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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 March 29, 1998
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 March 29, 1998 was
104,067,481.
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THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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QUARTERLY PERIOD ENDED MARCH 29, 1998
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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)
Mar. 29, Dec. 31,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 18.7 $ 29.5
Accounts receivable 611.3 586.1
Inventories 606.4 524.5
Other current assets 88.9 77.5
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Total current assets 1,325.3 1,217.6
Investments and other assets:
Investees 149.2 151.1
Other assets 584.6 551.2
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733.8 702.3
Property, plant and equipment - net 5,608.6 5,540.9
Less accumulated depreciation and
amortization (2,285.3) (2,231.1)
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3,323.3 3,309.8
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Total assets $ 5,382.4 $ 5,229.7
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LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Notes payable $ 138.4 $
Accounts payable 338.5 330.4
Accrued liabilities 364.2 382.6
Current maturities of long-term
debt 3.2 1.8
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Total current liabilities 844.3 714.8
Long-term debt 1,428.0 1,428.0
Commitments and contingent liabilities
Deferred items 810.1 798.4
Shareowners' equity:
Common shares 155.1 154.9
Additional paid-in capital 62.9 53.5
Foreign currency translation
adjustment (24.4) (20.5)
Retained earnings 2,106.4 2,100.6
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2,300.0 2,288.5
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Total liabilities and
shareowners' equity $ 5,382.4 $ 5,229.7
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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 dollar amounts in millions, except per share amounts)
First Quarter Ended
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Mar. 29, Mar. 30,
1998 1997
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Net sales $ 1,167.4 $ 1,135.7
Cost of products sold 950.8 940.5
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Gross profit 216.6 195.2
Selling and administrative expenses 140.2 142.3
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Earnings from operations 76.4 52.9
Other revenues - net 3.4 2.6
Interest and debt expense (26.5) (23.3)
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Earnings from continuing
operations before income taxes 53.3 32.2
Income taxes 19.7 11.8
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Earnings from continuing
operations before equity in net
earnings (loss) of investees 33.6 20.4
Equity in net earnings (loss)
of investees (3.0) (.2)
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Net earnings $ 30.6 $ 20.2
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Earnings per common share - basic
and assuming dilution $ .29 $ .19
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Cash dividends per common share $ .16 $ .15
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Weighted-average number of common
shares outstanding (millions) -
basic 103.9 104.4
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Weighted-average number of common
shares outstanding (millions) -
assuming dilution 105.8 106.1
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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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Mar. 29, Mar. 30,
1998 1997
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Cash flows from operating activities:
Net earnings $ 30.6 $ 20.2
Adjustments to reconcile net earnings to
net cash (used in) operating activities:
Depreciation and depletion of property, plant
and equipment 62.7 60.6
Depreciation and amortization of other assets 11.1 11.6
Deferred income taxes 4.3 3.4
Investees-loss and dividends 2.2 (.2)
Other (.1) (5.3)
Change in current assets and liabilities:
Accounts receivable (25.2) 4.4
Inventories (81.9) (73.0)
Other current assets (12.2) (10.0)
Accounts payable and accrued liabilities (10.3) (44.1)
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Net cash (used in) operating activities (18.8) (32.4)
Cash flows from investing activities:
Capital expenditures (78.5) (66.8)
Additions to equipment rented to others (6.2) (8.9)
Other (31.2) 9.2
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Net cash (used in) investing activities (115.9) (66.5)
Cash flows from financing activities:
Additional borrowings 115.7 539.3
Payments on borrowings (115.0) (531.8)
Notes payable 138.4 100.3
Cash dividends paid (16.6) (15.7)
Common shares issued 10.1 8.1
Common shares purchased (8.7) (7.2)
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Net cash provided by financing activities 123.9 93.0
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(Decrease) in cash and cash equivalents (10.8) (5.9)
Cash and cash equivalents at beginning of year 29.5 20.6
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Cash and cash equivalents at end of quarter $ 18.7 $ 14.7
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See notes to financial statements.
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All dollar amounts in millions)
A - FINANCIAL STATEMENTS
The balance sheet at December 31, 1997, 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):
March 29, Dec. 31,
1998 1997
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Finished and semi-finished products $419.4 $342.5
Raw materials 103.6 99.3
Stores and supplies 83.4 82.7
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$606.4 $524.5
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D - INVESTEES
The summarized operating data for all investees is presented in the
following table:
First Quarter Ended
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March 29, March 30,
1998 1997
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Revenues $ 176.4 $ 179.3
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Gross profit $ 1.6 $ 11.7
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Net earnings (loss) $ (2.5) $ 2.0
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E - LONG-TERM DEBT
Long-term debt at March 29, 1998, includes $75.0 million of short-term
borrowings which have been classified as long-term debt based on
management's intent and the company's ability to refinance the
borrowings on a long-term basis. After reduction for these financings,
the company has unused long-term lines of credit of $385.0 million.
F - SHAREOWNERS' EQUITY
During the first quarter of 1998, the company repurchased approximately
252,000 common shares on the open market. The company has outstanding
authorization from the Board of Directors to repurchase up to ten
million common shares, of which 6.4 million shares have been repurchased
as of the end of the first quarter of 1998.
G - COMPREHENSIVE INCOME
Effective January 1, 1998, the company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." The
company's difference between net income and comprehensive income relates
to the changes in foreign currency translation adjustment.
Comprehensive income for the quarters ended March 29, 1998 and March 30,
1997, was $26.7 million and $13.9 million, respectively.
H - ADDITIONAL INFORMATION ON CASH FLOWS
First Quarter Ended
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March 29, March 30,
1998 1997
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Cash paid (refunded) for:
Interest (net of capitalized
interest) $ 42.3 $ 24.4
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Income taxes $ 7.5 $ (3.0)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
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Net Sales
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First quarter 1998 net sales were $1.17 billion, a 3% increase over the
$1.14 billion in the first quarter of 1997. Net earnings for the quarter
were $30.6 million compared with $20.2 million in 1997. Average selling
prices were higher in the first quarter of 1998 for many of the
company's products, especially coated paper and corrugating medium
compared with the first quarter of 1997. Sales volume was slightly lower
for coated and carbonless papers. At Mead's distribution business,
Zellerbach, sales improved compared with the first quarter of 1997.
Sales for School and Office Products declined from the level of the same
quarter of 1997.
Operating Costs and Expenses
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Gross profit as a percent of sales increased to 18.6% for the first
quarter of 1998 from 17.2% compared with first quarter of 1997 primarily
due to higher selling prices. During the quarter earnings were
negatively affected by higher operating costs at the Rumford, Maine,
mill due to a temporary equipment outage, and at the company's
corrugating medium mill in Stevenson, Alabama, as a result of start-up
costs associated with the paper machine expansion and related
environmental improvement project.
Selling and administrative expenses totaled $140.2 million in the first
quarter, down from $142.3 million in 1997. As a percentage of net sales,
these expenses were 12.0% in the first quarter of 1998 compared with
12.5% in the same quarter in 1997.
Interest and Debt Expense
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First quarter interest and debt expense was $26.5 million, up from the
first quarter of 1997 level of $23.3 million. The increase is
attributable to additional debt levels in 1998, primarily associated
with the expansion project at the Stevenson mill.
Income Taxes
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The effective tax rate was 37.0% for the first quarter of 1998 compared
to 36.6% for the first quarter of 1997.
Equity in Net Earnings of Investees
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Mead's investees, consisting primarily of its 50% owned Northwood
companies, recorded a loss of $3.0 million in the first quarter of 1998
compared with a loss of $.2 million in the same quarter of 1997. Sales
volume for pulp was higher during the quarter compared with 1997,
though prices declined during the quarter and were about even with the
same quarter of 1997. The pulp mill operated well during the quarter
with production rates slightly higher than in the same period last year.
Prices for lumber were much lower in the first quarter of 1998, as were
prices and sales volume for plywood compared with the same quarter in
1997. During the quarter, two of Northwood's sawmills took some
market-related downtime. In the second quarter, Northwood's pulp mill is
scheduled to take effectively 12 days of downtime.
Financial Data by Business
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Paper segment
First Quarter
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1998 1997 % Change
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(All dollar amounts in millions)
Net sales (to unaffiliated
customers) $379.9 $393.5 (3)%
Segment earnings before taxes 59.5 41.8 42%
Net sales in the segment decreased modestly in the first quarter on
slightly lower sales volume. Sales volume was lower in coated papers and
carbonless papers, and was about even with the first quarter of last
year for uncoated and specialty papers. Earnings for the paper segment
improved over the first quarter of 1997 as a result of higher selling
prices for coated papers, especially for those grades produced at the
Rumford, Maine, and Escanaba, Michigan, paper mills. Prices for most
other grades were about even with those of the prior year. During the
quarter, production increased compared with the same quarter in 1997 at
the Escanaba mill, the Chillicothe, Ohio, mill and the South Lee,
Massachusetts, specialty paper mill. In April, Mead announced the
acquisition of a specialty paper mill in Potsdam, New York, from the
Little Rapids Corporation for an undisclosed cash sum. The mill
manufactures about 22,000 tons annually of pressure-sensitive tape
paper. Mead plans to invest over the next three years to upgrade the
mill's capabilities to allow it to also produce specialty grades such
as those produced at Mead's specialty paper mill in South Lee.
Packaging and Paperboard segment
First Quarter
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1998 1997 % Change
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(All dollar amounts in millions)
Net sales (to unaffiliated
customers) $342.9 $315.5 9%
Segment earnings before taxes 29.4 21.5 37%
Sales and earnings for the segment increased from the first quarter of
1997. Selling prices for corrugating medium, produced at the Stevenson
mill, increased about 40% from the levels of the same quarter in 1997,
while selling prices for corrugated containers were up slightly. The
division built inventory during the quarter in anticipation of a
scheduled 17-day shutdown of the #2 machine in April to facilitate the
expansion project. The #1 machine will take three days of scheduled
downtime during the same period.
In the Coated Board System, shipments of coated paperboard from the
Mahrt mill in Alabama, to Mead Packaging and the open market increased
by about 10% compared to the first quarter of 1997. Shipment volume of
beverage packaging was higher compared with the first quarter of 1997 as
a result of strong market demand in North America, Europe and Latin
America. Operating performance at Mead's packaging converting facilities
improved over the first quarter of 1997.
Distribution and School and Office Products segment
First Quarter
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1998 1997 % Change
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(All dollar amounts in millions)
Net sales (to unaffiliated
customers) $444.6 $426.7 4%
Segment earnings before taxes 2.4 3.1 (23)%
Sales for the segment in the first quarter were higher than in the same
quarter of 1997 as result of an eight percent increase in sales volume
at Zellerbach, Mead's distribution business. The increase in sales
occurred in all three of the division's businesses: printing; packaging;
and industrial supplies. Sales were seasonally lower than in the fourth
quarter of 1997. Division selling costs increased compared with the
first quarter of 1997 as a result of strengthening the sales force, but
that increase was offset during the quarter by lower administrative
costs, as the division continues to address operating performance
issues. Sales within the School and Office Products division were lower
than last year. The division's facilities operated well and built
inventory in preparation for the "back-to-school" selling season which
begins in the second quarter.
LIQUIDITY AND CAPITAL RESOURCES
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Working capital on March 29, 1998 was $481.0 million compared to $502.8
million on December 31, 1997. The current ratio of 1.6 at the end of
the first quarter was slightly lower than 1.7 at December 31, 1997.
Inventories are generally higher in the first quarter of the year in
preparation for the Mead School and Office Products "back-to-school"
season. Inventories levels were increased over levels of the first
quarter of 1997 at Zellerbach as part of an effort to grow sales volume,
and at Mead's Containerboard Division in anticipation of a scheduled
shutdown during the second quarter. At the end of the quarter, inventory
levels were much lower in coated paper at the Rumford mill and in coated
paperboard at the Mahrt mill compared to the first quarter of 1997.
Borrowed capital (long-term debt) as a percentage of total capital
(long-term debt plus shareowners' equity) was 38.3% on March 29, 1998,
and was 38.4% on December 31, 1997. On December 31, 1997 the company
classified $155.3 million of short-term borrowings as long-term debt
with the intent to refinance those borrowings on a long-term basis.
During the first quarter, $81.1 million was refinanced.
Capital expenditures totaled $78.5 million for the first quarter of 1998
compared with $66.8 million in the first quarter of 1997. The major
project in both time periods was at the Stevenson corrugating medium
mill.
Under a Board of Directors authorization, Mead repurchased 252,000
shares of its capital stock in the first quarter of 1998. By March 29,
1998, the 10 million share repurchase program (adjusted for the December
1997 two-for-one stock split) was 64% completed.
At the end of the first quarter, Mead paid a fixed rate or capped rate
on 72% of its debt and paid a floating rate of interest on the
remainder. A change of 1% in the floating rate, on an annual basis,
would result in a $.03 change in earnings per share for the year. The
estimated market value of long-term debt, excluding capital leases, was
$65.2 million more than the book value at the end of the first quarter
of 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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No material changes occurred to information previously
provided in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
PART II - OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
(10) Material Contracts:
(1) Corporate Annual Incentive Plan for 1998 in
which executive officers participate.
(2) Corporate Long Term Incentive Plan effective
1998 in which executive officers participate.
(3) Lease Agreement between The Industrial
Development Board of the City of Stevenson,
Alabama and The Mead Corporation, dated as of
March 1, 1998.
(27.1) Financial Data Schedule Quarter 1, 1998
(27.2) Financial Data Schedule Fiscal year ends 1996, 1995
and Quarters 1, 2, 3 of 1996
(27.3) Financial Data Schedule Quarters 1, 2, 3 of 1997
(b) Reports on Form 8-K
(1) A Form 8-K was filed on February 11, 1998 reporting
under Item 5 certain financial results of Registrant
for the year ended December 31, 1997. Also
filed as an exhibit was a copy of a Press
Release dated January 23, 1998.
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 11, 1998
THE MEAD CORPORATION
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(Registrant)
By: G. T. GESWEIN
_________________________
G. T. Geswein
Vice President, Controller and
Chief Accounting Officer