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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 September 30, 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 __.
-
The number of Common Shares outstanding at September 30, 2001 was 99,279,762.
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THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
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PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
--------------------
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
- --------------------------------------------------
BALANCE SHEETS (unaudited)
- ---------------
(All dollar amounts in millions)
Sept. 30, Dec. 31,
2001 2000
---------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 20.6 $ 29.4
Accounts receivable 666.9 557.3
Inventories 558.4 561.5
Other current assets 124.8 133.1
--------- ---------
Total current assets 1,370.7 1,281.3
Investments and other assets 1,120.4 1,128.8
Property, plant and equipment 6,141.5 6,032.4
Less accumulated depreciation and amortization (2,948.3) (2,762.5)
--------- ---------
3,193.2 3,269.9
--------- ---------
Total assets $ 5,684.3 $ 5,680.0
========= =========
LIABILITIES AND SHAREHOWNERS' EQUITY
Current liabilities:
Notes payable $ 205.5 $ 200.3
Accounts payable 219.1 269.1
Accrued liabilities 504.4 530.3
Current maturities of long-term debt 135.3 12.6
--------- ---------
Total current liabilities 1,064.3 1,012.3
Long-term debt 1,316.0 1,322.8
Deferred items 927.1 947.1
Shareowners' equity:
Common shares 148.0 147.4
Additional paid-in capital 134.1 125.2
Retained earnings 2,126.1 2,172.9
Other comprehensive loss (31.3) (47.7)
--------- ---------
2,376.9 2,397.8
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Total liabilities and shareowners' equity $ 5,684.3 $ 5,680.0
========= =========
See notes to financial statements.
2
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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STATEMENTS OF EARNINGS (unaudited)
- -----------------------
(All dollar amounts in millions, except per share amounts)
Third Quarter Ended Three Quarters Ended
---------------------- ----------------------
Sept. 30, Oct. 1, Sept. 30, Oct. 1,
2001 2000 2001 2000
-------- -------- -------- --------
Net sales $1,145.2 $1,218.2 $3,241.6 $3,323.2
Costs and expenses:
Cost of sales 973.2 975.7 2,788.3 2,658.7
Selling and administrative expenses 131.0 122.2 368.2 366.4
-------- -------- -------- --------
1,104.2 1,097.9 3,156.5 3,025.1
-------- -------- -------- --------
Earnings from operations 41.0 120.3 85.1 298.1
Other revenues - net 9.0 .3 12.0 6.5
Interest and debt expense (28.0) (32.0) (86.3) (93.0)
-------- -------- -------- --------
Earnings before income taxes 22.0 88.6 10.8 211.6
Income taxes 4.7 30.7 2.3 74.2
-------- -------- -------- --------
Earnings before equity in
net earnings of investees 17.3 57.9 8.5 137.4
Equity in net earnings of investees 1.9 1.9 5.1 9.5
-------- -------- -------- --------
Earnings before cumulative effect of
change in accounting principle 19.2 59.8 13.6 146.9
Cumulative effect of change in
accounting principle (10.4) (2.4)
-------- -------- -------- --------
Net earnings $ 19.2 $ 59.8 $ 3.2 $ 144.5
======== ======== ======== ========
Earnings per common share - basic:
Earnings before cumulative effect of
change in accounting principle $ .19 $ .59 $ .13 $ 1.43
Cumulative effect of change in
accounting principle (.10) (.02)
-------- -------- -------- --------
Net earnings $ .19 $ .59 $ .03 $ 1.41
======== ======== ======== ========
Earnings per common share - diluted:
Earnings before cumulative effect of
change in accounting principle $ .19 $ .59 $ .13 $ 1.42
Cumulative effect of change in
accounting principle (.10) (.02)
-------- -------- -------- --------
Net earnings $ .19 $ .59 $ .03 $ 1.40
======== ======== ======== ========
Cash dividends per common share $ .17 $ .17 $ .51 $ .51
======== ======== ======== ========
Average common shares
outstanding (millions) - basic 99.2 101.1 99.1 102.2
======== ======== ======== ========
Average common shares
outstanding (millions) - diluted 99.8 101.5 99.6 103.2
======== ======== ======== ========
See notes to financial statements.
3
THE MEAD CORPORATION AND CONSOLIDATION SUBSIDIARIES
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STATEMENTS OF CASH FLOWS (unaudited)
- ------------------------
(All dollar amounts in millions)
Three Quarters Ended
-------------------------
Sept. 30, Oct. 1,
2001 2000
----------- ----------
Cash flows from operating activities:
Net earnings $ 3.2 $ 144.5
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation, amortization and depletion of
property, plant and equipment 210.1 207.8
Depreciation and amortization of other assets 49.6 45.0
Deferred income taxes (4.8) 50.7
Investees-earnings and dividends (3.4) (1.5)
(Gain) on sale of business (5.6)
Cumulative effect of accounting change 10.4 2.4
Other (11.1) (3.2)
Change in current assets and liablities:
Accounts receivable (109.6) (68.2)
Inventories 1.2 (66.8)
Other current assets (4.1) (5.0)
Accounts payable and accrued liabilities (76.2) (70.0)
-------- --------
Net cash provided by operating activities 59.7 235.7
Cash flows from investing activities:
Capital expenditures (145.2) (127.6)
Additions to equipment rented to others (21.1) (21.8)
Proceeds from sale of business 13.4
Other 7.7 (26.4)
-------- --------
Net cash (used in) investing activities (145.2) (175.8)
Cash flows from financing activities:
Additional borrowings 125.9
Payments on borrowings (13.1) (35.0)
Notes payable 5.2 50.9
Cash dividends paid (50.0) (52.3)
Common shares issued 8.7 6.6
Common shares purchased (58.3)
-------- --------
Net cash provided by (used in) financing activities 76.7 (88.1)
-------- --------
(Decrease) in cash and cash equivalents (8.8) (28.2)
Cash and cash equivalents at beginning of year 29.4 56.4
-------- --------
Cash and cash equivalents at end of quarter $ 20.6 $ 28.2
======== ========
See notes to financial statements.
4
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, 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 third quarter ended September 30, 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):
Sept. 30, Dec. 31,
2001 2000
---------- ----------
Finished and semi-finished products $348.6 $360.1
Raw materials 120.7 117.2
Stores and supplies 89.1 84.2
------ ------
$558.4 $561.5
====== ======
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, all of
which have been paid, related to 269 salaried and hourly employees who left the
company on or before April 1, 2001.
In the third quarter of 2001, the company recorded a pretax charge of $4.9
million or 3 cents per share related to closure of a Mead facility in Atlanta,
Georgia. Plans for this closure were communicated to affected employees in the
third quarter of 2001. These costs are for employee severance and relate to
approximately 206 salaried and hourly employees. Substantially all employees
are expected to leave by December 31, 2001, and the remaining costs are expected
to be paid prior to the end of the first quarter of 2002. The following is a
summary related to the severance charges.
5
2001
Severance
Charge
------------
Charge recorded $ 4.9
Used for intended purpose (.4)
---------
Balance at September 30, 2001 $ 4.5
=========
Mead announced its intention to sell its Gilbert Paper business to Fox River
Paper Company, which will produce and sell Gilbert products as part of a
separate branding strategy. Mead will retain a 20 percent interest in the
combined company. The transaction and related closure of the Gilbert Paper mill
will result in Mead recording a pretax charge of approximately $24 million when
the transaction is completed in the fourth quarter of 2001.
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 third quarter of 2001. As of the third quarter of 2001, 4.1 million
shares have been repurchased on the open market.
Comprehensive earnings for the three quarters ended September 30, 2001 and
October 1, 2000 were $19.6 million and $121.1 million, respectively.
Comprehensive earnings for the quarters ended September 30, 2001 and October 1,
2000 were $20.5 million and $47.7 million, respectively. The difference between
net earnings and comprehensive earnings for the third quarter and the three
quarters ended September 30, 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 and cash flow hedge
adjustments related to the Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
F - ADDITIONAL INFORMATION ON CASH FLOWS
Three Quarters Ended
--------------------------
Sept. 30, Oct. 1,
2001 2000
------------ ----------
Cash paid for:
Interest $102.5 $108.0
====== ======
Income Taxes $ 35.5 $ 52.6
====== ======
6
G - SEGMENT INFORMATION
Third Quarter Ended Three Quarters Ended
------------------------------------- -------------------------------
Sept. 30, Oct. 1, Sept. 30, Oct. 1,
2001 2000 2001 2000
--------------- --------------- ------------ ------------
Net sales:
Industry segments:
Paper $ 445.8 $ 509.9 $1,385.1 $1,432.9
Packaging and Paperboard 388.7 413.9 1,163.7 1,238.3
Consumer and Office Products 310.7 294.4 692.8 652.0
-------- -------- -------- --------
Total $1,145.2 $1,218.2 $3,241.6 $3,323.2
======== ======== ======== ========
Earnings (loss) from operations
before income taxes:
Industry segments:
Paper $ (11.7) $ 54.0 $ (20.8) $ 153.0
Packaging and Paperboard 38.5 52.6 94.6 148.4
Consumer and Office Products 43.0 27.5 76.1 49.9
Corporate and other (1) (47.8) (45.5) (139.1) (139.7)
-------- -------- -------- --------
Total $ 22.0 $ 88.6 $ 10.8 $ 211.6
======== ======== ======== ========
(1) Corporate and other includes
the following:
Other revenues (expenses) $ (2.0) $ 1.0 $ (0.1) $ 5.4
Interest and debt expense (28.0) (32.0) (86.3) (93.0)
General Corporate expenses (17.8) (14.5) (52.7) (52.1)
-------- -------- -------- --------
Total $ (47.8) $ (45.5) $ (139.1) $ (139.7)
======== ======== ======== ========
Identifiable assets have not changed significantly at September 30, 2001,
compared to December 31, 2000.
H - DERIVATIVE 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 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.
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
7
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 third quarter of 2001 is recorded in other revenues.
The net derivative loss included in other comprehensive loss at the end of the
third quarter 2001 which is expected to be reclassified to earnings within the
next 12 months is approximately $471 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 risk 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 loss of approximately
$795 thousand associated with the ineffectiveness of fair value hedges of
interest rate risk during the third 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 for this
hedge during the third quarter of 2001 or the three quarters ended September 30,
2001.
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 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.
8
I - ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 eliminates the pooling-of-interests method of accounting
for combinations. SFAS No. 142 eliminates the amortization of purchased
goodwill and requires goodwill to be reviewed for impairment at least annually
and expensed to earnings only in the periods in which the recorded value of
goodwill is more than the fair value. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001, and SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. The company is evaluating the
potential impact of these statements.
J - PROPOSED MERGER
During the third quarter, The Mead Corporation and Westvaco Corporation
announced that they have agreed to a merger of equals creating MeadWestvaco, a
global company with leading positions in packaging, coated and specialty papers,
consumer and office products, and specialty chemicals. Under the terms of the
transaction, Mead shareholders will receive one share of MeadWestvaco stock for
each share of Mead stock, and Westvaco shareholders will receive 0.97 shares of
MeadWestvaco stock for each share of Westvaco stock. Mead shareholders will
also receive a special payment of $1.20 per share at closing. The merger is
structured as a stock-for-stock tax-free exchange, and will be accounted for as
a purchase transaction under the recent guidelines for business combinations.
Both Boards of Directors have approved the transaction. The companies expect to
close the transaction, subject to customary shareholder and regulatory
approvals, in the fourth quarter of 2001.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
RESULTS OF OPERATIONS
- ---------------------
During the third quarter, Mead sold a business unit in the Consumer and Office
Products segment, recording a pretax gain of $5.6 million. Mead also announced
plans to close a converting facility in Atlanta, Georgia, and transfer
production and distribution equipment to other facilities. Closing the Atlanta
facility will result in a pretax charge of approximately $6.4 million, of which
$4.9 million was recorded in the third quarter, primarily to cover severance-
related costs and the cost of transferring equipment. Mead expects the facility
closing to have a positive effect on earnings after allowing for the impact of
the charge.
In the Paper segment, Mead announced its intention to sell its Gilbert Paper
business to Fox River Paper Company, which will produce and sell Gilbert
products as part of a separate branding strategy. Mead will retain a 20 percent
interest in the combined company. The transaction and related closure of the
Gilbert Paper mill will result in Mead recording a pretax charge of
approximately $24 million when the transaction is completed in the fourth
quarter of 2001. Mead expects the sale to have a positive effect on earnings
after allowing for the impact of the charge.
Net sales
- ---------
Net sales of $1.145 billion in the third quarter of 2001 declined 6% from $1.218
billion in the third quarter of 2000. For the first three quarters of 2001, net
sales of $3.242 billion declined 2% from $3.323 billion in the first three
quarters of 2000. The decline in sales revenue compared to the prior year was a
result of lower selling prices for coated paper and corrugating medium offset in
part by higher sales volume in Consumer and Office Products.
Costs and expenses
- ------------------
Cost of sales of $973.2 million in the third quarter was essentially unchanged
from $975.7 million in 2000. For the first three quarters, cost of sales of
$2.788 billion increased 5% from $2.659 billion in the first three quarters of
2000, primarily due to higher sales volume and energy and energy-related raw
material costs. For the third quarter, selling and administrative expenses of
$131.0 million increased 7% from $122.2 million in 2000, primarily as a result
of higher sales at Consumer and Office Products and costs related to the
proposed merger of Mead and Westvaco. For the first three quarters of 2001,
selling and administrative expenses of $368.2 million was essentially unchanged
from $366.4 million in the first three quarters of 2000 due to cost containment
actions undertaken by the company.
Other Revenue
- -------------
In the third quarter, other revenue of $9.0 million included the $5.6 million
pretax gain on the sale of a business unit of Consumer and Office Products. In
the third quarter of 2000, other revenue was $0.3 million. In the first three
quarters of 2001, other revenue totaled $12.0 million compared to $6.5 million
in 2000. The increase was driven by gains on the sales of assets and a business
unit in 2001.
Interest and debt expense
- -------------------------
Interest and debt expense of $28.0 million in the third quarter decreased 13%
from $32.0 million in the third quarter of 2000. In the first three quarters of
2001, interest and debt expense of $86.3
10
million decreased 7% from $93.0 million in the first three quarters of 2000. The
decrease in 2001 resulted from lower interest rates.
Income taxes
- ------------
The effective income tax rate was 21.4% in the third quarter of 2001 and 21.3%
in the first three quarters of 2001, compared to 34.7% in the third quarter of
2000 and 35.1% in the first three quarters of 2000. The tax rate was lower than
in 2000 due to the tax benefits of certain export sales arrangements and
expected lower earnings levels in 2001.
Equity in net earnings of investees
- -----------------------------------
Mead's share of earnings from investees was $1.9 million in the third quarter of
both 2000 and 2001. For the first three quarters, equity in earnings from
investees was $5.1 million compared to $9.5 million in the first three quarters
of 2000. The year-to-date decline was a result of lower selling prices for
oriented strand board (OSB).
Net earnings
- -------------
Mead reported net earnings of $19.2 million in the third quarter of 2001
compared to net earnings of $59.8 million in the third quarter of 2000. For the
first three quarters of 2001, Mead reported net earnings of $3.2 million
compared to net earnings of $144.5 million in the first three quarters of 2000.
The decline in earnings in both periods compared to the prior year was primarily
a result of lower selling prices for coated paper and corrugating medium, higher
costs for energy and energy-related raw materials and higher operating costs in
the production of carbonless paper.
In the third quarter of 2001, net earnings included special items totaling $2.7
million pretax or $.02 per share, including a gain on the sale of a unit of the
Consumer and Office Products division, offset by charges related to the closure
of a division facility in Atlanta, Georgia, and costs associated with the
proposed merger. In the third quarter of 2000, special items included a charge
of $6.4 million pretax or $.04 per share related to the closure of Mead
facilities in Kalamazoo, Michigan, and Atlanta, Georgia.
In the first three quarters of 2001, net earnings included the items mentioned
above and a first quarter after-tax charge of $10.4 million for the cumulative
effect of an accounting change related to adoption of Statement of Financial
Accounting Standards No. 133. In the first three quarters of 2000, net earnings
included the third quarter items mentioned above and a first quarter 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, dealing with revenue recognition.
Financial Data by Business
- --------------------------
Paper segment
Third Quarter Three Quarters
-------------------------- ------------------------------
2001 2000 % Change 2001 2000 % Change
---- ---- -------- ---- ---- --------
(All dollar amounts in millions)
Net sales $445.8 $509.9 (13)% $1,385.1 $1,432.9 2%
Segment earnings (loss)
before income tax (11.7) 54.0 (122)% (20.8) 153.0 (114)%
11
Earnings in the Paper segment declined in the quarter and for the first three
quarters of 2001 compared to the same periods in the prior year. The decline was
a result of lower selling prices for coated paper, higher operating costs in
carbonless paper production and costs related to market downtime in coated and
specialty papers. Selling prices for coated paper in the third quarter were 10%
below the level of the third quarter of 2000, primarily as a result of high
levels of imports, which led to increased supply, and an economic slowdown,
which led to weak demand. Shipments of coated paper declined slightly in the
third quarter compared to the third quarter of 2000. Through the first three
quarters of 2001, shipments of coated paper were slightly higher compared to the
same period in 2000. Shipments of carbonless paper increased during the first
three quarters of 2001 compared to the first three quarters of 2000 as a result
of a multi-year sales agreement signed in late 2000 with a new customer.
Operating issues in carbonless paper production at the Ohio mill during the
first half of 2001 continued to affect performance in the third quarter in the
form of higher operating costs and poor productivity, primarily from lower
yields from production of base stock and from the carbonless coating process.
The company expects the financial impact of these same operating issues to
continue in the fourth quarter. In Mead's specialty paper businesses, results
for the third quarter and year to date were below the levels of the same periods
in 2000, reflecting the effects of the slowing economy and the strong U.S.
dollar.
Packaging and Paperboard segment
Third Quarter Three Quarters
-------------------------- ------------------------------
2001 2000 % Change 2001 2000 % Change
---- ---- -------- ---- ---- --------
(All dollar amounts in millions)
Net sales $388.7 $413.9 (6)% $1,163.7 $1,238.3 (6)%
Segment earnings
before income tax 38.5 52.6 (27)% 94.6 148.4 (36)%
Net sales in the Packaging and Paperboard segment declined 6% in the third
quarter and for the first three quarters of 2001 compared to the prior year.
Earnings declined 27% in the third quarter of 2001 and 36% in the first three
quarters of 2001 compared to similar periods in 2000. The decline in earnings
was primarily a result of lower selling prices for corrugating medium which were
15% lower in the third quarter of 2001 than in the third quarter 2000. Shipments
of corrugating medium in the first three quarters of 2001 were essentially
unchanged compared to the levels of the first three quarters of 2000. To better
match production to demand, the Containerboard division slowed production of
corrugating medium at its Stevenson, Alabama, mill, taking the equivalent of
46,000 tons of market-related downtime during the first three quarters of 2001.
At the end of the third quarter, inventories of corrugating medium were
approximately 30% below the level of the beginning of 2001.
In the company's Coated Board system, results from the worldwide beverage
packaging business reflected stable volumes with higher shipments in North
America offsetting some weakness in other markets. Shipments of coated
paperboard to open-market customers increased during the three quarters of 2001
compared to the first three quarters of 2000. Selling prices for coated
paperboard in the open market in the third quarter were slightly lower than in
the third quarter of 2000. During the quarter, the company's international
beverage packaging operations continued to be negatively affected by the impact
of foreign currency exchange rates, though to a lesser extent than earlier in
the year. In the segment's wood products business, sales volume and selling
prices at the sawmills declined considerably from the third quarter of 2000.
12
Consumer and Office Products segment
Third Quarter Three Quarters
-------------------------- ------------------------------
2001 2000 % Change 2001 2000 % Change
---- ---- -------- ---- ---- --------
(All dollar amounts in millions)
Net sales $310.7 $294.4 6% $692.8 $652.0 6%
Segment earnings
before income tax 43.0 27.5 56% 76.1 49.9 53%
Sales in the Consumer and Office Products segment increased 6% in the third
quarter and in the first three quarters of 2001 compared to the same periods in
2000. Segment earnings increased 56% in the third quarter and 53% in the first
three quarters of 2001 compared to the same periods in 2000. Without the special
items in both years related to the closing or sale of facilities, segment
earnings in the third quarter of 2001 increased $9.5 million or 29% compared to
the third quarter of 2000. In the third quarter of 2001, special items in the
segment included a $4.9 million pretax charge for the closing of a converting
facility in Atlanta and a $5.6 million pretax gain from the sale of a business
unit, netting a pretax gain of $.7 million in the quarter. In the third quarter
of 2000, segment results included a pretax charge of $5.3 million for the
closing of a converting facility in Kalamazoo, Michigan.
The improvement in operating performance in the third quarter and in the first
three quarters of 2001 compared to the same periods last year was a result of
higher operating efficiencies achieved through the consolidation of converting
facilities and from the overall realignment of the division's organization. The
segment's performance was also helped by the addition of sales volume and from
an enhanced sales mix of value-added products. Converting and distribution
facilities operated well during the quarter.
LIQUIDITY AND CAPITAL RESOURCES
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Working capital on September 30, 2001 was $306 million compared to $269 million
on December 31, 2000. The current ratio of 1.3 at the end of the third quarter
of 2001 was unchanged from December 31, 2000. Accounts receivable increased from
December 31, 2000 due primarily to seasonal sales growth in the Consumer and
Office Products business. In the third quarter of 2001, inventories were 2%
below the level of the third quarter of 2000 as a result of actions taken to
reduce inventories in paper and paperboard.
Long-term debt as a percentage of total capital (long-term debt plus
shareowners' equity) was 35.6% at the end of the third quarter and on December
31, 2000. Total debt to total capital (total debt plus shareowners' equity) at
the end of the third quarter 2001 was 41.1% compared to 39.0% on December 31,
2000, reflecting the normal seasonality of the Consumer and Office Products
business.
Capital expenditures totaled $145 million for the first three quarters of 2001
compared to $128 million for the first three quarters of 2000. Mead expects
capital expenditures for 2001 to remain below the level of depreciation.
At the end of the third 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 $.03 change in earnings per share for the year. The
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estimated market value of long-term debt, excluding capital leases, was $38.4
million more than book value at the end of the third quarter.
OUTLOOK
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During the third quarter, The Mead Corporation and Westvaco Corporation
announced that they have agreed to a merger of equals creating MeadWestvaco, a
global company with leading positions in packaging, coated and specialty papers,
consumer and office products, and specialty chemicals. Under the terms of the
transaction, Mead shareholders will receive one share of MeadWestvaco stock for
each share of Mead stock, and Westvaco shareholders will receive 0.97 shares of
MeadWestvaco stock for each share of Westvaco stock. Mead shareholders will
also receive a special payment of $1.20 per share at closing. The merger is
structured as a stock-for-stock tax-free exchange, and will be accounted for as
a purchase transaction under the recent guidelines for business combinations.
Both Boards of Directors have approved the transaction. The companies expect to
close the transaction, subject to customary shareholder and regulatory
approvals, in the fourth quarter of 2001.
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 third quarter of 2001, the company had spent a
total of $95 million. The system implementation has been completed at the
company's headquarters and all its major mills, including its three major paper
mills, coated paperboard mill and containerboard mill. Implementation at
additional company locations will follow in 2002 and 2003.
In its more cyclical businesses of containerboard and coated paper, the company
expects lower prices in the fourth quarter of 2001 compared to the fourth
quarter of 2000 as a result of a weaker economy and a continuing strong dollar.
To better match production to demand in the fourth quarter of 2001, Mead expects
to slow manufacturing of corrugating medium to an equivalent of approximately
15,000 tons of downtime, and it expects to reduce coated paper production by
70,000 tons.
The impact of foreign currency fluctuations, primarily the Euro and the Canadian
dollar, can affect the results of the company's businesses, directly in the
packaging and paperboard segment and indirectly in the paper segment. The
general strength of retail sales can affect results for the Consumer and Office
Products segment.
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 and Canada; stability of financial markets;
capacity spending levels in the industry; general
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business and economic conditions in the U.S., Europe, Asia Pacific and Latin
America; economic consequences of war; interest rates and their volatility;
energy costs and availability; government actions; competitive factors; receipt
of regulatory and shareholder approval of the proposed merger; 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 during the quarter to information previously
provided in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 or Quarterly Reports on Form 10-Q filed during 2001.
PART II - OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(10) Material Contracts:
(1) Amendment to Corporate Annual Incentive Plan for 2001 in
which executive officers participate.
(2) Amendment to Corporate Long Term Incentive Plan effective
2001 in which executive officers participate.
(3) Amendment to Corporate Long Term Incentive Plan effective
2002 in which executive officers participate.
(4) Amendment to the 1985 Supplement to the Deferred
Compensation Plan for Directors.
(5) Amendment to the 1985 Supplement to the Incentive
Compensation Election Plan in which executive officers
participate.
(6) Amendment to the Executive Capital Accumulation Plan in
which executive officers participate.
(7) Amendment to the Incentive Compensation Election Plan in
which executive officers participate.
(8) Amendment to the Deferred Compensation Plan for Directors.
(9) Amendment to the Excess Earnings Benefit Plan in which
executive officers participate.
(10) Amendment to the Section 415 Excess Benefit Plan in which
executive officers participate.
(11) Amendment to the Directors Capital Accumulation Plan.
(12) Fourth Amendment to Benefit Trust Agreement.
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(b) Reports on Form 8-K
(1) A Form 8-K was filed on October 18, 2001 reporting under Item 5 a
registration statement on Form S-4 on behalf of MW Holding
Corporation containing a preliminary joint proxy
statement/prospectus and other relevant documents concerning the
proposed merger of the Registrant and Westvaco Corporation.
(2) A Form 8-A/A Amendment No. 3 was filed on October 18, 2001
reporting under Item 1 Registrant's execution of Amendment No. 3
to Rights Agreement between the Registrant and Fleet National
Bank, dated August 29, 2001, in connection with the Merger
Agreement between the Registrant and Westvaco Corporation. Also
filed as an exhibit was a copy of the Amendment No. 3 to Rights
Agreement.
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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: November 7, 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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