MeadWestvaco Announces Q3 Loss: Merger Synergies Bearing Fruit
Press release from the issuing company
STAMFORD, Conn., Oct 22 - MeadWestvaco Corporation today reported a net loss of $2 million or 1 cent per share for the third quarter of 2002. Included in the net loss were results of discontinued operations, and restructuring and other merger-related expenses. Earnings from continuing operations were $17 million or 9 cents per share. Excluding nonrecurring items, earnings from continuing operations in the third quarter were $34 million or 17 cents per share. Sales in the third quarter were $2 billion.
The third quarter results included a loss from discontinued operations of $19 million after tax or 10 cents per share due to the sale of the company's U.S. containerboard business. In addition, nonrecurring items including restructuring charges and other merger expenses in the third quarter totaled $28 million pretax or 8 cents per share.
"The improvement in operating earnings from the second quarter reflected strong seasonal improvement in our packaging and coated paper businesses, the benefits of merger-related synergies, a solid performance in Consumer & Office Products and continued strength in most of our markets for the Specialty Chemicals segment," said John A. Luke, Jr., president and chief executive officer. "While industry conditions remain challenging, we continue to make excellent progress on merger integration. Reflecting our continued momentum on integration, we realized $56 million of merger synergies during the third quarter, compared to $58 million for the first half of the year. With year- to-date total synergies of $114 million, we have raised our synergy goal for the full year 2002 by 50 percent to $140 million, and we expect to exceed that target."
The $56 million in ongoing synergies realized in the quarter was partially offset by restructuring and merger-related costs of $28 million pretax. Pretax earnings from continuing operations in the quarter also included $14 million of higher depreciation, depletion and amortization expenses due to the effects of merger-related purchase accounting.
Sales in Packaging (which excludes discontinued operations), the company's largest segment, totaled $971 million in the third quarter of 2002, compared to $965 million in the second quarter of 2002 and $903 million in the third quarter of 2001 for the combined companies. Segment operating profit, which included the effect of a scheduled maintenance shutdown at the company's coated paperboard mill in Alabama, was $88 million in the third quarter compared to $93 million in the second quarter, and $68 million for the combined companies in third quarter 2001. Shipment volumes of bleached board remained at the strong seasonal levels of the second quarter and were ahead of last year's levels. During the quarter, market prices for most of the company's paperboard grades rose, and earnings benefited on sales of those products which are not sold under longer-term contract arrangements.
During the seasonally strong third quarter, operating results improved over the prior year in the company's global packaging systems business, which serves soft drink, brewery, dairy and food markets. In consumer packaging, sales and operating results improved compared to the prior year in media and entertainment and pharmaceutical markets in North America and Europe. Rigesa, Ltda., the company's Brazilian packaging operation, had solid operating results that were ahead of the prior year, despite the current challenging economic environment.
In the Paper segment, third quarter sales were $612 million compared to $535 million in the second quarter and $644 million for the combined companies in 2001. The segment reported a loss of $3 million compared to a loss of $45 million in the second quarter and a loss of $9 million for the combined companies in third quarter 2001. Third quarter results improved compared to the prior quarter due to lower maintenance costs, higher volumes and higher synergy capture. Results improved over last year as synergy benefits, lower maintenance and market-related downtime offset the effect of lower coated paper prices.
Sales volume of coated paper rose substantially from second quarter to the levels of the prior year as a result of strong seasonal demand. Average selling prices for coated paper declined slightly from the second quarter and appeared to stabilize at the end of the quarter. During the third quarter, price increases were announced for a number of coated paper grades based upon improved demand. Mill inventories of coated paper declined in the third quarter and were below the levels of yearend 2001. For carbonless paper, average selling prices were stable with the prior quarter and the prior year. Shipments of carbonless papers were unchanged from the second quarter and modestly lower than the prior year.
Consumer & Office Products
Sales in the Consumer & Office Products segment were $350 million in the third quarter, compared to $312 million in the second quarter and $389 million for the combined companies in the third quarter of the prior year. Lower year-over-year sales reflected the impact of business units sold, generally lower retail sales and pressure from offshore competition. Segment earnings were $54 million in the third quarter, compared to $43 million in the second quarter and $45 million for the combined companies in the prior year. The sequential increase in segment earnings was a result of seasonal factors. The year-over-year earnings improvement resulted from cost reductions taken over the last year. The results also reflect the continued solid performance of the Consumer & Office Products' branded products in all major market segments -- school, time management and envelopes.
Sales in the Specialty Chemicals segment in the third quarter were $90 million, compared to $93 million in the second quarter and $87 million in the third quarter last year. Segment operating profit was $14 million, compared to $18 million in the prior quarter and $19 million in the prior year. During the quarter, sales of activated carbon products to the automotive market were strong, as the company's product capabilities continue to be enhanced to meet higher auto and truck emission standards. Sales of asphalt emulsifiers and fabric dye dispersants also increased. However, demand for printing inks and other industrial products weakened.
Enhancing Financial Strength
For the first nine months of the year, capital spending totaled about $240 million, which represents a rate well below the company's annual costs for depreciation, depletion and amortization. For the full year, the company expects capital expenditures to be about $400 million, which is below earlier estimates of $450 to $500 million.
At the end of the third quarter, the company sold its U.S. containerboard business for $375 million. Proceeds from the sale will be used to reduce debt and result in lower future interest expense.
During the third quarter of 2002, the company continued its program to sell non-strategic timberlands, selling 15,000 acres and recording a gain of $9 million. In the first nine months of 2002 timberlands sales totaled 55,000 acres, which resulted in a gain of $38 million. Of the 450,000 acres previously identified by the company for sale, a total of 209,000 acres had been sold or were under contract to be sold by the end of the third quarter. During the third quarter, the company completed a strategic review of its more than 3 million acres of U.S. timberlands and announced plans to sell an additional 700,000 acres of non-strategic timberlands to be marketed over approximately five years.
Restructuring Charges and Other Merger-Related Costs
During the third quarter, the company recorded pretax expenses of $28 million for restructuring charges and other merger-related costs, of which $12 million had a cash effect. Third quarter restructuring actions included asset write downs, facility closures and employee restructuring benefits. As previously disclosed, other merger and related expenses include charges for integration-related consulting and costs associated with relocating certain functions which are expensed as incurred. For the first nine months of 2002, restructuring charges and merger-related items amounted to $116 million, of which $40 million had a cash effect. Of these amounts, $15 million and $57 million were recorded in cost of products sold and $13 million and $59 million were recorded in selling, research and administrative expenses for the third quarter and first nine months of 2002. For the full year, the company expects restructuring and merger-related costs in a range of $130 to $140 million, of which about $50 million is expected to have a cash effect.
Integration efforts and other actions, including the sale of the containerboard business, have led to employee reductions of 3,600, compared to employee levels at the combined companies on June 30, 2001. By yearend 2002, the total number of workforce reductions is expected to be approximately 4,000.
"Third quarter results reflect seasonally strong demand in our markets for packaging and coated papers and the growing benefit of merger-related synergies," said Mr. Luke. "During the quarter, prices improved across many grades of paperboard and pricing for coated papers appeared to stabilize. However, global economies remain weak and markets for coated paper continue to be very challenging. Since our merger, we have exceeded our targets in synergy capture and are operating as one company."
"While these accomplishments are significant, they are only the beginning of the steps we must take to deliver improved financial returns. Beyond synergies, we are focused on continuing efforts to improve our profitability through greater efficiency, innovation and leveraging our business platforms to fully serve our target markets," Mr. Luke said. "The merger created opportunities that are greater than the achievement of significant synergies. In coming together, we created a strong company with valuable, complementary business platforms. In particular, we created a global packaging platform that has leadership positions in high-value markets, alignment with our customers and a successful history of innovation in structural and graphic design, packaging systems, and the ability to meet customer needs with both paper and plastic substrates. We are working hard to capture the full potential of our strong packaging platform."
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