraged
written option embedded in an interest rate swap transaction with
Bankers Trust Company. The risk of loss from future adjustments to
market of the financial instruments the company currently uses is
not significant in the opinion of management.
Interest and Debt Expense
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First quarter 1994 interest and debt expense was $24.6 million
compared to $24.4 million for the first quarter 1993.
Equity in Net Earnings of Investees
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Earnings contributed by Mead's investees, primarily its jointly-
owned Northwood companies, increased to $11.4 million for the first
quarter of 1994 compared to $6.8 million for the comparable quarter
of 1993. Strong prices for wood products, rising prices for pulp
and improved pulp mill operations all contributed to the increase.
Financial Data by Business
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Comparisons between 1994 and 1993 earnings in the following
discussion have been made prior to the depreciation expense effect
of the change in asset lives.
Both sales and earnings declined in the Paper segment compared to
first quarter 1993 amounts due to lower volume and continuing low
or declining prices for uncoated grades. Sales were down
approximately 5% and earnings down 9% compared to the same quarter
of 1993. Continued improved operations at Mead's two largest paper
mills in Escanaba, Michigan, and Chillicothe, Ohio, helped mitigate
the adverse effects of price and volume throughout the segment.
Mead expects that pressure on prices and tonnage will continue in
the Paper segment.
Sales for the Packaging and Paperboard segment increased about 3%
in the first quarter of 1994 compared to the first quarter of 1993,
but earnings decreased about 23% compared to the first quarter of
1993. The increase in sales came from the Mead Coated Board
Division due, in part, to the Division's two sawmill operations.
Mead Containerboard's sales were level with those of the first
quarter of 1993 despite declining prices for corrugated boxes.
Domestic sales of Mead Packaging are ahead of last year, but
continued weakness in European and Japanese economies caused
foreign sales to decline. Mead expects prices for coated board and
beverage packaging to remain uncertain in the short term. Mead
Containerboard reports that a recent price increase in corrugated
medium appears to be holding.
In the Distribution and School and Office Products segment, sales
increased about 2% in the first quarter of 1994 as compared to the
same period of 1993. The increase came from Mead's Zellerbach
distribution business. The first quarter is essentially the "off-
season" for Mead School and Office Products. Their sales are
somewhat behind 1993 levels due, in part, to retailers' efforts in
managing their own inventories, but earnings are essentially equal
to last year. The division is encouraged by the early response to
its "back-to-school" season. Zellerbach's earnings are behind 1993
levels because of weak paper prices and additional restructuring
costs.
Investments made by Mead Data Central (MDC) in the first half of
1993 contributed to the Electronic Publishing segment's first
quarter 1994 sales and earnings improvements over the comparable
period in 1993. First quarter 1994 sales were 14% above the first
quarter of 1993, and earnings increased substantially. Part of the
earnings improvement arose due to certain intangible assets related
to a previous acquisition becoming fully amortized by the end of
1993. Amortization expense was, therefore, lower in the first
quarter of 1994 than in 1993. MDC also had incurred significant
expenses in the first half of 1993 to enhance its sales, marketing
and research programs. New products, cost reductions and the
results of its strengthened sales force accounted for the rest of
the earnings improvement.
Liquidity and Capital Resources
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Mead's consolidated working capital at April 3, 1994 was $419.2
million in comparison to $419.8 million at December 31, 1993. The
seasonal increase in inventories for Mead School and Office
Products was financed through short-term borrowings. The current
ratio declined to 1.5 at April 3, 1994 as compared to 1.6 at the
prior fiscal year end.
Borrowed capital (long-term debt) as a percent of total capital
(long-term debt plus shareowners' equity) decreased from 46.4% at
December 31, 1993 to 46.2% at April 3, 1994.
Capital expenditures for the first quarter totaled $80.7 million as
compared to $52.4 million for the first quarter of 1993. Much of
the 1994 spending was at the Escanaba, Michigan, and Chillicothe,
Ohio, paper mills to upgrade Mead's coated paper system.
The Company uses various financial instruments, including
derivative products, with off-balance sheet risk, to manage its
interest rate exposure. These derivatives include options, forward
contracts and interest-rate swaps. The current derivative
portfolio includes:
(A) Interest rate caps with a notional amount of $400 million
having an average strike rate of 10.1% and an average
maturity of 4.9 years. Purchased caps give the Company
the right to receive a payment to offset any increase in
interest rates above strike rates. The Company uses caps
to protect its floating rate debt from abnormal rate
increases such as those experienced in the early 1980's.
(B) Interest rate swaps with a notional amount of $275
million convert a floating rate liability into a fixed
rate liability for one party and achieves the reverse for
the other party. These swap agreements do not involve a
transfer of any principal dollars, only the exchange of
interest payments for a specified period. The Company
uses swaps to adjust its mix of fixed and floating rate
debt. The average fixed interest rate received is 5.8%
for an average maturity of 3.5 years and the average
fixed interest rate paid is 8.4% for an average maturity
of 5.1 years.
In the opinion of management, the risk of loss to the Company in
the event of nonperformance by any counterparty under these
agreements is not significant. All counterparties are rated A or
higher by Moody's and Standard and Poor's with the majority of the
contracts executed with counterparties rated AA or higher by both
agencies.
At the end of the first quarter, the Company paid a fixed rate or
variable rate subject to a capped rate on 68% of its debt and paid
a floating rate of interest on the remainder. A change of 1% in
the floating interest rate, on an annual basis, would result in a
$.07 change in net earnings per share for the year. The market
value of the long-term debt, excluding capital leases, at quarter-
end exceeded the book value by $1.6 million while the market value
at year-end exceeded the book value by $43.8 million.
The Company reported a $7.4 million loss after tax for the quarter
from derivatives used to manage debt interest rates, including
termination of a leveraged written option embedded in an interest
rate swap. Although the loss on these transactions has been
recorded by the end of the first quarter, actual cash payments will
be made over the next 6-1/2 years. The swap, including the option,
was written in connection with the Company's overall policy to
manage exposure to fluctuations of interest rates.
The Company also uses foreign currency options and forward
contracts to reduce the Company's risk due to foreign currency
exchange rate movement. Gains and losses on these contracts
generally offset losses and gains on the assets, liabilities and
transactions being hedged. These financial instruments are used to
minimize exposure and to reduce risk from exchange rate
fluctuations in the regular course of the Company's global
business. Based on the opinion of management, no material exposure
exists in any of these instruments.
PART II - OTHER INFORMATION
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Item 1. LEGAL PROCEEDINGS
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Reference is made to the third paragraph under "Item 3. Legal
Proceedings" in Mead's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, regarding a declaratory judgment
action filed by Mead against the U. S. Navy. Mead filed a Renewed
Motion for Partial Summary Judgment on April 21, 1994 as to the
liability of the U. S. Navy and cited additional documents in
support.
Reference is made to the seventh paragraph under "Item 3.
Legal Proceedings" in Mead's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, regarding alleged air
violations at the Mead Publishing Paper mill in Escanaba, Michigan.
A settlement was reached with USEPA in April, 1994. Mead agreed to
pay a fine of $85,000, to make minor changes to some equipment and
operating procedures and to provide certain reports to USEPA in
settlement of this proceeding.
In March, 1994, Mead received a Notice of Violation from USEPA
for alleged Violations of the Ohio State Implementation Plan
("SIP") under the Clean Air Act. USEPA alleges that on two
occasions emissions of particulate matter from one of the boilers
at the Mead Fine Paper mill in Chillicothe, Ohio exceeded levels
allowed under the SIP. USEPA and Mead are discussing these
allegations, and Mead does not believe that this proceeding will
have a material adverse effect on the Company.
Mead has been informed by Ohio EPA that it is contemplating an
enforcement action seeking penalties from Mead for various alleged,
unrelated air violations at the Mead Fine Paper mill in
Chillicothe, Ohio dating back to 1989. The alleged violations
concern particulate emissions from a coal-fired boiler in 1989, the
absence of a permit for the facility's chlorine unloading station
and the untimely installation of equipment to control odors. Ohio
EPA and Mead are discussing these allegations, and Mead does not
believe that any such proceeding will have a material adverse
effect on the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
(10) Material Contracts:
(1) Mead Management Incentive Plan for 1994 in
which executive officers participate.
(2) Restricted Stock Plan effective December 10,
1987, as amended through April 28, 1994.
(3) Lease Agreement between The Industrial
Development Board of the City of Phenix City,
Alabama and Mead Coated Board, Inc., dated as
of June 1, 1993.
(11.1), (11.2), (11.3) Calculations of Net Earnings per
Share.
(b) No current reports on Form 8-K were filed with the
Commission in the first quarter of 1994.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: May 13, 1994
THE MEAD CORPORATION
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(Registrant)
By J. D. Fuller
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J. D. Fuller
Controller and
Chief Accounting Officer
QUARTERLY\FORM10Q.WP
051294