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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 2, 2000
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 April 2, 2000 was 102,792,999.
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THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
QUARTERLY PERIOD ENDED APRIL 2, 2000
PART I - FINANCIAL INFORMATION
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 2, Dec. 31,
2000 1999
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ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 12.3 $ 56.4
Accounts receivable 498.7 547.7
Inventories 618.4 489.9
Other current assets 142.6 136.3
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Total current assets 1,272.0 1,230.3
Investments and other assets 1,084.8 1,074.0
Property, plant and equipment 5,910.3 5,904.4
Less accumulated depreciation and
amortization (2,597.2) (2,547.0)
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3,313.1 3,357.4
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Total assets $ 5,669.9 $ 5,661.7
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LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Notes payable $ 291.4 $ 186.2
Accounts payable 246.8 266.1
Accrued liabilities 437.4 513.2
Current maturities of long-term debt 13.6 35.1
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Total current liabilities 989.2 1,000.6
Long-term debt 1,334.0 1,333.7
Deferred items 908.0 896.6
Shareowners' equity:
Common shares 153.3 153.0
Additional paid-in capital 127.8 121.6
Retained earnings 2,185.7 2,178.0
Other comprehensive loss (28.1) (21.8)
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2,438.7 2,430.8
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Total liabilities and
shareowners' equity $ 5,669.9 $ 5,661.7
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See notes to financial statements.
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THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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STATEMENTS OF EARNINGS (unaudited)
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(All dollar amounts in millions, except per share amounts)
First Quarter Ended
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April 2, April 4,
2000 1999
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Net sales $ 915.6 $ 863.2
Costs and expenses:
Cost of sales 735.7 715.9
Selling and administrative expenses 118.6 93.9
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854.3 809.8
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Earnings from operations 61.3 53.4
Other revenues - net 1.5 4.0
Interest and debt expense (29.7) (26.7)
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Earnings before income taxes 33.1 30.7
Income taxes 12.0 11.1
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Earnings before equity in net
earnings of investees 21.1 19.6
Equity in net earnings of investees 4.0 3.3
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Net earnings $ 25.1 $ 22.9
Net earnings per common share - basic $ .24 $ .22
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Net earnings per common share - diluted $ .24 $ .22
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Cash dividends per common share $ .17 $ .16
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Average common shares
outstanding (millions) - basic 102.7 101.7
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Average common shares
outstanding (millions) - diluted 104.4 102.9
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See notes to financial statements.
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THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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STATEMENTS OF CASH FLOWS (audited)
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(All dollar amounts in millions)
First Quarter Ended
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April 2, April 4,
2000 1999
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Cash flows from operating activities:
Net earnings $ 25.1 $ 22.9
Adjustments to reconcile net earnings to
net cash (used in) operating activities:
Depreciation and depletion of property, plant
and equipment 69.0 67.6
Depreciation and amortization of other assets 14.9 10.3
Deferred income taxes 18.4 2.5
Investees - earnings and dividends (4.2) (4.7)
Other (6.6) 2.4
Change in current assets and liabilities:
Accounts receivable 49.0 (32.4)
Inventories (128.5) (44.8)
Other current assets (10.0) (19.3)
Accounts payable and accrued liabilities (95.1) (77.2)
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Net cash (used in) operating activities (68.0) (72.7)
Cash flows from investing activities:
Capital expenditures (32.2) (45.6)
Additions to equipment rented to others (7.5) (6.4)
Proceeds from sale of assets 13.6
Other (9.0) 4.8
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Net cash (used in) investing activities (48.7) (33.6)
Cash flows from financing activities:
Additional borrowings 15.0
Payments on borrowings (21.7) (17.8)
Notes payable 105.2 45.5
Cash dividends paid (17.4) (16.3)
Common shares issued 6.5 4.7
Common shares purchased (14.9)
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Net cash provided by financing activities 72.6 16.2
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(Decrease) in cash and cash equivalents (44.1) (90.1)
Cash and cash equivalents at beginning of year 56.4 102.0
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Cash and cash equivalents at end of quarter $ 12.3 $ 11.9
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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, 1999, 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, 1999. The results of operations for
the first quarter ended April 2, 2000, 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 2, Dec. 31,
2000 1999
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Finished and semi-finished products $413.7 $297.1
Raw materials 126.3 113.7
Stores and supplies 78.4 79.1
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$618.4 $489.9
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D - ASSET WRITE-DOWNS AND EMPLOYEE TERMINATION COSTS
During 1999, the company recorded a pretax charge of $18.9 million ($17.5
million in cost of sales and $1.4 million in selling and administrative
expenses) associated with the shutdown and disposal of four uncoated paper
machines at the Rumford, Maine, paper mill. The charge included asset
write-downs, contractual obligations for severance costs including medical,
dental and other benefits, impairment charge to adjust the carrying amount of
machinery and equipment and related spare parts included in stores and supplies
inventory to their estimated fair values, and a write off of an investment in a
joint venture as a result of the permanent decline in its value. The severance
costs related to 113 salaried and hourly employees, all of whom left the company
on or before the end of the first quarter of 2000. The balance related to
severance charges, which had not been paid at
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December 31, 1999, was $2.7 million, all of which was paid during the first
quarter.
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
during the first quarter of 2000.
Comprehensive earnings for the quarters ended April 2, 2000 and April 4, 1999,
were $18.8 million and $25.1 million. The difference between net earnings and
comprehensive earnings for the first quarter ended April 2, 2000 relates to the
change in foreign currency translation adjustment, unrealized loss on
available-for-sale securities and additional minimum pension liability.
F - ADDITIONAL INFORMATION ON CASH FLOWS
First Quarter Ended
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April 2, April 4,
2000 1999
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Cash paid for:
Interest $ 45.1 $ 42.5
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Income taxes $ 30.5 $ 5.1
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G - SEGMENT INFORMATION
First Quarter Ended
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April 2, April 4,
2000 1999
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Net sales:
Industry segments:
Paper $ 454.9 $ 453.9
Packaging and Paperboard 369.2 347.7
Consumer & Office Products 91.5 61.6
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Total $ 915.6 $ 863.2
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Earnings (loss) from operations
before income taxes:
Industry segments:
Paper $ 51.4 $ 46.1
Packaging and Paperboard 42.2 24.6
Consumer & Office Products (11.9) 1.4
Corporate and other (1) (48.6) (41.4)
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Total $ 33.1 $ 30.7
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(1) Corporate and other includes the following:
Other revenues $ 2.0 $ 4.0
Interest expense (29.7) (26.7)
Other expenses (20.9) (18.7)
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Total $ (48.6) $ (41.4)
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Identifiable assets have not changed significantly at April 2, 2000, compared to
December 31, 1999.
H - RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with current year
presentation. In the first quarter, the company changed the presentation of its
income statement to include Cost of Sales and Selling and Administration
Expenses under the heading of Costs and Expenses, eliminating the Gross Margin
line. This change conforms the company's presentation to more closely compare
to that of other companies in its industry.
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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
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Net Sales
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First quarter net sales were $915.6 million, a 6% increase over $863.2 million
in the first quarter of 1999. The increase in sales revenue was primarily from
higher selling prices for corrugating medium and coated paper and from the
addition of sales of AT-A-GLANCE which was acquired in the fourth quarter of
1999 as part of the Consumer and Office Products segment. Without AT-A-GLANCE,
sales would have increased 3%.
Costs and expenses
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Costs of sales of $735.7 million increased 3% from $715.9 million in 1999
primarily as a result of the AT-A-GLANCE acquisition. Selling and administrative
expenses of $118.6 million increased 26% from $93.9 million in 1999. Without the
impact of AT-A-GLANCE, the increase would have been 4%. The increase includes
spending related to the implementation of the company's enterprise resource
planning system.
Interest and debt expense
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First quarter interest and debt expense of $29.7 million increased 11% from
$26.7 million in the first quarter of 1999. The increase reflected a higher
level of borrowing for three acquisitions in the second half of 1999 that
included: AT-A-GLANCE; the Devon Valley, England, specialty paper mill; and
Comercializadora ZAE, school products distribution business in Mexico.
Income taxes
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The effective income tax rate was 36.2%, essentially unchanged from the 1999
rate.
Equity in net earnings of investees
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Mead's share of earnings from investees was $4 million compared to $3.3 million
in the first quarter of 1999. Earnings in the first quarter of 2000 were
primarily from the oriented strand board facility (OSB) in Bemidji, Minnesota,
known as Northwood Panelboard. Earnings in the first quarter of 1999 included
the results of the pulp and lumber operations of Northwood Inc. that Mead sold
in the fourth quarter of 1999.
Net earnings
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Net earnings for the first quarter of 2000 of $25.1 million increased 10% from
the level of net earnings in the first quarter of 1999. The increase was a
result of higher selling prices for corrugating medium, slightly higher prices
for coated paper offset somewhat by the seasonal loss in the Consumer & Office
Products segment. The acquisition of AT-A-GLANCE, which occurred in the fourth
quarter of 1999, changed the historical pattern of seasonality of the
company's Consumer & Office Products segment which was set by the timing of the
back-to-school selling season of late spring and summer. Consumers generally
purchase AT-A-GLANCE products such as calendars, planners and time-management
products in the second half of the year, and the business incurs an operating
loss in the first quarter.
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Financial Data by Business
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Paper segment
First Quarter
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2000 1999 % Change
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(All dollar amounts in millions)
Net sales (to unaffiliated customers) $454.9 $453.9 --
Segment earnings before taxes 51.4 46.1 11%
Sales in the paper segment were essentially unchanged from last year's first
quarter. Earnings for the segment were 11% above prior year. The increase
reflected higher selling prices for coated paper. Shipments of coated and
carbonless paper were essentially unchanged from the first quarter levels of
1999, while sales of uncoated paper were lower as a result of the closure of
four uncoated paper machines at the Maine mill at the end of 1999. During the
quarter, the company made the decision to permanently shutdown an older paper
machine that produces base stock for carbonless paper at the Ohio mill. The
machine, which will be shut down in the second quarter, has the capacity to
produce approximately 115 tons per day. The decision was part of a plan to
consolidate production of carbonless paper on the mill's largest, most efficient
machine. In addition, the company has idled indefinitely another small uncoated
paper machine (70 tons per day) at the Ohio mill. Segment earnings were reduced
by approximately $3 million pretax as a result of a higher level of depreciation
related to the machine shutdown and an operating loss at the Devon Valley
industrial specialty paper mill which was acquired in the second half of 1999.
During the quarter, the company completed the conversion of a former uncoated
paper machine to a pulp dryer at the Maine mill enabling the sale of its excess
pulp.
Packaging and Paperboard segment
First Quarter
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2000 1999 % Change
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(All dollar amounts in millions)
Net sales (to unaffiliated customers) $369.2 $347.7 6%
Segment earnings before taxes 42.2 24.6 72%
Sales in the packaging and paperboard segment increased 6% from the first
quarter of 1999. Earnings increased 72% over the prior year as a result of
higher selling prices for corrugating medium and containers. Pricing for
corrugating medium increased over 50% from the first quarter of 1999. The
effect on earnings of improved pricing was partially offset by higher costs
of recycled fiber used in the production of corrugating medium and coated
paperboard. The Stevenson, Alabama, corrugating medium mill operated well
during the quarter. Production and shipment volume increased over the levels
of the first quarter of 1999. Results for Mead's Coated Board System, which
includes the Packaging and Coated Board divisions, were weaker
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in the first quarter of 2000 compared to the prior year. Weaker results were
based on the impact of higher raw material costs for the Coated Board
division's solid wood products business, lower sales volume in North America
and foreign currency exchange rates on European operations.
Consumer & Office Products segment
First Quarter
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2000 1999 % Change
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(All dollar amounts in millions)
Net sales (to unaffiliated customers) $91.5 $61.6 49%
Segment earnings (loss) before taxes (11.9) 1.4 NM
Sales in the Consumer & Office Products segment increased by 49% in the first
quarter of 2000 compared to the prior year primarily from the addition of
AT-A-GLANCE, which was acquired in the fourth quarter of 1999. The segment
reported a loss of $11.9 million compared to earnings of $1.4 million in the
first quarter of 1999. The results reflected a loss of approximately $15 million
pretax by AT-A-GLANCE due to the significant seasonality of the business. The
rest of the segment, which represents primarily school supplies, had improved
results compared to the prior year. The integration of the company's former
School and Office Products division with AT-A-GLANCE continued to proceed during
the quarter.
LIQUIDITY AND CAPITAL RESOURCES
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Working capital on April 2, 2000 was $283 million compared to $230 million on
December 31, 1999. The current ratio was 1.3 at the end of the first quarter of
2000 compared to 1.2 at December 31, 1999. Inventories are generally higher in
the first quarter of the year as part of the seasonal build for the Consumer and
Office Products segment. Inventories of $618 million were up $100 million over
the first quarter of 1999. More than half of this increase was from the
acquisition of AT-A-GLANCE and the Devon Valley specialty paper mill. The
remainder of the increase reflected higher inventories of coated paper and
coated paperboard.
Borrowed capital (long-term debt) as a percentage of total capital (long-term
debt plus shareowner's equity) was 35.4% essentially unchanged from December
31,1999. Total debt to total capital at the end of the first quarter 2000 was
40.2% compared to 39% on December 31, 1999, reflecting the seasonality and
acquisition financing of Mead's Consumer and Office Products business.
Capital expenditures totaled $32.2 million for the first quarter of 2000
compared to $45.6 million for the first quarter of 1999.
At the end of the first quarter, Mead paid a fixed rate or capped rate on 63% 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
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value of long-term debt, excluding capital leases, was $37 million less than
the book value at the end of the first quarter of 1999.
OUTLOOK
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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 its ERP system between
1998 and 2002. In 2000 and 2001, Mead's Coated Board and Paper divisions are
scheduled to implement the ERP system with additional company divisions to
follow in 2001 and 2002.
While the impact of foreign currency fluctuations in European currencies is not
significant to the company's overall results, it can affect the results of
individual segments, primarily packaging and paperboard, as it did in the first
quarter of 2000.
Inflation in general is not expected to have a significant impact on the
company's results in 2000. However, costs for certain raw materials have
increased in 2000 and will affect the results of specific businesses. These
include costs for recycled fiber (primarily OCC) used in the production of
containerboard and coated paperboard, purchased pulp used in the company's
specialty paper businesses, and oil which impacts costs for transportation, fuel
oil and some petroleum-derived raw materials.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
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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, 1999.
PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
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Reference is made to the first paragraph under "Item 3. Legal
Proceedings" in Mead's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 regarding Beazer East Inc. v. The Mead Corporation, C.A. No.
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91-0408, filed in the United States District Court for the Western District of
Pennsylvania. In March, 2000, the District Court ruled on objections to the
report and recommendation of the magistrate judge, entering an allocation order
establishing Mead's share of recoverable costs at 67.5%. The District Court has
not yet determined the nature and scope of costs subject to recovery in the
proceeding. The allocation order is not subject to appeal at this time. A trial
regarding remaining issues will occur, if necessary, on an unspecified date
after January 21, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
(10) Material Contracts:
(1) Corporate Annual Incentive Plan for 2000 in
which executive officers participate.
(2) Corporate Long Term Incentive Plan effective
2000 in which executive officers
participate.
(3) Restated Corporate Executive Capital
Accumulation Plan effective January 1, 2000
in which executive officers participate.
(4) Restated Directors Capital Accumulation Plan
effective January 1, 2000 in which directors
participate.
(27) Financial Data Schedule Quarter 1, 2000
(b) No current reports on Form 8-K were filed with the Commission
in the first quarter of 2000.
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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 10, 2000
THE MEAD CORPORATION
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(Registrant)
By: /s/ PETER H. VOGEL, JR.
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Peter H. Vogel, Jr.
Vice President, Finance and Treasurer
(Chief Accounting Officer)
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