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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 1, 2001
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 ___.
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The number of Common Shares outstanding at April 1, 2001 was 99,107,586.
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THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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QUARTERLY PERIOD ENDED APRIL 1, 2001
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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 (unaudited)
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(All dollar amounts in millions)
April 1, Dec. 31,
2001 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 14.4 $ 29.4
Accounts receivable 496.8 557.3
Inventories 655.2 561.5
Other current assets 138.8 133.1
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Total current assets 1,305.2 1,281.3
Investments and other assets 1,131.8 1,128.8
Property, plant and equipment 6,065.1 6,032.4
Less accumulated depreciation and amortization (2,822.5) (2,762.5)
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3,242.6 3,269.9
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Total assets $ 5,679.6 $ 5,680.0
========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Notes payable $ 218.2 $ 200.3
Accounts payable 262.2 269.1
Accrued liabilities 429.3 530.3
Current maturities of long-term debt 112.7 12.6
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Total current liabilities 1,022.4 1,012.3
Long-term debt 1,337.3 1,322.8
Deferred items 967.8 947.1
Shareowners' equity:
Common shares 147.8 147.4
Additional paid-in capital 129.6 125.2
Retained earnings 2,109.6 2,172.9
Other comprehensive loss (34.9) (47.7)
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2,352.1 2,397.8
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Total liabilities and shareowners' equity $ 5,679.6 $ 5,680.0
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See notes to financial statements.
2
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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STATEMENTS OF OPERATIONS (unaudited)
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(All dollar amounts in millions, except per share amounts)
First Quarter Ended
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April 1, April 2,
2001 2000
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Net sales $ 944.5 $ 953.6
Costs and expenses:
Cost of sales 850.7 776.6
Selling and administrative
expenses 113.5 118.6
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964.2 895.2
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Earnings (loss) from operations (19.7) 58.4
Other revenues - net .4 1.5
Interest and debt expense (28.8) (29.7)
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Earnings (loss) before income taxes (48.1) 30.2
Income taxes (10.3) 11.0
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Earnings (loss) before equity in
net earnings of investees (37.8) 19.2
Equity in net earnings of investees 1.2 4.0
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Earnings (loss) before cumulative effect of
change in accounting principle (36.6) 23.2
Cumulative effect of change in
accounting principle (10.4) (2.4)
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Net earnings (loss) $ (47.0) $ 20.8
========= =========
Earnings (loss) per common share - basic:
Earnings (loss) before cumulative effect of
change in accounting principle $ (.37) $ .22
Cumulative effect of change in
accounting principle (.10) (.02)
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Net earnings (loss) $ (.47) $ .20
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Earnings (loss) per common share - diluted:
Earnings (loss) before cumulative effect of
change in accounting principle $ (.37) $ .22
Cumulative effect of change in
accounting principle (.10) (.02)
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Net earnings (loss) $ (.47) $ .20
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Cash dividends per common share $ .17 $ .17
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Average common shares
outstanding (millions) - basic 99.1 102.7
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Average common shares
outstanding (millions) - diluted 99.1 104.4
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See notes to financial statements.
3
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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STATEMENTS OF CASH FLOWS (unaudited)
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(All dollar amounts in millions)
First Quarter Ended
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April 1, April 2,
2001 2000
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Cash flows from operating activities:
Net earnings (loss) $ (47.0) $ 20.8
Adjustments to reconcile net earnings (loss) to
net cash (used in) operating activities:
Depreciation, amortization and depletion of
property, plant and equipment 71.3 69.0
Depreciation and amortization of other assets 15.7 14.9
Deferred income taxes 22.6 17.4
Investees-earnings and dividends (1.9) (4.2)
Cumulative effect of change in accounting principle 10.4 2.4
Other (5.6) (6.6)
Change in current assets and liabilities:
Accounts receivable 60.5 60.6
Inventories (93.7) (137.3)
Other current assets (7.7) (10.0)
Accounts payable and accrued liabilities (107.9) (94.3)
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Net cash (used in) operating activities (83.3) (67.3)
Cash flows from investing activities:
Capital expenditures (45.5) (32.2)
Additions to equipment rented to others (8.0) (7.5)
Other 1.8 (9.0)
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Net cash (used in) investing activities (51.7) (48.7)
Cash flows from financing activities:
Additional borrowings 113.9
Payments on borrowings (.3) (21.7)
Notes payable 17.9 105.2
Cash dividends paid (16.3) (17.4)
Common shares issued 4.8 5.8
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Net cash provided by financing activities 120.0 71.9
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(Decrease) in cash and cash equivalents (15.0) (44.1)
Cash and cash equivalents at beginning of year 29.4 56.4
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Cash and cash equivalents at end of quarter $ 14.4 $ 12.3
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See notes to financial statements.
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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, 2000, 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 of normal recurring
adjustments) necessary to present fairly the financial position and results of
operations for the interim periods presented have been made. These financial
statements should be read in conjunction with the company's Annual Report on
Form 10-K for the year ended December 31, 2000. The results of operations for
the first quarter ended April 1, 2001, are not necessarily indicative of the
results for the full year.
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 1, Dec. 31,
2001 2000
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Finished and semi-finished products $ 436.5 $ 360.1
Raw materials 131.2 117.2
Stores and supplies 87.5 84.2
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$ 655.2 $ 561.5
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D - LOCATION CLOSURES AND EMPLOYEE TERMINATION COSTS
During 2000, the company recorded a pretax charge of $9.5 million in cost of
sales associated with the shutdown and disposal of one Consumer and Office
Products location and the shutdown of one Packaging and Paperboard location. The
charges included $1.3 million for transferring equipment to other locations,
$6.8 million for severance costs including medical, dental and other benefits,
and an additional $1.4 million in depreciation expense. Machinery and equipment
was transferred to various Consumer and Office Products and Packaging and
Paperboard locations and expensed as incurred. The severance costs related to
269 salaried and hourly employees who have left the company on or before April
1, 2001. The following is a summary of the related severance charges.
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Severance Charge
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Balance at December 31, 2000 $ 1.3
Used for intended purpose (1.3)
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Balance at April 1, 2001 $
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E - SHAREOWNERS' EQUITY
The company has outstanding authorization from the Board of Directors to
repurchase up to ten million common shares; however, no shares were repurchased
in the first quarter of 2001. As of the first quarter of 2001, 4.1 million
shares have been repurchased on the open market.
Comprehensive earnings for the first quarter ended April 1, 2001 and April 2,
2000, were $(34.2) million and $14.6 million; respectively. The difference
between net earnings and comprehensive earnings for the first quarter ended
April 1, 2001 relates to the change in foreign currency translation adjustment,
unrealized loss on available-for-sale securities, additional minimum pension
liability and the adoption of Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities".
F - ADDITIONAL INFORMATION ON CASH FLOWS
First Quarter Ended
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April 1, April 2,
2001 2000
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Cash paid for:
Interest $ 43.4 $ 45.1
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Income Taxes $ 24.7 $ 30.5
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G - SEGMENT INFORMATION
First Quarter Ended
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April 1, April 2,
2001 2000
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Net sales:
Industry segments:
Paper $ 476.3 $ 468.6
Packaging and Paperboard 363.2 388.8
Consumer and Office Products 105.0 96.2
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Total $ 944.5 $ 953.6
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Earnings (loss) from operations
before income taxes:
Industry segments:
Paper $ (6.3) $ 48.5
Packaging and Paperboard 11.9 42.2
Consumer and Office Products (8.5) (11.9)
Corporate and other (1) (45.2) (48.6)
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Total $ (48.1) $ 30.2
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(1) Corporate and other includes the
following:
Other revenues (expenses) $ (.4) $ 2.0
Interest expense (28.8) (29.7)
Other expenses (16.0) (20.9)
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Total $ (45.2) $ (48.6)
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Identifiable assets have not changed significantly at April 1, 2001, compared to
December 31, 2000.
H - DERIVATIVES FINANCIAL INSTRUMENTS
Effective January 1, 2001, the company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
All derivative instruments are required to be recorded on the balance sheet at
fair value. If the derivative is designated as a fair value hedge, the changes
in the
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fair value of the derivative and of the hedged item attributable to the hedged
risk are recognized in earnings. If the derivative is designated as a cash flow
hedge, the effective portion of the change in the fair value of the derivative
is recorded in other comprehensive loss and is recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in the fair value of cash flow hedges are recognized in earnings currently.
The adoption of SFAS No. 133 resulted in a cumulative effect after-tax charge to
earnings of $10.4 million and a reduction in other comprehensive loss of $10.3
million. The reduction to income is mostly attributable to an embedded option
within a convertible debenture classified as an available for sale investment.
The debenture was received as part of the consideration for the sale of an
equity investee in 1999. The embedded derivative has been bifurcated from the
debenture and is not designated as a hedge. The change in fair value of the
derivative during the first quarter of 2001 is recorded in other revenues.
The net derivative loss included in other comprehensive loss at the end of the
first quarter 2001 which is expected to be reclassified to earnings within the
next 12 months is approximately $100 thousand.
The company uses various derivative financial instruments as part of an overall
strategy to manage exposures to market risks associated with interest rates,
commodity prices and foreign currency exchange fluctuations. The company's
objective for engaging in derivatives is to manage the risks to an acceptable
level while using the most cost effective methods.
Interest Rate Risk
The company utilizes interest rate swap and cap agreements to manage its
interest rate risks on its debt instruments including the reset of interest
rates on variable rate debt. As part of an overall strategy to maintain an
acceptable level of exposure to interest rate fluctuation, the company has
developed a targeted mix of fixed-rate or cap-protected debt and variable rate
debt. To efficiently manage this mix, the company may utilize interest rate swap
and cap agreements. The company utilizes interest rate cap agreements to limit
the impact of increases in interest rates on its floating rate. The fair value
of the cap is not material. The company has interest rate swaps with a $34.3
million notional amount designated as fair value hedges of certain fixed rate
borrowings. The maturity dates on these swaps match the maturity dates of the
underlying debt. Included in other revenues is pre-tax income of approximately
$350 thousand associated with the ineffectiveness of fair value hedges of
interest rate risk during the first quarter. The company also has an interest
rate swap with a notional amount of $50 million and remaining life of five
years, designated as a cash flow hedge. There was no ineffectiveness during the
first quarter of 2001 for this hedge.
Commodities Price Risk
The company is exposed to price changes in raw materials, components, and items
purchased for resale. The prices of some of these items can vary significantly
over time due to changes in the markets in which the company's many suppliers
operate. The company's selling prices often change in a similar fashion,
although often to a greater or lesser degree. The company currently uses a
limited amount of derivative financial instruments to manage its exposure to
changes in certain commodity prices. The company has entered swap transactions
on a notional amount of
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old corrugated containers ("OCC") and corrugated medium sales. These contracts
are designated as cash flow hedges of the forecasted purchases of OCC and
forecasted sales of medium. There is no ineffectiveness associated with these
contracts.
Foreign Currency Risk
The company uses foreign currency forward contracts to manage the foreign
currency exchange risks associated with its international operations. The
company utilizes forward contracts which are short-term in duration and receives
or pays the difference between the contracted forward rate and the exchange rate
at the settlement date. The forward contracts, which are not designated as
hedging instruments under SFAS No. 133, are used to hedge the impact of the
variability of exchange rates on the company's cash flow.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
- ---------------------
Net sales
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First quarter net sales were $944.5 million, a 1% decrease from $953.6 million
in the first quarter of 2000. The slight decline in sales revenue was primarily
from lower prices and sales volume of coated paper and corrugating medium.
Costs and expenses
- ------------------
Costs of sales of $850.7 million increased 10% from $776.6 million in 2000
primarily as a result of higher costs for energy and oil-derived raw materials
and due to operating difficulties at one of Mead's larger paper mills. Selling
and administrative expenses of $113.5 million decreased 4% from $118.6 million
in 2000 as a result of lower consulting and compensation-related expenses.
Interest and debt expense
- -------------------------
First quarter interest and debt expense of $28.8 million decreased 3% from $29.7
million in 2000 as a result of slightly lower interest rates in 2001.
Income taxes
- ------------
The effective income tax rate was 21.4% compared to 36.4% in the first quarter
of 2001. The tax rate was much lower because of the expected earnings reduction
in 2001 combined with the tax benefits of certain export sales arrangements.
Equity in net earnings of investees
- -----------------------------------
Mead's share of earnings from investees was $1.2 million compared to $4 million
in the first quarter of 2000. The decline was a result of lower selling prices
for oriented strand board (OSB).
Net earnings (loss)
- -------------------
Mead reported a net loss for the first quarter of 2001 of $47 million compared
to net earnings of $20.8 million in the first quarter of 2000. The net loss in
the first quarter of 2001 included an after-tax charge of $10.4 million for the
cumulative effect of an accounting change related to adoption of SFAS No. 133 as
discussed in Note H to the Financial Statements on this Form 10-Q. The decline
in operating results compared to the first quarter of 2000 was a result of lower
selling prices and shipments of coated paper and corrugating medium, operating
difficulties and higher costs for energy and certain raw materials. In the first
quarter of 2000, net earnings included an after-tax charge of $2.4 million,
reflecting the cumulative effect of a change in accounting principle related to
adoption of Securities and Exchange Commission Staff Accounting Bulletin No.
101.
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Financial Data by Business
- --------------------------
Paper segment
First Quarter
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2001 2000 % Change
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(All dollar amounts in millions)
Net sales $476.3 $468.6 2%
Segment earnings (loss) before income tax (6.3) 48.5 (113)%
Earnings in the Paper segment declined from last year's first quarter as a
result of higher costs for energy and certain raw materials, lower shipments and
selling prices for coated paper, lower selling prices for carbonless paper and
operating issues. Operating issues related to the conversion to alkaline
papermaking at the company's Ohio mill and other matters led to higher costs of
approximately $15 million pretax in the quarter. Shipments of carbonless paper
increased during the quarter compared to the first quarter of 2000 as a result
of a multi-year sales agreement signed in late 2000 with a new customer.
Packaging and Paperboard segment
First Quarter
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2001 2000 % Change
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(All dollar amounts in millions)
Net sales $363.2 $388.8 (7)%
Segment earnings before income tax 11.9 42.2 (72)%
Sales in the Packaging and Paperboard segment declined 7% from the prior year.
Earnings declined 72% from the prior year primarily as a result of market-
related issues that included higher costs for energy and certain raw materials,
lower shipments and prices for corrugating medium, containers and wood products
as well as the effect of foreign currency exchange rates on European operations.
To better match production to demand, the Containerboard division slowed
production of corrugating medium at its Stevenson, Alabama, mill, taking the
equivalent of 33,000 tons of market-related downtime during the first quarter at
a cost of approximately $5 million pretax.
Consumer and Office Products segment
First Quarter
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2001 2000 % Change
-------------------------------
(All dollar amounts in millions)
Net sales $105.0 $96.2 9%
Segment (loss) before income tax (8.5) (11.9) 29%
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Sales in the Consumer and Office Products segment increased 9% from the prior
year due to higher sales of consumer products. The segment reported a narrower
seasonal loss in the first quarter compared to the prior year's first quarter as
a result of higher sales and improvements in productivity. The segment generally
reports a seasonal operating loss in the first quarter of the year as the
selling season for its major product lines of school supplies and time
management products occurs later in the year. During the quarter, Mead acquired
selected assets formerly used by Pen-Tab, which had been a supplier of school
products to the marketplace. These assets included a facility in Front Royal,
Virginia, which Mead is now operating.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital on April 1, 2001 was $283 million compared to $269 million on
December 31, 2000. The current ratio was 1.3 at the end of the first quarter of
2001, unchanged from December 31, 2000. Inventories of $655 million were up 17%
from December 31, 2000 due in large part to the seasonal build for the Consumer
and Office Products segment. Inventories were up 2% from the level of the first
quarter of 2000, reflecting slightly higher inventories in the Paper segment.
Borrowed capital (long-term debt) as a percentage of total capital (long-term
debt plus shareowner's equity) was 36.2% at the end of the first quarter
compared to 35.6% on December 31, 2000. Total debt to total capital at the end
of the first quarter 2001 was 41.5% compared to 39% on December 31, 2000,
reflecting the seasonality of the Consumer and Office Products business.
Capital expenditures totaled $46 million for the first quarter of 2001 compared
to $32 million for the first quarter of 2000.
At the end of the first quarter, Mead paid a fixed rate or a capped rate of
interest on 63% 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 $.04 change in earnings per share for the year. The estimated
market value of long-term debt, excluding capital leases, was $9.3 million less
than book value at the end of the first quarter.
OUTLOOK
- -------
During the quarter, Mead continued the multi-year implementation of an
enterprise resource planning ("ERP") software system across the company. Mead
expects to spend approximately $125 million to implement the ERP system between
1998 and early 2003. Through the first quarter of 2001, the company had spent a
total of $82 million. In 2000, Mead implemented the system at its Coated Board
division and implemented a portion of the system, the source and supply
components, at its other four major mills. During the first quarter of 2001, two
of the company's three major paper mills completed the system implementation by
adding the order management components. The third paper mill is scheduled to
complete the implementation later this year. The containerboard mill is also
scheduled to complete the ERP implementation later this year. Implementation at
additional company divisions will follow in 2002 and 2003.
Mead expects energy-related costs to be higher in the second quarter of 2001
than in the same period last year. In the first quarter of 2001, energy-related
costs increased approximately $20 million on a pretax basis compared to the
first quarter of 2000. In its more cyclical businesses of
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containerboard and coated paper, the company expects lower prices and sales
volume in the second quarter of 2001 compared to a year ago as a result of a
weaker economy and a continuing strong dollar. To better match production to
demand, Mead expects to take production downtime of approximately 25,000 tons in
corrugating medium and approximately 5,000 tons in coated paper during the
second quarter.
Mead expects unfavorable currency exchange rates will continue to impact the
results of the international locations of the Paperboard and Packaging segment
in the second quarter of 2001.
In 2001, the company expects to continue capital spending at a level below the
rate of depreciation. Mead expects capital expenditures for the year will total
less than $250 million, subject to opportunities that may be presented to and
pursued by the company.
FORWARD-LOOKING STATEMENTS
- --------------------------
Forward-looking statements throughout this report are based upon current
expectations and are subject to numerous risks and uncertainties, which could
cause actual results to differ materially from those expressed. These risks and
uncertainties include, but are not limited to: growth in supply of different
sectors of the paper and forest products industry, particularly in the U.S.,
Europe and Asia Pacific; demand for paper and paperboard in the U.S., Europe and
Asia Pacific markets; market prices for these products; fluctuations in foreign
currency, primarily in Europe; stability of financial markets; capacity spending
levels in the industry; general business and economic conditions in the U.S.,
Europe, Asia Pacific and Latin America; interest rates and their volatility;
energy costs and availability; government actions; competitive factors; and
opportunities that may be presented to and pursued by the company not known at
this time.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
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,
2000.
PART II - OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(10) Material Contracts:
(1) Corporate Annual Incentive Plan for 2001 in which
executive officers participate.
(2) Corporate Long Term Incentive Plan effective 2001 in which
executive officers participate.
(3) Corporate Long Term Incentive Plan effective 2002 in which
executive officers participate.
(b) No current reports on Form 8-K were filed with the Commission in the
first quarter of 2001.
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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 9, 2001
THE MEAD CORPORATION
- --------------------
(Registrant)
By: /s/ PETER H. VOGEL, JR.
--------------------------------
Peter H. Vogel, Jr.
Vice President, Finance and Treasurer
(Chief Accounting Officer)
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