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MWV > SEC Filings for MWV > Form 10-Q on 5-Aug-2013All Recent SEC Filings

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Form 10-Q for MEADWESTVACO CORP


5-Aug-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

For the three and six months ended June 30, 2013, MeadWestvaco Corporation ("MeadWestvaco", "MWV" or the "company") reported modest sales growth, but lower year-over-year pre-tax earnings primarily due to the impact from a planned major outage and difficulties encountered following a system implementation at the company's paperboard mill in Covington, Virginia, as well as lower volumes of home and garden packaging due to unseasonably cool and wet weather. Cost savings associated with the company's enterprise-wide cost reduction initiative partially offset these impacts with $9 million and $16 million of savings achieved during the three and six months ended June 30, 2013, respectively.

Cash provided by operating activities from continuing operations improved to $112 million for the six months ended June 30, 2013 compared to $11 million for the six months ended June 30, 2012, primarily reflecting lower working capital levels, as well as higher cash flow associated with the company's expanded operations in Brazil. Cash used in investing activities from continuing operations declined to $228 million for the six months ended June 30, 2013 compared to $324 million for the six months ended June 30, 2012 and primarily reflects lower capital spend related to the company's expansion in Brazil, which was substantially completed in 2012.

Sales increased 1% to $1.43 billion for the three months ended June 30, 2013 compared to $1.42 billion for the three months ended June 30, 2012. Sales increased 2% to $2.78 billion for the six months ended June 30, 2013 compared to $2.74 billion for the six months ended June 30, 2012. The company generated growth in many targeted packaging markets, especially food, beverage, healthcare, and personal care, as well as in specialty chemicals. It also benefited from contributions from the pine chemicals business in Brazil (Resitec) and corrugated business in India (Ruby Macons), both of which were acquired in the fourth quarter of 2012, as well as from improved pricing for industrial packaging solutions in Brazil. These benefits were partially offset by lower volumes of food service and home and garden packaging, lower forestland sales and unfavorable foreign currency exchange during 2013.

For the three months ended June 30, 2013 income from continuing operations attributable to the company was $67 million, or $0.37 per share, compared to $78 million, or $0.44 per share, for the three months ended June 30, 2012. The results from continuing operations attributable to the company for the three months ended June 30, 2013 include after-tax restructuring charges of $4 million, or $0.02 per share, an after-tax pension settlement charge of $11 million, or $0.06 per share, and discrete income tax benefits of $15 million, or $0.08 per share. The results from continuing operations attributable to the company for the three months ended June 30, 2012 include after-tax restructuring charges of $4 million, or $0.02 per share.

For the six months ended June 30, 2013, income from continuing operations attributable to the company was $78 million, or $0.44 per share, compared to $128 million, or $0.73 per share, for the six months ended June 30, 2012. The results from continuing operations attributable to the company for the six months ended June 30, 2013 include after-tax restructuring charges of $21 million, or $0.12 per share, an after-tax pension settlement charge of $11 million, or $0.06 per share, and discrete income tax benefits of $15 million, or $0.09 per share. The results from continuing operations attributable to the company for the six months ended June 30, 2012 include after-tax restructuring charges of $11 million, or $0.06 per share.


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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

OUTLOOK

In the third quarter of 2013, MWV expects earnings to be above year-ago levels on a continuing operations basis. The principal drivers of the expected earnings improvement are:

Momentum with its profitable growth strategies to drive volume improvement across its targeted packaging and specialty chemicals markets;

Pricing improvement in industrial paperboard packaging solutions;

Productivity gains from increased operating leverage;

Earnings benefits from the ramp-up of the company's new paperboard machine in Brazil; and,

Cost benefits from execution against the company's overhead reduction initiative.

Challenging global macroeconomic conditions and weaker foreign currency exchange, primarily the depreciation of Brazilian Real against the U.S. Dollar, are expected to partially offset these benefits in the third quarter of 2013.

Savings associated with the previously announced enterprise-wide overhead cost reduction plan were $16 million for the six months ended June 30, 2013. The company anticipates it will achieve savings exceeding the high end of its range of $25 million to $30 million by the end of 2013 and continues to target savings of $75 million in 2014.

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.

To improve margins in the Home, Health & Beauty segment, as previously announced 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.

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 and six months ended June 30, 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           Six Months Ended
In millions, except per share amounts                      June 30,                    June 30,
                                                      2013           2012          2013         2012
Net sales                                           $   1,434       $ 1,423      $  2,778      $ 2,736

Cost of sales                                           1,171         1,098         2,300        2,138
Selling, general and administrative expenses              160           179           328          340
Interest expense                                           39            35            79           76
Other income, net                                          (7 )          (7 )         (11 )        (17 )

Income from continuing operations before income
taxes                                                      71           118            82          199
Income tax provision                                        7            38             6           68

Income from continuing operations                          64            80            76          131
Income from discontinued operations, net of
income taxes                                                4            10             4            9

Net income                                                 68            90            80          140
Less: Net (loss) income attributable to
non-controlling interests, net of income taxes             (3 )           2            (2 )          3

Net income attributable to the company              $      71       $    88      $     82      $   137


Income from continuing operations attributable to
the company                                         $      67       $    78      $     78      $   128


Net income per share attributable to the company
- basic:
Income from continuing operations                   $    0.38       $  0.45      $   0.44      $  0.74
Income from discontinued operations                      0.02          0.06          0.02         0.05

Net income attributable to the company              $    0.40       $  0.51      $   0.46      $  0.79


Net income per share attributable to the company
- diluted:
Income from continuing operations                   $    0.37       $  0.44      $   0.44      $  0.73
Income from discontinued operations                      0.02          0.06          0.02         0.05

Net income attributable to the company              $    0.39       $  0.50      $   0.46      $  0.78


Shares used to compute net income per share
attributable to the company:
Basic                                                   177.5         173.6         177.0        172.8
Diluted                                                 180.3         176.7         179.8        176.2

Sales increased 1% to $1.43 billion for the three months ended June 30, 2013 compared to $1.42 billion for the three months ended June 30, 2012. Sales increased 2% to $2.78 billion for the six months ended June 30, 2013 compared to $2.74 billion for the six months ended June 30, 2012. The company generated growth in many targeted packaging markets, especially food, beverage, healthcare, and personal care, as well as in specialty chemicals. It also benefited from contributions from the pine chemicals business in Brazil (Resitec) and corrugated business in India (Ruby Macons), both of which were acquired in the fourth quarter of 2012, as well as from improved pricing for industrial packaging solutions in Brazil. These benefits were partially offset by lower volumes of food service and home and garden packaging, lower forestland sales and unfavorable foreign currency exchange during 2013. 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 $1.17 billion for the three months ended June 30, 2013 compared to $1.10 billion for the three months ended June 30, 2012. Cost of sales was $2.30 billion for the six months ended June 30, 2013 compared to $2.14 billion for the six months ended June 30, 2012. For the three and six months ended June 30, 2013, costs associated with the planned outage and the negative impacts from operational difficulties encountered following a system implementation at the company's paperboard mill in Covington, Virginia more than offset the favorable impacts associated with the company's cost reduction initiative compared to 2012. In addition, for the three and six months ended June 30, 2013, input costs for energy, raw materials and freight were $5 million and $16 million higher, respectively, compared to the same periods of 2012.

For the three months ended June 30, 2013, cost of sales includes charges of $10 million primarily related to write-offs of inventories that were overstated in the fourth quarter of 2012 and first quarter of 2013 as a result of the negative impacts of the system implementation discussed above. The aforementioned adjustments were deemed to be immaterial to the company's consolidated financial statements for the current period, first quarter of 2013 and the fourth quarter of 2012.

Selling, general and administrative expenses were $160 million for the three months ended June 30, 2013 compared to $179 million for the three months ended June 30, 2012. Selling, general and administrative expenses were $328 million for the six months ended June 30, 2013 compared to $340 million for the six months ended June 30, 2012. For the three and six months ended June 30, 2013 lower expense reflects lower variable employee incentive and equity compensation, as well as benefits associated with the company's cost reduction initiative compared to the same periods of 2012.

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 and six months ended June 30, 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 June 30, 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 )       $   2       $     1     $    0        $   0     $     0      $ (1 )    $   2     $     1
Home, Health & Beauty                       (1 )           1             0         (2 )          0          (2 )      (3 )        1          (2 )
Industrial                                   1             0             1         (1 )          0          (1 )       0          0           0
Specialty Chemicals                          0             0             0          6            0           6         6          0           6

Total charges                          $    (1 )       $   3       $     2     $    3        $   0     $     3      $  2      $   3     $     5

Three months ended June 30, 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
Home, Health & Beauty                 $     4         $     0     $     4     $   0       $   0      $     0     $  4     $   0     $     4
Industrial                                  2               0           2         0           0            0        2         0           2

Total charges                         $     6         $     0     $     6     $   0       $   0      $     0     $  6     $   0     $     6


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                            MEADWESTVACO CORPORATION

                     and Consolidated Subsidiary Companies



Six months ended June 30, 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                         $   0       $   3       $     3     $    0       $    0     $     0     $  0     $   3     $     3
Home, Health & Beauty                       5           1             6          5            0           5       10         1          11
Industrial                                  2           1             3          5            0           5        7         1           8
Specialty Chemicals                         0           0             0          6            0           6        6         0           6
All other                                   0           4             4          0            0           0        0         4           4

Total charges                           $   7       $   9       $    16     $   16       $    0     $    16     $ 23     $   9     $    32

Six months ended June 30, 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
All                                          4           1            5         0           0            0        4         1           5
Industrial                                   6           0            6         0           0            0        6         0           6
All other                                    0           2            2         0           1            1        0         3           3

Total charges                          $    11       $   4       $   15     $   0       $   1      $     1     $ 11     $   5     $    16

Pension income, excluding settlements, attributable to continuing operations was $24 million and $18 million for the three months ended June 30, 2013 and 2012, respectively. Pension income, excluding settlements, attributable to continuing operations was $44 million and $34 million for the six months ended June 30, 2013 and 2012, respectively. Pension income is reported in Corporate and Other for segment reporting purposes.

On April 15, 2013, the company completed a program that allowed vested former employees who terminated service with the company on or before November 30, 2012 with the option to receive their pension benefit in a single lump sum which was funded from assets included in the U.S. qualified plans. Benefit payments pursuant to the lump sum program totaled approximately $415 million and resulted in a pre-tax settlement charge of $17 million.

As a result of the lump sum settlement, the assets and liabilities of the U.S. qualified pension plans were re-measured at May 1, 2013 and June 30, 2013 using a discount rate of 4.00% and 4.80%, respectively, resulting in a net increase to the plans' funded status for which the company recorded a gain of $38 million pre-tax ($23 million after-tax) in other comprehensive income for the three and six months ended June 30, 2013.


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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

Other income, net is comprised of the following for the three and six months ended June 30, 2013 and 2012:

                                              Three months ended          Six months ended
 In millions                                       June 30,                   June 30,
                                             2013            2012        2013           2012
 Interest income                            $     2         $     3     $     4         $   7
 Foreign currency exchange gains (losses)         0               0          (3 )           0
 Other 1                                          5               4          10            10

                                            $     7         $     7     $    11         $  17

1 For the six months ended June 30, 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 $39 million for the three months ended June 30, 2013 and was comprised of $30 million related to bond and bank debt, $1 million related to a long-term obligation non-recourse to MWV, $6 million related to borrowings on insurance policies and $2 million related to other items. Interest expense from continuing operations was $35 million for the three months ended June 30, 2012 and was comprised of $28 million related to bond and bank debt, $1 million related to a long-term obligation non-recourse to MWV, $5 million related to borrowings on insurance policies and $1 million related to other items. Interest expense from continuing operations was $79 million for the six months ended June 30, 2013 and was comprised of $61 million related to bond and bank debt, $1 million related to a long-term obligation non-recourse to MWV, $12 million related to borrowings on insurance policies and $5 million related to other items. Interest expense from continuing operations was $76 million for the six months ended June 30, 2012 and was comprised of $59 million related to bond and bank debt, $1 million related to a long-term obligation non-recourse to MWV, $11 million related to borrowings on insurance policies and $5 million related to other items.

For the three and six months ended June 30, 2013, the effective tax rates from continuing operations were approximately 10% and 7%, respectively. The differences in the effective tax rates in 2013 compared to statutory rates were primarily due to the effects of discrete items, as well as from the mix and levels between domestic and foreign earnings. For the three and six months ended June 30, 2013, the discrete items include tax benefits totaling $15 million related to favorable tax rulings in certain foreign jurisdictions. For the six months ended June 30, 2013, the discrete items also 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. For the three and six months ended June 30, 2012, the effective tax rates from continuing operations were approximately 32% and 34%, respectively. The differences in the effective tax rates in 2012 compared to statutory rates were primarily due to the mix and levels between domestic and foreign earnings, as well as from the effects of discrete items including foreign and domestic tax settlements.

The annual effective tax rate in 2013 from continuing operations, excluding discrete items, is expected to be about 32%.

In addition to the information discussed above, the following sections discuss the results of operations for each of the company's segments 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 the 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           Six months ended
           In millions                  June 30,                    June 30,
                                  2013            2012          2013         2012
           Sales                $     802       $     808     $   1,563     $ 1,555
           Segment profit (1)          52             100            92         163

(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 $802 million and $808 million for the three months ended June 30, 2013 and 2012, respectively. Sales declined in 2013 as weaker sales in beverage, tobacco, and food service packaging more than offset sales growth in food packaging and commercial print compared to 2012. Food packaging sales in 2013 were driven by gains with food brand owners in a range of applications including frozen food and club store packaging. In beverage, share gains with key customers in North America outpaced broader market trends driving lower beer and soft drink consumption compared to 2012. The beverage business also continued strong growth during 2013 in the Asia-Pacific and Latin America regions. In Europe, sales of beverage and tobacco were challenged due to continued economic weakness and unseasonably cold and wet weather compared to 2012. Lower food service sales were due to an on-going transition to a new product offering which negatively impacted pricing and product mix compared to 2012.

Profit for the Food & Beverage segment was $52 million and $100 million for the three months ended June 30, 2013 and 2012, respectively. Profit decline in 2013 was driven primarily by $20 million of higher costs from a major mill outage and $15 million from negative impacts from operational difficulties following a system implementation at the company's paperboard mill in Covington, Virginia. The decline in 2013 was also driven by $8 million from unfavorable pricing and product mix, $5 million from inflation, and $2 million from unfavorable productivity compared to 2012. These declines were partially offset by $2 million from higher volumes compared to 2012.

Sales for the Food & Beverage segment were $1.56 billion for the six months ended June 30, 2013 and 2012. In 2013, sales increased due to overall paperboard volume growth, including gains in higher value food packaging and commercial . . .

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