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

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Form 10-Q for MEADWESTVACO CORP


6-Nov-2013

Quarterly Report


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

OVERVIEW

For the three months ended September 30, 2013, MeadWestvaco Corporation ("MeadWestvaco", "MWV" or the "company") reported increased sales and earnings from continuing operations primarily due to growth in targeted packaging and specialty chemicals markets, increased land sales and contributions from acquisitions. For the nine months ended September 30, 2013, the company reported increased sales, but lower year-over-year earnings from continuing operations as growth in certain packaging and specialty chemicals markets were more than offset by the impact during the second quarter of 2013 from a planned major mill outage and difficulties encountered following a system implementation at the 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 $28 million of savings achieved during the nine months ended September 30, 2013.

Cash provided by operating activities from continuing operations improved to $260 million for the nine months ended September 30, 2013 compared to $127 million for the nine months ended September 30, 2012, primarily reflecting higher earnings and lower working capital levels, as well as improved cash flow associated with the company's expanded operations in Brazil. Cash used in investing activities from continuing operations declined to $315 million for the nine months ended September 30, 2013 compared to $466 million for the nine months ended September 30, 2012 and primarily reflects lower capital spend related to the company's expansion in Brazil, which was substantially completed in 2012.

Sales were $1.43 billion for the three months ended September 30, 2013 compared to $1.40 billion for the three months ended September 30, 2012. Sales were $4.21 billion for the nine months ended September 30, 2013 compared to $4.13 billion for the nine months ended September 30, 2012. The company generated growth in 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 and corrugated business in India, both of which were acquired in the fourth quarter of 2012, as well as from improved pricing for industrial packaging solutions in Brazil and higher land sales. These benefits were partially offset by lower volumes of tobacco and home and garden packaging and unfavorable foreign currency exchange during 2013.

For the three months ended September 30, 2013, income from continuing operations attributable to the company was $80 million, or $0.44 per share, compared to $67 million, or $0.38 per share, for the three months ended September 30, 2012. The results from continuing operations attributable to the company for the three months ended September 30, 2013 include after-tax restructuring charges of $3 million, or $0.02 per share, after-tax pension settlement and other charges of $3 million, or $0.02 per share, and discrete income tax items of $2 million, or $0.01 per share. The results from continuing operations attributable to the company for the three months ended September 30, 2012 include after-tax restructuring charges of $2 million, or $0.01 per share.

For the nine months ended September 30, 2013, income from continuing operations attributable to the company was $158 million, or $0.88 per share, compared to $195 million, or $1.10 per share, for the nine months ended September 30, 2012. The results from continuing operations attributable to the company for the nine months ended September 30, 2013 include after-tax restructuring charges of $24 million, or $0.14 per share, after-tax pension settlement and other charges of $14 million, or $0.07 per share, and discrete income tax benefits of $13 million, or $0.07 per share. The results from continuing operations attributable to the company for the nine months ended September 30, 2012 include after-tax restructuring charges of $13 million, or $0.07 per share.


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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

On October 28, 2013, the company announced the signing of a definitive agreement with Plum Creek for the sale of all of the company's U.S. forestlands and certain related assets, as well as the formation of a land development partnership comprised of MWV's diversified properties in the Charleston, South Carolina region. The total consideration of the transaction, including Plum Creek's initial investment in the partnership, is approximately $1.1 billion.

Under the terms of the agreement, Plum Creek will acquire approximately 501,000 acres and certain related assets for approximately $934 million, of which approximately $74 million will be paid in cash and $860 million will be in the form of a 10-year installment note (with the option to extend for 10 years) that the company intends to securitize or otherwise finance after closing. Also included in the transaction are the wind, coal and mineral rights relative to the forestlands, other than certain oil and natural gas rights in West Virginia that have been retained by MWV.

In addition to the U.S. forestlands acquisition, Plum Creek will invest approximately $152 million in cash in a newly formed land development partnership comprised of MWV's land holdings of approximately 109,000 acres in the Charleston, South Carolina region. The partnership will be comprised of two ventures. One venture will consist of MWV's active developments on approximately 22,000 acres and the other venture will consist of MWV's long-term development projects on approximately 87,000 acres. MWV will consolidate the partnership for financial reporting purposes.

The company estimates that net proceeds from this transaction will be approximately $950 million, after the securitization or other financing of the installment note and payment of both fees and current income taxes, and considering the expected recovery of alternative minimum taxes of about $100 million over the next several years. Approximately $210 million will be used to repay a term loan and approximately $75 million will be retained in the land development partnership to fund future development. Following the close of the transaction, the company will determine the form of returning the remaining proceeds of approximately $665 million to its shareholders.

Also as part of the transaction, the company and Plum Creek will execute 25-year fiber supply agreements covering forestlands in Virginia and West Virginia to support the company's paperboard mill located in Covington, Virginia. The fiber will be sold at market pricing.

The transaction is expected to close by the end of this year subject to the satisfaction of customary closing conditions. With the exceptions of the land development partnership and retained oil and natural gas rights in West Virginia, the net assets and results of operations associated with the company's forestry and rural land sales businesses will be presented as discontinued operations in the company's consolidated financial statements in the period this transaction closes. Due to the tax-efficient structure of the consideration received for the forestlands, the accounting gain associated with such assets will be recognized upon the collection of the installment note from Plum Creek. The cash consideration for the sale of the wind, coal and mineral rights will result in an accounting gain in the period this transaction closes.

OUTLOOK

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

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

Pricing improvement in industrial packaging solutions;

Productivity gains from improved operating leverage and benefits from the Covington biomass boiler;

Continued earnings benefits from the company's new paperboard machine in Brazil; and,

Savings from execution against the company's overhead reduction initiative.

Continued challenging global macroeconomic conditions, raw materials inflation (resin and fiber) and depreciation of the real against the U.S. dollar are expected to partially offset these benefits.


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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

Savings associated with the previously announced enterprise-wide overhead cost reduction plan were $28 million for the nine months ended September 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.

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 continues to assess strategic options to accomplish an exit through the sale of this business. In Brazil, the company is repurposing its folding carton operation to manufacture higher value dispensing solutions, which is expected to be largely completed during the first half of 2014.

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 nine months ended September 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           Nine Months Ended
In millions, except per share amounts                    September 30,               September 30,
                                                      2013           2012          2013          2012
Net sales                                           $   1,434       $ 1,395      $   4,212      $ 4,131

Cost of sales                                           1,112         1,095          3,412        3,233
Selling, general and administrative expenses              160           160            488          500
Interest expense                                           39            38            118          114
Other income, net                                         (12 )          (2 )          (23 )        (19 )

Income from continuing operations before income
taxes                                                     135           104            217          303
Income tax provision                                       55            37             61          105

Income from continuing operations                          80            67            156          198
(Loss) income from discontinued operations, net
of income taxes                                             0           (16 )            4           (7 )

Net income                                                 80            51            160          191
Less: Net (loss) income attributable to
non-controlling interests, net of income taxes              0             0             (2 )          3

Net income attributable to the company              $      80       $    51      $     162      $   188


Income from continuing operations attributable to
the company                                         $      80       $    67      $     158      $   195


Net income per share attributable to the company
- basic:
Income from continuing operations                   $    0.45       $  0.38      $    0.89      $  1.12
(Loss) income from discontinued operations               0.00         (0.09 )         0.02        (0.04 )

Net income attributable to the company              $    0.45       $  0.29      $    0.91      $  1.08


Net income per share attributable to the company
- diluted:
Income from continuing operations                   $    0.44       $  0.38      $    0.88      $  1.10
(Loss) income from discontinued operations               0.00         (0.10 )         0.02        (0.04 )

Net income attributable to the company              $    0.44       $  0.28      $    0.90      $  1.06


Shares used to compute net income per share
attributable to the company:
Basic                                                   178.0         174.2          177.3        173.2
Diluted                                                 180.8         177.5          180.1        176.6

Sales were $1.43 billion for the three months ended September 30, 2013 compared to $1.40 billion for the three months ended September 30, 2012. Sales were $4.21 billion for the nine months ended September 30, 2013 compared to $4.13 billion for the nine months ended September 30, 2012. The company generated growth in 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 and corrugated business in India, both of which were acquired in the fourth quarter of 2012, as well as from improved pricing for industrial packaging solutions in Brazil and higher land sales. These benefits were partially offset by lower volumes of tobacco and home and garden packaging 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 $1.11 billion for the three months ended September 30, 2013 compared to $1.10 billion for the three months ended September 30, 2012. Cost of sales was $3.41 billion for the nine months ended September 30, 2013 compared to $3.23 billion for the nine months ended September 30, 2012. For the three and nine months ended September 30, 2013, input cost inflation for energy, raw materials, and freight were $12 million and $28 million higher, respectively, compared to the same periods of 2012. In addition, for the nine months ended September 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 had an unfavorable impact on cost of sales compared to 2012.

Selling, general and administrative expenses were $160 million for both of the three months ended September 30, 2013 and 2012. Selling, general and administrative expenses were $488 million for the nine months ended September 30, 2013 compared to $500 million for the nine months ended September 30, 2012. For the three and nine months ended September 30, 2013 lower variable employee incentive and equity compensation, as well as benefits associated with the company's cost reduction initiative had a favorable impact on selling, general and administrative expenses 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 nine months ended September 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 September 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      $     3      $   0       $   0      $     0     $  1      $   2     $     3
Home, Health & Beauty                         1             0            1          1           0            1        2          0           2
Industrial                                   (1 )           0           (1 )        0           0            0       (1 )        0          (1 )
All other                                     0             1            1          0           0            0        0          1           1

Total charges                           $     1         $   3      $     4      $   1       $   0      $     1     $  2      $   3     $     5


Three months ended September 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                         $     0         $   2      $     2      $   0       $   0      $     0     $  0      $   2     $     2
All other                                     0             1            1          0           0            0        0          1           1

Total charges                           $     0         $   3      $     3      $   0       $   0      $     0     $  0      $   3     $     3


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                            MEADWESTVACO CORPORATION

                     and Consolidated Subsidiary Companies



Nine months ended September 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       $     5      $     6     $    0       $   0     $     0     $  1     $   5     $     6
Home, Health & Beauty                        6             1            7          6           0           6       12         1          13
Industrial                                   1             1            2          5           0           5        6         1           7
Specialty Chemicals                          0             0            0          6           0           6        6         0           6
All other                                    0             5            5          0           0           0        0         5           5

Total charges                          $     8       $    12      $    20     $   17       $   0     $    17     $ 25     $  12     $    37


Nine months ended September 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       $     3      $     4     $    0       $   0     $     0     $  1     $   3     $     4
Home, Health & Beauty                        4             1            5          0           0           0        4         1           5
Industrial                                   6             0            6          0           0           0        6         0           6
All other                                    0             3            3          0           1           1        0         4           4

Total charges                          $    11       $     7      $    18     $    0       $   1     $     1     $ 11     $   8     $    19

Pension income, excluding settlements, attributable to continuing operations was $30 million for the three months ended September 30, 2013 compared to $18 million for the three months ended September 30, 2012. Pension income, excluding settlements, attributable to continuing operations was $74 million for the nine months ended September 30, 2013 compared to $52 million for the nine months ended September 30, 2012. 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. As a result of the lump sum program, the company incurred pre-tax settlement charges of $1 million and $18 million for the three and nine months ended September 30, 2013, respectively. In addition, the assets and liabilities of the U.S. qualified pension plans were re-measured at September 30, 2013 using a discount rate of 4.90%, resulting in a net increase to the plans' funded status for which the company recorded a pre-tax gain in other comprehensive income of $18 million ($12 million after-tax) and $56 million ($35 million after-tax) for the three and nine months ended September 30, 2013, respectively.


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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

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

                                        Three months ended            Nine months ended
  In millions                             September 30,                 September 30,
                                       2013             2012        2013            2012
  Interest income                    $       4         $    2      $     8         $     9
  Foreign currency exchange losses           0             (3 )         (3 )            (3 )
  Transition services income                 0              4            1               8
  Insurance settlements                      5              0            8               0
  Other1                                     3             (1 )          9               5

                                     $      12         $    2      $    23         $    19

1 For the nine months ended September 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 September 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 $38 million for the three months ended September 30, 2012 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 $1 million related to other items. Interest expense from continuing operations was $118 million for the nine months ended September 30, 2013 and was comprised of $91 million related to bond and bank debt, $2 million related to a long-term obligation non-recourse to MWV, $18 million related to borrowings on insurance policies and $7 million related to other items. Interest expense from continuing operations was $114 million for the nine months ended September 30, 2012 and was comprised of $89 million related to bond and bank debt, $2 million related to a long-term obligation non-recourse to MWV, $17 million related to borrowings on insurance policies and $6 million related to other items.

For the three and nine months ended September 30, 2013, the effective tax rates from continuing operations were approximately 41% and 28%, 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 nine months ended September 30, 2013, the discrete items include tax benefits totaling $15 million related to favorable tax rulings in certain foreign jurisdictions and 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 nine months ended September 30, 2012, the effective tax rates from continuing operations were approximately 36% and 35%, respectively. The differences in the effective tax rates in 2012 compared to statutory rates were primarily due to the mix and levels between forecasts of domestic and foreign earnings, as well as from the effects of discrete items.

The annual effective tax rate in 2013 from continuing operations, excluding discrete items, is expected to be about 35%.

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 12 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           Nine months ended
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