Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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MEADWESTVACO Merger
MeadWestvaco Corporation was formed on January 29, 2002, as a result of a merger
of equals between The Mead Corporation and Westvaco Corporation, creating a
global company with leading positions in packaging, coated and specialty papers,
consumer and office products, and specialty chemicals. As part of the merger,
the company has announced plans to achieve significant cost savings and
operational synergies of $325 million by the end of two years of combined
operations.
Mead and Westvaco announced their agreement in August 2001. The transaction was
approved by the Boards of Directors of both companies and was approved by the
shareholders of both companies at special meetings held on January 28, 2002.
Under the terms of the transaction, Mead shareholders received one share of
MeadWestvaco stock for each share of Mead stock held, and Westvaco shareholders
received 0.97 shares of MeadWestvaco stock for each share of Westvaco stock
held. Mead shareholders also received a cash payment of $1.20 per share. The
merger was structured as a stock-for-stock exchange and will be accounted for as
an acquisition of Mead by Westvaco. Note A in the Consolidated Financial
Statements provides summary pro forma data and details on the merger accounting.
Recent Developments
On March 4, 2002, MeadWestvaco announced plans to permanently shut down four
coated paper machines and related equipment from its paper segment in Luke, MD,
and Chillicothe, OH. The company expects restructuring and other merger-related
charges to earnings taken in 2002 to approximate $100 million, all of which
relates to the former Westvaco operations, of which about $40 million is
expected to be taken in the first quarter. Of the total estimated $100 million
in charges, about 70% or $70 million are expected to be noncash charges. The
total estimated charges include $12 million attributable to the shutdown of the
Luke, MD, paper machine. Under merger accounting rules, charges for the
writedown of assets and severance relating to the former Mead operations,
including the paper machine shutdowns in Chillicothe, OH, are recorded in
purchase accounting and do not affect current earnings. The restructuring will
result in the elimination of about 350 positions in Ohio and approximately 75
positions in Maryland. It is expected that, over time, production will be
transferred to more efficient machines elsewhere in the company's paper segment
as market conditions improve. These actions will take effect beginning April 1,
2002, and it is anticipated that they will be completed by May 31, 2002.
RESULTS OF OPERATIONS
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Effective January 29, 2002, Westvaco changed its fiscal year-end from October 31
to December 31. Accordingly, the Consolidated Financial Statements include the
results of operations of Westvaco for the transition period, which are not
necessarily indicative of operations for a full year.
Transition period ended December 31, 2001
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Sales for the two months ended December 31, 2001 were $602.7 million, compared
to $631.3 million for the same period last year, due to an 11.1% decrease in
average selling price, offset by an increase in volume of 6.6%. The company's
results during this period reflected weak global economic conditions resulting
in lower demand and selling prices for many of the company's products and
competitive pressures due to the strength of the U.S. dollar, particularly in
the paper segment.
The net loss from operations for the two months ended December 31, 2001 was
$21.7 million, or $.21 per share, compared to earnings of $26.0 million, or $.26
per share for the same period last year. Results for the two
months ended December 31, 2001 reflect the effect of market-related downtime of
about 70,000 tons, with an estimated negative impact on earnings of $15 million
pretax, or $.09 per share, compared to only 31,000 tons, or about $8 million
pretax, or $.05 per share, for the same period last year. Results for the period
also include $.10 per share in higher costs and expenses for the writedowns of
plant and equipment taken out of service, writedowns of inventories due to lower
cost or market evaluations, increased costs associated with the acceleration of
maintenance to coincide with market-related downtime and other items principally
relating to employee benefits and receivables.
The company's export sales from the United States for the two months ended
December 31, 2001 increased 3.2% to $91.5 million, compared to the same period
last year, and accounted for approximately 15% of the company's consolidated
sales. Total sales outside of the United States, including sales of the
company's foreign operating subsidiaries, increased 22% from the same period
last year and accounted for approximately 32% of consolidated sales. The
increase was largely due to improved results from the company's European media
packaging business and the acquisition of Alfred Wall AG, a European consumer
packaging company, which was acquired in the third fiscal quarter of 2001.
Gross profit margin for the two months ended December 31, 2001 was 10% compared
with 20% for the same period last year, as a result of lower prices for some of
the company's paper and paperboard grades, higher repair and maintenance costs
incurred during machine downtime and inventory writedowns. Depreciation and
amortization increased by 8% for the two-month period, or $4.5 million, largely
due to acquisitions in fiscal year 2001. For the two months ended December 31,
2001, operating results benefited from noncash pension credits of $22.9 million,
compared to $22.5 million for the same period last year.
Unless otherwise indicated, all earnings per share information relates to basic
and diluted; see Notes to Consolidated Financial Statements.
Packaging segment Two months ended
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December 31
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(in millions) 2001 2000
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Sales $393.3 $402.2
Operating profit [loss] [6.4] 40.8
Sales for the packaging segment decreased 2.2% for the two months ended December
31, 2001, compared to the same period last year due to weak business conditions
and lower sales prices across the sector. Volume for the segment increased 9.6%
during the two-month period as a result of acquisitions in fiscal year 2001,
while average prices were 11.8% lower. The packaging segment experienced a loss
of $6.4 million for the two months ended December 31, 2001, compared to
operating profit of $40.8 million in the same period last year, due to the
weaker economy as well as lower demand and prices for some bleached and
unbleached paperboard, particularly heavy-weight paperboards and food service
products. Higher energy and chemical costs and the acceleration of maintenance
projects during machine downtime also contributed to lower operating profits.
Responding to market conditions, the company took downtime at the Charleston,
SC, Covington, VA, and Evadale, TX, mills of about 57,000 tons with an estimated
negative impact on earnings of approximately $11 million pretax, or $.07 per
share.
Additional downtime of approximately 30,000 tons was taken in January 2002 due
to the temporary shutdown of four paper machines and other equipment at the
Evadale mill to make necessary repairs and manufacturing improvements. The
downtime is estimated to reduce first quarter profit for the segment by about $6
million pretax. In addition, MeadWestvaco plans to take a total of 58,000 tons
of market-related downtime during the first calendar quarter of 2002, which
is estimated to negatively impact segment quarterly profit by about $13 million
pretax.
For the two months ended December 31, 2001, sales to the tobacco industry
accounted for approximately 16% of packaging segment sales compared to
approximately 18% last year. Of these sales to tobacco markets,
approximately 9% of the segment sales were exported or used to produce products
for export while the remaining 7% was sold to the domestic tobacco industry for
sale in the United States. The current legal, regulatory and legislative
pressures on the tobacco industry may have an adverse effect on packaging
segment profitability. While we would expect to compensate for such an adverse
effect with growth in other consumer product markets, these alternatives may
not, in the short run, fully offset any decline in profitability related to
sales to the tobacco industry.
For 2002, the company believes that demand for packaging for high-value consumer
products will continue to be relatively stable, although demand for consumer
media products for which the company produces packaging, such as DVDs and
computer games, is growing rapidly. If the economic weakness persists,
commodity-based markets, specifically linerboard, will continue to be negatively
impacted. The packaging segment will continue to focus on controllable items,
including manufacturing efficiency programs and cost containment initiatives.
Paper segment Two months ended
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(in millions) December 31
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2001 2000
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Sales $157.3 $170.5
Operating profit [loss] [2.8] 14.5
Paper segment sales for the two months ended December 31, 2001 decreased 7.7%
from the same period last year due to a decrease in average prices of 9.8%,
offset by an increase in volume of 2.1%. The paper segment experienced a loss of
$2.8 million for the two months ended December 31, 2001, compared to operating
profit of $14.5 million for the same two-month period last year, principally due
to a slower economy, the effect of a strong U.S. dollar and the resulting
competitiveness of imports, weak pricing and market-related downtime of
approximately 13,000 tons which negatively impacted segment profit by about $4
million pretax, or $.02 per share.
As stated earlier, MeadWestvaco announced on March 4, 2002 that three coated
paper machines and associated equipment will be permanently closed at the
Chillicothe, OH, mill and one coated paper machine at the Luke, MD, mill will be
permanently shut down. Over time, production will be transferred to more
efficient machines elsewhere in the company's paper segment as market conditions
improve.
For 2002, management expects volume and pricing will continue to be under
pressure if the U.S. economy remains weak and the U.S. dollar continues to be
strong. In addition, in the first quarter MeadWestvaco plans to take about
37,000 tons of market-related downtime, which is expected to negatively impact
segment quarterly profit by about $14 million pretax. MeadWestvaco intends to
continue to focus on higher margin specialty and digital papers, to introduce
other high-value products and to continue to implement cost reduction measures.
Chemicals segment Two months ended
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(in millions) December 31
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2001 2000
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Sales $50.0 $56.2
Operating profit 4.4 9.2
Sales for the chemicals segment declined by 10.9% due to a decrease in average
price of 12.5%, partially offset by an increase in volume of 1.6%. Sales
declined due to slower economic activity and increased competition from products
produced in the Far East. As a result of current weak economic conditions, the
company took market-related downtime to manage production and overall inventory
levels. Near term, the company does not anticipate the need for further
downtime. Operating profit for the two months ended December 31, 2001 for the
chemicals segment declined 52% from the same period last year to a level of $4.4
million due to weak market conditions and lower production.
Overall, the company expects stable earnings for the chemicals segment for 2002,
but may be negatively affected to some degree by higher prices for crude tall
oil, lower prices for printing ink resins and the loss of carbon business not
related to the automotive industry of approximately 5% of the segment's annual
sales.
Other items
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Other income [expense], net decreased for the two-month period ended December
31, 2001 to $[2.3] million from $10.1 million, compared to the same period in
2000. This decline is due primarily to the writeoff in December 2001 of a
research facility taken out of service. Last year, Other income included a gain
from the sale of a real estate lease in New York City. Selling, research and
administrative expenses increased 13% from the same period last year as a result
of acquisitions in the second half of fiscal year 2001. Interest expense
decreased by 7% for the two-month period ended December 31, 2001, compared to
the same period last year due to lower interest rates. The effective tax rate of
43.8% represents a tax benefit resulting from a pretax loss recorded in the two
months ended December 31, 2001. The same period in fiscal year 2001 reflected
pretax income and a tax provision.
Fiscal year 2001
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Sales for fiscal year 2001 were $3.94 billion, compared to $3.86 billion for
fiscal year 2000, due to an increase in volume of 4.4%, offset by a 2.4%
decrease in average prices. As a result of the weak economy, the company,
through market-related downtime, reduced production by 194,000 tons, with an
estimated negative impact on earnings of $44 million pretax, or $.27 per share,
to manage production and overall inventory levels. Due to weak markets, demand
and pricing for the company's coated papers and certain grades of paperboard
declined. The strong U.S. dollar also affected the company's coated papers
markets as the resulting competitiveness of imports affected pricing and volumes
in coated papers.
Net income from operations in fiscal year 2001 was $88.2 million, or $.87 per
share, compared to $245.9 million, or $2.44 per share, for fiscal year 2000.
Earnings for fiscal year 2001 included a pretax restructuring charge of $56.9
million, or $.35 per share after tax, due to fixed asset writedowns, employee
terminations and other exit costs, primarily due to the closings of the
company's fine papers mill in Tyrone, PA, and consumer packaging plants in
Richmond, VA, and Memphis, TN. Fiscal 2001 also included a $.10 per share
benefit resulting from increased utilization of domestic research and foreign
tax credits and the resolution of prior years tax issues and a gain of $5.2
million, or $.03 per share after tax, from the sale of a real estate lease in
New York City. Earnings for fiscal year 2000 included a pretax restructuring
charge of $27.2 million, or $.18 per share after tax, resulting primarily from a
writedown of assets due to the anticipated decline in future sales of folding
cartons to domestic tobacco markets, a pretax gain of $11.2 million, or $.07 per
share after tax, from the sale of a liquid packaging plant previously written
down as part of the restructuring charge in 1999, an after-tax extraordinary
charge of $8.8 million, or $.09 per share, from the early retirement of higher
interest rate debt and an after-tax gain of $3.6 million, or $.04 per share
after tax, from the sale of an interest in a joint venture in China.
Due to the effects of the strong U.S. dollar, the company's export sales from
the United States decreased 4.8% to $562.4 million, compared to fiscal year
2000, and accounted for approximately 14% of the company's consolidated sales
due primarily to a decrease in price and a weaker product mix. Total sales to
customers outside of the United States, including sales of the company's foreign
operating subsidiaries, increased 22% from the prior year largely due to
acquisitions, and accounted for approximately 25% of consolidated sales.
Gross profit margin for the year was 18% compared with 22% for the prior year as
a result of lower prices for certain paper and paperboard grades, and higher
energy and pulpwood costs. Earnings for the year also reflect the effect of
market-related downtime of approximately 194,000 tons, or $44 million pretax,
compared to only 12,000 tons, or $2 million pretax in the prior year. In
addition, the current year's earnings reflect the impact of a LIFO (last
in-first out) charge of $2.9 million, compared to a charge of $17.0 million in
the prior year. Increasing energy costs negatively impacted manufacturing costs
and reduced operating profits. Energy costs were 19% higher for the year
compared with the prior year. In response to higher energy prices, the company
switched to alternative fuels where possible. Depreciation and amortization
increased by 11% largely due to acquisitions in the current year, as well as in
fiscal year 2000 where they were included for only a portion of the year. Fiscal
year 2001 operating results also benefited from an increase in noncash pension
credits of $26.9 million as a result of cumulative favorable investment returns
on pension plan assets. The company anticipates that earnings in fiscal year
2002 will benefit from an increase in noncash pension credits of $2.6 million to
approximately $138 million pretax.
Unless otherwise indicated, all earnings per share information relates to basic
and diluted; see Notes to Consolidated Financial Statements.
Packaging segment
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(in millions) Fiscal year ended October 31,
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2001 2000 1999
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Sales $2,503.2 $2,264.6 $1,542.3
Operating profit 196.1 351.2 190.5
Sales for the packaging segment increased 10.5% from fiscal year 2000 due to the
acquisitions of AGI (formerly known as IMPAC), which was acquired in July 2000,
and Alfred Wall AG, which was acquired in the third quarter of 2001. Volume for
the segment increased 13.8% and price decreased by 3.3%. Operating profit for
the packaging segment for fiscal year 2001 decreased by 44% to $196.1 million
from the fiscal year 2000, due to the weaker economy and increased energy costs,
as well as lower demand and prices for some bleached and unbleached paperboard.
Responding to market conditions, the company took downtime at the Charleston,
SC, Covington, VA, and Evadale, TX, mills of about 174,000 tons with an
estimated negative impact on annual earnings of $37 million before taxes. An
additional 17,000 tons of downtime was taken in August 2001 due to a
manufacturing interruption at the Evadale mill, but the production rate was
fully recovered by September.
During fiscal year 2001, approximately 15% of packaging segment sales were made
to the tobacco industry for packaging tobacco products, compared to
approximately 19% for fiscal year 2000. Of these tobacco sales, approximately 8%
of segment sales were exported or used to produce products for export, with the
remaining 7% sold to the domestic tobacco industry for sale in the United
States. The current legal, regulatory and legislative pressures on the tobacco
industry may have an adverse effect on packaging segment profitability. While we
would expect to compensate for such an adverse effect with growth in other
consumer product markets, these alternatives may not, in the short run, fully
offset any decline in profitability related to sales to the tobacco industry.
Rigesa, Ltda., Westvaco's Brazilian subsidiary, benefited from good demand for
most of its value-added products, particularly fruit packaging, although its
operating profit and revenues declined compared to the fiscal year 2000 period,
as a result of weaker local currency exchange rates.
Paper segment
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(in millions) Fiscal year ended October 31,
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2001 2000 1999
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Sales $1,058.3 $1,225.8 $1,085.7
Operating profit 50.8 140.6 62.0
Paper segment sales for the fiscal year 2001 decreased 13.7% from the fiscal
year 2000 due to decreases in volume of 10.5% and price of 3.2%. A strong U.S.
dollar and the resulting competitiveness of imports affected pricing and volumes
in coated papers, as did the lower level of economic activity. Paper segment
operating profit decreased substantially to $50.8 million for the fiscal year
2001, compared to $140.6 million for fiscal year 2000, principally due to a
slowing economy, as well as higher energy costs and market-related downtime of
approximately 21,000 tons which negatively impacted segment profit by about $7
million pretax.
Chemicals segment
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(in millions) Fiscal year ended October 31,
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2001 2000 1999
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Sales $347.8 $358.0 $327.7
Operating profit 62.9 64.5 52.5
Sales for the chemicals segment declined by 2.9% in fiscal year 2001 due to a
decrease in volume of 5.7%, partially offset by an increase in price of 2.8%.
Sales of resins used in printing inks and other products increased while sales
of fabric dye dispersants declined due to slower economic activity and increased
competition from products produced in the Far East. Sales of carbon products for
emission protection in the automotive markets were weaker due to a lower level
of economic activity. The fiscal year 2001 operating profit for the chemicals
segment declined 2.4% to a level of $62.9 million due to higher fuel prices.
Other Items
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Compared to fiscal year 2000, Other income [expense], net decreased due
primarily to lower interest income while gains on land sales were higher by 12%
due to an increased level of sales activity following the company's strategic
review of its forestland holdings. Earnings for fiscal year 2001 include pretax
gains from land sales of $34.7 million, compared to $31.0 million in fiscal year
2000. Other income also includes a pretax gain of $5.2 million, or $.03 per
share after tax, from the sale of a real estate lease in New York City. Selling,
research and administrative expenses increased 29% as a result of acquisitions
in the current year as well as in fiscal year 2000 in which acquisitions were
included for only a portion of the year. The increase is also attributable to
the continued development of the company's technology platform. Interest expense
increased by 8% in fiscal year 2001, compared to fiscal year 2000 due to higher
interest costs relating to acquisitions closed during the prior year. The
effective tax rate for fiscal year 2001 decreased to 25.6% from 36.9% in the
prior year, primarily due to an increase in the proportion of earnings
attributable to foreign operations and subject to lower rates, research credit
utilization and the favorable resolution of prior years tax issues, partially
offset by higher nondeductible goodwill amortization.
Fiscal year 2000
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Sales for fiscal year 2000 were $3.9 billion, a 30.6% increase compared to
fiscal year 1999, and reflect an increase in volume of 24.9% and a 5.7% benefit
from price improvement. Sales from acquisitions completed in fiscal year 2000
represented two-thirds of the increase in sales. Net income in fiscal year 2000
was $245.9 million, or $2.44 per share, basic and diluted, an increase of 121%
from fiscal year 1999 earnings of $111.2 million, or $1.11 per share, basic and
diluted. Earnings for fiscal year 2000 included a pretax restructuring charge of
$27.2 million, or $.18 per share after tax, resulting primarily from a writedown
of assets due to an anticipated decline in future sales of folding cartons to
U.S. tobacco markets that has not yet occurred, a pretax gain of $11.2 million,
or $.07 per share after tax, from the sale of a liquid packaging plant
previously written down as part of the restructuring charge in fiscal year 1999,
an after-tax extraordinary charge of $8.8 million, or $.09 per share, from the
early retirement of higher interest rate debt and an after-tax gain of $3.6
million, or $.04 per share, from the sale of our interest in a joint venture in
China.
Export sales from the United States in fiscal year 2000 increased 17% compared
to fiscal year 1999 and accounted for 16% of the company's consolidated sales.
Total sales outside of the United States, including sales of our foreign
operating subsidiaries, accounted for approximately 22% of consolidated sales
compared to 24% in the prior year. Gross profit margin for the year improved to
23% from 20% in the prior year, due primarily to savings resulting from our 1999
restructuring and other cost reduction initiatives, partially offset by the
impact of a provision to reflect inventories at LIFO value. Fiscal year 2000
operating results also benefited from an increase in noncash pension credits of
$26.0 million, as a result of cumulative favorable investment returns on pension
plan assets.
Packaging segment
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Packaging segment sales increased by 46.8% from the prior year to $2.3 billion
in fiscal year 2000, due to the effects of higher shipment volume, product mix
improvement and strong performance by the company's
acquisition of a bleached paperboard mill in Evadale, TX; segment volume
increased 43.0% and price improvements increased revenues by 3.8%. The increase
in shipment volume reflects the contributions by acquisitions including the
Evadale, TX, mill, AGI and Mebane. Fourth quarter shipments were well ahead of
1999 fourth quarter levels, but demand softened in the fourth quarter relative
to the second and third quarters of 2000. To balance demand and production, the
company took downtime at the Covington, VA, and Evadale, TX, mills of about
12,000 tons or $2 million. Operating profit for the packaging segment for 2000
increased by 84.4% to $351.2 million due to acquisitions, product mix
improvements, reduced costs and stronger business conditions. Revenues and
profits for Rigesa, Ltda; showed strong improvement as a result of improved
economic conditions in Brazil and product mix enhancements.
During fiscal year 2000, approximately 19% of packaging segment sales were made
to the tobacco industry compared to about 26% for fiscal year 1999. About 13% of
segment sales were for overseas tobacco markets with the remaining 6% for
tobacco sales in the United States. Competitive conditions as well as the legal
and regulatory pressures on the tobacco industry had an adverse effect on
packaging segment profitability.
Paper segment
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Paper segment sales of $1.2 billion increased 12.9% from the prior year, due to
improvements in price of 8.0% and volume gains of 4.9%. Sales of coated printing
papers increased sharply in fiscal year 2000 compared to fiscal year 1999 as new
products and focused selling efforts led to an increase in market share and
higher prices. Operating profit for the paper segment was $140.6 million for the
year, compared to $62.0 million for the prior year period. Coated papers
accounted for nearly all of the improvement. Manufacturing efficiencies, higher
prices, higher shipment volumes and cost reductions contributed to the
improvement.
Chemicals segment
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Chemicals segment sales for the year increased 9.2% from fiscal year 1999 to
$358.0 million, due to favorable changes in price of 3.1% and volume gains of
6.1%. Operating profit for the chemicals segment was $64.5 million compared to
$52.5 million in the prior year. This increase reflects strong U.S. demand in a
number of our markets. In fiscal year 2000, the company increased its market
share for tall oil based ingredients used for ink resins. Other markets for tall
oil ingredients, including paper size and rubber emulsifiers, were also strong
in response to the strong economy and results were enhanced by cost savings.
Asphalt emulsifier sales increased sharply compared to fiscal year 1999, due in
part to the acquisition of the asphalt emulsion business of Raschig GmbH in
2000. The company's activated carbon business benefited from record U.S. auto
sales and strong global sales.
The above segment discussion does not take into account the restructuring
charges for fiscal years 2000 and 1999 which are included in Corporate and other
segment information.
Other items
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Other income [expense], net increased from the prior year due to increased gains
on land sales, a gain on the sale of our interest in a folding carton plant in
China and higher interest income from the temporary investment of cash raised to
finance acquisitions. Gains on land sales totaled $31.0 million before tax for
fiscal year 2000 compared to $23.0 million pretax in fiscal year 1999. Interest
expense increased by 56% in fiscal year 2000 compared to fiscal year 1999, due
to the issuance of long-term debt in the first and third quarters of 2000 and
increased commercial paper borrowings to support our acquisition activities. The
effective tax rate for fiscal year 2000 increased to 36.9% from 24.9% in the
prior year, principally due to the one-time 1999 release of deferred taxes
resulting from a business reorganization and the effects of fiscal year 2000
nondeductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
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Operating activities
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At December 31, 2001, the ratio of current assets to current liabilities was 1.4
compared to 1.9 at December 31, 2000 and 1.4 and 1.9 at October 31, 2001 and
2000, respectively. Cash flows from operations totaled $34.1 million for the two
months ended December 31, 2001, compared to $9.3 million for the same period in
2000 and $252.6 million, $583.1 million and $412.7 million in fiscal years ended
2001, 2000 and 1999, respectively.
Investment activities
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New investment in plant and timberlands, excluding acquisitions, totaled $56.2
million for the two months ended December 31, 2001, compared to $45.0 million
for the same period in 2000 and $296.4 million, $212.3 million and $232.3
million in fiscal years ended 2001, 2000 and 1999, respectively. New investment
in plant and timberlands was $45.8 million in the packaging segment, $4.2
million in the paper segment, $2.0 million in the chemicals segment and $4.2
million in the corporate and other nonreportable segment. This increased level
of capital spending is mainly due to postponement in the prior year of capital
projects scheduled to be completed in that year. As part of its program to
improve return on investment, MeadWestvaco plans to continue to hold annual
capital spending below depreciation and amortization levels over the next few
years. Total cash payments, including expenditures for environmental control
equipment and facilities, totaled $54.1 million for the two months ended
December 31, 2001, compared to $45.5 million for the same period in 2000, $290.4
million, $214.0 million and $228.9 million in fiscal years 2001, 2000 and 1999,
respectively. At December 31, 2001, the funds required to complete all
authorized capital projects were approximately $190.7 million. MeadWestvaco's
capital expenditures for 2002 are expected to be approximately $500 million.
These expenditures will be used to support the company's current primary
production capacity levels, address the requirements of consumer packaging
facilities to satisfy anticipated customer needs, cover anticipated
environmental capital expenditures and strengthen the company's technology
platform.
Financing activities
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In December 2001, MeadWestvaco negotiated a $500 million bank credit agreement
that expires in December 2002 and a $500 million bank credit agreement that
expires in December 2006. These new agreements became effective upon merger.
Their terms and covenants are similar to those contained in the company's prior
agreements.
Prior to the merger, Westvaco maintained a $500 million revolving credit
agreement. Borrowings under the agreement could have been in unsecured domestic
or Eurodollar notes and at rates approximating prime or the London Interbank
Offered Rate (LIBOR) at the company's option. There was no borrowing under this
arrangement during the current period, except for the support of commercial
paper borrowings, which were $75.0 million and $264.6 million at December 31,
2001 and 2000, respectively, with a weighted average interest rate of 2.9% and
7.4%, respectively. The revolving credit agreement contained a financial
covenant limiting the ratio of debt to capitalization to 0.55 to 1 and specified
rates approximating prime or LIBOR at the company's option.
The ratio of debt to total capital for Westvaco was 46% at December 31, 2001 and
45% at December 31, 2000. In February 2001, Westvaco issued $300 million of
7.95% thirty-year notes to repay commercial paper, to fund working capital and
other general requirements. At December 31, 2001, Westvaco had $166.6 million of
notes payable and current maturities of long-term obligations, compared to $30.5
million at December 31, 2000. The weighted average interest rate for these
borrowings was 8.6% for December 31, 2001.
In the third quarter of 2001, Westvaco entered into an interest rate swap with a
notional principal amount of $100 million and a variable-rate of six-month LIBOR
plus 1.115% with respect to $100 million of Sinking Fund Debentures with a fixed
interest rate of 7.1%. The swap matures in November 2009. At October 31, 2001,
the company had $200 million of unused debt registered with the Securities and
Exchange Commission. During the two months ended December 31, 2001, the company
declared a $.22 per share dividend payable January 2, 2002. During the two
months ended December 2001, the company did not purchase any common stock under
the repurchase program approved by the Board of Directors in 1997 and 145,498
shares were issued out of treasury stock to satisfy stock option exercises.
Following the merger, (i) debt issued by Westvaco has been unconditionally
guaranteed, on a joint and several basis, by both MeadWestvaco and Mead, (ii)
debt issued by Mead has been unconditionally guaranteed, on a joint and several
basis, by both MeadWestvaco and Westvaco and (iii) future debt issued by
MeadWestvaco will be guaranteed by either or both of Mead and/or Westvaco. In
connection with its future financing and capital structure requirements, on
March 8, 2002, MeadWestvaco filed a registration statement with the Securities
and Exchange Commission on Form S-3, covering up to $1.0 billion in debt
securities which the company may issue from time to time after the registration
statement becomes effective, for general corporate purposes including repayment
of short-term debt and maturing long-term debt and working capital.
Dividends declared during the transition period ended December 31, 2001 were
$22.6 million and $89.3 million, $88.5 million and $88.2 million for the years
ended October 31, 2001, 2000 and 1999, respectively. MeadWestvaco had announced
an annual dividend rate of $.92 per share.
Effect of inflation
- -------------------
The company believes inflation has not had a material effect on its net sales
and revenues or on income from continuing operations; however, there can be no
assurance that such items will not be affected by inflation in the future. The
company's overall sales are not subject to significant seasonal variations.
Environmental matters
- ---------------------
MeadWestvaco's operations are subject to extensive regulation by federal, state
and local authorities, as well as regulatory authorities with jurisdiction over
foreign operations of the company. Mead and Westvaco have made significant
capital expenditures in the past to comply with environmental laws, rules and
regulations. Westvaco capital expenditures for environmental projects were $4.3
million during the two months ended December 31, 2001. Due to changes in
environmental laws and regulations, the application of such regulations and
changes in environmental control technology, it is not possible for MeadWestvaco
to predict with certainty the amount of capital expenditures to be incurred for
environmental purposes. Taking these uncertainties into account, MeadWestvaco
estimates that it may incur approximately $40 million in expenditures for
Westvaco facilities for the year ending December 31, 2002, and approximately $22
million in expenditures over the next three calendar years for Mead facilities.
A portion of anticipated future environmental capital expenditures of
MeadWestvaco will concern compliance with regulations promulgated under the
Clean Air Act and Clean Water Act (the "Cluster Rules") designed to reduce air
and water discharges of specific substances from U.S. pulp and paper mills by
2006. MeadWestvaco has taken major steps to comply with the Cluster Rules.
MeadWestvaco expects to incur capital expenditures beyond the expenditures
stated above of approximately $85 million over the next five years to comply
with the Cluster Rules. Additional operating expenses will be incurred as
capital installations required by the Cluster Rules are put into service.
Environmental organizations are challenging the Cluster Rules in the U.S. Court
of Appeals. MeadWestvaco and other companies are participating in the litigation
which could result in additional compliance costs in excess of $150 million over
several years if the legal challenge by these environmental organizations is
successful.
The U.S. Environmental Protection Agency (the "EPA") has undertaken several
initiatives to reduce ozone-causing pollutants from large utility and industrial
sources in the Midwest, including a call for states to adopt more stringent
emission controls on all or some of the sources within their boundaries (the
"NOx SIP Call") and the promulgation of new federal emission standards that may
be applied to specific identified sources in the affected states. Alabama,
Michigan and Ohio are among the states affected by these EPA initiatives.
MeadWestvaco has developed plans for compliance with the applicable federal
programs and the Alabama, Michigan and Ohio programs, and does not expect any
significant capital expenditures beyond the expenditures stated above for the
Mead facilities will be necessary in the next three years. MeadWestvaco also
expects capital expenditures in the range of $15-20 million will be required to
install additional controls at MeadWestvaco facilities located in Kentucky,
Maryland and Virginia by 2004. Estimated expenditures assume
the technology identified by the EPA is capable of achieving the NOx reductions
projected by the EPA, which MeadWestvaco has not independently confirmed.
Mead and Westvaco have been notified by the EPA or by various state or local
governments that they may be liable under federal environmental laws or under
applicable state or local laws with respect to the cleanup of hazardous
substances at sites currently operated or used by each company. Mead and
Westvaco are also currently named as potentially responsible parties ("PRP"), or
have received third party requests for contribution under federal, state or
local laws with respect to numerous sites. There are other sites which may
contain contamination or which may be potential Superfund sites but for which
MeadWestvaco has not received any notice or claim. The potential liability for
all these sites will depend upon several factors, including the extent of
contamination, the method of remediation, insurance coverage and contribution by
other PRPs. Although the costs associated with remediation of all these sites
are not certain at this time, MeadWestvaco has established reserves of
approximately $57 million relating to current environmental litigation and
proceedings which it believes are probable and reasonably estimable. These
reserves were established after considering the number of other PRPs, their
ability to pay their portion of the costs, Mead's or Westvaco's relative
contribution to the site, and other factors. Expenses to be charged to this
reserve are not included in the anticipated capital expenditures previously
stated. MeadWestvaco believes that it is reasonably possible that costs
associated with these sites may exceed current reserves by amounts that may
prove insignificant or by as much as approximately $40 million. This estimate of
the range of reasonably possible additional costs is less certain than the
estimate upon which reserves are based. Payments made relating to these sites
were not material to liquidity during the year and are not expected to be
material for 2002.
MeadWestvaco is involved in other various legal proceedings and environmental
actions, generally arising in the normal course of business. Although the
ultimate outcome of such matters cannot be predicted with certainty, management
does not believe that the currently expected outcome of any proceeding, lawsuit
or claim that is pending or threatened, or all of them combined, will have a
material adverse effect on its consolidated financial position, liquidity or
results of operations.
Acquisitions
During the third quarter of fiscal year 2001, Westvaco completed, in a series of
transactions, its previously disclosed acquisition of a 90% interest in Alfred
Wall AG (Wall) and related assets. Wall is a leading European supplier of a wide
range of consumer packaging based in Graz, Austria. The company used existing
cash of $45 million and approximately 1.5 million shares of the company's common
stock, with an assured value of $35 per share, to fund the purchase price of
$98.7 million, net of debt assumed of $50.6 million. The acquisition was
accounted for using the purchase method of accounting. The assets acquired and
liabilities assumed were recorded using preliminary estimated fair values as
determined by the company based on information currently available and on
current assumptions as to future operations. The purchase price allocation for
this acquisition is preliminary and further refinements are likely to be made
upon completion of final valuation studies. Related goodwill of approximately
$47 million, which represents the excess of purchase price over fair value of
net tangible and intangible assets acquired, has been amortized under existing
accounting standards on a straight-line basis over 40 years. See the section
Recently Issued Accounting Standards below for further information regarding
goodwill and other intangible assets.
Also in fiscal year 2001, Westvaco completed the acquisitions of Lakewood
Industries, Inc. (known as Poly-Matrix) and TM Limited through its AGI Media
Packaging subsidiary. Poly-Matrix has manufacturing operations in Pittsfield,
MA, and is North America's largest producer of specialty plastic components for
DVD, CD and other entertainment packaging. TM Limited is one of Europe's leading
suppliers of specialty packaging design, prepress and print services to the
movie industry. The company used existing cash to fund the combined purchase
prices of $41.1 million, net of debt assumed of $14.6 million. Goodwill
associated with the Poly-Matrix purchase will not be amortized per issued
Statement of Financial Accounting Standards No. 142.
During 2001, the company refined the preliminary allocation of the purchase
price of Mebane Packaging Group, acquired in fiscal year 2000. The result was an
increase in identifiable intangible assets of $15.9 million and fixed assets of
$20.5 million and credits to goodwill of $22.3 million and to deferred taxes of
$14.1 million.
During the fourth quarter of 2001, the company refined the preliminary
allocation of the purchase price of AGI. The result was an increase in
identifiable intangible assets of $75.1 million and fixed assets of $24.2
million and a credit to goodwill of $61.3 million and to deferred taxes of $38.0
million.
Special Items Including Restructuring and Business Improvement Actions
MeadWestvaco expects restructuring and other merger-related costs charged to
earnings in 2002 to approximate $100 million, all of which relates to the former
Westvaco operations, of which about $40 million is expected to be taken in the
first quarter. Of the total estimated $100 million in charges, about 70% or $70
million are expected to be noncash charges.
During fiscal year 2001, the company recorded total pretax restructuring charges
of $56.9 million, including $5.2 million of inventory writedowns included within
Cost of products sold.
The following table and discussion presents additional detail to the charges.
In millions Asset Employee Other Sub- Inventory
----------- writedowns costs costs Adjustments total writedowns Total
---------- --------- ----- ----------- ----- ---------- -----
Packaging $21.4 $3.2 $0.8 $[0.5] $24.9 $1.6 $26.5
Paper 15.5 5.7 4.6 [0.2] 25.6 3.6 29.2
Chemicals 1.2 - - - 1.2 - 1.2
----- ---- ---- ------ ----- ---- -----
$38.1 $8.9 $5.4 $[0.7] $51.7 $5.2 $56.9
===== ==== ==== ====== ===== ==== =====
Balance of related
accruals remaining at
December 31, 2001 $3.8 $1.8 $5.6 $5.6
==== ==== ==== ====
During the fourth quarter of fiscal year 2001, Westvaco recorded a pretax
restructuring charge of $53.7 million which consisted of $37.1 million of fixed
asset writedowns, $6.7 million of employee termination costs and $5.0 million of
other exit costs, primarily lease termination costs. Included in the
restructuring charge are related inventory writedowns of $4.9 million, which
have been included within Cost of products sold. Restructuring actions taken in
the fourth quarter are expected to result in annual pretax savings of about $50
million, which are expected to be attained by the end of fiscal 2002.
Packaging segment: The realignment of the consumer packaging operations included
the closing of the packaging plants in Richmond, VA, and Memphis, TN, and
further streamlining of its remaining Richmond packaging operations by
relocating equipment to other company facilities. The packaging charge also
included the writedown of assets at the company's Covington, VA, mill as part of
a plan to focus the mill's production at targeted markets. Charges associated
with these shutdowns included $21.4 million to write down the assets, using an
assets-to-be-held-and-used model. Severance costs of $3.2 million relating to
the termination of approximately 320 employees and other exit costs of $0.8
million were recorded. In addition, the company recognized related inventory
writedowns of $1.6 million, which have been included within Cost of products
sold. At December 31, 2001, all of the plants' employees had been terminated.
Paper segment: The paper mill in Tyrone, PA, was shut down in October 2001 due
to the competitive pressures caused by the economic slowdown, the strong U.S.
dollar and the related increase in imported paper. Charges
associated with the shutdown included $14.5 million to write down the assets,
using an assets-to-be-disposed-of model, $3.5 million of severance costs
covering approximately 260 employees and other exit costs of $4.2 million which
primarily relate to lease termination costs. In addition, the company recognized
related inventory writedowns of $3.3 million, which have been included within
Cost of products sold. At December 31, 2001, all of the mill's employees had
been terminated. During the third quarter of fiscal year 2001, the company
recorded a restructuring charge of $1.6 million, due primarily to a salaried
workforce reduction of 20 employees at the company's Envelope Division
headquarters in Springfield, MA. During the second quarter of fiscal year 2001,
the company recorded a restructuring charge of $2.3 million which consisted of
$1.0 million of fixed asset writedowns, $0.6 million of employee termination
costs and $0.4 million of other exit costs. Included in the restructuring charge
are related inventory writedowns of $0.3 million, which have been included
within Cost of products sold. These actions were due to the curtailment of
production on two of the three product lines at the company's Envelope Division
flexible packaging operation.
Chemicals segment: The charge of $1.2 million related to the writedown of assets
at the company's Covington, VA, carbon plant related to a program of
concentrating production on high-growth markets.
Also included in the Restructuring charges line is a credit of $0.7 million for
the reversal of reserves no longer required associated with the restructuring
charge taken in the fiscal year 1999.
During the third quarter of fiscal year 2000, due to the anticipated decline in
future sales of folding cartons to U.S. tobacco markets, the company reviewed
certain long-lived assets in its consumer packaging business for impairment. As
a result of the review, production facilities were written down to their fair
value using an assets-held-for-use model and a pretax impairment charge of $24.3
million, including $3.3 million of associated goodwill, was recorded in the
third quarter of fiscal year 2000. The impairment was recorded because
undiscounted cash flows were less than the carrying value of the assets prior to
the impairment charge. During the fourth quarter of fiscal year 2000, the
company recorded an additional pretax charge of $2.9 million relating to the
earlier charge and related employee termination costs. During the second quarter
of fiscal 2000, the liquid packaging plant was sold, resulting in a pretax gain
of $11.2 million, which was included in the Restructuring charges line in the
Consolidated Statements of Income. As noted below, the liquid packaging plant
had been written down in fiscal year 1999 in connection with the restructuring
charge recorded in the fiscal 1999 fourth quarter. The gain resulted from a
change in facts and circumstances in fiscal year 2000 from that existing during
the fourth quarter of fiscal year 1999.
During the fourth quarter of fiscal year 1999, following completion of its
strategic review process, the company adopted a plan to improve the company's
performance, principally to enhance the strength and focus of its
packaging-related businesses. Additionally, the company reviewed certain
long-lived assets in its business for impairment. As a result of these
initiatives, a pretax charge of $80.5 million was recorded in the fourth quarter
of fiscal year 1999. Included in this charge were certain assets of the
company's liquid packaging plant that were written down to reflect the plant's
planned shutdown. This charge was primarily due to the writedown of impaired
long-lived assets, involuntary employee termination and other exit costs.
Production facilities were written down to their fair value using an
asset-held-for-use model. An impairment of $67.4 million was recorded as
undiscounted cash flows were less than the carrying value of the assets prior to
the impairment. Further, the company wrote off a paper machine and certain
equipment with a total carrying value of $8.6 million and abandoned the assets.
During the fourth quarter of fiscal year 1999, in addition to the asset
impairments described above, the company also recognized inventory writedowns of
$1.7 million, which have been included within the Cost of products sold,
employee termination costs of $1.5 million and other exit costs of $1.2 million.
At October 31, 2001, reserves for the fiscal years 1999 and 2000 activities were
fully utilized.
Critical Accounting Policies
- ----------------------------
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of some assets and liabilities
and, in some instances, the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
The company recognizes revenues at the point the risk of ownership passes.
Export sales revenue is recognized at the point title passes, generally at the
destination port.
Environmental expenditures that increase useful lives are capitalized, while
other environmental expenditures are expensed. Liabilities are recorded when
remedial efforts are probable and the costs can be reasonably estimated. The
estimated closure costs for existing landfills based on current environmental
requirements and technologies are accrued over the expected useful lives of the
landfills.
The company provides retirement benefits for substantially all domestic
employees under several noncontributory trusteed plans and also provides
benefits to employees whose retirement benefits exceed maximum amounts permitted
by current tax law under an unfunded benefit plan. Benefits are based on a final
average pay formula for the salaried plans and a unit benefit formula for the
hourly paid plans. Prior service costs are amortized on a straight-line basis
over the average remaining service period for active employees. Contributions
are made to the funded plans in accordance with ERISA requirements. The net
pension credit reflects cumulative favorable investment returns on plan assets.
The funded status of the plans and amounts recognized in the Consolidated
Balance Sheets at December 31 and October 31 are based on valuation dates of
September 30 and July 31 prepared by independent third-party actuaries.
The company periodically evaluates whether current events or circumstances
indicate that the carrying value of its long-lived assets to be held and used
may not be recoverable. An estimate of undiscounted future cash flows produced
by the asset, or the appropriate grouping of assets, is compared to the carrying
value to determine whether an impairment exists. If an asset is determined to be
impaired, the loss is measured based on quoted market prices in active markets,
if available. If quoted market prices are not available, the estimate of fair
value is based on various valuation techniques, including a discounted value of
estimated future cash flows. The company reports an asset to be disposed of at
the lower of its carrying value or its estimated net realizable value.
For a more complete listing of the company's significant accounting policies,
see the Notes to the Consolidated Financial Statements.
Recently Issued Accounting Standards
- ------------------------------------
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which establishes one accounting model to be
used for long-lived assets to be disposed of by sale and broadens the
presentation of discontinued operations to include more disposal transactions.
SFAS 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of, and the accounting and reporting provisions of
Accounting Principles Board (APB) Opinion No. 30. SFAS 144 is effective for
fiscal years beginning after December 15, 2001. The company does not anticipate
any immediate financial statement impact with the adoption of this statement.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS 141 supersedes APB Opinion
No. 16, Business Combinations. The provisions of SFAS 141 (1) require that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, (2) provide specific criteria for the initial recognition
and measurement of intangible assets apart from goodwill and (3) require that
unamortized negative goodwill be written off immediately as an extraordinary
gain instead of being deferred and amortized. The Poly-Matrix acquisition has
been accounted for under SFAS 141. SFAS 141 also requires that upon adoption of
SFAS 142 the company reclassify the carrying amounts of certain intangible
assets into or out of goodwill, based on certain criteria. SFAS 142 supersedes
APB Opinion No. 17, Intangible Assets, and is effective for fiscal years
beginning after December 15, 2001. SFAS 142 primarily addresses the accounting
for goodwill and intangible assets subsequent to their initial recognition. The
provisions of SFAS 142 (1) prohibit the amortization of goodwill and
indefinite-lived intangible assets, (2)
require that goodwill and indefinite-lived intangibles assets be tested annually
for impairment (and in interim periods if certain events occur indicating that
the carrying value of goodwill and/or indefinite-lived intangible assets may be
impaired), (3) require that reporting units be identified for the purpose of
assessing potential future impairments of goodwill, and (4) remove the 40 year
limitation on the amortization period of intangible assets that have finite
lives.
The company will adopt the provisions of SFAS 142 in its first quarter of
2002. The company is in the process of preparing for its adoption of SFAS 142
and is making the determinations as to what its reporting units are and what
amounts of goodwill, intangible assets, other assets and liabilities should be
allocated to those reporting units. The company expects that it will no longer
record approximately $14 million of amortization relating to its existing
goodwill and indefinite-lived intangibles, as adjusted for the reclassifications
just mentioned.
SFAS 142 requires that goodwill and indefinite lived intangible assets be
tested annually for impairment using a two-step process. The first step is to
identify a potential impairment and, in transition, this step must be measured
as of the beginning of the fiscal year. However, a company has six months from
the date of adoption to complete the first step. The company expects to complete
that first step of the goodwill and indefinite lived intangible assets
impairment test during the first quarter of 2002. The second step of the
goodwill and indefinite lived intangible assets impairment test measures the
amount of the impairment loss (measured as of the beginning of the year of
adoption), if any, and must be completed by the end of the company's fiscal
year. Any impairment loss resulting from the transitional impairment tests will
be reflected as the cumulative effect of a change in accounting principle as of
the beginning of 2002. Based upon the goodwill assessment work to date, the
company estimates that a noncash goodwill impairment charge in the range of
$250-$350 million will be recorded in 2002 as the effect of adopting the new
accounting standard. Any resulting goodwill impairment will be the same before
and after taxes as the related goodwill is not deductible for tax purposes.
Forward-looking statements
Certain statements in this document and elsewhere by management of the company
that are neither reported financial results nor other historical information are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such information includes, without limitation,
the business outlook, assessment of market conditions, anticipated financial and
operating results, strategies, future plans, contingencies and contemplated
transactions of the company. Such forward-looking statements are not guarantees
of future performance and are subject to known and unknown risks, uncertainties
and other factors which may cause or contribute to actual results of company
operations, or the performance or achievements of each company, or industry
results, to differ materially from those expressed or implied by the
forward-looking statements. In addition to any such risks, uncertainties and
other factors discussed elsewhere herein, risks, uncertainties and other factors
that could cause or contribute to actual results differing materially from those
expressed or implied for the forward-looking statements include, but are not
limited to, events or circumstances which affect the ability of Mead and
Westvaco to integrate successfully and achieve the anticipated benefits of the
transaction; competitive pricing for each company's products; changes in raw
materials; energy and other costs; fluctuations in demand and changes in
production capacities; changes to economic growth in the United States and
international economies; government policies and regulations, including, but not
limited to those affecting the environment and the tobacco industry; and
currency movements. MeadWestvaco undertakes no obligation to publicly update any
forward-looking statement, whether as a result of new information, future events
or otherwise. Investors are advised, however, to consult any further disclosures
made on related subjects in the company's reports filed with the SEC.
Investor services plan
At December 31, 2001, approximately 15,300 shareholders, including members of
the company's savings and investment plans for salaried and hourly employees,
representing 16,828,152 shares of Westvaco
common stock, were participants in the company's Investor Services Plan.
Number of shareholders
At December 31, 2001, the number of individuals and institutions owning Westvaco
common shares was about 18,920. This number includes 12,629 members of the
company's salaried and hourly savings and investment plans. The plans,
established in 1968 and 1995, respectively, hold 15,780,757 shares of Westvaco
common stock for the accounts of participants. This represents 15% of the
102,554,826 shares of common stock outstanding at December 31, 2001.
Payroll and benefit costs
The total cost of payroll and benefits was $147 million for the transition
period ended December 31, 2001, compared with $857 million and $742 million for
the fiscal years ended 2001 and 2000, respectively. This includes $11.3 million
in Social Security taxes in the transition period ended December 31, 2001, and
$65.6 million and $52.5 million for the fiscal years ended 2001 and 2000,
respectively. Payroll and benefit costs were 24% of sales in the transition
period ended December 31, 2001 and 22% and 20% for the fiscal years ended 2001
and 2000, respectively.
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
In millions, except per share Transition period
ended December 31, Fiscal year ended October 31,
------------------ ----------------------------------------
2001 2001 2000 1999
Sales $602.7 $3,935.5 $3,856.5 $2,953.2
Other income [expense], net [2.3] 48.1 57.0 29.4
----- ------- ------- -------
600.4 3,983.6 3,913.5 2,982.6
----- ------- ------- -------
Cost of products sold [excludes depreciation
shown separately below] 482.2 2,893.9 2,706.0 2,120.9
Selling, research and administrative expenses 63.2 364.4 281.7 230.9
Depreciation and amortization 60.7 347.4 313.9 280.5
Restructuring charges - 51.7 16.1 78.8
Interest expense 32.9 207.7 192.2 123.5
----- ------- ------- -------
639.0 3,865.1 3,509.9 2,834.6
----- ------- ------- -------
Income [loss] before taxes and extraordinary charge [38.6] 118.5 403.6 148.0
Income taxes [16.9] 30.3 148.9 36.8
----- ------- ------- -------
Income [loss] before extraordinary charge [21.7] 88.2 254.7 111.2
Extraordinary charge - extinguishment of
debt, net of taxes of $5.5 - - [8.8] -
----- ------- ------- -------
Net income [loss] $ [21.7] $ 88.2 $ 245.9 $ 111.2
===== ======= ======= =======
Net income [loss] per share - basic and diluted
Income [loss] before extraordinary charge $ [.21] $ .87 $ 2.53 $ 1.11
Extraordinary charge - - [.09] -
----- ------- ------- -------
Net income [loss] $ [.21] $ .87 $ 2.44 $ 1.11
===== ======= ======= =======
Shares used to compute net income [loss] per share
Basic 102.5 101.5 100.6 100.2
Diluted 102.6 101.6 100.9 100.5
The accompanying notes are an integral part of these financial statements.
MEADWESTVACO CORPORATION AND CONSOLIDATED SUBSIDIARY COMPANIES
FINANCIAL STATEMENTS
Consolidated balance sheets
In millions
At December 31, At October 31,
-------------- ---------------------
2001 2001 2000
ASSETS
Cash and marketable securities $ 102.4 $ 81.2 $ 225.3
Receivables 395.6 414.7 421.7
Inventories 434.6 426.4 333.3
Prepaid expenses and other current assets 101.0 93.4 83.4
------- ------- -------
Current assets 1,033.6 1,015.7 1,063.7
Plant and timberlands:
Machinery 5,908.0 5,875.1 5,673.4
Buildings 848.3 843.0 794.1
Other property, including plant land 265.0 261.2 248.8
------- ------- -------
7,021.3 6,979.3 6,716.3
Less: accumulated depreciation 3,223.9 3,170.6 2,916.4
------- ------- -------
3,797.4 3,808.7 3,799.9
Timberlands-net 264.2 263.7 268.7
Construction in progress 174.3 154.9 128.0
------- ------- -------
4,235.9 4,227.3 4,196.6
Prepaid pension asset 800.1 779.4 641.7
Goodwill 560.9 565.2 606.2
Other assets 197.8 199.4 61.7
------- ------- -------
$6,828.3 $6,787.0 $6,569.9
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 543.9 $ 511.6 $ 523.2
Notes payable and current maturities of
long-term obligations 166.6 172.9 30.1
Income taxes 15.3 16.5 13.6
------- ------- -------
Current liabilities 725.8 701.0 566.9
Long-term debt 2,697.2 2,660.5 2,686.7
Other long-term obligations 83.0 76.8 76.0
Deferred income taxes 1,007.1 1,007.8 907.7
Shareholders' equity:
Common stock, $5 par, at stated value
Shares authorized: 300,000,000
Shares issued: 103,170,667 [2001 and 2000-103,170,667] 815.7 815.4 767.5
Retained income 1,687.5 1,731.8 1,761.8
Accumulated other comprehensive income [loss] [171.7] [186.8] [135.7]
Common stock in treasury, at cost
Shares held: 615,841 [2001-751,979; 2000-2,508,258] [16.3] [19.5] [61.0]
------- ------- -------
2,315.2 2,340.9 2,332.6
-------- -------- --------
$6,828.3 $6,787.0 $6,569.9
======== ======== ========
The accompanying notes are an integral part of these financial statements.
MEADWESTVACO CORPORATION AND CONSOLIDATED SUBSIDIARY COMPANIES
FINANCIAL STATEMENTS
Consolidated Statements of Shareholders' Equity
In millions
Outstanding Common Common Retained Accumulated Total
shares stock stock in income other shareholders'
treasury comprehensive equity
income [loss]
Balance at October 31, 1998 100.3 $764.6 $[74.9] $1,588.9 $ [32.2] $2,246.4
Comprehensive income
Net income - - - 111.2 - 111.2
Foreign currency translation - - - - [97.8] [97.8]
Comprehensive income 13.4
Cash dividends - - - [88.2] - [88.2]
Repurchases of common stock [0.5] - [11.9] - - [11.9]
Issuances of common stock 0.5 1.2 14.8 [4.4] - 11.6
----- ------ ------ -------- --------- --------
Balance at October 31, 1999 100.3 765.8 [72.0] 1,607.5 [130.0] 2,171.3
Comprehensive income
Net income - - - 245.9 - 245.9
Foreign currency translation - - - - [5.7] [5.7]
Comprehensive income 240.2
Cash dividends - - - [88.5] - [88.5]
Repurchases of common stock [0.1] - [4.5] - - [4.5]
Issuances of common stock 0.5 1.7 15.5 [3.1] - 14.1
----- ------ ------ -------- --------- --------
Balance at October 31, 2000 100.7 767.5 [61.0] 1,761.8 [135.7] 2,332.6
Comprehensive income
Net income - - - 88.2 - 88.2
Foreign currency translation - - - - [47.9] [47.9]
Minimum pension liability
net of taxes of $1.9 - - - - [3.2] [3.2]
Comprehensive income 37.1
Cash dividends - - - [89.3] - [89.3]
Repurchases of common stock [0.1] - [2.1] - - [2.1]
Issuances of common stock 1.8 47.9 43.6 [28.9] - 62.6
----- ------ ------ -------- --------- --------
Balance at October 31, 2001 102.4 815.4 [19.5] 1,731.8 [186.8] 2,340.9
Comprehensive [loss]
Net loss - - [21.7] - [21.7]
Foreign currency translation - - - 14.8 14.8
Minimum pension liability
net of taxes of $0.1 - - - - 0.3 0.3
Comprehensive [loss] [6.6]
Cash dividends - - - [22.6] - [22.6]
Repurchases of common stock - - [0.3] - - [0.3]
Issuances of common stock 0.2 0.3 3.5 - 3.8
----- ------ ------ -------- --------- --------
Balance at December 31, 2001 102.6 $815.7 $[16.3] $1,687.5 $[171.7] $2,315.2
===== ===== ===== ======= ====== =======
The accompanying notes are an integral part of these financial statements.
MEADWESTVACO CORPORATION AND CONSOLIDATED SUBSIDIARY COMPANIES
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
In millions
Transition period
ended December 31, Fiscal year ended October 31,
------------------ -----------------------------
2001 2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
- -------------------------------------------------------------------------------------------------------------------------------
Net income [loss] $ [21.7] $ 88.2 $ 245.9 $ 111.2
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for depreciation and amortization 60.7 347.4 313.9 280.5
Provision for deferred income taxes [4.8] 43.6 94.9 32.3
Restructuring charges - 51.7 16.1 78.8
Pension credit and other employee benefits [15.0] [131.2] [92.9] [78.7]
Loss [gain] on sales of plant and timberlands 3.5 [37.7] [26.8] [17.9]
Foreign currency transaction loss [gain] [0.4] 1.2 0.9 3.6
Loss on extinguishment of debt, net of taxes - - 8.8 -
Net changes in assets and liabilities 13.1 [108.4] 25.3 [2.6]
Other, net [1.3] [2.2] [3.0] 5.5
------ ------ ------- -------
Net cash provided by operating activities 34.1 252.6 583.1 412.7
CASH FLOWS FROM INVESTING ACTIVITIES
- -------------------------------------------------------------------------------------------------------------------------------
Additions to plant and timberlands [54.1] [290.4] [214.0] [228.9]
Payments for acquisitions, net of cash acquired - [81.2] [1,342.8] [22.7]
Proceeds from sales of assets 0.6 48.2 81.6 22.8
Other, net [0.2] [0.2] 0.2 [1.1]
------ ------ ------- -------
Net cash used in investing activities [53.7] [323.6] [1,475.0] [229.9]
CASH FLOWS FROM FINANCING ACTIVITIES
- -------------------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of common stock 3.3 6.3 9.3 9.1
Proceeds from issuance of debt 79.9 1,125.3 2,611.5 881.5
Dividends paid - [89.3] [88.5] [88.2]
Treasury stock purchases - [1.6] [2.4] [10.8]
Repayment of notes payable and long-term debt [42.4] [1,103.6] [1,523.7] [952.2]
------ ------ ------- -------
Net cash provided by [used in] financing activities 40.8 [62.9] 1,006.2 [160.6]
Effect of exchange rate changes on cash - [10.2] 2.2 [18.5]
------ ------ ------- -------
Increase [decrease] in cash and marketable securities 21.2 [144.1] 116.5 3.7
Cash and marketable securities:
At beginning of period 81.2 225.3 108.8 105.1
------ ------ ------- -------
At end of period $102.4 $ 81.2 $ 225.3 $ 108.8
====== ====== ======= =======
The accompanying notes are an integral part of these financial statements.
MEADWESTVACO CORPORATION AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS
Summary of significant accounting policies
Basis of consolidation and preparation of financial statements: The Consolidated
Financial Statements include the accounts of MeadWestvaco Corporation (see Note
A) and all subsidiaries more than 50% owned. Investments in 20% to 50% owned
companies are generally accounted for using the equity method. Accordingly, the
company's share of the earnings of these companies is included in consolidated
net income. In accordance with generally accepted accounting principles, the
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of some assets and liabilities and,
in some instances, the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Reclassification: Certain prior years' amounts have been reclassified to conform
with the current presentation.
Translation of foreign currencies: Generally, the local currency is the
functional currency for the company's operations outside the United States. The
assets and liabilities of the company's foreign subsidiaries are translated into
U.S. dollars using period-end exchange rates and adjustments resulting from
these financial statement translations are included in Accumulated other
comprehensive income [loss] in the Consolidated Balance Sheets. Revenues and
expenses are translated at average rates prevailing during the period.
Marketable securities: For financial statement purposes, highly liquid
securities purchased three months or less from maturity are considered to be
cash equivalents.
Inventories: Inventories are valued at the lower of cost or market. Cost is
determined using the last-in, first-out (LIFO) method for substantially all raw
materials, finished goods and production materials of U.S. manufacturing
operations. Cost of all other inventories, including stores and supplies
inventories and inventories of non-U.S. manufacturing operations, is determined
by the first-in, first-out (FIFO) or average cost method.
Plant and timberlands: Owned assets are recorded at cost. Also included in the
cost of these assets is interest on funds borrowed during the construction
period. When assets are sold, retired or disposed of, their cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in Other income [expense]. Costs of renewals and betterments
of properties are capitalized; costs of maintenance and repairs are charged to
income. Costs of reforestation of timberlands are capitalized.
Depreciation, amortization and impairment of long-lived assets: The cost of
plant and equipment is depreciated, generally by the straight-line method, over
the estimated useful lives of the respective assets, which range from 20 to 40
years for buildings and 5 to 30 years for machinery and equipment. The cost of
standing timber is amortized as timber is cut, at rates determined annually
based on the relationship of unamortized timber costs to the estimated volume of
recoverable timber. The company periodically evaluates whether current events or
circumstances indicate that the carrying value of its long-lived assets,
including intangible assets to be held and used may not be recoverable. An
estimate of undiscounted future cash flows produced by the asset, or the
appropriate grouping of assets, is compared to the carrying value to determine
whether an impairment exists. If an asset is determined to be impaired, the loss
is measured based on quoted market prices in active markets, if available. If
quoted market prices are not available, the estimate of fair value is based on
various valuation techniques, including a discounted value of estimated future
cash flows. The company reports an asset to be disposed of at the lower of its
carrying value or its estimated net realizable value.
Environmental: Environmental expenditures that increase useful lives are
capitalized, while other environmental expenditures are expensed. Liabilities
are recorded when remedial efforts are probable and the costs can be reasonably
estimated. The estimated closure costs for existing landfills based on current
environmental requirements and technologies are accrued over the expected useful
lives of the landfills.
Goodwill and other intangible assets: Goodwill represents the excess of the cost
over the fair value of net assets of purchased businesses and is being amortized
through December 31, 2001 on a straight-line basis over periods not exceeding 40
years for goodwill arising prior to June 30, 2001. The company continually
evaluates the
NOTES TO FINANCIAL STATEMENTS
carrying value of goodwill and other intangible assets as described above.
Amortization expense charged to operations for the two-month transition period
ended December 31, 2001 was $4.1 million. Amortization expense charged to
operations for the year ended October 31, 2001 was $17.4 million (2000-$7.2
million, 1999-$30,000). See Note B for additional information.
Financial instruments: The company has, where appropriate, estimated the fair
value of financial instruments. These fair value amounts may be significantly
affected by the assumptions used, including the discount rate and estimates of
cash flow. Accordingly, the estimates presented are not necessarily indicative
of the amounts that could be realized in a current market exchange. Where these
estimates approximate carrying value, no separate disclosure of fair value is
shown.
Derivatives: The company utilizes well-defined financial contracts in the normal
course of its operations as means to manage its interest rate and commodity
price risks. For those limited number of contracts that are considered
derivative instruments, the company has formally designated each as a hedge of
specific and well-defined risks. See Note N for further information.
Revenue recognition: The company recognizes revenues at the point the risk of
ownership passes. Export sales revenue is recognized at the point title passes,
generally at the destination port.
Income taxes: Deferred income taxes are recorded for temporary differences
between financial statement carrying amounts and the tax basis of assets and
liabilities. Deferred tax assets and liabilities reflect the enacted tax rates
in effect for the years the differences are expected to reverse.
Income per share: Basic net income per share for all the periods presented has
been calculated using the weighted average shares outstanding. In computing
diluted net income per share, incremental shares issuable upon the assumed
exercise of stock options have been added to the weighted average shares
outstanding. For the two month transition period ended December 31, 2001, stock
options of 5.8 million shares were not included because their effect was
antidilutive. For the fiscal year ended October 31, 2001, stock options of 5.3
million shares were not included because their effect was antidilutive (2000-3.9
million options, 1999-1.9 million options).
NOTES TO FINANCIAL STATEMENTS
A. MeadWestvaco merger
On August 29, 2001, Westvaco and Mead announced that they agreed to a merger of
equals creating a global company with leading positions in packaging, coated and
specialty papers, consumer and office products, and specialty chemicals. The
transaction has been approved by the Boards of Directors of both companies and
was approved by the shareholders at special meetings held by both companies on
January 28, 2002. The new company, MeadWestvaco Corporation, has approximately
$8 billion in annual revenues, strong platforms in the company's four core
businesses and a strong balance sheet with substantial financial capacity. Under
the terms of the transaction, Mead shareholders received one share of
MeadWestvaco stock for each share of Mead stock held, and Westvaco shareholders
received 0.97 shares of MeadWestvaco stock for each share of Westvaco stock
held. Mead shareholders also received a cash payment of $1.20 per share. The
merger was structured as a stock-for-stock exchange and will be accounted for in
2002 as a purchase transaction under the recent guidelines for business
combinations. Westvaco and Mead determined that the relative outstanding share
ownership and the designation of certain senior management positions requires
Westvaco to be the acquiring entity for accounting purposes with the historical
financial statements of Westvaco becoming the consolidated financial statements
of MeadWestvaco. The total acquisition cost of Mead is estimated at
approximately $3.2 billion.
MeadWestvaco Corporation Selected Unaudited Pro Forma Combined Financial Data
The following table summarizes, under the purchase method of accounting,
selected unaudited pro forma combined statement of operations data for the
fiscal years ended October 31, 2001 and 2000 as if the business combination
between Westvaco and Mead had been completed at the beginning of the periods
presented. This selected unaudited pro forma combined financial data is included
only for the purposes of illustration, and it does not necessarily indicate what
the operating results would have been if the business combination between
Westvaco and Mead had been completed on such date. Moreover, this information
does not necessarily indicate what the future operating results of the combined
company will be. The unaudited pro forma combined condensed statements of
operations data reflect the full years ended October 31, 2001 and 2000 for
Westvaco and the full years ended December 31, 2001 and 2000 for Mead. The
unaudited pro forma combined condensed balance sheet data reflects the December
31, 2001 balance sheet of Westvaco and records, on a preliminary basis, the
acquisition of Mead assuming the transaction had been completed at December 31,
2001. The Mead balance sheet at December 31, 2001 was used for purposes of
estimating the preliminary purchase asset allocation. The allocation reflected
in the unaudited pro forma information is preliminary and subject to adjustment
as final valuations of tangible and intangible assets acquired and liabilities
assumed are completed.
Pro forma in millions, except per share [unaudited] 2001 2000
-------- --------
Net sales $8,112.0 $8,224.6
Net income 37.8 376.1
Net income per common share from continuing
operations -- assuming dilution $0.19 $1.88
Balance sheet data:
Total assets $13,599.8
Working capital 437.8
Long-term debt 4,004.5
Shareholders' equity 5,387.4
Management expects the accounting for the acquisition to result in the recording
of approximately $350 million of goodwill. Pro forma adjustments include
recording Mead's tangible and intangible assets and liabilities at their fair
market value, including related deferred income taxes. Identifiable intangible
assets include product
NOTES TO FINANCIAL STATEMENTS
trademarks, tradenames and customer relationships. The adjustments also include
additional borrowings associated with the $1.20 per share payment to existing
Mead stockholders and transaction and merger-related costs.
MeadWestvaco expects restructuring and other merger-related costs charged to
earnings in 2002 to approximate $100 million, all of which relates to the former
Westvaco operations, of which about $40 million is expected to be taken in the
first quarter. Of the total estimated $100 million in charges about 70% or $70
million are expected to be noncash charges.
The company's historical Consolidated Financial Statements presented herein do
not reflect any accounting for the merger.
B. Acquisitions
During the third quarter of fiscal year 2001, Westvaco completed, in a series of
transactions, its acquisition of a 90% interest in Alfred Wall AG (Wall) and
related assets. Wall is one of Europe's leading suppliers of packaging for a
wide range of consumer products. Westvaco used existing cash of $45 million and
approximately 1.5 million shares of Westvaco's common stock, with an assured
value of $35 per share, to fund the purchase price of $98.7 million, net of debt
assumed of $50.6 million.
Also in fiscal year 2001, Westvaco completed the acquisitions of Poly-Matrix and
TM Limited by its AGI Media Packaging subsidiary. Poly-Matrix has manufacturing
operations in Pittsfield, MA, and is North America's largest producer of
specialty plastic components for DVD, CD and other entertainment packaging. TM
Limited is one of Europe's leading suppliers of specialty packaging design,
prepress and print services to the movie industry. The company used existing
cash to fund the combined purchase price of $41.1 million, net of debt assumed
of $14.6 million.
The fiscal year 2001 acquisitions were accounted for using the purchase method
of accounting. The tangible and intangible assets acquired and liabilities
assumed were recorded at estimated fair values as determined by the company
based on information currently available and on current assumptions as to future
operations. The purchase price allocation for these acquisitions is preliminary
and further refinements are likely to be made upon completion of final valuation
studies. Accordingly, the assets and liabilities of the acquired businesses are
included in the Consolidated Balance Sheet at December 31, 2001 and October 31,
2001. Preliminary goodwill recognized as a result of the Wall and TM Limited
acquisitions was approximately $61.4 million and is being amortized on a
straight-line basis over 40 years until Statement of Financial Accounting
Standards (SFAS) No. 142 is adopted. Related goodwill for the Poly-Matrix
acquisition of approximately $4.8 million has not been amortized, in accordance
with SFAS 142, but will be reviewed annually for impairment. The results of
operations of the acquired businesses are included in the accompanying financial
statements from their respective dates of acquisition. On a pro forma basis, if
the businesses acquired during fiscal year 2001 had been acquired at the
beginning of fiscal year 2000, Sales and Net income would not differ materially
from the amounts reported in the accompanying Consolidated Statements of Income.
In July 2000, Rigesa, Ltda., Westvaco's Brazilian subsidiary, acquired all of
the assets of Agaprint Embalagens, a leading supplier of consumer packaging in
Brazil. In August 2000, AGI Europe, a Westvaco subsidiary, acquired the
privately held DuBOIS Holdings Limited, global licenser and European
manufacturer of the DVD-Safe (TM) (or Amaray(R)) package, the world's
top-selling DVD package. In October 2000, AGI Europe also acquired Sony Music
Printing (Holland) BV. The plant is located adjacent to Sony's CD/DVD
distribution center in Haarlem, The Netherlands, and produces printed booklets,
folders and inlay cards for Sony as well as multimedia products sold to Sony and
other companies throughout Europe. The combined purchase price for these
acquisitions was $71.6 million. Goodwill recognized as a result of these
acquisitions was approximately $48.9 million and is being amortized on a
straight-line basis over 40 years until SFAS 142 is adopted.
Also in July 2000, Westvaco completed its acquisition of AGI (formerly IMPAC
Group, Inc.), a leading global supplier of packaging for entertainment products,
cosmetics and health and beauty aids with 13 plants in Europe
NOTES TO FINANCIAL STATEMENTS
and eight plants in the United States. The company used existing cash reserves,
commercial paper and $400 million of notes issued in June 2000 to fund the
purchase price of $253.4 million, net of debt assumed of $274.7 million,
resulting in the recognition of goodwill of $368 million. During the fourth
quarter of 2001, the company refined the preliminary allocation of the purchase
price of AGI. The result was an increase in identifiable intangible assets of
$75.1 million and fixed assets of $24.2 million and a credit to goodwill of
$61.3 million and to deferred taxes of $38.0 million. Plant, property and
equipment is being depreciated over not more than 40 years. Goodwill is being
amortized on a straight-line basis over 40 years until SFAS 142 is adopted.
Acquired other identifiable intangible assets consist primarily of customer
lists, workforce, patents and trade names and are amortized over their useful
lives, ranging from 2-40 years using the straight-line method.
In January 2000, Westvaco completed the purchase of Mebane Packaging Group
(Mebane), a leading supplier of packaging for pharmaceutical products and
personal care items, based in Mebane, NC, for approximately $209.8 million, net
of $15.7 million of debt assumed. During fiscal year 2001, the company refined
the preliminary allocation of the purchase price of Mebane. The result was an
increase in identifiable intangible assets of $15.9 million and fixed assets of
$20.5 million and credits to goodwill of $22.3 million and to deferred taxes of
$14.1 million. Plant, property and equipment is being depreciated over not more
than 15 years. Goodwill is being amortized on a straight-line basis over 40
years until SFAS 142 is adopted. Acquired other identifiable intangible assets
consists primarily of customer lists, workforce and trade names and are
amortized over their useful lives, ranging from 10-20 years using the
straight-line method.
In December 1999, Westvaco completed its acquisition of Temple-Inland's bleached
paperboard mill in Evadale, TX (Evadale). The total purchase price, net of $82
million of debt assumed, was $566 million. The company used existing cash
reserves, commercial paper and $400 million of debentures issued in November
1999 to fund the purchase. The purchase price was allocated to the net assets of
the mill, primarily plant, property and equipment based on independent
appraisals of fair values.
Westvaco accounted for all of these transactions using the purchase method of
accounting. The purchase price for these acquisitions, including transaction
costs, has been allocated to tangible and intangible assets acquired and
liabilities assumed based on fair market values at the date of acquisition. The
following unaudited pro forma consolidated results of operations are presented
as if the Evadale mill, Mebane and AGI acquisitions had been made at the
beginning of the periods presented.
The following unaudited pro forma data for the fiscal year 2000 reflects 308
days, 299 days and 113 days of Westvaco's operation of the Evadale mill, Mebane
and AGI, respectively. The balance of the fiscal year 2000 and all of the fiscal
year 1999 reflect the results of these operations under the management of the
prior owners. The unaudited pro forma amounts of the other fiscal year 2000
acquisitions are not included, as their effect is not material to the company's
results of operations.
Pro forma in millions, except per share [unaudited] 2000 1999
---- ----
Net sales $4,185.0 $3,821.1
Income before extraordinary items 236.5 77.5
Per share of common stock:
Basic $2.35 $.77
Diluted 2.34 .77
Net income $ 227.7 $ 77.5
Per share of common stock:
Basic and diluted $2.26 $.77
The pro forma consolidated results of operations include adjustments to give
effect to depreciation, amortization of goodwill on a straight-line basis over
40 years and interest expense on acquisition debt, together with related income
tax effects. The pro forma information is not necessarily indicative of the
results of operations that
NOTES TO FINANCIAL STATEMENTS
would have occurred had the purchases been made at the beginning of the periods
presented, nor is it necessarily indicative of the future results of the
combined operations.
C. Provisions for restructuring
Fiscal year 2001
- ----------------
During the fiscal year ended October 31, 2001, Westvaco recorded total pretax
restructuring charges of $56.9 million, including $5.2 million of inventory
writedowns included within Cost of products sold.
The following table and discussion presents additional detail to the charges.
In millions
- ----------- Asset Employee Other Sub- Inventory
Writedowns Costs Costs Adjustments Total Writedowns Total
---------- --------- ----- ----------- ----- ---------- -----
Packaging $21.4 $3.2 $0.8 $[0.5] $24.9 $1.6 $26.5
Paper 15.5 5.7 4.6 [0.2] 25.6 3.6 29.2
Chemicals 1.2 - - - 1.2 - 1.2
----- ----- ----- ----- ----- ----- -----
$38.1 $8.9 $5.4 $[0.7] $51.7 $5.2 $56.9
===== ==== ==== ===== ===== ==== =====
Balance of related accruals
remaining at December 31,
2001 $3.8 $1.8 $5.6 $5.6
==== ==== ==== ====
During the fourth quarter of fiscal 2001, the company recorded a pretax
restructuring charge of $53.7 million which consisted of $37.1 million of fixed
asset writedowns and $6.7 million of employee termination costs and $5.0 million
of other exit costs, primarily lease termination costs. Included in the
restructuring charge is related inventory writedowns of $4.9 million, which have
been included within Cost of products sold.
Packaging: The realignment of the consumer packaging operations included the
closing of the packaging plants in Richmond, VA, and Memphis, TN, by
mid-November 2001 and further streamlining of its remaining Richmond packaging
operations by relocating equipment to other company facilities. The packaging
charge also included the writedown of assets at the company's Covington, VA,
mill as part of a plan to focus the mill's production at targeted markets.
Charges associated with the shutdowns included $21.4 million to write down the
assets using an asset-to-be-held-and-used-model. Severance costs of $3.2 million
relate to the termination of approximately 320 employees and other exit costs
amounted to $0.8 million. In addition, the company recognized related inventory
writedowns of $1.6 million, which have been included within Cost of products
sold. At December 31, 2001, all of the plants' employees had been terminated.
Paper: The paper mill in Tyrone, PA, was shutdown in October 2001 due to the
competitive pressures caused by the economic slowdown, the strong U.S. dollar
and the related sharp increase in imported paper. Charges associated with the
shutdown included $14.5 million to write down the assets using an
assets-to-be-disposed-of model, $3.5 million of severance costs covering
approximately 260 employees and other exit costs of $4.2 million which primarily
related to lease termination costs. In addition, the company recognized related
inventory writedowns of $3.3 million, which have been included within Cost of
products sold. At December 31, 2001, all of the mill's employees had been
terminated. During the third quarter of fiscal year 2001, the company recorded a
restructuring charge of $1.6 million, due primarily to a salaried workforce
reduction of 20 employees at the company's Envelope Division headquarters in
Springfield, MA. During the second quarter of fiscal year 2001, the company
recorded a restructuring charge of $2.3 million, which consisted of $1.0 million
of fixed asset writedowns, $0.6 million of employee termination costs and $0.4
million of other exit costs. Included in the restructuring charge are related
inventory writedowns of $0.3 million, which have been included within Cost of
products sold. These actions were due to the curtailment of production on two of
the three product lines at the company's Envelope Division flexible packaging
operation.
Chemicals: The restructuring charge incorporates the writedown of assets at the
company's Covington, VA, carbon plant related to a program to concentrate
production on high-growth markets.
Also included in the restructuring charges line is a credit of $0.7 million for
the reversal of reserves no longer required associated with the restructuring
charge taken in fiscal year 1999.
Fiscal year 2000
- ----------------
During the third quarter of fiscal year 2000, due to the anticipated decline in
future sales of folding cartons to U.S. tobacco markets, Westvaco reviewed
certain long-lived assets in its consumer packaging business for impairment. As
a result of the review, production facilities were written down to their fair
value using an assets-held-for-use model and a pretax impairment charge of $24.3
million, including $3.3 million of associated goodwill, was recorded in the
third quarter of fiscal year 2000 in restructuring charges. The impairment was
recorded because undiscounted cash flows were less than the carrying value of
the assets prior to the impairment charge. During the fourth quarter of 2000,
the company recorded an additional pretax charge of $2.9 million relating to the
earlier charge and related employee termination costs. Such reserves for these
activities were fully utilized at October 31, 2001. During the second quarter of
fiscal year 2000, the liquid packaging plant was sold, resulting in a pretax
gain of $11.2 million, which is included in the restructuring charges. As noted
below, the liquid packaging plant was written down in fiscal year 1999 in
connection with the restructuring charge recorded in the fiscal year 1999 fourth
quarter. The gain resulted from a change in facts and circumstances in 2000 from
that existing during the fourth quarter of fiscal year 1999.
Fiscal year 1999
- ----------------
During the fourth quarter of fiscal year 1999, following completion of its
strategic review process, Westvaco adopted a plan to improve the company's
performance, principally to enhance the strength and focus of its
packaging-related businesses. Additionally, Westvaco reviewed certain long-lived
assets in its business for impairment. As a result of these initiatives, a
pretax charge of $80.5 million was recorded in the fourth quarter of fiscal year
1999. Included in this charge are certain assets of the company's liquid
packaging plant that were written down to reflect the plant's planned shutdown.
This charge was primarily due to the writedown of impaired long-lived assets,
involuntary employee termination and other exit costs. Production facilities
were written down to their fair value using an assets-held-for-use model. An
impairment of $67.4 million was recorded as undiscounted cash flows were less
than the carrying value of the assets prior to the impairment. Further, the
company wrote off a paper machine and certain equipment with a total carrying
value of $8.6 million and abandoned the assets. During the fourth quarter of
fiscal year 1999, in addition to the asset impairments described above, the
company also recognized inventory writedowns of $1.7 million, which have been
included within the Cost of products sold, employee termination costs of $1.5
million and other exit costs of $1.2 million. Such reserves for these activities
were fully utilized at October 31, 2001.
D. Recently issued accounting standards
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141,
Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS
141 supersedes Accounting Principles Board Opinion (APB) No. 16, Business
Combination. The provisions of SFAS 141 (1) require that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
(2) provide specific criteria for the initial recognition and measurement of
intangible assets apart from goodwill, and (3) require that unamortized negative
goodwill be written off immediately as an extraordinary gain instead of being
deferred and amortized. The Poly-Matrix acquisition has been accounted for under
SFAS No. 141. SFAS 141 also requires that upon adoption of SFAS 142, Westvaco
reclassify the carrying amounts of certain intangible assets into or out of
goodwill, based on certain criteria. SFAS 142 supersedes APB 17, Intangible
Assets, and is effective for fiscal years beginning after December 15, 2001.
SFAS 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. The provisions of SFAS 142 (1) prohibit
the amortization of goodwill and indefinite-lived intangible assets, (2) require
that goodwill and indefinite-lived intangibles assets be tested annually for
impairment (and in interim periods if certain events occur indicating that the
carrying value of goodwill and/or indefinite-lived intangible assets may be
impaired), (3) require that reporting units be identified for the purpose of
assessing potential future impairments of goodwill and (4) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
NOTES TO FINANCIAL STATEMENTS
The company will adopt the provisions of SFAS 142 during the first quarter of
fiscal year 2002. The company is in the process of preparing for its adoption of
SFAS 142 and is making the determinations as to what its reporting units are and
what amounts of goodwill, intangible assets, other assets and liabilities should
be allocated to those reporting units. The company expects that it will no
longer record approximately $14.0 million of amortization relating to its
existing goodwill and indefinite-lived intangibles.
SFAS 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to complete the
first step. The company expects to complete that first step of the goodwill
impairment test during the first quarter of 2002. The second step of the
goodwill impairment test measures the amount of the impairment loss (measured as
of the beginning of the year of adoption), if any, and must be completed by the
end of the company's fiscal year. Intangible assets deemed to have an indefinite
life will be tested for impairment using a one-step process which compares the
fair value to the carrying amount of the asset as of the beginning of the fiscal
year, and pursuant to the requirements of SFAS 142 will be completed during the
first quarter of 2002. Any impairment loss resulting from the transitional
impairment tests will be reflected as the cumulative effect of a change in
accounting principle in the first quarter 2002. Based upon the goodwill
assessment work to date, the company estimates that a noncash goodwill
impairment charge in the range of $250-350 million will be recorded in 2002 as
the effect of adopting the new accounting standard. Any resulting impairment
charge will be the same before and after taxes as the related goodwill cannot be
deducted for tax purposes.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which establishes one accounting model to be used
for long-lived assets to be disposed of by sale and broadens the presentation of
discontinued operations to include more disposal transactions. SFAS 144
supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets to Be
Disposed Of and the accounting and reporting provisions of APB Opinion 30. SFAS
144 is effective for fiscal years beginning after December 15, 2001. The company
does not anticipate any immediate financial statement impact with the adoption
of this statement.
E. Other income [expense]
Components of other income [expense] are as follows:
Transition
period ended
December 31, Fiscal year ended October 31,
------------- --------------------------------------
In millions 2001 2001 2000 1999
- ----------- ------------- ----- ----- -----
Gains [losses] on sales of plant, equipment
and timberlands $[3.5] $37.7 $26.8 $17.9
Interest income 0.9 11.5 28.4 15.1
Foreign currency transaction gains [losses] 0.4 [1.2] [0.9] [3.6]
Other, net [0.1] 0.1 2.7 -
----- ---- ----- ----
$[2.3] $48.1 $57.0 $29.4
===== ==== ==== ====
F. Research and development
Expenditures of $7.3 million for the transition period ended December 31, 2001,
and $47.5 million, $49.5 million and $47.3 million in the fiscal years ended
October 31, 2001, 2000 and 1999, respectively, were expensed as incurred.
NOTES TO FINANCIAL STATEMENTS
G. Income taxes
Income [loss] before provision [benefit] for income taxes consisted of:
Transition
period ended
December 31, Fiscal year ended October 31,
------------ ----------------------------------------
In millions 2001 2001 2000 1999
- ----------- ------- ------ ------ ------
U.S. $[52.0] $ 51.6 $354.4 $113.4
Non U.S. 13.4 66.9 49.2 34.6
----- ----- ----- -----
$[38.6] $118.5 $403.6 $148.0
===== ===== ===== =====
The provision [benefit] for income taxes is composed of:
Transition
period ended
December 31, Fiscal year ended October 31,
------------ ----------------------------------------
In millions 2001 2001 2000 1999
- ----------- ------- ------ ------ ------
Current:
Federal $[11.4] $ [20.9] $38.1 $ 4.4
State [2.3] [4.3] 7.6 [4.6]
Foreign 1.6 11.9 8.3 4.7
------ ------ ----- ----
[12.1] [13.3] 54.0 4.5
------ ------ ----- ----
Deferred:
Federal [4.3] 34.4 85.8 43.3
State [0.3] 4.7 7.9 [15.4]
Foreign [0.2] 4.5 1.2 4.4
------ ------ ----- ----
[4.8] 43.6 94.9 32.3
------ ------ ----- ----
$[16.9] $ 30.3 $148.9 $36.8
====== ====== ===== ====
The net deferred income tax liability includes the following components:
Transition
period ended
December 31, Fiscal year ended October 31,
------------ -----------------------------
In millions 2001 2001 2000
- ----------- ---------- ------ -------
Current deferred tax assets:
Employee benefits $ 21.4 $ 21.4 $ 19.3
Other 43.2 41.6 38.1
------- ------- -------
64.6 63.0 57.4
------- ------- -------
Noncurrent deferred tax assets:
Alternative minimum tax carryforward 139.4 127.7 112.0
------- ------- -------
Noncurrent deferred tax liabilities:
Depreciation 715.3 715.1 686.5
Pension and other employee benefits 256.0 248.0 199.4
State and local taxes 100.0 100.1 98.1
Identifiable intangibles 39.4 35.0 -
Other 35.8 37.3 35.7
------- ------- -------
1,146.5 1,135.5 1,019.7
------- ------- -------
Total net deferred tax liability $ 942.5 $ 944.8 $ 850.3
======= ======= =======
The differences (expressed as a percentage of pretax income) between the U.S.
statutory federal income tax rate and the effective income tax rate as reflected
in the accompanying Consolidated Statements of Income are:
Transition
period ended
December 31, Fiscal year ended October 31,
------------ --------------------------------
2001 2001 2000 1999
------- ---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0% 35.0%
State and local taxes 4.3 0.2 2.5 [8.8]
Foreign income at other than U.S. rates * 8.6 [9.7] [1.7] [1.3]
Goodwill [2.2] 4.5 0.9 -
Research credit 0.3 [3.4] [0.2] -
Resolution of domestic prior years tax issues [0.8] [2.8] [0.1] [0.9]
Other, net [1.4] 1.8 0.5 0.9
---- ----- ---- ----
Effective tax rate 43.8% 25.6% 36.9% 24.9%
==== ===== ==== ====
* includes amounts resulting from resolution of prior years tax issues
At December 31, 2001, for tax purposes, Westvaco had available $139 million of
alternative minimum tax credit carryforwards, which do not expire under current
laws. At December 31, 2001, Westvaco had available $1.7 million of foreign tax
credit carryforwards, which, if unused, will expire in fiscal year 2004.
Provision has not been made for income taxes which would become payable upon
remittance of $216 million of the December 31, 2001 undistributed earnings of
certain foreign subsidiaries representing that portion of such earnings which
the company considers to have been indefinitely reinvested in the subsidiaries,
principally in Brazil. Computation of the potential deferred tax liability
associated with these undistributed earnings is not practicable. Current
deferred taxes at December 31, 2001 of $64.6 million and $63.0 million and $57.4
million at October 31, 2001 and 2000, respectively, are included in Prepaid
expenses and other current assets.
H. Current assets
Marketable securities of $22.6 million at December 31, 2001 and $18.1 million
and $22.0 million at October 31, 2001 and 2000, respectively, are valued at
cost, which approximates market value. Trade receivables have been reduced by
allowances for discounts and doubtful accounts of $16.5 million at December 31,
2001 and $16.1 million and $17.6 million at October 31, 2001 and 2000,
respectively. Receivables also include $53.1 million from sources other than
trade at December 31, 2001 and $46.5 million and $15.9 million at October 31,
2001 and 2000, respectively, relating to income taxes, by-product sales and
other items. Inventories after adjustment to LIFO value at December 31, 2001 and
October 31, 2001 and 2000 are composed of:
Transition
period ended
December 31, Fiscal year ended October 31,
------------ -----------------------------
In millions 2001 2001 2000
- ----------- ------------- ---------- -------
Raw materials $ 82.0 $ 82.1 $ 73.1
Production materials, stores and supplies 79.9 79.6 78.8
Finished and in process goods 272.7 264.7 181.4
----- ----- -----
$434.6 $426.4 $333.3
===== ===== =====
If inventories had been valued at current cost, they would have been $569.8
million at December 31, 2001 and $565.5 million and $469.5 million at October
31, 2001 and 2000, respectively. Inventories valued on the LIFO basis were
$282.9 million at December 31, 2001 and $273.1 million and $202.4 million at
October 31, 2001 and 2000, respectively.
I. Interest capitalization
Interest cost incurred was $34.2 million for the transition period ended
December 31, 2001 and $215 million, $197.7 million and $132.4 million for the
fiscal years ended October 31, 2001, 2000 and 1999, respectively. Interest
capitalized during the transition period ended December 31, 2001 was $1.3
million and $7.3 million, $5.5 million and $8.9 million for the fiscal years
ended October 31, 2001, 2000 and 1999, respectively.
J. Accounts payable and accrued expenses
Transition
period ended
December 31, Fiscal year ended October 31,
-------------- -----------------------------
In millions 2001 2001 2000
----------- ------------- ------ -----
Accounts payable:
Trade $164.2 $139.4 $156.4
Other 45.9 35.2 34.9
Accrued expenses:
Taxes, other than income 25.3 34.5 33.6
Interest 54.1 57.3 52.8
Payroll and employee benefit costs 127.3 130.0 125.4
Accrued rebates 34.1 30.7 29.8
Other 93.0 84.5 90.3
----- ----- -----
$543.9 $511.6 $523.2
===== ===== =====
NOTES TO FINANCIAL STATEMENTS
K. Cash flows Transition
period ended
Changes in assets and liabilities are as follows: December 31, Fiscal year ended October 31,
------------- -----------------------------------------
In millions 2001 2001 2000 1999
- ----------- ------------- ------- ------ -------
[Increase] decrease in:
Receivables $ 22.5 $ 22.8 $[15.6] $ [41.1]
Inventories [6.4] [66.6] [0.8] 24.5
Prepaid expenses and other current assets [4.8] [5.8] 1.9 [1.1]
Other non-current assets [1.7] [15.7] - -
Increase [decrease] in:
Accounts payable and accrued expenses 5.5 [46.7] 39.0 24.8
Income taxes payable [2.0] 3.6 0.8 [9.7]
----- ------- ---- -------
$ 13.1 $[108.4] $ 25.3 $ [2.6]
===== ======= ==== =======
Reconciliation of capital expenditures on a cash basis:
Transition
period ended Fiscal year ended October 31,
December 31, --------------------------------
In millions 2001 2001 2000 1999
- ----------- ----- ------ ----- -----
New investment in plant and timberlands $ 56.2 $296.4 $212.3 $232.3
Less: debt assumed - [9.0] [0.3] [0.2]
net change in related current liabilities [2.1] 3.0 2.0 [3.2]
----- ----- ----- -----
Cash additions to plant and timberlands $ 54.1 $290.4 $214.0 $228.9
===== ===== ===== =====
Cash payments for interest for the transition period ended December 31, 2001,
excluding amounts capitalized, were $40.3 million and $209.2 million, $167.1
million and $112.1 million for the fiscal years ended 2001, 2000 and 1999,
respectively. Cash payments for the transition period ended December 31, 2001
for income taxes were $0.7 million and $2.7 million, $40.2 million and $12.1
million for the fiscal years ended 2001, 2000 and 1999, respectively. Dividends
declared during the transition period ended December 31, 2001 were $.22 per
share. Dividends declared and paid were $.88 per share for the fiscal years
ended 2001, 2000 and 1999.
L. Leasing activities and other commitments
The company leases a variety of assets for use in its operations. Leases for
administrative offices, converting plants and storage facilities generally
contain options which allow the company to extend lease terms for periods up to
25 years, or to purchase the properties. Certain leases provide for escalation
of the lease payments as maintenance costs and taxes increase. Minimum rental
payments under operating leases that have noncancellable lease terms in excess
of 12 months are as follows:
NOTES TO FINANCIAL STATEMENTS
In millions Operating leases
- ----------- ----------------
2002 $42.2
2003 33.6
2004 26.4
2005 19.7
2006 14.7
Later years 58.8
-----
Minimum lease payments $195.4
=====
Rental expense under operating leases was $9.2 million for the transition period
ended December 31, 2001 and $54.8 million, $48.4 million and $38.4 million for
the fiscal years ended October 31, 2001, 2000 and 1999, respectively. At
December 31, 2001, commitments required to complete currently authorized capital
projects are approximately $191 million.
M. Long-term debt
Long-term debt consists of the following at:
At October 31,
--------------
In millions At December 31, 2001 2001 2000
- ------------ -------------------- ---- ----
Notes:
6.85%, due 2004 $200.0 $ 200.0 $ 200.0
7.10%, due 2009 203.0 208.9 200.0
8.40%, due 2007 200.0 200.0 200.0
Floating rate, due 2003 200.0 200.0 200.0
Debentures:
7.95%, due 2031 300.0 300.0 -
8.20%, due 2030 400.0 400.0 400.0
9.65%, due 2002 100.0 100.0 100.0
9 3/4%, due 2020 100.0 100.0 100.0
Sinking Fund Debentures:
7%, due 2004-2023 150.0 150.0 150.0
7 1/2%, due 2008-2027 150.0 150.0 150.0
7.65%, due 2008-2027 150.0 150.0 150.0
7.75%, due 2004-2023 150.0 150.0 150.0
8 1/8%, due 2001-2007 - - 14.8
8.30%, due 2003-2022 125.0 125.0 125.0
Pollution Control Revenue Bonds:
5.85-6.65%, due 2004-2018 26.6 26.6 26.6
5 7/8-5.9%, due 2002-2003 4.9 4.9 6.7
5 7/8-6.2%, due 2002-2007 7.8 10.9 11.5
5.9-6.2%, due 2004-2008 5.9 5.9 5.9
6 3/8%, due 2026 5.7 5.7 5.7
8 1/4%, due 2001-2010 - - 4.0
9 1/8-9.6%, due 2006-2015 10.1 10.1 10.1
10 1/2%, due 2004 1.5 1.5 1.5
Industrial Revenue Bonds:
7-7.67%, due 2002-2027 80.0 94.1 94.5
Floating rate, due 2009 17.2 - -
Floating rate, due 2002-2014 43.9 44.4 46.1
Economic Development Bonds:
8 3/4%, due 2002-2010 4.1 4.1 4.2
Notes payable and other 228.1 191.3 360.2
------- ------- -------
2,863.8 2,833.4 2,716.8
Less installments due within one year [166.6] [172.9] [30.1]
------- ------- -------
Long-term debt $2,697.2 $2,660.5 $2,686.7
======= ======= =======
Outstanding debt maturing in the next five years are (in millions): 2002-$166.6;
2003-$309.7; 2004-$249.3; 2005-$45.7; 2006-$39.3.
In December 2001, MeadWestvaco negotiated a $500 million bank credit agreement
that expires in
NOTES TO FINANCIAL STATEMENTS
December 2002 and a $500 million bank credit agreement that expires in December
2006. These new agreements became effective upon merger. Their terms and
covenants are similar to those contained in the company's prior agreements.
Prior to the merger, Westvaco maintained a $500 million revolving credit
agreement. Borrowings under the agreement could have been in unsecured domestic
or Eurodollar notes and at rates approximating prime or the London Interbank
Offered Rate (LIBOR), at the company's option. There was a nominal commitment
fee on the unused funds. These facilities were used to support commercial paper
borrowings. The revolving credit agreement contained financial covenants
relating to limiting the ratio of total debt to total capitalization to 0.55 to
1. There were no borrowings under this facility during 2001, 2000 or 1999.
Included in Notes payable and other in the prior table are short-term borrowings
amounting to $75 million, which have been classified as long-term obligations.
These borrowings have repayment terms that can be extended under the loan
agreement and are intended to be outstanding more than one year.
At December 31, 2001, Westvaco had $75 million of commercial paper outstanding
compared to $30 million and $270 million at October 31, 2001 and 2000,
respectively. The maximum amounts of combined commercial paper outstanding
during the two months ended December 31, 2001 was $75 million compared to $380
million and $440 million for the years ended October 31, 2001 and 2000
respectively. The average amount of commercial paper outstanding during the two
months ended December 31, 2001 was $14.7 million with an average interest rate
of 2.9%. The average amount of commercial paper outstanding during the years
ended October 31, 2001 and 2000, were $14.7 million and $21.5 million. For
fiscal years 2001 and 2000, the average interest rates for these borrowings were
6.05% and 6.42%.
In February 2001, Westvaco issued $300 million of 7.95% thirty-year notes in
part to repay existing debt and for working capital purposes. During the second
quarter of fiscal year 2000, the company recorded an extraordinary charge of
$8.8 million after tax, or $.09 per share, from the early retirement of $270
million of higher interest rate debt.
At December 31, 2001, the book value of financial instruments included in
long-term debt was $2.9 billion, and the fair value was estimated to be $3
billion. At October 31, 2001, the book value of financial instruments included
in long-term debt was $2.8 billion (2000-$2.7 billion), and the fair value was
estimated to be $3 billion (2000-$2.7 billion). The difference between book
value and market value is derived from the difference between the period-end
market interest rate and the stated rate for the company's long-term debt. The
company has estimated the fair value of financial instruments based upon quoted
market prices for the same or similar issues or on the current interest rates
available to the company for debt of similar terms and maturities.
N. Financial instruments
Prior to the fiscal year 2001 third quarter, Westvaco had no derivative
instruments. In the third quarter of 2001, the company initiated the use of an
interest rate swap agreement to hedge the interest rate characteristics (risks)
of a portion of its outstanding fixed-rate debt. The company's goal is to create
a prudent balance between fixed and floating rates. The hedge qualifies as a
fair value hedge under the SFAS 133 criteria. The company, at inception,
formally designates and documents the instruments as hedges of specific
underlying exposures, and documents the risk management objective and strategy
for each hedge transaction. Changes in the fair value of a derivative that is
highly effective, and that is designated and qualifies as a fair value hedge,
along with the changes in the fair-value hedged asset or liability that are
attributable to the hedged risk, are recorded in the current-period earnings.
Because of the high degree of effectiveness between the hedging instrument and
the underlying exposure being
NOTES TO FINANCIAL STATEMENTS
hedged, fluctuations in the value of the derivative instruments are generally
offset by changes in the value or cash flows of the underlying exposures being
hedged.
Under an interest rate swap contract, Westvaco agrees to pay an amount equal to
a specified variable-rate of interest times a notional principal amount, and to
receive in return an amount equal to a specified fixed rate of interest times
the same notional principal amount. The notional amounts of the contract are not
exchanged. No other cash payments are made unless the contract is terminated
prior to maturity, in which case the amount paid or received in settlement is
established by agreement at the time of termination, and usually represents the
net present value, at current rates of interest, of the remaining obligations to
exchange payments under the terms of the contract. Interest rate swap contracts
are entered into with major financial institutions in order to minimize
counterparty credit risk.
At December 31, 2001, Westvaco had an interest rate swap contract to pay
variable rates of interest based on six-month LIBOR plus 1.115%, (currently
3.089%) and receive fixed rates of interest of 7.1% on $100 million notional
amount of indebtedness. This resulted in approximately 17% of Westvaco's debt
being subject to variable interest rates. The company has designated this
derivative instrument as a fair-value hedge. The $100 million notional amount of
outstanding contracts will mature during 2009. As of December 31, 2001 and
October 31, 2001, the company has recorded the fair value of the derivative
instrument asset of $3.0 million and $8.9 million, respectively, in other assets
in the Consolidated Balance Sheet. At October 31, 2000, Westvaco did not have
any interest rate swap contracts. During the current transition period and the
year ended October 31, 2001, the interest rate swap was an effective hedge and
therefore required no charge to earnings under SFAS 133.
O. Shareholders' equity
The value included in common stock for all periods presented reflects common
stock at par and additional paid-in capital.
Westvaco did not repurchase shares of company stock during the transition period
ended December 31, 2001, and repurchased 60,000, 80,000 and 460,000 in the
fiscal years ended October 31, 2001, 2000 and 1999, respectively, under a
repurchase program authorized in 1997 by the Board of Directors. The program was
initiated to satisfy issuances under the company's stock option plans. There
were no purchases in 1999, 2000 or 2001 under the stock repurchase program
authorized in 1987 by the Board of Directors.
At December 31, 2001, there were 44,170 shares of nonvoting $100 par value
cumulative preferred stock authorized and 10 million shares of preferred stock
without par value authorized and available for issue. Pursuant to a Rights
Agreement approved by the company's Board of Directors in 1997, in the event a
person or group were to acquire a 15% or greater position in Westvaco, each
right would entitle its holder (other than the acquiror) to buy that number of
shares of common stock of Westvaco which, at the time of the 15% acquisition,
had a market value of two times the exercise price of the rights. If, after the
rights have been triggered, an acquiring company were to merge or otherwise
combine with Westvaco, or Westvaco were to sell 50% or more of its assets or
earning power, each right would entitle its holder (other than the acquiror) to
buy that number of shares of common stock of the acquiring company which, at the
time of such transaction, would have a market value of two times the exercise
price of the rights. The rights have no effect on earnings per share until they
become exercisable. The rights expire in December 2007.
On August 28, 2001, the Rights Agreement was amended in connection with the
merger with Mead to provide that none of the entities involved in the merger
transaction would be deemed an acquirer for the purposes of the Rights
Agreement, and to provide that the Rights would expire immediately
NOTES TO FINANCIAL STATEMENTS
prior to the merger.
P. Stock option plans
At December 31, 2001, Westvaco had five stock option plans. The 1983 and 1988
Stock Option and Stock Appreciation Rights Plans, 1995 Salaried Employee Stock
Incentive Plan and the 1999 Salaried Employee Stock Incentive Plan provide for
the granting of up to 4,725,000, 4,500,000, 4,837,500 and 5,000,000,
respectively, of stock options and stock appreciation rights to key employees.
The 1995 Non-Employee Director Stock Incentive Plan provides for the granting of
up to 112,500 stock options and stock appreciation rights to outside directors.
For the employee plans, stock options may be granted with or without stock
appreciation rights and are granted at market value. They are exercisable after
a period of six months to one year and expire not later than ten years from the
date of grant. Under each employee plan, stock options may be granted with or
without limited stock appreciation rights, which are exercisable upon the
occurrence of certain events related to changes in corporate control. The merger
with Mead does not cause such rights to be exercisable. In 1999, nearly all
outstanding limited stock appreciation rights, which had previously been granted
to employees, were cancelled or surrendered. Except for grants to employees of
the company that are employed in countries that do not allow local employees to
hold stock options of companies domiciled in other countries, no new grants for
stock appreciation rights were awarded during the transition period ended
December 31, 2001 and for the fiscal years ended October 31, 2001 and 2000.
The company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, as amended, in accounting for its plans. If compensation cost for the
company's stock options had been determined based on the fair value method of
SFAS 123, Accounting for Stock-Based Compensation, the company's net income and
net income per share would have been reduced to the unaudited pro forma amounts
as follows:
Transition
period ended
December 31, Fiscal year ended October 31,
------------ -----------------------------
In millions, except per share 2001 2001 2000 1999
----------------------------- ------------ ------ ------ ------
Net income [loss]
As reported $[21.7] $88.2 $245.9 $111.2
Pro forma - unaudited [28.0] 82.1 240.8 107.9
Income [loss] per share - basic
As reported $[.21] $.87 $2.44 $1.11
Pro forma - unaudited [.27] .81 2.39 1.08
Income [loss] per share - diluted
As reported $[.21] $.87 $2.44 $1.11
NOTES TO FINANCIAL STATEMENTS
Pro forma - unaudited [.27] .81 2.39 1.07
In determining the fair value of options for pro forma purposes, Westvaco used
the Black-Scholes option pricing model and assumed the following for options
granted during the transition period ended December 31, 2001 and fiscal years
ended October 31, 2001, 2000 and 1999, respectively: risk-free interest rate
of 4.77%, 5.61%, 6.13% and 4.72%; dividend yield of 3.07%, 3.15%, 2.87% and
3.05%; an expected option life of seven years for the transition period ended
December 31, 2001 and six years for each fiscal year ended October 31, 2001,
2000 and 1999; and an expected volatility of 25%, 25%, 22% and 20% for each
period. The weighted average fair values of the options granted during the
transition period ended December 31, 2001 and fiscal years ended October 31,
2001, 2000 and 1999 were $7.30, $7.05, $7.65 and $5.34 per share,
respectively.
The following table summarizes activity in the plans for the transition period
ended December 31, 2001 and fiscal years ended October 31, 2001, 2000 and
1999:
Weighted average
Options exercise price
--------- ----------------
Outstanding at October 31, 1998 5,138,841 $26.49
Granted 1,001,655 28.78
Exercised [466,169] 22.31
Cancelled [19,527] 26.71
---------
Outstanding at October 31, 1999 5,654,800 27.24
Granted 1,079,455 30.63
Exercised [514,611] 24.48
Cancelled [9,087] 27.33
---------
Outstanding at October 31, 2000 6,210,557 28.08
Granted 1,406,280 27.91
Exercised [293,279] 23.40
Cancelled [90,427] 26.61
---------
Outstanding at October 31, 2001 7,233,131 28.25
Granted 1,406,755 28.67
Exercised [145,798] 24.09
Cancelled [8,900] 26.82
---------
Outstanding at December 31, 2001 8,485,188 28.39
=========
The following table shows various information about stock options outstanding
at December 31, 2001:
Range of exercise prices
--------------------------------------------------------------
$23.08 - $25.06 - Over
NOTES TO FINANCIAL STATEMENTS
$24.25 $27.50 $27.50 Total
-------- ----------- ----------- ------------
Number outstanding 432,996 2,268,842 5,783,350 8,485,188
Weighted average price $23.64 $26.41 $29.53 $28.39
Weighted average remaining life (in years) 1.49 4.14 8.13 6.73
Number exercisable 432,996 2,268,842 4,376,595 7,078,433
Weighted average price $23.64 $26.41 $29.80 $28.34
There were 1,684,657 shares available for grant as of December 31, 2001, and
3,084,012, 4,401,265 and 5,476,570 as of October 31, 2001, 2000 and 1999,
respectively. At December 31, 2001, 476,297 outstanding options had related
limited stock appreciation rights and 55,100 stock appreciation rights were
outstanding. The company measures compensation expense related to the stock
appreciation rights at the end of each period as the amount by which the quoted
market value of the shares of the company's stock covered by a grant exceeds the
option price specified under the plan and accrues such amount as a charge to
expense over the periods the employee performs the related services. Changes in
the quoted market value are reflected as an adjustment of accrued compensation
and compensation expense in the periods in which the changes occur. For all
periods presented, the expenses related to stock appreciation rights has not
been material. There have been no exercises of stock appreciation rights for the
transition period ended December 31, 2001 or for fiscal years ended October 31,
2001, 2000 and 1999, respectively.
Q. Employee retirement, postretirement and postemployment benefits
Pension and retirement plans
Westvaco provides retirement benefits for substantially all domestic employees
under several noncontributory trusteed plans and also provides benefits to
employees whose retirement benefits exceed maximum amounts permitted by current
tax law under an unfunded benefit plan. Benefits are based on a final average
pay formula for the salaried plans and a unit benefit formula for the hourly
paid plans. Prior service costs are amortized on a straight-line basis over the
average remaining service period for active employees. Contributions are made to
the funded plans in accordance with ERISA requirements. Plan assets are
comprised mainly of listed stocks, including $71 million of company stock, money
market and fixed income investments.
Net pension credit relating to employee pension and retirement benefits was
$22.9 million for the transition period ended December 31, 2001 and $134.9
million, $108.2 million and $82.3 million for fiscal years ended October 31,
2001, 2000 and 1999, respectively. The net pension credit reflects cumulative
favorable investment returns on plan assets. The components of the net pension
credit for the transition period ended December 31, 2001 and the fiscal years
ended October 31, 2001, 2000 and 1999 are as follows:
NOTES TO FINANCIAL STATEMENTS
Transition
period ended
December 31, Fiscal year ended October 31,
------------ ---------------------------------
In millions 2001 2001 2000 1999
----------- ------------ ---- ---- ----
Service cost-benefits earned during the period $ 6.3 $ 32.8 $ 28.6 $ 28.9
Interest cost on projected benefit obligation 14.3 79.6 74.2 71.7
Expected return on plan assets [39.7] [216.7] [187.5] [171.2]
Net transition asset [0.4] [6.4] [6.9] [6.9]
Amortization of prior service cost 1.4 6.7 5.5 5.5
Net gain [4.8] [30.9] [22.1] [10.3]
------ ------- ------- ------
Net pension credit $[22.9] $[134.9] $[108.2] $[82.3]
====== ======= ======= ======
Additional minimum liability $ 0.4 $ [5.1] $ - $ -
====== ======= ======= ======
Postretirement benefits
Westvaco provides life insurance for substantially all retirees and medical
benefits to certain retirees in the form of cost subsidies until medicare
eligibility is reached and to certain other retirees, medical benefits up to
a maximum lifetime amount. None of these benefits are funded. The components
of net periodic postretirement benefits cost for the transition period ended
December 31, 2001 and the fiscal years ended October 31, 2001, 2000 and 1999
are as follows:
Transition
period ended
December 31, Fiscal year ended October 31,
------------- ---------------------------------
2001 2001 2000 1999
------------- ---- ---- ----
In millions
-----------
Service cost-benefits earned during the period $ 0.3 $ 1.2 $ 1.3 $ 1.2
Interest cost 0.2 1.3 1.3 1.2
Net amortization [0.1] [0.6] [0.9] [1.1]
----- ----- ----- -----
Net periodic postretirement benefits cost $ 0.4 $ 1.9 $ 1.7 $ 1.3
===== ===== ===== =====
The changes in the consolidated prepaid pension asset for defined benefit
plans and the accrued postretirement benefit obligation are shown below. The
net prepaid pension cost, from the following table, is included in other
assets, except for an obligation of $33 million for an unfunded excess benefit
plan which is recorded as a long-term liability. For plans with accumulated
benefit obligations in excess of plan assets, the projected benefit
obligation, accumulated benefit obligation and fair value of plan assets were
$54 million, $33 million and $0, respectively, at December 31, 2001 and
October 31, 2001 and 2000.
NOTES TO FINANCIAL STATEMENTS
The following table sets forth the funded status of the plans and amounts
recognized in the Consolidated Balance Sheets at December 31 and October 31,
based on valuation dates of September 30 and July 31:
In millions
- -----------
Pension and retirement benefits Postretirement benefits
------------------------------- -----------------------
Transition Fiscal year ended Transition Fiscal year ended
period ended ----------------- period ended -----------------
December 31, October 31, December 31, October 31,
----------- ----------
2001 2001 2000 2001 2001 2000
---- ---- ---- ---- ---- ----
Change in benefit obligation
Benefit obligation at beginning of period $1,361.6 $1,204.2 $1,123.4 $ 21.0 $ 19.6 $ 19.9
Service cost 6.3 32.8 28.6 0.3 1.2 1.3
Interest cost 14.3 79.6 74.2 0.2 1.3 1.3
Actuarial gain [loss] 23.0 70.4 0.7 - 1.2 [0.5]
Plan amendments - 29.0 20.7 - - -
Foreign currency exchange rate changes [0.3] 0.1 - - - -
Employee contributions - 0.1 - - - -
Acquisitions 2.2 2.2 9.7 - 0.6 -
Termination benefits 3.7 1.8 - - - -
Benefits paid [10.6] [58.6] [53.1] [0.3] [2.8] [2.4]
-------- -------- -------- ------- ------ ------
Benefit obligation at end of year $1,400.2 $1,361.6 $1,204.2 $ 21.2 $ 21.1 $ 19.6
======== ======== ======== ======= ====== ======
Change in plan assets
Fair value of plan assets at beginning of
period $2,542.3 $2,753.7 $2,614.3 $ - $ - $ -
Actual return on plan assets [241.6] [157.6] 179.8 - - -
Company contributions 0.7 2.1 1.9 0.3 2.8 2.4
Acquisitions 1.4 2.5 10.8 - - -
Foreign currency exchange rate changes [0.3] 0.1 - - - -
Employee contributions - 0.1 - - - -
Benefits paid [10.6] [58.6] [53.1] [0.3] [2.8] [2.4]
-------- -------- -------- ------ ------ ------
Fair value of plan assets at end of year $2,291.9 $2,542.3 $2,753.7 $ - $ - $ -
======== ======== ======== ====== ====== ======
Funded status of the plans $ 891.7 $1,180.7 $1,549.6 $[21.2] $[21.1] $[19.6]
Unrecognized net actuarial gain [224.7] [511.1] [986.7] [4.9] [5.0] [6.8]
Unrecognized prior service
cost 106.3 84.5 62.1 - - -
Unrecognized net transition obligation [2.2] [2.6] [9.0] - - -
-------- -------- -------- ------- ------ ------
Net prepaid pension asset [liability] $ 771.1 $ 751.5 $ 616.0 $ [26.1] $[26.1] $[26.4]
======== ======== ======== ======= ====== ======
Prepaid benefit cost $ 800.1 $ 779.4 $ 641.7 $ - $ - $ -
Accrued benefit liability [33.7] [33.0] [25.7] [26.1] [26.1] [26.4]
Accumulated other comprehensive
income 4.7 5.1 - - - -
-------- -------- -------- ------- ------ ------
Total recognized $ 771.1 $ 751.5 $ 616.0 $ [26.1] $[26.1] $[26.4]
======== ======== ======== ======= ====== ======
NOTES TO FINANCIAL STATEMENTS
The assumptions used in the measurement of the company's benefit obligations are
as follows:
Transition
period ended Fiscal year ended October 31,
December 31, --------------------------------
2001 2001 2000 1999
---- ---- ---- ----
Pension and retirement benefits
Discount rate 6.50% 6.50% 6.75% 6.75%
Expected return on plan assets 8.75% 8.75% 8.75% 8.75%
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
Postretirement benefits
Discount rate 6.50% 6.50% 6.75% 6.75%
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
The annual rate of increase in health care costs was assumed at 10% for 2001
declining 0.5% per year until reaching 5% in 2011 and thereafter. The effect
of a 1% increase in the assumed health care cost trend rate would increase the
September 30, 2001 accumulated postretirement benefit obligation by $265,000
and the net postretirement benefits cost for 2001 by $11,000. The effect of a
1% decrease in the assumed health care cost trend rate would decrease the
September 30, 2001 accumulated postretirement benefit obligation by $234,000
and the net postretirement benefits cost for 2001 by $10,000.
The company also has defined contribution plans that cover substantially all
U.S. employees. Expense for company matching contributions under these plans
was approximately $3.7 million for the transition period ended December 31,
2001 and $20.8 million, $24.6 million and $18.0 million in fiscal years ended
October 31, 2001, 2000 and 1999, respectively.
Postemployment benefits
Westvaco provides limited postemployment benefits to former or inactive
employees, including short-term disability, workers' compensation and
severance.
R. Environmental and legal matters
Westvaco is currently named as a potentially responsible party with respect to
the cleanup of a number of hazardous waste sites under the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA) and similar
state laws. While joint and several liability is authorized under CERCLA, as a
practical matter, remediation costs will be allocated among the waste
generators and others involved. The company has accrued approximately $4
million for estimated potential cleanup costs based upon its close monitoring
of ongoing activities and its past experience with these matters. In addition,
the company is involved in the remediation of certain other than CERCLA sites
and has accrued approximately $13 million for remediation of these sites.
The company is involved in various legal proceedings and environmental
actions, generally arising in the normal course of its business. Although the
ultimate outcome of such matters cannot be predicted with certainty, the
company does not believe that the outcome of any
NOTES TO FINANCIAL STATEMENTS
proceeding, lawsuit or claim that is pending or threatened, or all of them
combined, will have a material adverse effect on its consolidated financial
position, liquidity or results of operations.
S. Business segment information
Commencing with the first quarter ended March 31, 2002, MeadWestvaco's principal
business segments are projected to be (1) packaging, (2) coated and specialty
papers, (3) consumer and office products, and (4) specialty chemicals.
Westvaco is a leading manufacturer of packaging, paper and chemicals serving
both U.S. and international markets. Westvaco's principal business segments,
which account for the majority of sales, income and the asset base are:
The packaging segment manufactures, markets and distributes bleached paperboard,
kraft paper and board and packaging for consumer products markets. The packaging
segment also manufactures printed plastic packaging and injection-molded
products used for packaging DVDs and CDs. These products are manufactured at
three domestic mills and two mills located in Brazil; paper and board are
converted into packaging products at plants located in the United States, Brazil
and Europe. These products are sold primarily in the United States with
additional markets located in Brazil, Europe, Asia and the Pacific Rim. In
Brazil, Rigesa is a major producer of paperboard and corrugated packaging for
the markets of that country. Operating results for Rigesa are subject to the
economic conditions in Brazil, including its inflation and currency
fluctuations.
The paper segment is engaged in the manufacturing and marketing of printing
grade papers and envelopes. All of this segment's operations are in the United
States. It operates two mills in the eastern half of the country and
manufactures envelopes at nine domestic plants.
The chemicals segment manufactures products at four domestic locations. Major
product groups are: activated carbon products and services; printing ink resins
and lignin-based surfactants; tall oil fatty acid, rosin and derivative
products.
Corporate and other includes the company's forestry operations and income and
expense items and activities not directly associated with segment operations,
including corporate support staff services and related assets and liabilities.
The segments are measured on operating profits before restructuring charges,
interest expense, income taxes, extraordinary items and cumulative effect of
accounting changes, except for Rigesa in the packaging segment, whose operating
profit includes interest income of $0.5 million for the two months ended
December 31, 2001 and $7.0 million, $10.0 million and $13.2 million in the
fiscal years ended 2001, 2000 and 1999, respectively, and interest expense of
$0.4 million for the two months ended December 31, 2001 and $3.3 million, $5.3
million and $4.6 million in the fiscal years ended 2001, 2000 and 1999,
respectively. The segments follow the same accounting principles described in
the Summary of Significant Accounting Policies. Sales between the segments are
recorded primarily at market prices. The fiscal year 2001 restructuring charges
of $56.9 million are related to the closure of the company's Tyrone, PA, mill,
closure of components of the Consumer Packaging Group's Richmond, VA, and
Memphis, TN, plants and other asset writedowns. The fiscal year 2001
restructuring charges related to packaging, paper and chemicals were $27.0
million, $28.7 million and $1.2 million, respectively. The fiscal year 2000
restructuring charge of $27.2 million, related to the expected decline in sales
of folding
NOTES TO FINANCIAL STATEMENTS
cartons to U.S. tobacco markets, and the gain of $11.2 million from the sale of
the liquid packaging plant relate to the packaging segment. The fiscal year
1999 restructuring charge following the completion of the company's strategic
review related to packaging, paper and chemicals was $57.7 million, $21.2
million and $1.6 million, respectively.
No single customer accounts for 10% or more of consolidated trade sales in the
two months ended December 31, 2001 and in the fiscal years ended October 31,
2001, 2000 and 1999.
Total sales outside of the United States, including sales of the company's
foreign operating subsidiaries, accounted for approximately $195.7 million for
the transition period ended December 31, 2001 and $996.7 million, $816.8 million
and $671.4 million for the fiscal years ended October 31, 2001, 2000 and 1999,
respectively. Export sales from the United States amounted to $91.5 million for
the transition period ended December 31, 2001 and $562.4 million, $590.8 million
and $504.5 million for the fiscal years ended October 31, 2001, 2000 and 1999,
respectively. Income of foreign subsidiaries included in consolidated net income
amounted to $11.7 million for the transition period ended December 31, 2001 and
$50.9 million, $49.2 million and $40.5 million for the fiscal years ended
October 31, 2001, 2000 and 1999, respectively. Long-lived assets located outside
the United States are $661.9 million at December 31, 2001 and $656.2 million and
$518.3 million at October 31, 2001 and 2000, respectively. Long-lived assets
located in the United States are $5,132.8 million at December 31, 2001, and
$5,115.1 million and $4,988.0 million at October 31, 2001 and 2000,
respectively.
NOTES TO FINANCIAL STATEMENTS
Financial information by business segment follows:
Sales
---------------------------------------- Depreciation
Inter- Operating and Segment Capital
(In millions) Trade segment Total profit amortization assets expenditures
Transition period ended December 31, 2001
- -------------------------------------------------------------------------------------------------------------------------------
Packaging $367.9 $0.3 $368.2 $ [8.7] $36.3 $3,796.8 $38.6
Rigesa 25.1 - 25.1 2.3 1.4 230.1 7.2
------------------------------------------------------------------------------------------------------
Packaging total 393.0 0.3 393.3 [6.4] 37.7 4,026.9 45.8
------------------------------------------------------------------------------------------------------
Paper 156.6 0.7 157.3 [2.8] 14.9 1,310.0 4.2
------------------------------------------------------------------------------------------------------
Chemicals 47.0 3.0 50.0 4.4 3.9 294.2 2.0
------------------------------------------------------------------------------------------------------
Corporate and other 6.1 4.8 10.9 [33.8] 4.2 1,197.2 4.2
------------------------------------------------------------------------------------------------------
Total 602.7 8.8 611.5 [38.6] 60.7 6,828.3 56.2
------------------------------------------------------------------------------------------------------
Intersegment
eliminations [8.8] [8.8]
------------------------------------------------------------------------------------------------------
Consolidated totals $602.7 $ - $602.7 $[38.6] $60.7 $6,828.3 $56.2
======================================================================================================
Year ended October 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------
Packaging $2,337.2 $ 2.3 $2,339.5 $165.0 $197.5 $3,812.7 $174.7
Rigesa 163.7 - 163.7 31.1 9.2 199.0 13.7
------------------------------------------------------------------------------------------------------
Packaging total 2,500.9 2.3 2,503.2 196.1 206.7 4,011.7 188.4
------------------------------------------------------------------------------------------------------
Paper 1,049.1 9.2 1,058.3 50.8 93.8 1,315.2 35.0
------------------------------------------------------------------------------------------------------
Chemicals 327.8 20.0 347.8 62.9 20.6 298.6 14.4
------------------------------------------------------------------------------------------------------
Corporate and other 57.7 30.4 88.1 [191.3] 26.3 1,161.5 58.6
------------------------------------------------------------------------------------------------------
Total 3,935.5 61.9 3,997.4 118.5 347.4 6,787.0 296.4
------------------------------------------------------------------------------------------------------
Intersegment
eliminations [61.9] [61.9]
------------------------------------------------------------------------------------------------------
Consolidated totals $3,935.5 $ - $3,935.5 $118.5 $347.4 $6,787.0 $296.4
======================================================================================================
Year ended October 31, 2000
- --------------------------------------------------------------------------------------------------------------------------------
Packaging $2,085.3 $ 4.4 $2,089.7 $318.7 $161.9 $3,555.8 $104.6
Rigesa 174.9 - 174.9 32.5 10.8 285.1 13.6
------------------------------------------------------------------------------------------------------
Packaging total 2,260.2 4.4 2,264.6 351.2 172.7 3,840.9 118.2
------------------------------------------------------------------------------------------------------
Paper 1,205.6 20.2 1,225.8 140.6 96.7 1,383.7 39.7
------------------------------------------------------------------------------------------------------
Chemicals 332.9 25.1 358.0 64.5 23.5 321.4 10.8
------------------------------------------------------------------------------------------------------
Corporate and other 57.8 39.1 96.9 [152.7] 21.0 1,023.9 43.6
------------------------------------------------------------------------------------------------------
Total 3,856.5 88.8 3,945.3 403.6 313.9 6,569.9 212.3
------------------------------------------------------------------------------------------------------
Intersegment
eliminations [88.8] [88.8]
------------------------------------------------------------------------------------------------------
Consolidated totals $3,856.5 $ - $3,856.5 $403.6 $313.9 $6,569.9 $212.3
======================================================================================================
Year ended October 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------
Packaging $1,389.6 $ 4.0 $1,393.6 $ 165.3 $128.6 $2,043.5 $ 99.8
Rigesa 148.7 - 148.7 25.2 9.4 257.4 31.0
------------------------------------------------------------------------------------------------------
Packaging total 1,538.3 4.0 1,542.3 190.5 138.0 2,300.9 130.8
------------------------------------------------------------------------------------------------------
Paper 1,062.3 23.4 1,085.7 62.0 100.6 1,441.8 60.0
------------------------------------------------------------------------------------------------------
Chemical 307.1 20.6 327.7 52.5 23.8 314.7 18.1
------------------------------------------------------------------------------------------------------
Corporate and other 45.5 35.7 81.2 [157.0] 18.1 839.3 23.4
------------------------------------------------------------------------------------------------------
Total 2,953.2 83.7 3,036.9 148.0 280.5 4,896.7 232.3
------------------------------------------------------------------------------------------------------
Intersegment [83.7] [83.7]
eliminations
------------------------------------------------------------------------------------------------------
Consolidated totals $2,953.2 $ - $2,953.2 $ 148.0 $280.5 $4,896.7 $232.3
======================================================================================================
T. Guarantor and nonguarantor financial statements
Following the merger, (i) debt issued in the past by Westvaco has been
unconditionally guaranteed, on a joint and several basis, by both MeadWestvaco
and Mead, (ii) debt issued in the past by Mead has been unconditionally
guaranteed, on a joint and several basis, by both MeadWestvaco and Westvaco and
(iii) future debt issued by MeadWestvaco will be guaranteed by either or both of
Mead and/or Westvaco.
The company's debt as of December 31, 2001 subject to the guarantees referred to
above includes: 6.85% Notes due 2004, 7.10% Notes due 2009, 8.40% Notes due
2007, Floating Rate Notes due 2003, 8.20% Debentures due 2030, 9.65% Debentures
due 2002, 9.75% Debentures due 2020, 7.95% Debentures due 2031, 7.00% Sinking
Fund Debentures due 2004-2023, 7.50% Sinking Fund Debentures due 2008-2027,
7.65% Sinking Fund Debentures due 2008-2027, 7.75% Sinking Fund Debentures due
2004-2023, 8.125% Sinking Fund Debentures due 2001-2007 and 8.30% Sinking Fund
Debentures due 2003-2022 (see Note M).
In connection with its future financing and capital structure requirements, on
March 8, 2002 MeadWestvaco filed a registration statement with the Securities
and Exchange Commission on Form S-3, covering up to $1 billion in debt
securities which the company may issue from time to time after the registration
statement becomes effective. As described above, the debt securities of
MeadWestvaco may be guaranteed on a full, unconditional and joint and several
basis by either or both of Mead and Westvaco.
The following condensed consolidating financial information presents:
(1) condensed consolidating balance sheet as of December 31, 2001 and October
31, 2001 and 2000 and the related statements of income and cash flows for the
transition period ended December 31, 2001 and each of the three years ended
October 31, 2001 of (a) the company, issuer of existing debt and possible
guarantor of future debt to be issued by MeadWestvaco, (b) the nonguarantor
subsidiaries and (c) the company on a consolidated basis, and
(2) elimination entries necessary to consolidate the company with non-guarantor
subsidiaries.
Investments in subsidiaries are accounted for by the company using the equity
method of accounting. The guarantor and nonguarantor subsidiaries are each
presented on a combined basis. The principal elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions. Separate
financial
NOTES TO FINANCIAL STATEMENTS
statements for the nonguarantor subsidiaries are not presented because
management believes such financial statements would not be meaningful to
investors.
NOTES TO FINANCIAL STATEMENTS
Transition period ended December 31, 2001
Westvaco Non guarantor
In millions (Issuer/Guarantor) (1) subsidiaries Eliminations Consolidated total
Sales $448.0 $155.3 $ [0.6] $ 602.7
Other income [expense], net [4.0] 112.0 [110.3] [2.3]
------ ------ ------- -------
444.0 267.3 [110.9] 600.4
------ ------ ------- -------
Cost of products sold [excludes
depreciation shown separately below] 385.0 208.0 [110.8] 482.2
Selling, research and administrative
expenses 39.0 24.2 - 63.2
Depreciation and amortization 27.3 33.4 - 60.7
Interest expense 31.3 1.7 [0.1] 32.9
------ ------ ------- -------
482.6 267.3 [110.9] 639.0
------ ------ ------- -------
Income [loss] before taxes [38.6] - - [38.6]
Income taxes [benefit] [13.8] [3.1] - [16.9]
------ ------ ------- -------
Net income [loss] from continuing
operations before equity in net
earnings of subsidiaries [24.8] 3.1 - [21.7]
Equity in earnings [loss] of subsidiaries 3.1 - [3.1] -
------ ------ ------- -------
Net income $[21.7] $ 3.1 $ [3.1] $ [21.7]
====== ====== ======= =======
Year ended October 31, 2001
Westvaco Non guarantor
In millions (Issuer/Guarantor) (1) subsidiaries Eliminations Consolidated total
Sales $3,154.3 $ 784.6 $ [3.4] $3,935.5
Other income [expense], net 38.3 817.8 [808.0] 48.1
-------- -------- ------- -------
3,192.6 1,602.4 [811.4] 3,983.6
-------- -------- ------- -------
Cost of products sold [excludes
depreciation shown separately below] 2,613.3 1,091.3 [810.7] 2,893.9
Selling, research and administrative
expenses 240.9 123.5 - 364.4
Depreciation and amortization 169.0 178.4 - 347.4
Restructuring charges 33.8 17.9 - 51.7
Interest expense 199.6 8.8 [0.7] 207.7
-------- -------- ------- -------
3,256.6 1,419.9 [811.4] 3,865.1
-------- -------- ------- -------
Income [loss] before taxes [64.0] 182.5 - 118.5
Income taxes [benefit] [35.4] 65.7 - 30.3
-------- -------- ------- -------
Net income [loss] from continuing
operations before equity in net
earnings of subsidiaries [28.6] 116.8 - 88.2
NOTES TO FINANCIAL STATEMENTS
Equity in earnings [loss] of subsidiaries 116.8 - [116.8] -
------ ------- ------- -----
Net income $ 88.2 $ 116.8 $[116.8] $88.2
====== ======= ======= =====
NOTES TO FINANCIAL STATEMENTS
Year ended October 31, 2000
Westvaco Non guarantor Consolidated
In millions (Issuer/Guarantor) (1) subsidiaries Eliminations total
Sales $3,412.2 $ 447.5 $ [3.2] $3,856.5
Other income [expense], net 47.7 833.1 [823.8] 57.0
-------- -------- ------- --------
3,459.9 1,280.6 [827.0] 3,913.5
-------- -------- ------- --------
Cost of products sold [excludes
depreciation shown separately below] 2,753.8 778.1 [825.9] 2,706.0
Selling, research and administrative
expenses 224.7 57.0 - 281.7
Depreciation and amortization 159.7 154.2 - 313.9
Restructuring charges 16.1 - - 16.1
Interest expense 184.2 9.1 [1.1] 192.2
-------- -------- ------- --------
3,338.5 998.4 [827.0] 3,509.9
-------- -------- ------- --------
Income before taxes 121.4 282.2 - 403.6
Income taxes 51.1 97.8 - 148.9
-------- -------- ------- --------
Net income from continuing operations
before equity in net earnings of
subsidiaries 70.3 184.4 - 254.7
Equity in earnings [loss] of subsidiaries 184.4 - [184.4] -
-------- -------- ------- --------
Income before extraordinary charge 254.7 184.4 [184.4] 254.7
Extraordinary charge - extinguishment of
debt, net of taxes of $5 [8.8] - - [8.8]
-------- -------- ------- --------
Net income $ 245.9 $ 184.4 $[184.4] $ 245.9
======== ======== ======= ========
NOTES TO FINANCIAL STATEMENTS
Year ended October 31, 1999
Westvaco Non guarantor Consolidated
In millions (Issuer/Guarantor) (1) subsidiaries Eliminations total
Sales $2,763.9 $ 205.3 $ [16.0] $2,953.2
Other income [expense], net 32.6 [1.8] [1.4] 29.4
------- ------ ------ -------
2,796.5 203.5 [17.4] 2,982.6
------- ------ ------ -------
Cost of products sold [excludes
depreciation shown separately
below] 2,014.0 122.9 [16.0] 2,120.9
Selling, research and administrative
expenses 192.7 38.2 - 230.9
Depreciation and amortization 267.3 13.2 - 280.5
Restructuring charges 77.7 1.1 - 78.8
Interest expense 119.0 5.9 [1.4] 123.5
------- ------ ------ -------
2,670.7 181.3 [17.4] 2,834.6
------- ------ ------ -------
Income before taxes 125.8 22.2 - 148.0
Income taxes 26.6 10.2 - 36.8
------- ------ ------ -------
Net income from continuing operations
before equity in net earnings of
subsidiaries 99.2 12.0 - 111.2
Equity in earnings [loss] of
subsidiaries 12.0 - [12.0] -
------- ------ ------ -------
Net income $ 111.2 $ 12.0 $ [12.0] $ 111.2
======= ====== ======= =======
NOTES TO FINANCIAL STATEMENTS
At December 31, 2001
Westvaco Non guarantor Consolidated
In millions (Issuer/Guarantor)(1) subsidiaries Eliminations total
ASSETS
Cash and marketable securities $ 35.6 $ 66.8 $ - $ 102.4
Receivables 267.4 128.2 - 395.6
Intercompany receivables 5.1 809.9 [815.0] -
Inventories 319.0 115.6 - 434.6
Prepaid expenses and other current assets 79.6 21.4 - 101.0
-------- -------- --------- --------
Current assets 706.7 1,141.9 [815.0] 1,033.6
Plant and timberlands, net 1,885.8 2,350.1 - 4,235.9
Prepaid pension asset 798.3 1.8 - 800.1
Goodwill 499.7 61.2 - 560.9
Other assets 56.3 141.5 - 197.8
Intercompany long-term receivables 4.1 - [4.1] -
Investment in subsidiaries 2,766.1 - [2,766.1] -
-------- -------- --------- --------
Total assets $6,717.0 $3,696.5 $[3,585.2] $6,828.3
-------- -------- --------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 441.4 $ 102.5 $ - $ 543.9
Intercompany payables 809.9 5.1 [815.0] -
Notes payable and current maturities of
long-term obligations 103.2 63.4 - 166.6
Income taxes [0.3] 15.6 - 15.3
-------- -------- --------- --------
Current liabilities 1,354.2 186.6 [815.0] 725.8
Long-term debt 2,592.4 104.8 - 2,697.2
Intercompany long-term debt - 4.1 [4.1] -
Other long-term obligations 73.9 9.1 - 83.0
Deferred income taxes 522.4 484.7 - 1,007.1
Shareholders' equity 2,174.1 2,907.2 [2,766.1] 2,315.2
-------- -------- --------- --------
Total liabilities and shareholders' equity $6,717.0 $3,696.5 $[3,585.2] $6,828.3
======== ======== ========= ========
NOTES TO FINANCIAL STATEMENTS
At October 31, 2001
Non
Westvaco guarantor Consolidated
In millions (Issuer/Guarantor)(1) subsidiaries Eliminations total
ASSETS
Cash and marketable securities $ 11.7 $ 69.5 $ - $ 81.2
Receivables 285.9 128.8 - 414.7
Intercompany receivables - 837.5 [837.5] -
Inventories 309.4 117.0 - 426.4
Prepaid expenses and other current assets 67.7 25.7 - 93.4
-------- -------- --------- --------
Current assets 674.7 1,178.5 [837.5] 1,015.7
Plant and timberlands, net 1,943.4 2,283.9 - 4,227.3
Prepaid pension asset 778.0 1.4 - 779.4
Goodwill 502.4 62.8 - 565.2
Other assets 158.0 41.4 - 199.4
Intercompany long-term receivables 4.1 - [4.1] -
Investment in subsidiaries 2,680.4 - [2,680.4] -
-------- -------- --------- --------
Total assets $6,741.0 $3,568.0 $[3,522.0] $6,787.0
======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 394.7 $116.9 $ - $ 511.6
Intercompany payables 837.5 - [837.5] -
Notes payable and current maturities of
long-term obligations 103.2 69.7 - 172.9
Income taxes [16.1] 32.6 - 16.5
-------- -------- --------- --------
Current liabilities 1,319.3 219.2 [837.5] 701.0
Long-term debt 2,553.4 107.1 - 2,660.5
Intercompany long-term debt - 4.1 [4.1] -
Other long-term obligations 73.1 3.7 - 76.8
Deferred income taxes 582.0 425.8 - 1,007.8
Shareholders' equity 2,213.2 2,808.1 [2,680.4] 2,340.9
-------- -------- --------- --------
Total liabilities and shareholders' equity $6,741.0 $3,568.0 $[3,522.0] $6,787.0
======== ======== ========= ========
NOTES TO FINANCIAL STATEMENTS
At October 31, 2000
Non
Westvaco guarantor Consolidated
In millions (Issuer/Guarantor) (1) subsidiaries Eliminations total
ASSETS
Cash and marketable securities $ 120.2 $ 105.1 $ - $ 225.3
Receivables 315.2 106.5 - 421.7
Intercompany receivables 4.6 667.7 [672.3] -
Inventories 241.8 91.5 - 333.3
Prepaid expenses and other current assets 63.5 19.9 - 83.4
-------- -------- --------- --------
Current assets 745.3 990.7 [672.3] 1,063.7
Plant and timberlands, net 1,905.7 2,290.9 - 4,196.6
Prepaid pension asset 640.1 1.6 - 641.7
Goodwill 562.9 43.3 - 606.2
Other assets 41.6 20.1 - 61.7
Intercompany long-term receivables 6.1 - [6.1] -
Investment in subsidiaries 2,505.1 - [2,505.1] -
-------- -------- --------- --------
Total assets $6,406.8 $3,346.6 $[3,183.5] $6,569.9
======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 421.1 $ 102.1 $ - $ 523.2
Intercompany payables 667.7 4.6 [672.3] -
Notes payable and current maturities of
long-term obligations 7.1 23.0 - 30.1
Income taxes [46.9] 60.5 - 13.6
-------- -------- --------- --------
Current liabilities 1,049.0 190.2 [672.3] 566.9
Long-term debt 2,604.6 82.1 - 2,686.7
Intercompany long-term debt - 6.1 [6.1] -
Other long-term obligations 75.9 0.1 - 76.0
Deferred income taxes 512.5 395.2 - 907.7
Shareholders' equity 2,164.8 2,672.9 [2,505.1] 2,332.6
-------- -------- --------- --------
Total liabilities and shareholders' equity $6,406.8 $3,346.6 $[3,183.5] $6,569.9
======== ======== ========= ========
NOTES TO FINANCIAL STATEMENTS
Transition period ended December 31, 2001
Westvaco Non guarantor Consolidated
In millions (Issuer/Guarantor) (1) (2) subsidiaries (2) Eliminations total
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ [21.7] $3.1 $ [3.1] $[21.7]
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in [income] loss of subsidiaries [3.1] - 3.1 -
Provision for depreciation and amortization 27.3 33.4 60.7
Provision for deferred income taxes [6.5] 1.7 [4.8]
Pension credit and other employee benefits [18.2] 3.2 [15.0]
Gains on sales of plant and timberlands 2.9 0.6 3.5
Foreign currency transaction losses 0.2 [0.6] [0.4]
Net changes in assets and liabilities:
[Increase] decrease in receivables 18.5 4.0 22.5
[Increase] decrease in intercompany receivables [5.1] 23.2 [18.1] -
[Increase] decrease in inventories [9.1] 2.7 [6.4]
[Increase] decrease in prepaid expenses and
other current assets [9.3] 4.5 [4.8]
Increase [decrease] in accounts payable and
accrued expenses 30.5 [25.0] 5.5
Increase [decrease] in intercompany payables [23.2] 5.1 18.1 -
Increase [decrease] in income taxes payable 15.8 [17.8] [2.0]
[Increase] decrease in other assets [1.7] - [1.7]
Other, net [2.8] 1.5 - [1.3]
------ ----- ----- -----
Net cash provided by operating activities [5.5] 39.6 34.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant and timberlands [11.5] [42.6] [54.1]
Proceeds from sales of assets 0.6 - 0.6
Other - [0.2] [0.2]
------ ----- -----
Net cash used in investing activities [10.9] [42.8] [53.7]
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 3.3 - 3.3
Proceeds from issuance of debt 75.0 4.9 79.9
Intercompany dividends 1.3 [1.3] -
Dividends paid
Treasury stock purchases
Repayment of notes payable and long-term debt [39.3] [3.1] [42.4]
------ ----- -----
Net cash provided by financing activities 40.3 0.5 40.8
Effect of exchange rate changes on cash - - - -
------ ----- ----- -----
NOTES TO FINANCIAL STATEMENTS
Increase [decrease] in cash and marketable
securities 23.9 [2.7] 21.2
Cash and marketable securities:
At beginning of period 11.7 69.5 - 81.2
----- ----- ------- ------
At end of period $35.6 $66.8 $ $102.4
===== ===== ======= ======
Year ended October 31, 2001
Westvaco Non guarantor Consolidated
In millions (Issuer/Guarantor)(1) (2) subsidiaries (2) Eliminations total
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 88.2 $ 116.8 $[116.8] $ 88.2
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in [income] loss of subsidiaries [116.8] - 116.8 -
Provision for depreciation and amortization 169.0 178.4 - 347.4
Provision for deferred income taxes 12.5 31.1 - 43.6
Restructuring charges 33.8 17.9 - 51.7
Pension credit and other employee benefits [139.9] 8.7 - [131.2]
Gains on sales of plant and timberlands [37.7] - - [37.7]
Foreign currency transaction losses 0.6 0.6 - 1.2
Net changes in assets and liabilities:
[Increase] decrease in receivables 41.2 [18.4] - 22.8
[Increase] decrease in intercompany receivables 4.6 [112.1] 107.5 -
[Increase] decrease in inventories [45.6] [21.0] - [66.6]
[Increase] decrease in prepaid expenses and
other current assets 1.4 [7.2] - [5.8]
Increase [decrease] in accounts payable and
accrued expenses [83.2] 36.5 - [46.7]
Increase [decrease] in intercompany payables 112.1 [4.6] [107.5] -
Increase [decrease] in income taxes payable 30.8 [27.2] - 3.6
[Increase] decrease in other assets [15.7] - - [15.7]
Other, net [34.5] 32.3 - [2.2]
----- ----- ------- ------
Net cash provided by operating activities 20.8 231.8 - 252.6
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant and timberlands [119.7] [170.7] - [290.4]
Payments for acquisitions, net of cash acquired [12.6] [68.6] - [81.2]
Proceeds from sales of assets 45.6 2.6 - 48.2
Other - [0.2] - [0.2]
----- ----- ------- ------
Net cash used in investing activities [86.7] [236.9] - [323.6]
CASH FLOWS FROM FINANCING ACTIVITIES:
NOTES TO FINANCIAL STATEMENTS
Proceeds from issuance of common stock 6.3 - 6.3
Proceeds from issuance of debt 1,102.3 23.0 - 1,125.3
Intercompany debt 2.0 [2.0] - -
Intercompany dividends 1.3 [1.3] - -
Dividends paid [89.3] - - [89.3]
Treasury stock purchases [1.6] - - [1.6]
Repayment of notes payable and long-term debt [1,063.6] [40.0] - [1,103.6]
----- ----- ---- ------
Net cash used in financing activities [42.6] [20.3] - [62.9]
Effect of exchange rate changes on cash - [10.2] - [10.2]
----- ----- ---- ------
Decrease in cash and marketable securities [108.5] [35.6] - [144.1]
Cash and marketable securities:
At beginning of period 120.2 105.1 - 225.3
----- ----- ---- ------
At end of period $ 11.7 $ 69.5 $ - $ 81.2
===== ===== ==== ======
Year ended October 31, 2000
Westvaco Non guarantor Consolidated
In millions (Issuer/Guarantor)(1) (2) subsidiaries (2) Eliminations total
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 245.9 $ 184.4 $[184.4] $245.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in [income] loss of subsidiaries [184.4] - 184.4 -
Provision for depreciation and amortization 159.7 154.2 - 313.9
Provision for deferred income taxes [283.1] 378.0 - 94.9
Restructuring charges 16.1 - - 16.1
Pension credit and other employee benefits [98.6] 5.7 - [92.9]
Gains on sales of plant and timberlands [23.9] [2.9] - [26.8]
Foreign currency transaction losses 0.3 0.6 - 0.9
Loss on extinguishment of debt, net of taxes 8.8 - - 8.8
Net changes in assets and liabilities:
[Increase] decrease in receivables [25.9] 10.3 [15.6]
[Increase] decrease in intercompany
receivables [4.6] [458.1] 462.7 -
[Increase] decrease in inventories [29.3] 28.5 - [0.8]
[Increase] decrease in prepaid expenses and
other current assets 5.3 [3.4] - 1.9
Increase [decrease] in accounts payable and
accrued expenses 96.2 [57.2] - 39.0
NOTES TO FINANCIAL STATEMENTS
Increase [decrease] in intercompany payables 458.1 4.6 [462.7] -
Increase [decrease] in income taxes payable [55.9] 56.7 - 0.8
Other, net [18.8] 15.8 - [3.0]
------- ------- ----- -------
Net cash provided by operating activities 265.9 317.2 - 583.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant and timberlands [102.5] [111.5] - [214.0]
Payments for acquisitions, net of cash acquired [1,284.3] [58.5] - [1,342.8]
Proceeds from sales of assets 78.6 3.0 - 81.6
Other - 0.2 - 0.2
------- ------- ----- -------
Net cash used in investing activities [1,308.2] [166.8] - [1,475.0]
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 9.3 - - 9.3
Proceeds from issuance of debt 2,600.1 11.4 - 2,611.5
Intercompany debt 10.0 [10.0] - -
Intercompany dividends 3.8 [3.8] - -
Dividends paid [88.5] - - [88.5]
Treasury stock purchases [2.4] - - [2.4]
Repayment of notes payable and long-term debt [1,398.8] [124.9] - [1,523.7]
------- ------- ----- -------
Net cash provided by [used in] financing
activities 1,133.5 [127.3] - 1,006.2
Effect of exchange rate changes on cash - 2.2 - 2.2
------- ------- ----- -------
Increase in cash and marketable securities 91.2 25.3 - 116.5
Cash and marketable securities:
At beginning of period 29.0 79.8 - 108.8
------- ------- ----- -------
At end of period $ 120.2 $ 105.1 $ - $ 225.3
======= ======= ===== =======
Year ended October 31, 1999
Westvaco
(Issuer/Guarantor) Non guarantor Consolidated
In millions (2) subsidiaries (2) Eliminations total
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 111.2 $ 12.0 $ [12.0] $ 111.2
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in [income] loss of subsidiaries [12.0] - 12.0 -
Provision for depreciation and amortization 267.3 13.2 - 280.5
Provision for deferred income taxes 27.9 4.4 - 32.3
Restructuring charges 77.7 1.1 - 78.8
Pension credit and other employee benefits [84.4] 5.7 - [78.7]
NOTES TO FINANCIAL STATEMENTS
Gains on sales of plant and timberlands [19.0] 1.1 - [17.9]
Foreign currency transaction losses 0.3 3.3 - 3.6
Net changes in assets and liabilities
[Increase] decrease in receivables [37.5] [3.6] - [41.1]
[Increase] decrease in intercompany
receivables 42.2 42.5 [84.7] -
[Increase] decrease in inventories 24.8 [0.3] - 24.5
Increase [decrease] in prepaid expenses and
other current assets [0.8] [0.3] - [1.1]
Increase [decrease] in accounts payable and
accrued expenses 15.0 9.8 - 24.8
Increase [decrease] in intercompany payables [42.5] [42.2] 84.7 -
Increase [decrease] in income taxes payable [4.8] [4.9] - [9.7]
Other, net 1.6 3.9 - 5.5
------- ------- ---- -------
Net cash provided by operating activities 367.0 45.7 - 412.7
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant and timberlands [193.4] [35.5] - [228.9]
Payments for acquisitions, net of cash acquired - [22.7] - [22.7]
Proceeds from sales of assets 22.4 0.4 - 22.8
Other - [1.1] - [1.1]
------- ------- ---- -------
Net cash used in investing activities [171.0] [58.9] - [229.9]
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 9.1 - - 9.1
Proceeds from issuance of debt 860.0 21.5 - 881.5
Intercompany debt [10.1] 10.1 - -
Intercompany dividends 6.0 [6.0] - -
Dividends paid [88.2] - - [88.2]
Treasury stock purchases [10.8] - - [10.8]
Repayment of notes payable and long-term debt [948.1] [4.1] - [952.2]
------- ------- ---- -------
Net cash provided by [used in] financing
activities [182.1] 21.5 - [160.6]
Effect of exchange rate changes on cash - [18.5] - [18.5]
------- ------- ---- -------
Increase [decrease] in cash and marketable
securities 13.9 [10.2] - 3.7
Cash and marketable securities:
At beginning of period 15.1 90.0 - 105.1
------- ------- ---- -------
At end of period $ 29.0 $ 79.8 $ - $ 108.8
======= ======= ==== =======
NOTES TO FINANCIAL STATEMENTS
(1) The company is the issuer of previously issued debt securities and potential
guarantor of debt that may be issued in the future by MeadWestvaco, the
Parent.
(2) Certain intercompany transactions for contract manufacturing between the
company and the non-guarantor subsidiaries are non-cash transactions;
therefore, the effects of such are not reflected in the statements of cash
flows.
U. Fiscal year change
Effective January 29, 2002, Westvaco changed its fiscal year end from October 31
to December 31. Accordingly, the consolidated financial statements include the
results of operations for the transition period, which are not necessarily
indicative of operations for a full year.
Results for the 2001 transition period and comparable prior year period are
summarized below.
In millions, except per share data Two months ended December 31,
---------------------------------- -----------------------------
2001 2000
------ ------
Unaudited
Sales $602.7 $631.3
Operating income [loss] [38.6] 41.2
Income tax provision [benefit] [16.9] 15.2
Net income [loss] [21.7] 26.0
Net income [loss] per share -
basic and diluted $[0.21] $ 0.26
Earnings for the two months ended December 31, 2001 reflects a $17.0 million
charge, or $.10 per share for the writedowns of plant and equipment taken out of
service, writedowns of inventories due to lower of cost or market evaluations,
increased costs associated with the acceleration of maintenance to coincide with
market-related downtime and other items principally relating to employee
benefits and receivables. Of the $17.0 million charge, $11.0 million is included
in Cost of products sold, $4.0 million is included in Other income [expense],
net and $2.0 million is included in Selling, research and administrative
expenses.
V. Selected quarterly information [unaudited]
In millions, except per share data
- ----------------------------------
Fiscal Year Ended October 31,
----------------------------------------
Quarter 2001/1/ 2000/2/ 1999/3/
------- ---- ---- ----
Sales
First $ 971.1 $ 841.9 $ 685.7
Second 966.9 955.2 715.7
Third 995.1 977.8 738.4
Fourth 1,002.4 1,081.6 813.4
-------- -------- --------
Year $3,935.5 $3,856.5 $2,953.2
======== ======== ========
Gross profit
NOTES TO FINANCIAL STATEMENTS
First $ 185.1 $ 175.4 $ 119.2
Second 168.6 211.3 127.1
Third 174.7 216.5 139.5
Fourth 182.9 244.7 176.9
------- --------- ---------
Year $ 711.3 $ 847.9 $ 562.7
======= ========= =========
Net income before extraordinary charge
First $ 33.3 $ 50.2 $ 25.2
Second 18.5 70.2 27.3
Third 28.0 53.6 35.0
Fourth 8.4 80.7 23.7
------- --------- ---------
Year $ 88.2 $ 254.7 $ 111.2
======= ========= =========
Net income
First $ 33.3 $ 50.2 $ 25.2
Second 18.5 61.4 27.3
Third 28.0 53.6 35.0
Fourth 8.4 80.7 23.7
------- --------- ---------
Year $ 88.2 $ 245.9 $ 111.2
======= ========= =========
Net income before extraordinary charge
per common share--basic and diluted
First $ .33 $ .50 $ .25
Second .18 .70 .27
Third .28 .53 .35
Fourth .08 .80 .24
------- --------- ---------
Year $ .87 $ 2.53 $ 1.11
======= ========= =========
NOTES TO FINANCIAL STATEMENTS
Net income
per common share - basic and diluted
First $ .33 $ .50 $ .25
Second .18 .61 .27
Third .28 .53 .35
Fourth .08 .80 .24
----- ----- -----
Year $ .87 $2.44 $1.11
===== ===== =====
1) Second quarter 2001 results include a net pretax charge of $1.6 million,
or $.01 per share, as a result of restructuring. Third quarter 2001
results include a pretax charge of $1.6 million, or $.01 per share, as the
result of restructuring and a gain of $.05 per share to reflect a tax
benefit adjustment. Fourth quarter 2001 results include a pretax charge of
$53.7 million or $.33 per share for a restructuring plan, the impact of a
LIFO (last in-first out) credit of $.07 per share and a gain of $.05 per
share resulting from the resolution of prior year tax audits.
2) Results for the 2000 second quarter include an extraordinary charge of
$8.8 million after tax, or $.09 per share, from the retirement of higher
coupon debt and a pretax gain of $11.2 million, or $.07 per share from the
sale of a liquid packaging plant previously written down as part of the
1999 restructuring charge. Third quarter 2000 results include a pretax
charge of $24.3 million, or $.16 per share, as a result of restructuring.
Fourth quarter 2000 results include a pretax charge of $3.0 million, or
$.02 per share, for restructuring and a pretax gain of $3.6 million, or
$.04 per share, resulting from the sale of the company's equity interest
in a foreign operation. Fourth quarter results also include a pretax LIFO
provision of $9.0 million, or $.06 per share.
3) Results for the 1999 fourth quarter include a pretax charge of $80.5
million, or $.49 per share, as a result of restructuring, and a $15.0
million tax benefit, or $.15 per share, resulting from a release of
deferred taxes.
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the information and representations in the
accompanying consolidated financial statements and related notes as well as all
other financial information contained in this report. These financial statements
were prepared in accordance with accounting principles generally accepted in the
United States of America and by necessity include some amounts determined using
informed estimates and judgments.
Management is responsible for establishing and maintaining a system of internal
control. The company's accounting systems include internal controls which
management believes provide reasonable assurance of the reliability of its
financial records and the proper safeguarding and use of its assets. In
establishing the basis for reasonable assurance, management balances the cost of
the internal controls with the benefits they provide. Additionally, it has long
been the policy of the company to conduct its business affairs in accordance
with high ethical standards, as set forth in the company's Code of Conduct.
PricewaterhouseCoopers LLP, the company's independent accountants, were engaged
to audit the consolidated financial statements and were responsible for
conducting their audit in accordance with auditing standards generally accepted
in the United States of America. The appointment of PricewaterhouseCoopers LLP
as the company's independent accountants by the Board of Directors, on the
recommendation of the Audit Committee, has been ratified each year by the
shareholders. Their report immediately follows this statement.
The Audit Committee of the Board of Directors, composed solely of nonmanagement
directors, meets regularly with the company's management, the internal audit
director and the independent accountants to discuss accounting and financial
reporting matters and the nature, scope and results of audits. The Audit
Committee meets with the independent accountants both with and without the
presence of management. The committee also meets with the company's general
counsel to review the company's legal compliance program as well as significant
litigation issues. The independent accountants and the director of internal
audit have full and free access to the Audit Committee.
John A. Luke, Jr.
President and
Chief Executive Officer
Karen R. Osar
Senior Vice President and Chief Financial Officer
February 15, 2002
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of
MeadWestvaco Corporation
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of income, shareholders' equity and of cash flows
appearing on pages 21 through 52 present fairly, in all material respects, the
financial position of MeadWestvaco Corporation (formerly Westvaco Corporation)
and its subsidiaries at December 31, 2001 and October 31, 2001 and 2000 and the
results of their operations and their cash flows for the two months in the
period ended December 31, 2001 and for each of the three years in the period
ended October 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 15, 2002