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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 June 29, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File 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: 937-495-6323
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 __ .
The number of Common Shares outstanding at June 29, 1997 was 52,306,147.
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THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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QUARTERLY PERIOD ENDED JUNE 29, 1997
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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
- --------------------------------------------------
BALANCE SHEETS
- --------------
(All dollar amounts in millions)
June 29, Dec. 31,
1997 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 15.8 $ 20.6
Accounts receivable 755.5 578.2
Inventories 541.4 509.3
Other current assets 93.8 81.2
-------- --------
Total current assets 1,406.5 1,189.3
Investments and other assets:
Investees 155.9 154.9
Other assets 559.6 521.3
-------- --------
715.5 676.2
Property, plant and equipment 5,342.9 5,198.5
Less accumulated depreciation and
amortization (2,167.4) (2,078.1)
-------- --------
3,175.5 3,120.4
-------- --------
Total assets $5,297.5 $4,985.9
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Notes payable $ 173.8 $
Accounts payable 386.4 358.9
Accrued liabilities 388.0 371.9
Income taxes payable 1.5 11.8
Current maturities of long-term debt 14.3 15.1
-------- --------
Total current liabilities 964.0 757.7
Long-term debt 1,273.6 1,239.7
Commitments and contingent liabilities
Deferred items 779.7 742.1
Shareowners' equity:
Common shares 156.0 155.5
Additional paid-in capital 33.5 13.2
Foreign currency translation adjustment (10.6) (2.4)
Retained earnings 2,101.3 2,080.1
-------- --------
2,280.2 2,246.4
-------- --------
Total liabilities and
shareowners' equity $5,297.5 $4,985.9
======== ========
See notes to financial statements.
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
- --------------------------------------------------
STATEMENTS OF EARNINGS
- ----------------------
(All dollar amounts in millions, except per share amounts)
Second Quarter Ended First Half Ended
-------------------- ------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
Net sales $1,322.3 $1,258.5 $2,458.0 $2,325.7
Cost of products sold 1,088.3 1,000.4 2,028.8 1,863.6
-------- -------- -------- --------
Gross profit 234.0 258.1 429.2 462.1
Selling and administrative expenses 139.5 140.0 281.8 274.9
-------- -------- -------- --------
Earnings from operations 94.5 118.1 147.4 187.2
Other revenues (expenses) - net (.9) 1.7 1.7 8.0
Interest and debt expense (24.6) (12.7) (47.9) (27.4)
-------- -------- -------- --------
Earnings from continuing operations
before income taxes 69.0 107.1 101.2 167.8
Income taxes 25.5 39.0 37.3 61.5
-------- -------- -------- --------
Earnings from continuing operations
before equity in net earnings (loss)
of investees 43.5 68.1 63.9 106.3
Equity in net earnings (loss)
of investees 4.3 (1.0) 4.1 (8.3)
-------- -------- -------- --------
Earnings from continuing operations 47.8 67.1 68.0 98.0
Discontinued operations (Note G) 5.4
-------- -------- -------- --------
Net earnings $ 47.8 $ 67.1 $ 68.0 $ 103.4
======== ======== ======== ========
Per common and common equivalent share:
Earnings from continuing operations $.90 $1.26 $1.28 $1.84
Discontinued operations .10
-------- -------- -------- --------
Net earnings $.90 $1.26 $1.28 $1.94
======== ======== ======== ========
Cash dividends per common share $.30 $ .30 $ .60 $ .58
======== ======== ======== ========
Average common and common equivalent
shares outstanding (millions) 53.0 53.2 53.0 53.4
======== ======== ======== ========
See notes to financial statements.
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
- --------------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------
(All dollar amounts in millions)
First Half Ended
-----------------
June 29, June 30,
1997 1996
------- -------
Cash flows from operating activities:
Net earnings $ 68.0 $103.4
Adjustments to reconcile net earnings to
net cash provided by (used in) operating activities:
Depreciation and depletion of property, plant
and equipment 120.4 97.0
Amortization of other assets 23.0 24.4
Deferred income taxes 15.2 11.1
Investees-earnings and dividends (1.7) 13.1
Discontinued operations (5.4)
Other (9.9) (12.3)
Change in current assets and liabilities:
Accounts receivable (177.3) (105.2)
Inventories (32.1) (68.1)
Other current assets (6.7) (9.1)
Accounts payable and accrued liabilities 33.3 (55.1)
Cash (used in) discontinued operations (1.5)
------ ------
Net cash (used in) operating activities 32.2 (7.7)
------ ------
Cash flows from investing activities:
Capital expenditures (185.6) (173.9)
Additions to equipment rented to others (18.4) (20.9)
Proceeds from sale of business 19.6
Other (12.4) (20.8)
------ ------
Net cash provided by (used in) investing activities (216.4) (196.0)
------ ------
Cash flows from financing activities:
Additional borrowings 564.2 32.8
Payments on borrowings (532.6) (67.5)
Notes payable 173.8 39.0
Cash dividends paid (31.3) (30.6)
Common shares issued 21.7 5.3
Common shares purchased (16.4) (45.7)
------ ------
Net cash provided by (used in) financing activities 179.4 (66.7)
------ ------
(Decrease) in cash and cash equivalents (4.8) (270.4)
Cash and cash equivalents at beginning of year 20.6 292.6
------ ------
Cash and cash equivalents at end of half $ 15.8 $22.2
====== ======
See notes to financial statements.
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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NOTES TO FINANCIAL STATEMENTS
- -----------------------------
(All dollar amounts in millions)
A - FINANCIAL STATEMENTS
The balance sheet at December 31, 1996 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):
June 29, Dec. 31,
1997 1996
-------- -------
Finished and semi-finished products $371.9 $337.8
Raw materials 87.2 91.2
Stores and supplies 82.3 80.3
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$541.4 $509.3
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D - INVESTEES
The summarized operating data for all investees is presented in the
following table:
Second Quarter Ended First Half Ended
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June 29, June 30, June 29, June 30,
1997 1996 1997 1996
------- ------- ------- -------
Revenues $193.0 $164.2 $372.3 $309.4
====== ====== ====== ======
Gross profit (loss) $ 21.4 $ 5.1 $ 33.1 $(10.3)
====== ====== ====== ======
Net earnings (loss) $ 11.0 $ (.5) $ 13.0 $(14.1)
====== ====== ====== ======
E - ADDITIONAL INFORMATION ON CASH FLOWS
First Half Ended
-----------------
June 29, June 30,
1997 1996
------- -------
Cash paid for:
Interest $ 31.7 $ 28.9
====== ======
Income taxes $ 18.1 $ 38.2
====== ======
F - SHAREOWNERS' EQUITY
During the second quarter of 1997, the Company repurchased approximately
148,000 common shares on the open market. The Company has outstanding
authorization from the Board of Directors to repurchase up to five million
common shares, of which 2.3 million shares have been repurchased as of the
end of the first half of 1997.
G - DISCONTINUED OPERATIONS
Mead sold its previously discontinued Imaging business during the first
quarter of 1996. The sale resulted in a gain of $5.4 million, net of
income tax of $3.2 million.
H - EARNINGS PER SHARE
The Company calculates earnings per share using methods prescribed by
Accounting Principles Board Opinion (APB) No. 15, "Earnings per Share."
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which replaces APB No. 15 and requires adoption for periods ending
after December 15, 1997. The Statement will require dual presentation of
basic and diluted earnings per share on the face of the statement of
earnings. For the periods ended June 29, 1997 and June 30, 1996, the
basic and diluted earnings per share calculated pursuant to SFAS No. 128
are not materially different from primary earnings per share calculated
under APB No. 15.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
RESULTS OF OPERATIONS
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Net Sales
- --------
Second quarter 1997 net sales were $1.32 billion, 5% higher than the $1.26
billion of sales generated in the second quarter of 1996. For the first
half, net sales were $2.46 billion in 1997 compared to $2.33 billion in
1996. 1997 sales include those of the Rumford, Maine, coated and
specialty paper mill acquired in November, 1996. Excluding Rumford's
results, 1997 net sales were slightly behind 1996 levels for both the
second quarter and first half. Sales volume to customers for coated
papers, paperboard and corrugating medium has exceeded 1996 levels for
both the first half and second quarter but prices have averaged lower,
most notably for medium. Sales volume and prices for the products of
Zellerbach, Mead's distribution business, also trail the prior year for
both the second quarter and the first half. Toward the end of the second
quarter of 1997, price increases for coated papers and corrugating medium
were announced. Overall, management is encouraged by the strengthening
prices now seen as a result of increased demand in pulp, coated paper and
containerboard.
Operating Costs and Expenses
- ----------------------------
Gross profit as a percent of sales fell to 17.7% for the second quarter of
1997 compared with 20.5% for the second quarter of 1996 due primarily to
declining prices. Likewise, this percentage decreased to 17.5% for the
first half of 1997 compared with 19.9% in the same period of last year.
Mead's operations performed well during the second quarter of 1997.
Productivity gains over 1996 were achieved in almost every division of
Mead. Mead's coated board mill in Phenix City, Alabama, operated well
despite the completion of the scheduled four-week rebuild of the Number 1
machine.
First half 1997 selling and administrative expenses of $281.8 million are
slightly higher than the same period of 1996 and include the addition of
the Rumford, Maine, operation. These expenses are even with 1996 for the
second quarter. As a percent of sales on a year-to-date basis, selling
and administrative expenses are about 11.5% for 1997 compared with 11.8%
for 1996.
Other Revenues (Expense) - Net
- ------------------------------
Other revenues (expense) were not significant in either the second
quarters or first halves of 1997 and 1996.
Interest and Debt Expense
- -------------------------
First half 1997 interest and debt expense was $47.9 million, a 75%
increase over the $27.4 million incurred in the same period of 1996.
Similarly, second quarter 1997 interest and debt expense almost doubled
from $12.7 million in 1996 to $24.6 million in 1997. The increase is
attributable to higher 1997 debt levels, primarily associated with the
acquisition of the Rumford, Maine, mill.
Income Taxes
- ------------
The effective tax rate was 37.0% in the second quarter of 1997 compared to
36.4% in the second quarter of 1996. For the half, this rate was 36.9% in
1997 and 36.6% in 1996.
Equity in Net Earnings of Investees
- -----------------------------------
In the second quarter of 1997, Mead's investees, consisting primarily of
its 50% owned Northwood companies, recorded earnings (Mead's share) of
$4.3 million compared to a loss of $(1.0) million in the same quarter of
1996. For the first half, Mead's share of earnings was $4.1 million in
1997 compared to a loss of $(8.3) million posted for 1996. Northwood's
1997 results improved on stronger wood prices, increasing pulp prices and
improved mill operations. Furthermore, the pulp mill has taken no market
downtime in 1997. During the first half of 1996, 21 days of market
downtime was taken. Selling prices of oriented structural board, however,
were about 35% lower than a year ago and partially offset the improved
pulp results.
Along with the Rumford, Maine, coated and specialty paper mill, Mead
acquired a 30% ownership interest in a limited partnership which operates
a cogeneration facility at that mill. This partnership contributed
positively to earnings after income taxes in each of the first two
quarters of 1997.
Discontinued Operations
- -----------------------
Mead sold its Imaging business during the first quarter of 1996. The sale
resulted in an after-tax gain of $5.4 million or $.10 per share.
Financial Data by Business
- --------------------------
Paper segment
Second Quarter First Half
------------------------ ----------------------
1997 1996 % Change 1997 1996 % Change
---- ---- -------- ---- ---- --------
(All dollar amounts in millions)
Net sales (to unaffiliated
customers) $377.1 $303.5 24% $770.6 $572.9 35%
Segment earnings before
taxes 44.6 46.0 (3)% 86.4 92.6 (7)%
Excluding the sales of the acquired Rumford mill, first half net sales for
the Paper segment were slightly ahead of last year's levels, though sales
for the second quarter were down. Sales volume for coated web grades was
strong and steadily improved throughout the first half of 1997, but prices
averaged below those realized in 1996. The weakness in selling prices
sharply affected the first half results of the Publishing Paper division
operations compared to the prior year. However, 1997 second quarter
earnings were even with 1996. At the Fine Paper division, volume,
primarily for coated sheets, was lower in the second quarter of 1997
compared with 1996. However, first half division earnings were ahead of
1996. Sales and earnings of Mead's Specialty Paper Division in South Lee,
Massachusetts, in 1997 have grown significantly over 1996 for both the
first half and second quarter. On the whole, Mead's paper mills operated
well during the quarter. Throughout the second quarter of 1997, backlogs
grew at both the Escanaba and Rumford mills.
Packaging and Paperboard segment
Second Quarter First Half
------------------------ ----------------------
1997 1996 % Change 1997 1996 % Change
---- ---- -------- ---- ---- ---------
(All dollar amounts in millions)
Net sales (to unaffiliated
customers) $378.2 $377.0 - % $693.7 $702.8 (1)%
Segment earnings before
taxes 30.1 49.2 (39)% 51.6 78.4 (34)%
For both the second quarter and first half of 1997, sales increases at
Mead's Phenix City, Alabama, coated board mill and Mead Packaging's North
American operations were offset by sales decreases at Mead Containerboard
and Mead Packaging's foreign operations. For the past two years, prices
for corrugating medium have steadily declined. Gross selling prices for
medium have fallen almost 60% from their highs in 1995. This price
decline is the principal reason that second quarter and first half 1997
earnings of the Containerboard division and the Packaging and Paperboard
segment were significantly below the results of the corresponding periods
of 1996. In June 1997, however, a $40 per ton price increase for medium
was announced. An additional price increase has been announced effective
August 1.
Mead Packaging division's 1997 second quarter earnings were slightly
higher than the second quarter of 1996, buoyed by a strong operating
performance and a brisk early summer beverage packaging season in North
America. This division's second quarter earnings were negatively impacted
by unfavorable foreign exchange rates and costs associated with the
closing of the Godfrey, Illinois, facility. For Mead's Coated Board
Division, second quarter earnings were lower in 1997 than in 1996 due to
lower open market pricing and a four-week shutdown of the Number 1 machine
for a scheduled rebuild. This caused first half 1997 earnings to be below
1996 levels as well.
Distribution and School and Office Products segment
Second Quarter First Half
------------------------ ------------------------
1997 1996 % Change 1997 1996 % Change
---- ---- -------- ---- ---- --------
(All dollar amounts in millions)
Net sales (to unaffiliated
customers) $567.0 $578.0 (2)% $993.7 $1,050.0 (5)%
Segment earnings before
taxes 32.0 40.4 (21)% 35.1 48.4 (27)%
At Zellerbach, Mead's distribution business, sales and earnings for the
first half and second quarter of 1997 were below those of the same periods
of 1996 due to weak prices and lower sales volume. Market conditions
appear to be improving in some segments of the business and in certain
parts of the country but remain soft in others. Mead's School and Office
Products Division posted higher sales for both the first half and second
quarter of 1997 compared to 1996 on strength in demand for its value added
and licensed products. This division's second quarter 1997 earnings were
slightly behind last year's second quarter but slightly exceeded 1996 for
the first half.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital was $442.5 million at June 29, 1997 compared to $431.6
million at December 31, 1996, and $539.8 million at June 30, 1996. The
current ratio was 1.5 at June 29, 1997, 1.6 at December 31, 1996 and 1.7
at June 30, 1996. Virtually all the working capital accounts, especially
receivables, inventories and accounts payable, were significantly higher
at June 29, 1997 than at June 30, 1996 due to the Rumford, Maine,
paper mill acquisition. The seasonal build in inventory and receivables
due to the Mead School and Office Product's back-to-school season was
partly financed by short-term notes payable. Mead's 1997 seasonal
borrowing needs were higher than at the end of the first half of
1996 due to lower 1997 selling margins on many products, higher capital
spending in 1997 and a lower cash balance at the beginning of the 1997
second quarter.
Capital expenditures totaled $185.6 million for the first half of 1997
compared to $173.9 million for the same period of 1996. For the second
quarter, capital expenditures were $118.8 million in 1997 and $96.3
million in 1996. Major projects in all time periods were at the
Stevenson, Alabama, corrugating medium mill.
Borrowed capital (long-term debt) as a percent of total capital (long-term
debt plus shareowners' equity) was 35.8% at June 29, 1997 compared to
35.6% at December 31, 1996. During the first quarter of 1997, Mead
refinanced $550 million of debt with a series of notes and debentures that
carry interest rates from 6.60% to 7.55% and have maturities ranging from
five to fifty years. In the second quarter of 1997, Mead completed a $25
million tax exempt financing related to the Stevenson, Alabama,
corrugating medium mill.
Under an April, 1995 Board of Directors' authorization, Mead repurchased
approximately 148,000 shares of its common stock during the second quarter
of 1997. Year-to-date repurchases amounted to approximately 273,000
shares. By June 29, 1997, the five million share repurchase program was
about 46% completed.
At the end of the second quarter, Mead paid a fixed rate or a capped rate
on 75% 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 $.05 change in earnings per share for the year. The estimated
market value of long-term debt, excluding capital leases, was $40 million
more than the book value at the end of the second quarter of 1997.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
Reference is made to the fifth paragraph under "Item 3. Legal Proceedings"
in Mead's Annual Report on Form 10-K for the fiscal year ended December
31, 1996, regarding various air violations at the Mead Fine Paper mill in
Chillicothe, Ohio dating back to 1989. Mead executed Final Findings and
Orders with the Director of the Ohio EPA on May 12, 1997 to resolve the
proceeding. Mead was assessed penalties in the amount of $221,130. Of
this amount, Mead paid $51,130 and agreed to make certain improvements
valued by Ohio EPA at $170,000 by not later than March 30, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
(a) The Annual Meeting of Shareholders of Mead was held on April
24, 1997.
(b) Proxies were solicited for the meeting pursuant to Regulation
14A. There was no solicitation in opposition to management's
nominees listed in the proxy statement, and John C. Bogle,
William E. Hoglund, John A. Krol, Susan J. Kropf, Steven C.
Mason, Paul F. Miller, Jr., Lee J. Styslinger, Jr., Jerome F.
Tatar and J. Lawrence Wilson were elected. The other
directors whose term of office continued after the meeting
also include John G. Breen, James G. Kaiser and Charles S.
Mechem, Jr.
(c) The results of the election directors are as follows:
Number of Votes
---------------
Nominee For Withheld
------- --- --------
John C. Bogle 44,904,107 1,424,340
William E. Hoglund 45,845,486 482,961
John A. Krol 45,865,950 462,496
Susan J. Kropf 44,905,493 1,422,954
Steven C. Mason 45,814,297 514,150
Paul F. Miller, Jr. 45,834,309 494,137
Lee J. Styslinger, Jr. 45,865,555 462,892
Jerome F. Tatar 45,833,628 494,819
J. Lawrence Wilson 45,865,580 462,866
Nominee Absentions Broker Non-Votes
------- ---------- ----------------
John C. Bogle -0- -0-
William E. Hoglund -0- -0-
John A. Krol -0- -0-
Susan J. Kropf -0- -0-
Steven C. Mason -0- -0-
Paul F. Miller, Jr. -0- -0-
Lee J. Styslinger, Jr. -0- -0-
Jerome F. Tatar -0- -0-
J. Lawrence Wilson -0- -0-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(27) Financial Data Schedule
(b) No current reports on Form 8-K were filed with the Commission
in the second quarter of 1997.
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: August 11, 1997
THE MEAD CORPORATION
- --------------------
(Registrant)
By: G. T. GESWEIN
__________________________________
G. T. Geswein
Vice President, Controller and
Chief Accounting Officer
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