Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

OR

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

COMMISSION FILE NUMBER 1-31215

MeadWestvaco Corporation

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    YES   x    NO  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES  x    NO  ¨

At October 31, 2004, the latest practicable date, there were 202,650,171 shares of MeadWestvaco Common Stock outstanding.

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

INDEX TO FORM 10-Q

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

PART I. FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these financial statements.

1

Table of Contents

INDEX

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

CONSOLIDATED BALANCE SHEETS

(Unaudited)

The accompanying notes are an integral part of these financial statements.

2

Table of Contents

INDEX

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these financial statements.

3

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Unaudited]

1. Basis of Presentation

MeadWestvaco Corporation is a Delaware corporation formed in 2001 prior to the merger of The Mead Corporation and Westvaco Corporation, which was completed on January 29, 2002. Unless otherwise indicated or the context otherwise requires, the terms “MeadWestvaco” or the “company” refer to MeadWestvaco Corporation and its consolidated subsidiaries, and the terms “Mead” and “Westvaco” refer to The Mead Corporation and Westvaco Corporation, respectively, in each case together with their consolidated subsidiaries. Because for accounting purposes the merger was treated as an acquisition of Mead by Westvaco, the historical financial statements of Westvaco became the historical consolidated financial statements of MeadWestvaco, the registrant.

These interim consolidated financial statements have not been audited. However, in the opinion of management, all normal recurring adjustments necessary to present fairly the financial position and the results of operations for the interim periods presented have been made. These interim financial statements have been prepared on the basis of accounting principles and practices generally accepted in the United States of America (“GAAP”) applied consistently with those used in the preparation of the consolidated financial statements included in the company’s 2003 Annual Report and incorporated by reference in the company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Certain information and footnote disclosures normally included in annual financial statements presented in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the 2003 Annual Report and incorporated by reference in the company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Certain prior period amounts have been reclassified to conform to the current presentation.

Stock Options

In January 2003, the company adopted the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation. The company continues to apply the intrinsic value-based method to account for stock options.

If compensation cost for the company’s stock options had been determined based on the fair value method of SFAS No. 123, the company’s net income (loss) and income (loss) per share would have been reduced to the unaudited pro forma amounts as follows:

4

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Unaudited]

2. Restructuring

Quarter ended September 30, 2004

During the quarter ended September 30, 2004, MeadWestvaco recorded total pretax charges of $48 million for asset writedowns, employee separation costs and other restructuring related costs. Approximately $47 million and $1 million of the charges were recorded within cost of sales and selling, general and administrative expenses, respectively, and, of these, $34 million were non-cash. Although these charges related to individual segments, such amounts are reflected in Corporate and other for segment reporting purposes.

Packaging:

Total charges for asset writedowns, employee separation costs and other restructuring related costs for the previously announced action to close a packaging systems plant are expected to be approximately $9 million. As of the end of the third quarter, total charges incurred for this action were $8 million and the remaining charges of $1 million are expected to be incurred in the fourth quarter of 2004. During the third quarter, the company recorded facility closure costs of $4 million in connection with this action. The charges included employee separation costs of $2 million related to approximately 140 employees. These employees are expected to separate from the company by the end of the fourth quarter. The remaining $2 million was related to asset writedowns and other closure related costs.

Additionally, the company recorded charges of $10 million for asset writedowns, employee separation costs and other restructuring related costs for various consolidation activities in its facilities, primarily in Europe. These charges included $3 million for employee separation costs affecting approximately 40 employees in various facilities, $5 million in connection with the loss on sale of a consumer packaging plant in Europe, which is included in asset writedowns, and $2 million for other restructuring related costs. The affected employees are expected to separate from the company by the end of 2004.

Consumer and Office Products:

In connection with the company’s announcement to consolidate its Consumer and Office Products operations in North America and close two facilities, certain long-lived assets were determined to be impaired. Charges

5

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Unaudited]

of $16 million were recorded to write down the affected assets to their estimated fair value. The company also recorded employee separation costs of $8 million related to approximately 580 employees associated with the two facilities. The affected employees are expected to separate from the company by the end of the fourth quarter. Additional charges of $8 million were recorded for lease termination and other closure related costs. Total charges related to this consolidation activity are expected to be approximately $40 million, and the remaining charges are expected to be incurred in the fourth quarter of 2004.

All Other:

During the quarter, a corporate asset was written down to its estimated fair value, resulting in a charge of $2 million.

The following table and discussion presents additional detail of the charges by business segment:

Three quarters ended September 30, 2004

During the three quarters ended September 30, 2004, MeadWestvaco recorded total pretax restructuring charges of $64 million, of which $43 million were non-cash, for employee separation costs, asset writedowns and other restructuring related costs. Approximately $61 million and $3 million of the charges were recorded within cost of sales and selling, general and administrative expenses, respectively. For the full year, the company expects restructuring charges related to the company’s productivity program to be approximately $85 million. Cash related amounts are expected to be paid throughout 2004 and 2005. In addition, charges of $15 million related to the company’s productivity program were recorded in the fourth quarter of 2003. Although these charges relate to individual segments, such amounts are reflected in corporate and other for segment reporting purposes.

Packaging:

In addition to the $4 million of facility closure costs taken in the third quarter noted above related to the closing of a packaging systems plant, during the second quarter of 2004 the segment recorded charges of $4 million for various other restructuring activities.

During the first three quarters of 2004, the segment had various other restructuring activities in its manufacturing operations, primarily in Europe. These actions resulted in a pretax charge of $17 million during the three quarters ended September 30, 2004, of which $6 million related to employee benefit costs covering approximately 80 employees. As of September 30, 2004, most of the employees had separated from the company. The remaining employees will separate by the end of 2004. The remaining $11 million in charges is related to asset writedowns of $8 million, which includes $5 million in connection with the loss on sale of a consumer packaging plant in Europe, and other restructuring related costs of $3 million.

6

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Unaudited]

Consumer and Office Products:

In connection with the company’s announcement to consolidate its Consumer and Office Products operations in North America and close two facilities, certain long-lived assets were determined to be impaired. Charges of $16 million were recorded to write down the affected assets to their estimated fair value. The company also recorded employee separation costs of $8 million related to approximately 580 employees associated with the two facilities. The affected employees are expected to separate from the company by the end of the fourth quarter. Additional charges of $8 million were recorded for lease termination and other closure related costs. Total charges related to this consolidation activity are expected to be approximately $40 million, and the remaining charges are expected to be incurred in the fourth quarter of 2004.

Also recorded during the three quarters ended September 30, 2004, was about $1 million related to employee separation costs covering approximately 10 employees. All of the affected employees have separated from the company.

All Other:

In addition to the $2 million of charges taken in the third quarter noted above, during the first three quarters ended September 30, 2004, the company recorded charges of $4 million related primarily to employee separation costs covering approximately 200 employees. The affected employees will separate from the company by early 2005.

The following table and discussion presents additional detail of the charges by business segment:

Year ended December 31, 2003

For the quarter and three quarters ended September 30, 2003, MeadWestvaco recorded total pretax restructuring charges and other merger-related costs of $6 million and $53 million, respectively. Of these amounts, $4 million and $2 million were recorded within cost of sales and selling, general and administrative expenses, respectively, in the third quarter of 2003. In the first three quarters of 2003, $35 million and $18 million were recorded within cost of sales and selling, general and administrative expenses, respectively. Those charges include employee-related costs for Packaging, Paper, Consumer and Office Products, Corporate and all other of $17 million, $7 million, $1 million and $15 million, respectively. Also included in the charges were $13 million for asset writedowns and other costs for the Packaging and corporate and other segments. For the year ended December 31, 2003, MeadWestvaco recorded total pretax restructuring charges and other merger-related costs of $68 million. Approximately $47 million and $21 million were recorded within cost of sales and selling, general and administrative expenses, respectively, and, of these, $45 million were non-cash. Although these charges related to individual segments, such amounts are reflected in corporate and other for segment reporting purposes.

7

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Unaudited]

Packaging:

The company streamlined its packaging operations by shutting down three packaging and converting plants resulting in total charges of $28 million in 2003. Of the 525 employees affected, all of the employees had been separated from the company as of September 30, 2004.

Additionally, $2 million of asset writedowns and $7 million of employee separation costs covering about 370 employees were incurred during the year as a result of various other restructuring activities. As of September 30, 2004, approximately 340 of these affected employees had been separated. The remaining separations are now expected to occur by the end of the second quarter of 2005.

Paper:

As part of various restructuring activities, the Paper segment had charges of $12 million in 2003 for the separation benefits of approximately 400 employees. As of September 30, 2004, most of these employees had separated from the company. The remaining separations are expected to occur by the end of the second quarter of 2005.

Corporate and other:

During 2003 as part of various corporate restructuring activities, the company recorded charges that included $22 million of employee separation benefits. Most of these employees have separated from the company as of September 30, 2004, and the remainder are expected to separate by early 2005. Additionally, a corporate asset that was sold was written down to its estimated fair value, resulting in a charge of $2 million, and the company sold two previously written-down facilities, resulting in a gain of $5 million.

Summary of all Restructuring Actions

The activity in the accrued restructuring balances related to all of the plans described above was as follows for the first three quarters of 2004:

Productivity Initiative

Merger-Related Restructuring Activity

8

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Unaudited]

3. Inventories and Property, Plant and Equipment

Property, plant and equipment is net of accumulated depreciation of $4,541 million and $4,134 million at September 30, 2004 and December 31, 2003, respectively.

4. Goodwill and Other Intangible Assets

Unless otherwise deemed necessary by events or changes in circumstances, the company performs its annual impairment review of goodwill during the fourth quarter of each year under the guidance of SFAS No. 142, Goodwill and Other Intangible Assets.

The following table summarizes intangible assets subject to amortization included in other assets:

The company recorded amortization expense of $9 million and $7 million for the quarters ended September 30, 2004 and 2003, respectively. For the three quarters ended September 30, 2004 and 2003, amortization expense was $27 million and $21 million, respectively.

Based on the current value of intangible assets subject to amortization, the estimated amortization expense for 2004 and each of the succeeding five years is as follows: 2004 - $38 million; 2005 - $39 million; 2006 - $35 million; 2007 - $33 million; 2008 - $28 million; and 2009 - $28 million. As acquisitions and dispositions occur in the future, these amounts may vary.

In August of 2004, the company acquired Tilibra S.A. Produtos de Papelaria (“Tilibra”), a manufacturer of school, office and time management stationery products in Brazil. Goodwill and other intangible assets recorded as part of this acquisition were $24 million and $21 million, respectively. The purchase price allocation related to this action is preliminary and is expected to be finalized in the fourth quarter of 2004.

9

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Unaudited]

5. Employee Retirement and Postretirement Benefits

Retirement Plans - MeadWestvaco provides retirement benefits for substantially all U.S. and certain non-U.S. employees under several noncontributory plans including benefits under unfunded plans where the employees’ retirement benefits are over ERISA limits. Benefits are based on a final average pay formula for the salaried plans and a unit benefit formula for the bargained hourly plans. Prior service costs are amortized on a straight-line basis over the average remaining service period for active employees. Contributions are made to the funded plans in accordance with ERISA requirements.

Postretirement Plans - MeadWestvaco provides life insurance for substantially all MeadWestvaco retirees. MeadWestvaco also provides some MeadWestvaco retirees with medical benefits to certain retirees in the form of cost subsidies until Medicare eligibility is reached, while other MeadWestvaco retirees receive medical benefits up to a maximum lifetime amount. The company funds certain medical benefits on a current basis with retirees paying a portion of the costs. Certain retired employees of businesses acquired by the company are covered under other medical plans that differ from current plans in coverage, deductibles and retiree contributions. Effective January 1, 2004, MeadWestvaco modified certain postretirement healthcare benefits to be provided to future retirees. The impact of this change reduced the postretirement benefit obligation by about $68 million, which is being amortized over the actuarially expected remaining life of the eligible employees, which is approximately 24 years. This change, combined with other demographic and assumption changes in the plan, is expected to result in $23 million of postretirement expense in 2004, similar to the $25 million recorded in 2003.

In December of 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The Act expands Medicare primarily by adding a prescription drug benefit for Medicare-eligible individuals. Pursuant to the guidance provided in FASB Staff Position No.106-2, the company is not required to begin recording the impact of this legislation in the third quarter because the company believes that the impact of the legislation is not significant to the plans. In accordance with the guidance, the effects of the Act are not reflected in the postretirement benefit obligation and net periodic benefit cost detail but will be incorporated in the next measurement of plan assets and obligations at year end.

The components of net periodic benefits cost (income) for each of the periods presented are as follows:

Quarter Ended September 30

10

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Unaudited]

Three Quarters Ended September 30

Employer Contributions

The company does not anticipate any required contributions to its U.S.-qualified pension plans in the foreseeable future as the plans are overfunded and not subject to any minimum regulatory funding requirements. Accordingly, no contributions have been made to these plans for the three quarters ended September 30 of 2004 and 2003. Contributions for the foreign plans are insignificant for the company.

The company expects to pay about $25 million in benefits to participants of the U.S.-nonqualified pension and postretirement plans in 2004. During the three quarters ended September 30, 2004, about $19 million was paid. The company presently anticipates paying the additional $6 million during the remainder of 2004.

6. Income (Loss) Per Common Share

Basic income (loss) per share for all of the periods presented has been calculated using the weighted average shares outstanding. For the quarter and three quarters ended September 30, 2004, 5.2 million options and 12.2 million options, respectively, were excluded from the calculation of weighted average shares, as the exercise price per share was greater than the average market value, resulting in an antidilutive effect on diluted earnings per share. Similarly, for the quarter ended September 30, 2003, 7.1 million options were excluded from the calculation of weighted average shares. The dilutive effects of the net incremental shares issuable upon the exercise of stock options were not included in the year to date loss for the three quarters ended September 30, 2003 as their effects would have been antidilutive.

7. Segment Information

The company’s principal business segments are (1) Packaging, (2) Paper, (3) Consumer and Office Products, and (4) Specialty Chemicals.

The Packaging segment produces bleached paperboard, coated natural kraft paperboard, linerboard and saturating kraft, and packaging for consumer products in the media, beverage and dairy, cosmetics, tobacco, pharmaceutical, and healthcare markets. In addition, the Packaging segment designs and produces multipack cartons and packaging systems primarily for the beverage take-home market. This segment’s products are manufactured at four domestic mills and two mills located in Brazil. Paper, board and plastic are converted into packaging products at plants located in North America, Brazil, Japan and Europe. These products are sold primarily in North America, with additional markets located in Latin America, Europe, Asia and the Pacific Rim.

11

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Unaudited]

The Paper segment is engaged in the manufacturing, marketing and distribution of coated, carbonless and specialty papers. This segment’s products are manufactured at seven domestic mills. The results for the company’s equity investment in an oriented-strand board facility are included in 2003 results and the first quarter of 2004 results. This investment was sold on March 26, 2004.

The Consumer and Office Products segment manufactures, markets and distributes school, office, envelope and time-management products to retailers and commercial distributors. This segment’s operations are conducted predominantly in North America and Brazil.

The Specialty Chemicals segment manufactures, markets and distributes products at four domestic locations. Major product groups are: activated carbon products; printing ink resins and lignin-based surfactants; and tall oil fatty acid, rosin and derivative products.

Corporate and other includes the company’s forestry operations and corporate support staff services, and related assets and liabilities, including merger-related goodwill. The results include income and expense items not directly associated with segment operations, such as restructuring charges, certain legal charges and settlements, net pension income, interest expense and other activities.

The principal business segments are measured on operating profits before restructuring charges, interest expense, income taxes, extraordinary items and cumulative effect of accounting changes. Sales between the segments are recorded primarily at market prices. Consolidated total profit (loss) in the following table reflects income (loss) before cumulative effect of accounting change.

12

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Unaudited]

8. Comprehensive Income (Loss)

Comprehensive income (loss) reflects changes in equity that result from transactions and economic events from non-owner sources. Comprehensive income (loss) for the third quarter ended September 30, 2004 and 2003 was $117 million and $(10) million, respectively. Comprehensive income (loss) for the three quarters ended September 30, 2004 and 2003 was $136 million and $(15) million, respectively. The difference between net income (loss) and comprehensive income (loss) for the third quarter and three quarters ended September 30, 2004 and 2003 primarily relates to the impact of foreign currency translations.

13

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Unaudited]

9. Environmental and Legal Matters

The company has been notified by the U.S. Environmental Protection Agency (the “EPA”) or by various state or local governments that it may be liable under federal environmental laws or under applicable state or local laws with respect to the cleanup of hazardous substances at sites previously operated or used by Mead or Westvaco. The company is currently named as a potentially responsible party (“PRP”) or has received third-party requests for contribution under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and similar state or local laws with respect to numerous sites. There are other sites which may contain contamination or which may be potential Superfund sites, but for which MeadWestvaco has not received any notice or claim. The potential liability for all these sites will depend upon several factors, including the extent of contamination, the method of remediation, insurance coverage and contribution by other PRPs. The company regularly evaluates its potential liability at these various sites. At September 30, 2004, MeadWestvaco has recorded liabilities of approximately $32 million for estimated potential cleanup costs based upon its close monitoring of ongoing activities and its past experience with these matters. The company believes that it is reasonably possible that costs associated with these sites may exceed amounts of recorded liabilities by an amount that could range from an insignificant amount to as much as $30 million. This estimate is less certain than the estimate upon which the environmental liabilities were based. After consulting with legal counsel and after considering established liabilities, it is our judgment that the resolution of pending litigation and proceedings is not expected to have a material adverse effect on the company’s consolidated financial condition or liquidity. In any given period or periods, however, it is possible such proceedings or matters could have a material effect on the results of operations.

As with numerous other large industrial companies, the company has been named a defendant in asbestos-related personal injury litigation. Typically, these suits also name many other corporate defendants. All of the claims against the company resolved to date have been concluded before trial, either through dismissal or through settlement with payments to the plaintiff that are not material to the company. To date, the costs resulting from the litigation, including settlement costs, have not been significant. As of September 30, 2004, there were approximately 700 lawsuits. Management believes that the company has substantial indemnification protection and insurance coverage, subject to applicable deductibles and policy limits, with respect to asbestos claims. The company has valid defenses to these claims and intends to continue to defend them vigorously. Additionally, based on its historical experience in asbestos cases and an analysis of the current cases, the company believes that it has adequate amounts accrued for potential settlements and judgments in asbestos-related litigation. At September 30, 2004, the company has litigation liabilities of approximately $25 million, a significant portion of which relates to asbestos. Should the volume of litigation grow substantially, it is possible that the company could incur significant costs resolving these cases. After consulting with legal counsel and after considering established liabilities, it is our judgment that the resolution of pending litigation and proceedings is not expected to have a material adverse effect on the company’s consolidated financial condition or liquidity. In any given period or periods, however, it is possible such proceedings or matters could have a material effect on the results of operations.

MeadWestvaco is involved in various other litigation and administrative proceedings arising in the normal course of business. Although the ultimate outcome of such matters cannot be predicted with certainty, management does not believe that the currently expected outcome of any matter, lawsuit or claim that is pending or threatened, or all of them combined, will have a material adverse effect on the company’s consolidated financial condition or liquidity. In any given period or periods, however, it is possible such proceedings or matters could have a material effect on the results of operations.

14

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Unaudited]

10. Gains on Sales of Forestland

The company recorded pretax gains on the sales of forestland of $71 million and $30 million in the quarters ended September 30, 2004 and 2003, respectively. For the three quarters ended September 30, 2004 and 2003, the company recorded pretax gains on the sales of forestland of $161 million and $70 million, respectively. These amounts are included in other income and in Corporate and other for segment reporting.

11. Shareholders’ Equity

Pursuant to the 1987 Restricted Stock Plan, as of September 30, 2004, the company issued 245,500 shares of restricted common stock to certain key executives. These shares have been accounted for under the guidance of APB No. 25, Accounting for Stock Issued to Employees. The total compensation expense is being recorded ratably over the shares’ three-year vesting period. Under this plan, the owners of the stock are entitled to voting rights and to receive dividends, but will forfeit the stock if the individual holder separates from the company within the three-year vesting period.

12. Investees

At December 31, 2003, the company’s investment in the Northwood Panelboard Company was deemed to be a significant subsidiary under Rule 3-09 under Regulation S-X, and its financial statements and related notes were included under Item 8 of the company’s Annual Report on Form 10-K for the year ended December 31, 2003. During the quarter ended March 31, 2004, the company sold its investment in the Northwood Panelboard Company for proceeds of approximately $30 million. The company’s share in the investee earnings, combined with the effect of the sale, resulted in $1 million of earnings before taxes. The Northwood Panelboard assets were written up to fair value at the time of the MeadWestvaco merger. Selected financial information for Northwood Panelboard Company through the first quarter of 2004 is included below.

13. Acquisition Activity

In April of 2004, MeadWestvaco acquired Aries Packaging, a machinery systems company in Troyes, France, which will support the company’s dairy packaging systems business in Europe and also represent a platform for growth in other markets. Goodwill and other intangible assets recorded as part of this acquisition were $11 million and $5 million, respectively. This purchase price allocation is preliminary and will be finalized in the fourth quarter of 2004.

In August of 2004, MeadWestvaco acquired Tilibra, a manufacturer of school, office and time management stationery products in Bauru, São Paulo state, Brazil, which will help the company extend its consumer and office products franchise in Latin America’s largest market, while creating an ideal platform for expansion elsewhere in the region. Goodwill and other intangible assets recorded as part of this acquisition were $24 million and $21 million, respectively. This purchase price allocation is preliminary and is expected to be finalized in the fourth quarter of 2004.

15

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Unaudited]

Additionally, the company acquired another small business, included in the Consumer and Office Products segment, in September of 2004. Other intangible assets recorded as part of this acquisition were $7 million.

These acquisitions will not have a significant effect on the financial condition, liquidity or results of operations of the company in 2004.

16

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

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

Overview

For the third quarter ended September 30, 2004, MeadWestvaco Corporation (“MeadWestvaco” or the “company”) reported net income of $105 million, or $0.52 per share. The net income for the quarter included pretax gains of $71 million (after-tax, $44 million), or $0.22 per share, on the sale of approximately 89,000 acres of nonstrategic forestland. Also included in net income were charges for restructuring of $48 million (after-tax, $32 million), or $0.16 per share. Charges and gains for these items are included in Corporate and other for segment reporting purposes. Comparable amounts for prior periods are noted later in this discussion. For the three quarters ended September 30, 2004, the company reported net income of $151 million, or $0.75 per share. The earnings for the three quarters ended September 30, 2004 included pretax gains of $161 million (after-tax, $100 million), or $0.50 per share, on the sale of approximately 133,000 acres of nonstrategic forestland. Also included in net income were charges for restructuring of $64 million (after-tax, $43 million), or $0.22 per share.

The company benefited from improved performance in many of its businesses driven by stronger market demand, which led to higher shipments and higher price realization during the quarter. Additionally, the improvement in earnings was driven in large part by productivity initiatives, including more efficient mill operating performance, continued growth in the paper and packaging converting businesses, and actions taken to reduce operating costs and improve product mix. The Paper business operated more efficiently than in the prior year and experienced both increased demand and market share resulting in higher shipment levels, from both production and inventory, for coated paper. These factors more than offset the effects of higher costs in the quarter for wood, energy, freight and petroleum-based raw materials. The Packaging segment operating profit improved in the quarter compared to the third quarter of 2003. This improvement was driven by stronger shipments, higher selling prices and better product mix for most grades of paperboard, as well as more efficient mill performance. The company’s converting operations also achieved stronger results, especially in the company’s consumer packaging businesses, which had strong growth year-over-year in media and entertainment markets and personal care markets. In the packaging systems business, results benefited from improved productivity, the favorable impact of foreign currency rates, and the contribution of the segment’s recent packaging acquisition in France. In the Consumer and Office Products segment, results were positively impacted by school and office and time-management products acquisitions during the current and prior year, which partially offset the decline in both sales and earnings due to the continuing challenge of global competitive pressures from lower-priced imports and higher costs for paper and distribution. In the Specialty Chemical segment, operating profit was unchanged from the prior year, as sales growth was offset during the quarter by higher costs. Although the overall company results improved in the quarter, results were offset in part by higher energy, wood and freight costs compared to the third quarter last year. These costs for each segment are noted in discussions about those operations.

The company continues to make progress on its two-year productivity initiative that it commenced in the fourth quarter of 2003, focusing on working capital reduction and earnings improvement. One of the initiatives is to reduce working capital as a percent of sales, generating the equivalent of $250 million of cash flow from inventory, accounts receivable and accounts payable by the end of 2005. The company also expects to improve pretax earnings over the two-year period by at least $250 million through cost reductions, product mix improvements and volume growth. During the quarter, the company made positive strides toward attaining both goals of this initiative by lowering net operating working capital as a percentage of sales by 2.6%, freeing up the equivalent of approximately $190 million in working capital compared to the third quarter of 2003, and improving pretax earnings by $40 million compared to the third quarter of 2003. Since the beginning of 2004, the company has generated approximately $150 million in

17

Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

pretax earnings improvement through the consolidation of various operations, cost reduction, and improved volume and mix in many of its businesses. Cash flow from operations increased $421 million over last year, allowing the company to reduce debt and fund its operations and dividend payments internally. This improvement was a result of both increased earnings and disciplined working capital management including inventories, accounts receivable and accounts payable. These earnings productivity improvements are net of cost inflation and before interest and income taxes and exclude the effects of acquisitions and divestitures. Any price increases or decreases in mill-based paper and paperboard businesses are excluded from the productivity measure. In connection with these initiatives, the company also incurred approximately $64 million in restructuring charges in the first three quarters of 2004.

Some of the productivity actions taken in the third quarter and first three quarters included the announced closing of two Consumer and Office Products manufacturing facilities, the consolidation of the forestry operations, the announced closing of a packaging systems plant, the integration of the former Day Runner organization, the continued focus on reducing inventories and the implementation of a change in the company’s accounts payable policy. These and other actions resulted in the elimination of approximately 700 positions across the company in the first three quarters of 2004.

RESULTS OF OPERATIONS

Presented below are results for the third quarter and three quarters ended September 30, 2004 and 2003 as reported in accordance with accounting principles generally accepted in the United States (“GAAP”). All per share amounts are presented on an after-tax basis.