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MWV > SEC Filings for MWV > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for MEADWESTVACO CORP


6-May-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

For the three months ended March 31, 2013, MeadWestvaco Corporation ("MeadWestvaco", "MWV" or the "company") reported income from continuing operations attributable to the company of $11 million, or $0.06 per share, compared to $50 million, or $0.29 per share, for the three months ended March 31, 2012. The results from continuing operations attributable to the company for the three months ended March 31, 2013 include after-tax restructuring charges of $18 million, or $0.10 per share. The results from continuing operations attributable to the company for the three months ended March 31, 2012 include after-tax restructuring charges of $7 million, or $0.04 per share.

Sales increased 2% to $1.34 billion for the three months ended March 31, 2013 compared to $1.31 billion for the three months ended March 31, 2012. Sales growth in 2013 was driven by higher volumes in targeted markets for food, tobacco, industrial, personal care and healthcare packaging, as well as increased volumes of higher value specialty chemical solutions. The company's sales in 2013 also reflect contribution from the corrugated business in India (Ruby Macons) and the pine chemicals business in Brazil (Resitec), both acquired during the fourth quarter of 2012. These benefits were partially offset by unseasonably cool and wet weather in key regions which negatively impacted demand for beverage and home and garden packaging, as well as asphalt additives. In addition, unfavorable economic conditions in Europe led to declines in beauty and personal care folding carton volumes compared to 2012. Revenues from emerging markets comprise about 29% of the company's total sales and increased 15% compared to 2012.

Pre-tax earnings on a continuing operations basis from the company's segments in total were $119 million for the three months ended March 31, 2013 compared to $166 million for the three months ended March 31, 2012. The year-over-year decline was primarily due to operational challenges related to outages at certain paperboard mills and specialty chemical refineries, as well as higher input cost inflation and unfavorable foreign currency exchange compared to 2012. Unseasonably cool and wet weather in key regions negatively impacted volumes of beverage and home and garden packaging, as well as asphalt additives, and lower consumer confidence and spending in Europe continued to negatively impact beauty and personal care folding carton volumes. Industrial packaging results in Brazil were above the company's expectations, but declined year-over-year primarily due to inflation and unfavorable foreign currency exchange.

OUTLOOK

Looking ahead to the second quarter of 2013, MWV expects earnings to be lower compared to prior year levels on a continuing operations basis. The company expects continued momentum with its profitable growth strategies to drive volume improvement across its targeted packaging and specialty chemicals businesses. In addition, the company is expecting to generate product pricing improvement and to benefit from its recent acquisitions in the Industrial and Specialty Chemicals segments. These benefits are expected to be more than offset by costs related to a planned major cold outage at the Covington, Virginia paperboard mill, which is expected to negatively impact pre-tax earnings by about $20 million, as well as lower land sales.

As announced with the company's first quarter earnings release on April 30, 2013, the company is accelerating certain actions to improve margins in its Home, Health & Beauty segment, reduce enterprise-wide overhead costs and explore strategic options to maximize and unlock the value of the Community Development and Land Management segment.

To improve margins in the Home, Health & Beauty segment, the company will exit the beauty and personal care folding carton businesses in Europe and Brazil. In Europe, the company is assessing strategic options to accomplish an exit through the sale of this business. In Brazil, the company will repurpose its folding carton operation during the second half of 2013 to manufacture high value, differentiated beauty and personal care dispensing products to meet significant market growth opportunities.


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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

The company is also undertaking an enterprise-wide overhead cost reduction plan, which is expected to result in annual cost savings between $65 million and $75 million in 2014. To achieve these savings, the company is refocusing and streamlining its operations, as well as consolidating general and administrative support across the organization. A substantial portion of these actions will be completed this year and the company expects benefits of $25 million to $30 million to be achieved in 2013.

The company continues to make progress in evaluating opportunities to unlock the value in its land management business. At the end of 2012, as market fundamentals improved and the business achieved a number of positive developments, the company retained advisors to assist in evaluating options to maximize the value of its forestland holdings, properties with mineral rights, and development properties in the Charleston, South Carolina region.

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. Refer to the "Forward-looking Statements" section located later in this document.


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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

RESULTS OF OPERATIONS

Presented below are results for the three months ended March 31, 2013 and 2012
reported in accordance with accounting principles generally accepted in the U.S.
All per share amounts are presented on an after-tax basis.



                                                                 Three Months Ended
In millions, except per share amounts                                 March 31,
                                                                2013             2012
Net sales                                                     $   1,344         $ 1,313

Cost of sales                                                     1,129           1,040
Selling, general and administrative expenses                        168             161
Interest expense                                                     40              41
Other income, net                                                    (4 )           (10 )

Income from continuing operations before income taxes                11              81
Income tax (benefit) provision                                       (1 )            30

Income from continuing operations                                    12              51
Loss from discontinued operations, net of income taxes                0              (1 )

Net income                                                           12              50
Less: Net income attributable to non-controlling
interests, net of income taxes                                        1               1

Net income attributable to the company                        $      11         $    49


Income from continuing operations attributable to the
company                                                       $      11         $    50


Net income per share attributable to the company - basic:
Income from continuing operations                             $    0.06         $  0.30
Loss from discontinued operations                                  0.00           (0.01 )

Net income attributable to the company                        $    0.06         $  0.29


Net income per share attributable to the company -
diluted:
Income from continuing operations                             $    0.06         $  0.29
Loss from discontinued operations                                  0.00           (0.01 )

Net income attributable to the company                        $    0.06         $  0.28


Shares used to compute net income per share attributable
to the company:
Basic                                                             176.4           171.9
Diluted                                                           179.4           175.3

Sales increased 2% to $1.34 billion for the three months ended March 31, 2013 compared to $1.31 billion for the three months ended March 31, 2012. Sales growth in 2013 was driven by higher volumes in targeted markets for food, tobacco, industrial, personal care and healthcare packaging, as well as increased volumes of higher value specialty chemical solutions. The company's sales in 2013 also reflect contribution from the corrugated business in India (Ruby Macons) and the pine chemicals business in Brazil (Resitec), both acquired during the fourth quarter of 2012. These benefits were partially offset by unseasonably cool and wet weather which negatively impacted demand for beverage and home and garden packaging, as well as asphalt additives. In addition, unfavorable economic conditions in Europe led to declines in beauty and personal care folding carton volumes compared to 2012. Revenues from emerging markets comprise about 29% of the company's total sales and increased 15% compared to 2012. Refer to the individual segment discussions below for detailed sales information for each segment.


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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

Cost of sales was $1.13 billion for the three months ended March 31, 2013 compared to $1.04 billion for the three months ended March 31, 2012. During 2013, incremental expense associated with the recent acquisitions of Ruby Macons and Resitec and the negative impacts associated with planned and unplanned maintenance outages at certain paperboard mills and specialty chemicals facilities drove higher cost of sales compared to 2012. In addition, in 2013, input costs for energy, raw materials and freight were $11 million higher compared to 2012.

Selling, general and administrative expenses were $168 million for the three months ended March 31, 2013 compared to $161 million for the three months ended March 31, 2012. In 2013, increased expenses were driven by costs associated with investments in new product development and commercial capabilities, as well as from incremental expense associated with the recent acquisitions of Ruby Macons and Resitec.

Restructuring charges attributable to individual segments and by nature of cost, as well as cost of sales ("COS") and selling, general and administrative expenses ("SG&A") classification in the consolidated statements of operations for the three months ended March 31, 2013 and 2012 are presented below. Although these charges related to individual segments, such amounts are included in Corporate and Other for segment reporting purposes.

Three months ended March 31, 2013

                                                                                 Asset write-downs
                                           Employee-related costs                 and other costs                       Total
In millions                             COS        SG&A         Total       COS         SG&A       Total      COS      SG&A       Total
Food & Beverage                        $   1       $   1       $     2     $    0       $   0     $     0     $  1     $   1     $     2
Home, Health & Beauty                      6           0             6          7           0           7       13         0          13
Industrial                                 1           1             2          6           0           6        7         1           8
All other                                  0           4             4          0           0           0        0         4           4

Total charges                          $   8       $   6       $    14     $   13       $   0     $    13     $ 21     $   6     $    27

Three months ended March 31, 2012

                                                                                    Asset write-downs
                                            Employee-related costs                   and  other costs                      Total
In millions                             COS            SG&A        Total       COS        SG&A        Total      COS      SG&A       Total
Food & Beverage                       $     1         $     1     $     2     $   0       $   0      $     0     $  1     $   1     $     2
Home, Health & Beauty                       0               1           1         0           0            0        0         1           1
Industrial                                  4               0           4         0           0            0        4         0           4
All other                                   0               2           2         0           1            1        0         3           3

Total charges                         $     5         $     4     $     9     $   0       $   1      $     1     $  5     $   5     $    10

Pension income was $20 million and $16 million for the three months ended March 31, 2013 and 2012, respectively. Pension income is reported in Corporate and Other for segment reporting purposes.


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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

Other income, net is comprised of the following for the three months ended March 31, 2013 and 2012:

                                                   Three months ended
              In millions                              March  31,
                                                  2013            2012
              Interest income                    $     2         $     4
              Foreign currency exchange losses        (3 )             0
              Other 1                                  5               6

                                                 $     4         $    10

1 For the three months ended March 31, 2013, Other income, net includes income of $4 million pursuant to certain value-added tax matters related to the fourth quarter of 2012. The aforementioned adjustment attributable to periods prior to 2013 is deemed to be immaterial to the company's consolidated financial statements for the current period and the fourth quarter of 2012.

Interest expense from continuing operations was $40 million for the three months ended March 31, 2013 and was comprised of $31 million related to bond and bank debt, $6 million related to borrowings on insurance policies and $3 million related to other items. Interest expense from continuing operations was $41 million for the three months ended March 31, 2012 and was comprised of $32 million related to bond and bank debt, $6 million related to borrowings on insurance policies and $3 million related to other items.

For the three months ended March 31, 2013, the effective tax rate benefit attributable to continuing operations was approximately 9%. For the three months ended March 31, 2012, the effective tax rate attributable to continuing operations was approximately 37%. The differences in the effective tax rates for the three months ended March 31, 2013 and 2012 compared to statutory rates are primarily due to discrete items, as well as from the mix and levels between domestic and foreign earnings. For the three months ended March 31, 2013, the discrete items include a $4 million benefit pursuant to an adjustment recorded to deferred taxes related to periods prior to 2013. The aforementioned adjustment attributable to periods prior to 2013 is deemed to be immaterial to the company's consolidated financial statements for the current period and periods prior to 2013.

In addition to the information discussed above, the following sections discuss the results of operations for each of the company's segments and Corporate and Other on a continuing operations basis. MWV's segments are (i) Food & Beverage,
(ii) Home, Health & Beauty (iii) Industrial, (iv) Specialty Chemicals, and
(v) Community Development and Land Management.

Refer to Note 11 of Notes to Consolidated Financial Statements for a reconciliation of the sum of the results of the segments to the company's consolidated income from operations before income taxes on a continuing operations basis.


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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

Food & Beverage



                                        Three months ended
                       In millions          March  31,
                                       2013            2012
                       Sales         $     761       $     747
                       Profit (1)           40              63

(1) Profit is measured as results before restructuring charges, pension income, interest expense and income, income taxes, and results from non-controlling interests.

The Food & Beverage segment produces packaging materials, and designs and produces packaging solutions primarily for the global food, food service, beverage, dairy and tobacco end markets, as well as paperboard for commercial printing. For the global food market, the segment develops and produces materials and innovative solutions that are used to package frozen food, dry goods, ready-to-eat meals, hot and cold drinks, and various shelf-stable dairy products. For the global beverage market, the segment has a fully integrated business model, including high-performance paperboard, carton design and converting operations, as well as beverage packaging machinery. For the global tobacco market, the segment produces high performance paperboard, and designs and produces cartons for the leading tobacco brand owners. The segment's materials are manufactured in the United States and converted into packaging solutions at plants located in North America, Europe and Asia.

Sales for the Food & Beverage segment were $761 million and $747 million for the three months ended March 31, 2013 and 2012, respectively. Sales increased in 2013 primarily due to overall paperboard volume growth, including gains in higher value food and tobacco packaging. These volume gains were partially offset by volume declines in beverage packaging due to unseasonably cool weather in key regions, as well as from lower pricing in general folding carton grades and product mix impact from the decline in beverage packaging compared to 2012.

Profit for the Food & Beverage segment was $40 million and $63 million for the three months ended March 31, 2013 and 2012, respectively. Profit decline in 2013 was driven by $14 million from unfavorable pricing and product mix, $9 million from inflation, $8 million of higher costs from mill maintenance outages, and $2 million from unfavorable foreign currency exchange compared to 2012. These declines were partially offset by $7 million from favorable productivity and $3 million from other favorable items compared to 2012.

Home, Health & Beauty



                                        Three months ended
                       In millions          March  31,
                                       2013            2012
                       Sales         $     188       $     200
                       Profit (1)            3              12

(1) Profit is measured as results before restructuring charges, pension income, interest expense and income, income taxes, and results from non-controlling interests.

The Home, Health & Beauty segment designs and produces packaging solutions for the global personal care, fragrance, home care, lawn and garden, prescription drug and healthcare end markets. For the global beauty and personal care market, the segment produces pumps for fragrances, lotions, creams and soaps, flip-top and applicator closures for bath and body products and lotions, and paperboard and plastic packaging for hair and skin care products. For the global home and garden market, the segment produces trigger sprayers for surface cleaners and fabric care, aerosol actuators for air fresheners, hose-end sprayers for lawn and garden maintenance, and spouted and applicator closures for a variety of other home and garden products. For the global healthcare market, the segment makes secondary packages designed to enhance patient adherence for prescription drugs, as well as healthcare dispensing systems, paperboard packaging and closures for over-the-counter and prescription drugs. Paperboard and plastic materials are converted into packaging solutions at plants located in North America, South America, Europe and Asia.


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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

Sales for the Home, Health & Beauty segment were $188 million and $200 million for the three months ended March 31, 2013 and 2012, respectively. Sales decreased in 2013 primarily due to lower than expected volumes in home and garden packaging as well as beauty and personal care folding carton packaging in Europe and Brazil. Unseasonably cool and wet weather in North America delayed the start of the home improvement and lawn and garden season which negatively impacted home and garden volumes, while continued negative economic conditions in Europe impacted demand for beauty and personal care folding carton packaging. These negative impacts were partially offset by gains in higher value beauty and personal care products, including fine mist dispensers and caps and closures. Healthcare packaging sales also increased from continued gains in medical dispensers.

Profit for the Home, Health & Beauty segment was $3 million and $12 million for the three months ended March 31, 2013 and 2012, respectively. Profit decline in 2013 was driven by $4 million from inflation, $2 million from lower volumes, $2 million from unfavorable pricing and product mix, and $2 million from unfavorable productivity compared to 2012. These declines were partially offset by $1 million from other favorable items compared to 2012.

Industrial



                                        Three months ended
                       In millions          March  31,
                                       2013            2012
                       Sales         $     132       $     114
                       Profit (1)           11              19

(1) Profit is measured as results before restructuring charges, pension income, interest expense and income, income taxes, and results from non-controlling interests.

The Industrial segment designs and produces corrugated packaging solutions, primarily for produce, meat, consumer products and bulk goods primarily in Brazil. In Brazil, the integrated business includes forestlands, paperboard mill production and corrugated box plants. This segment also includes operations in India, which develop corrugated packaging materials as well as corrugated packaging solutions for the domestic fresh produce growers. In Brazil, the segment manufactures high quality virgin kraftliner and recycle-based medium paperboards, and converts the material to corrugated packaging at five box plants across the country. In India, the segment converts raw materials to corrugated packaging at its facility in Pune and manufactures containerboard at two mills in Vapi and Morai.

Sales for the Industrial segment were $132 million and $114 million for the three months ended March 31, 2013 and 2012, respectively. In 2013, volume growth within its corrugated packaging solutions for targeted meat, produce, household goods and raw material markets, as well as improved pricing and product mix, drove the year-over-year sales increase. In addition, sales in 2013 reflect the benefits from the recently acquired corrugated business in India. These benefits were partially offset by unfavorable foreign currency exchange compared to 2012.

Profit for the Industrial segment was $11 million and $19 million for the three months ended March 31, 2013 and 2012, respectively. Profit decline in 2013 was driven by $9 million from inflation, $4 million from unfavorable productivity and $2 million from unfavorable foreign currency exchange compared to 2012. These declines were partially offset by $5 million from improved pricing and product mix, $1 million from higher volumes and $1 million profit contribution from the recently acquired corrugated business in India and other favorable items compared to 2012.


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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

Specialty Chemicals



                                        Three months ended
                       In millions          March  31,
                                       2013            2012
                       Sales         $     226       $     207
                       Profit (1)           49              58

(1) Profit is measured as results before restructuring charges, pension income, interest expense and income, income taxes, and results from non-controlling interests.

The Specialty Chemicals segment manufactures, markets and distributes specialty chemicals derived from sawdust and other byproducts of the papermaking process in North America, Europe, South America and Asia. Products include performance chemicals derived from pine chemicals used in printing inks, asphalt paving and adhesives as well as the agricultural, paper and petroleum industries. This segment also includes products based on activated carbon used in gas vapor emission control systems for automobiles and trucks and applications for air, water and food purification.

Sales for the Specialty Chemicals segment were $226 million and $207 million for the three months ended March 31, 2013 and 2012, respectively. Sales growth in 2013 was driven by continued volume growth in higher value end markets for pine chemicals, including adhesives and oilfield solutions as well as carbon technologies. Contribution from the recently acquired pine chemicals business in Brazil also drove year-over-year sales growth. Unseasonably wet weather negatively impacted demand for asphalt additives, which partially offset the above gains for 2013.

Profit for the Specialty Chemicals segment was $49 million and $58 million for the three months ended March 31, 2013 and 2012, respectively. Profit decline in 2013 was driven by $9 million from higher growth investments and unfavorable . . .

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