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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, 2014

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 001-31215

 

 

MeadWestvaco Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   501 South 5th Street
(State of incorporation)   Richmond, Virginia 23219-0501
  Telephone 804-444-1000
31-1797999   (Address and telephone number of
(I.R.S. Employer Identification No.)   registrant’s principal executive offices)

 

 

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

At October 24, 2014, there were 166,716,788 shares of MeadWestvaco common stock outstanding.

 

 

 


Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

INDEX TO FORM 10-Q

 

     Page  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements (unaudited):

  

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013

     1   

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September  30, 2014 and 2013

     2   

Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

     3   

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

     4   

Notes to Consolidated Financial Statements

     5   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     44   

Item 4. Controls and Procedures

     44   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     45   

Item 1A. Risk Factors

     45   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     45   

Item 5. Other Information

     45   

Item 6. Exhibits

     46   

SIGNATURES

     47   


Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

PART I. FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

In millions, except per share amounts    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Net sales

   $ 1,468      $ 1,378      $ 4,257      $ 4,079   

Cost of sales

     1,135        1,095        3,359        3,363   

Selling, general and administrative expenses

     144        157        465        484   

Interest expense

     54        39        160        117   

Other income, net

     (13     (13     (27     (24
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     148        100        300        139   

Income tax provision

     41        39        89        30   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     107        61        211        109   

Income from discontinued operations, net of income taxes

     1        19        1        51   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     108        80        212        160   

Less: Net income (loss) attributable to non-controlling interests, net of income taxes

     2        0        2        (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to the company

   $ 106      $ 80      $ 210      $ 162   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations attributable to the company

   $ 105      $ 61      $ 209      $ 111   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to the company – basic:

        

Income from continuing operations

   $ 0.62      $ 0.34      $ 1.23      $ 0.62   

Income from discontinued operations

     0.01        0.11        0.00        0.29   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to the company

   $ 0.63      $ 0.45      $ 1.23      $ 0.91   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to the company – diluted:

        

Income from continuing operations

   $ 0.60      $ 0.34      $ 1.22      $ 0.62   

Income from discontinued operations

     0.01        0.10        0.00        0.28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to the company

   $ 0.61      $ 0.44      $ 1.22      $ 0.90   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute net income per share attributable to the company:

        

Basic

     168.8        178.0        169.2        177.3   

Diluted

     171.6        180.8        172.0        180.1   

Cash dividends per share 1

   $ 0.25      $ 0.25      $ 1.75      $ 0.75   

 

1  Cash dividends per share for the nine months ended September 30, 2014 include a special dividend of $1.00 per share paid on March 3, 2014.

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

 

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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

In millions    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Net income

   $ 108      $ 80      $ 212      $ 160   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax:

        

Foreign currency translation

     (123     26        (90     (64

Adjustments related to pension and other benefit plans

     22        13        24        58   

Net unrealized gain (loss) on derivative instruments

     4        (2     5        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax

     (97     37        (61     (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     11        117        151        156   

Less: Comprehensive income (loss) attributable to non-controlling interests

     2        0        2        (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to the company

   $ 9      $ 117      $ 149      $ 158   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

In millions, except share and per share amounts    September 30,
2014
    December 31,
2013
 

ASSETS

    

Cash and cash equivalents

   $ 400      $ 1,057   

Accounts receivable, net

     784        625   

Inventories

     723        686   

Other current assets

     121        108   
  

 

 

   

 

 

 

Current assets

     2,028        2,476   

Property, plant, equipment and forestlands, net

     3,490        3,647   

Prepaid pension asset

     1,567        1,475   

Goodwill

     704        716   

Restricted assets held by special purpose entities

     1,258        1,258   

Other assets

     657        713   
  

 

 

   

 

 

 
   $ 9,704      $ 10,285   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Accounts payable

   $ 549      $ 563   

Accrued expenses

     428        534   

Notes payable and current maturities of long-term debt

     87        79   
  

 

 

   

 

 

 

Current liabilities

     1,064        1,176   

Long-term debt

     1,799        1,816   

Non-recourse liabilities held by special purpose entities

     1,112        1,112   

Deferred income taxes

     1,370        1,348   

Other long-term obligations

     688        734   

Commitments and contingencies

     —          —     

Equity:

    

Shareholders’ equity:

    

Common stock, $0.01 par value

    

Shares authorized: 600,000,000

    

Shares issued and outstanding: 2014 – 167,682,939 (2013 – 174,443,439)

     2        2   

Additional paid-in capital

     2,896        3,172   

Retained earnings

     855        950   

Accumulated other comprehensive loss

     (241     (180
  

 

 

   

 

 

 

Total shareholders’ equity

     3,512        3,944   

Non-controlling interests

     159        155   
  

 

 

   

 

 

 

Total equity

     3,671        4,099   
  

 

 

   

 

 

 
   $ 9,704      $ 10,285   
  

 

 

   

 

 

 

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

 

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and Consolidated Subsidiary Companies

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

In millions    Nine Months Ended
September 30,
 
     2014     2013  

Cash flows from operating activities:

    

Net income

   $ 212      $ 160   

Discontinued operations

     (1     (51

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation, depletion and amortization

     279        289   

Deferred income taxes

     24        7   

Loss (gain) on sales of assets, net

     15        (2

Pension income (excluding settlements, curtailments, and termination benefits)

     (91     (74

Impairment of long-lived assets

     14        13   

Appreciation in cash surrender value insurance policies

     (22     (28

Changes in working capital, excluding the effects of acquisitions and dispositions

     (230     (164

Payment of alternative minimum taxes – forestlands sale

     (98     0   

Other, net

     (19     14   
  

 

 

   

 

 

 

Net cash provided by operating activities from continuing operations

     83        164   

Discontinued operations

     1        96   
  

 

 

   

 

 

 

Net cash provided by operating activities

     84        260   

Cash flows from investing activities:

    

Capital expenditures

     (214     (337

Treasury grant proceeds

     39        0   

Payments for acquired businesses, net of cash acquired

     0        (2

Proceeds from dispositions of assets

     41        42   

Contributions to joint ventures

     (5     (9

Other

     3        (7

Discontinued operations

     0        (2
  

 

 

   

 

 

 

Net cash used in investing activities

     (136     (315

Cash flows from financing activities:

    

Repayment of long-term debt

     (96     (56

Proceeds from the issuance of long-term debt

     77        8   

Changes in notes payable and other short-term borrowings, net

     10        24   

Changes in bank overdrafts

     2        (5

Dividends paid (including special dividend of $175 million paid in March 2014)

     (302     (133

Stock repurchases

     (345     0   

Proceeds from exercises of stock options

     45        46   

Purchase of non-controlling interest

     0        (13

Other

     8        0   
  

 

 

   

 

 

 

Net cash used in financing activities

     (601     (129

Effect of exchange rate changes on cash

     (4     (17
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (657     (201

Cash and cash equivalents:

    

At beginning of period

     1,057        663   
  

 

 

   

 

 

 

At end of period

   $ 400      $ 462   
  

 

 

   

 

 

 

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

 

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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of presentation

MeadWestvaco Corporation (“MeadWestvaco”, “MWV”, or the “company”) is a global packaging company providing innovative solutions to the world’s most admired brands in the healthcare, beauty and personal care, food, beverage, home and garden, tobacco, and agricultural industries. The company also produces specialty chemicals for the automotive, energy, and infrastructure industries and maximizes the value of its development land holdings in the Charleston, South Carolina region. MeadWestvaco is a Delaware corporation, incorporated in 2001 and the successor to Westvaco Corporation and The Mead Corporation. MWV’s reporting segments are (i) Food & Beverage, (ii) Home, Health & Beauty, (iii) Industrial, (iv) Specialty Chemicals, and (v) Community Development and Land Management.

These interim consolidated financial statements have not been audited. However, in the opinion of management, all normal recurring adjustments necessary to state fairly the financial position and the results of operations for the interim periods presented have been made. These interim consolidated financial statements have been prepared on the basis of accounting principles and practices generally accepted in the U.S. (“GAAP”) applied consistently with those used in the preparation of the consolidated financial statements included in the company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Certain information and footnote disclosures normally included in annual financial statements presented in accordance with GAAP have been condensed or omitted. Certain prior year amounts have been recast to conform to the current period’s presentation. 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 consolidated financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

2. New accounting guidance

In January 2014, the company adopted new guidance regarding foreign currency matters. The new guidance clarifies existing guidance regarding circumstances when cumulative translation adjustments should be released into earnings. The impact of adoption did not have an effect on the company’s consolidated financial statements.

In January 2014, the company adopted new accounting guidance regarding the presentation of an unrecognized tax benefit when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists. The new guidance requires an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward, unless certain exceptions are met. The impact of adoption did not have an effect on the company’s consolidated financial statements.

In April 2014, the Financial Accounting Standards Board (“FASB”) issued new guidance regarding the requirements for reporting discontinued operations. The new guidance requires that a disposal of a component of an entity or a group of components of an entity be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The new guidance is effective on a prospective basis for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The company has elected to early adopt the new provisions for disposals or classifications as held for sale in 2014. The impact of adoption did not have a material effect on the company’s consolidated financial statements.

In May 2014, the FASB issued new guidance regarding revenue recognition requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including

 

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and Consolidated Subsidiary Companies

 

interim periods within that reporting period. The new guidance is to be applied retrospectively to each reporting period presented or retrospectively with the cumulative effect of initially applying the new guidance at the date of initial application. The impact of adoption is not expected to have a material effect on the company’s consolidated financial statements.

In June 2014, the FASB issued new guidance regarding accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The new guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The new guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the new guidance either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The impact of adoption is not expected to have a material effect on the company’s consolidated financial statements.

In August 2014, the FASB issued new guidance regarding management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. The new guidance is effective for annual reporting periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The impact of adoption will not have a material effect on the company’s consolidated financial statements.

During the nine months ended September 30, 2014, there were no other new accounting standards issued by the FASB that would have an impact on the company’s consolidated financial statements.

 

3. Fair value measurements

The following information is presented for assets and liabilities that are recorded in the consolidated balance sheets at fair value at September 30, 2014 and December 31, 2013, measured on a recurring and non-recurring basis. There were no significant transfers of assets and liabilities that are recorded at fair value between Level 1 and Level 2 during the three and nine months ended September 30, 2014 and 2013.

 

In millions    September 30,
2014
    Level 1 (1)      Level 2 (2)     Level 3 (3)  

Recurring fair value measurements:

         

Derivatives-assets (4)

   $ 9      $ 0       $ 9      $ 0   

Derivatives-liabilities (4)

     (4     0         (4     0   

Cash equivalents

     306        306         0        0   

Non-recurring fair value measurements:

         

Long-lived assets held for sale (5)

   $ 1      $ 0       $ 0      $ 1   

 

In millions    December 31,
2013
    Level 1 (1)      Level 2 (2)     Level 3 (3)  

Recurring fair value measurements:

         

Derivatives-assets (4)

   $ 2      $ 0       $ 2      $ 0   

Derivatives-liabilities (4)

     (3     0         (3     0   

Cash equivalents

     943        943         0        0   

 

(1)  Quoted prices in active markets for identical assets.
(2)  Quoted prices for similar assets and liabilities in active markets.
(3)  Significant unobservable inputs.

 

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(4)  Derivative instruments consist of hedge contracts on natural gas and foreign currencies. Natural gas hedge instruments are valued using models with market inputs such as New York Mercantile Exchange (“NYMEX”) natural gas futures contract pricings. Foreign currency forward contracts are valued using models with market inputs such as prices of instruments of a similar nature.
(5)  The fair value of long-lived assets is determined using a combination of a market approach based on market participant inputs and an income approach based on estimates of future cash flows.

Long-lived assets held for sale with a carrying value of $5 million were written down to their estimated fair value of $1 million, resulting in pre-tax impairment charges attributable to continuing operations of $1 million and $4 million for the three and nine months ended September 30, 2014, respectively. Additionally, long-lived assets held and used with a carrying value of $10 million were written off for the nine months ended September 30, 2014 due to the discontinuance of certain projects. These pre-tax charges are included in selling, general and administrative expenses.

At September 30, 2014, the book value of debt was $1.8 billion and the fair value was estimated to be $2.2 billion. The difference between book value and fair value is derived from the difference between the period-end market interest rate and the stated fixed rate for the company’s long-term debt. The company estimates the fair values of these financial instruments using Level 2 inputs which are based upon quoted market prices for the same or similar issues or on the current interest rates available to the company for debt of similar terms and maturities.

 

4. Restructuring charges

In January 2014, the company initiated a margin improvement program, which is expected to be largely completed by the end of 2014. Key elements of the program include implementing a leaner organization design, aligning the corporate infrastructure to the revenue base, reassessing participation within certain business lines and markets and prioritizing capital on the highest return projects. During 2013, the company initiated certain restructuring actions to reduce its overhead across its global operations. Restructuring charges incurred during the three and nine months ended September 30, 2014 and 2013 were pursuant to these actions. Cumulative charges included in the results from continuing operations through September 30, 2014 since the inception of the 2014 program were $43 million. Although these charges related to individual segments, such amounts are included in Corporate and Other for segment reporting purposes.

Restructuring charges attributable to individual segments and by nature of cost, as well as cost of sales (“COS”), selling, general and administrative expenses (“SG&A”) and Other income, net classification in the consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013 are presented below.

Three months ended September 30, 2014

 

In millions    Employee-related costs      Asset write-downs and other costs      Total  
   COS     SG&A      Total      COS     SG&A      Other
income,
net
     Total      COS     SG&A      Other
income,
net
     Total  

Food & Beverage

   $ (1   $ 1       $ 0       $ 0      $ 0       $ 0       $ 0       $ (1   $ 1       $ 0       $ 0   

Home, Health & Beauty

     1        0         1         (1     0         1         0         0        0         1         1   

Industrial

     1        0         1         0        0         0         0         1        0         0         1   

Other

     0        1         1         0        2         0         2         0        3         0         3   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total charges

   $ 1      $ 2       $ 3       $ (1   $ 2       $ 1       $ 2       $ 0      $ 4       $ 1       $ 5   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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and Consolidated Subsidiary Companies

 

Three months ended September 30, 2013

 

In millions    Employee-related costs     Asset write-downs
and other costs
     Total  
   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   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Nine months ended September 30, 2014

 

In millions    Employee-related costs      Asset write-downs and other costs      Total  
   COS     SG&A      Total      COS      SG&A      Other
income,
net
     Total      COS      SG&A      Other
income,
net
     Total  

Food & Beverage

   $ (1   $ 5       $ 4       $ 1       $ 0       $ 1       $ 2       $ 0       $ 5       $ 1       $ 6   

Home, Health & Beauty

     2        5         7         1         0         14         15         3         5         14         22   

Industrial

     2        2         4         0         0         0         0         2         2         0         4   

All other

     0        16         16         0         14         0         14         0         30         0         30   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $ 3      $ 28       $ 31       $ 2       $ 14       $ 15       $ 31       $ 5       $ 42       $ 15       $ 62   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nine months ended September 30, 2013

 

In millions    Employee-related costs      Asset write-downs
and other costs
     Total  
   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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Activity in the restructuring reserve balances was as follows for the nine months ended September 30, 2014:

 

In millions    Employee related  
     2014 program     Other actions     Total  

Balance at December 31, 2013

   $ 0      $ 31      $ 31   

Charges

     27        1        28   

Payments

     (22     (8     (30
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 5      $ 24      $ 29   
  

 

 

   

 

 

   

 

 

 

 

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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

 

5. Inventories and property, plant and equipment

Inventories consist of:

 

In millions    September 30,
2014
     December 31,
2013
 

Raw materials

   $ 195       $ 168   

Production materials, stores and supplies

     115         104   

Finished and in-process goods

     413         414   
  

 

 

    

 

 

 
   $ 723       $ 686   
  

 

 

    

 

 

 

Property, plant and equipment is net of accumulated depreciation of:

 

In millions    September 30,
2014
     December 31,
2013
 

Accumulated depreciation

   $ 4,070       $ 3,981   

In July 2014, the company received grant proceeds of $39 million as a result of its application for a U.S. Treasury Section 1603 Grant for Specified Energy property associated with the construction of a biomass boiler and a steam turbine generator at the company’s Covington, VA paperboard mill. These proceeds were recorded as a reduction to the book value of the biomass boiler and turbine generator and will be amortized ratably over the assets’ estimated useful lives.

 

6. Intangible assets

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

 

In millions    September 30, 2014      December 31, 2013  
     Gross carrying
amount
     Accumulated
amortization
     Gross carrying
amount
     Accumulated
amortization
 

Trademarks and trade names

   $ 28       $ 22       $ 28       $ 20   

Customer contracts and lists

     258         122         264         112   

Patents

     54         43         57         43   

Other – primarily licensing rights

     14         10         14         9   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 354       $ 197       $ 363       $ 184   
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in other assets are indefinite-lived intangible assets with carrying values of:

 

In millions    September 30,
2014
     December 31,
2013
 

Trademarks and trade names

   $ 92       $ 95   

 

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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

 

7. Financial instruments

The company uses various derivative financial instruments as part of an overall strategy to manage exposure to market risks associated with natural gas price fluctuations, foreign currency exchange rates and interest rates. The company does not hold or issue derivative financial instruments for trading purposes. The risk of loss to the company in the event of non-performance by any counterparty under derivative financial instrument agreements is not significant. Although the derivative financial instruments expose the company to market risk, fluctuations in the value of the derivatives are generally offset in earnings by the recognition of the hedged item in earnings or the earnings impact from the underlying exposures.

All derivative instruments are recorded in the consolidated balance sheets as assets or liabilities, measured at estimated fair values. Fair value estimates are based on relevant market information, including market rates and prices. For a derivative instrument designated as a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in accumulated other comprehensive loss and is recognized in earnings when the hedged item affects earnings. The ineffective portions of cash flow hedges are recognized, as incurred, in earnings. Changes in the fair value of a derivative instrument not designated as a qualifying hedge are recognized in earnings.

The pre-tax effect of derivative instruments, which excludes the offsetting impact of the hedged item and underlying exposures, in the consolidated statements of operations and accumulated other comprehensive loss for the three months ended September 30, 2014 and 2013 is presented below:

 

     Cash flow hedges      Fair value hedges      Derivatives not
designated as hedges
 
In millions    Foreign currency
hedges
    Natural gas hedges      Interest rate swaps      Foreign currency
derivatives
 
     2014      2013     2014     2013      2014      2013      2014     2013  

Gain (loss) recognized in other comprehensive income (effective portion)

   $ 9       $ (3   $ (2   $ 0       $ 0       $ 0       $ 0      $ 0   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Gain (loss) reclassified to earnings from accumulated comprehensive loss (effective portion)

   $ 1       $ 0      $ (1   $ 0       $ 0       $ 0       $ 0      $ 0   

(Loss) gain recognized in earnings 1

     0         0        0        0         0         0         (1     0   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Gain (loss) recognized in earnings2

   $ 1       $ 0      $ (1   $ 0       $ 0       $ 0       $ (1   $ 0   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

1  Amounts represent the ineffective portion or items excluded from effectiveness testing for all derivatives in cash flow hedging relationships or represent realized and unrealized gains (losses) associated with interest rate swaps or those derivatives not designated as hedges.
2  Gains and losses recognized in earnings are generally offset by the recognition of the hedged item in earnings or the earnings impact from the underlying exposures.

 

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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

 

The pre-tax effect of derivative instruments, which excludes the offsetting impact of the hedged item and underlying exposures, in the consolidated statements of operations and accumulated other comprehensive loss for the nine months ended September 30, 2014 and 2013 is presented below:

 

     Cash flow hedges     Fair value hedges      Derivatives not
designated as hedges
 
In millions    Foreign currency
hedges
    Natural gas hedges     Interest rate swaps      Foreign currency
derivatives
 
     2014     2013     2014     2013     2014      2013      2014     2013  

Gain (loss) recognized in other comprehensive income (effective portion)

   $ 9      $ (2   $ (1   $ 0      $ 0       $ 0       $ 0      $ 0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

(Loss) gain reclassified to earnings from accumulated comprehensive loss (effective portion)

   $ (1   $ (1   $ 0      $ (3   $ 0       $ 0       $ 0      $ 0   

Gain (loss) recognized in earnings 1

     0        0        0        0        5         0         (3     2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total (loss) gain recognized in earnings2

   $ (1   $ (1   $ 0      $ (3   $ 5       $ 0       $ (3   $ 2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

1  Amounts represent the ineffective portion or items excluded from effectiveness testing for all derivatives in cash flow hedging relationships or represent realized and unrealized gains (losses) associated with interest rate swaps or those derivatives not designated as hedges.
2  Gains and losses recognized in earnings are generally offset by the recognition of the hedged item in earnings or the earnings impact from the underlying exposures.

The fair values and the effect of derivative instruments on the consolidated balance sheets as of September 30, 2014 and December 31, 2013 are presented below:

 

     September 30, 2014
In millions    Gross amount of
recognized assets
(liabilities)
    Gross amount
offset in the
consolidated
balance sheet
     Net amount of assets
(liabilities) presented
in the consolidated
balance sheet
   

Classification

Assets

         

Derivatives designated as hedges:

         

Foreign currency derivatives

   $ 6      $ 0       $ 6      Other current assets

Foreign currency derivatives

     1        0         1      Other assets

Derivatives not designated as hedges:

         

Foreign currency derivatives

     2        0         2      Other current assets
  

 

 

   

 

 

    

 

 

   

Total assets

   $ 9      $ 0       $ 9     
  

 

 

   

 

 

    

 

 

   

Liabilities

         

Derivatives designated as hedges:

         

Foreign currency derivatives

   $ 0      $ 1       $ 1      Accounts payable

Natural gas

     (1     0         (1   Accounts payable

Derivatives not designated as hedges:

         

Foreign currency derivatives

     (5     1         (4   Accounts payable
  

 

 

   

 

 

    

 

 

   

Total liabilities

   $ (6   $ 2       $ (4  
  

 

 

   

 

 

    

 

 

   

Total derivatives

        $ 5     
       

 

 

   

 

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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

 

     December 31, 2013
In millions    Gross amount of
recognized assets
(liabilities)
    Gross amount
offset in the
consolidated
balance sheet
     Net amount of assets
(liabilities) presented
in the consolidated
balance sheet
   

Classification

Assets

         

Derivatives not designated as hedges:

         

Foreign currency derivatives

     2        0         2      Other current assets
  

 

 

   

 

 

    

 

 

   

Total assets

   $ 2      $ 0       $ 2     
  

 

 

   

 

 

    

 

 

   

Liabilities

         

Derivatives designated as hedges:

         

Foreign currency hedges

     (2     0         (2   Accounts payable

Derivatives not designated as hedges:

         

Foreign currency derivatives

     (1     0         (1   Accounts payable
  

 

 

   

 

 

    

 

 

   

Total liabilities

   $ (3   $ 0       $ (3  
  

 

 

   

 

 

    

 

 

   

Total derivatives

        $ (1  
       

 

 

   

Natural gas

In order to better predict and control the future cost of natural gas consumed at the company’s mills and plants, the company engages in financial hedging of future gas purchase prices. Gas usage is relatively predictable month-by-month. The company hedges primarily with financial instruments that are priced based on NYMEX natural gas futures contracts. The company does not hedge basis (the effect of varying delivery points or locations) or transportation (the cost to transport the gas from the delivery point to a company location) under these transactions. The notional values of these contracts in Million British Thermal Units (“MMBTU’s”) at September 30, 2014 and December 31, 2013 are presented below.

 

In MMBTU’s         
September 30, 2014      December 31, 2013  
  10         9   

The effective portion of unrealized gains and losses on contracts maturing in future months are recorded in accumulated other comprehensive loss; the ineffective portion is charged or credited to earnings. Once a contract matures, the company has a realized gain or loss on the contract up to the quantities of natural gas in the forward hedge agreements for that particular period, which are charged or credited to earnings when the related hedged item affects earnings. The ineffective portion of these cash flow hedges, as well as realized hedge gains and losses, are recorded within cost of sales in the consolidated statements of operations. The estimated pre-tax loss to be recognized in earnings during the next twelve months is $1 million. As of September 30, 2014, the maximum remaining term of existing hedges was two years. For the three and nine months ended September 30, 2014 and 2013, no gains or losses were recognized in earnings due to the probability that forecasted transactions will not occur.

Foreign currency risk

The company uses foreign currency forward contracts to manage some of the foreign currency exchange risks associated with short-term foreign inter-company loans, foreign currency sales and purchases of its international operations, and foreign sales of its U.S. operations.

The foreign currency forward contracts related to certain inter-company loans are short term in duration and are not designated as hedging instruments. Gains and losses related to these forward contracts are included in other income, net in the consolidated statements of operations. The notional amounts of these foreign currency forward contracts at September 30, 2014 and December 31, 2013 are presented below.

 

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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

 

In millions    September 30,
2014
     December 31,
2013
 

Notional amount of foreign currency forward contracts – not designated as hedges

   $ 136       $ 147   

Other foreign currency forward contracts, which are for terms of approximately one year, are designated as cash flow hedges. These hedges are used to reduce the foreign currency exposure related to certain foreign and inter-company sales. For these hedges, realized hedge gains and losses are recorded in net sales in the consolidated statements of operations concurrent with the recognition of the hedged sales. The ineffective portion of these hedges is also recorded in net sales. The estimated pre-tax gain to be recognized in earnings during the next twelve months is $7 million. As of September 30, 2014, the maximum remaining term of existing hedges was approximately one year. For the three and nine months ended September 30, 2014 and 2013, no amounts of gains or losses were recognized in earnings due to the probability that forecasted transactions will not occur. The notional amounts of these foreign currency forward contracts at September 30, 2014 and December 31, 2013 are presented below.

 

In millions    September 30,
2014
     December 31,
2013
 

Notional amount of foreign currency forward contracts – designated as hedges

   $ 188       $ 76   

Interest rate risk

The company has developed a targeted mix of fixed- and variable-rate debt as part of an overall strategy to maintain an appropriate level of exposure to interest-rate fluctuations. To efficiently manage this mix, the company utilizes interest-rate swap agreements. For the three months ended September 30, 2014, there were no interest-rate swap agreements outstanding. For the nine months ended September 30, 2014, the company terminated its interest-rate swaps on its fixed-rate debt and realized $4 million in net cash proceeds. For the nine months ended September 30, 2014, the interest-rate swaps were an effective hedge and, therefore, required no charge to earnings due to ineffectiveness. For the three and nine months ended September 30, 2013, there were no interest-rate swap agreements outstanding. For these fair value hedges, changes in fair value of both the hedge instruments and hedged items are recorded in interest expense in the consolidated statements of operations.

 

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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

 

8. Employee retirement and postretirement benefits

The components of net periodic benefit (income) cost for the company’s retirement and postretirement plans for the three months ended September 30, 2014 and 2013 are presented below.

 

     Three months ended September 30,  
In millions    Pension benefits     Postretirement benefits  
     2014     2013     2014     2013  

Service cost - benefits earned during the period

   $ 10      $ 10      $ 0      $ 1   

Interest cost on projected benefit obligation

     31        29        1        1   

Expected return on plan assets

     (73     (72     0        0   

Amortization of prior service cost (income)

     1        1        (1     0   

Amortization of net actuarial loss

     1        2        0        0   

Termination benefits

     0        0        0        0   

Settlement loss

     0        1        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit (income) cost

   $ (30   $ (29   $ 0      $ 2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit (income) cost – continuing operations

   $ (30   $ (29   $ 0      $ 2   
  

 

 

   

 

 

   

 

 

   

 

 

 

The components of net periodic benefit (income) cost for the company’s retirement and postretirement plans for the nine months ended September 30, 2014 and 2013 are presented below.

 

     Nine months ended September 30,  
In millions    Pension benefits     Postretirement benefits  
     2014     2013     2014     2013  

Service cost - benefits earned during the period

   $ 31      $ 31      $ 2      $ 3   

Interest cost on projected benefit obligation

     92        91        4        4   

Expected return on plan assets

     (219     (216     0        0   

Amortization of prior service cost (income)

     2        3        (2     (1

Amortization of net actuarial loss

     3        17        0        0   

Termination benefits

     1        0        0        0   

Curtailment loss 1

     2        0        0        0   

Settlement loss

     0        18        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit (income) cost

   $ (88   $ (56   $ 4      $ 6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit (income) cost – continuing operations

   $ (88   $ (56   $ 4      $ 6   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

1 For the nine months ended September 30, 2014, the company recorded within restructuring charges a curtailment loss of approximately $2 million.

Settlement recognition

In 2013, the company completed a program that allowed vested former employees who terminated service with the company on or before November 30, 2012 the option to receive their pension benefit in a single lump sum which was funded from assets included in the U.S. qualified plans. A pre-tax settlement charge of $18 million was recorded for the nine months ended September 30, 2013.

Plan amendment recognition

Pursuant to the company’s announcement of changes to certain U.S. retiree benefits, plan liabilities were re-measured at July 1, 2014 and September 1, 2014 using a discount rate of 3.95% and 3.70%, respectively, resulting in a net decrease to the plan’s funded status for which the company recorded an after-tax gain of $21 million in other comprehensive loss for the three and nine months ended September 30, 2014.

 

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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

 

Employer contributions

The company does not anticipate any required contributions to its U.S. qualified retirement plans in the foreseeable future as the plans do not require any minimum regulatory funding contribution. However, the company expects to contribute $2 million to the funded non-U.S. plans in 2014.

 

9. Income per common share

Basic net income per share for all the periods presented has been calculated using the weighted average shares outstanding. In computing diluted net income per share, incremental shares issuable upon the assumed exercise of stock options and other share-based compensation awards are included in the weighted average shares outstanding, if dilutive. Presented below is the number of potentially dilutive shares not included in the calculation of diluted net income per share because to do so would have been anti-dilutive for the periods presented.

 

In millions    Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2014      2013      2014      2013  

Anti-dilutive shares

     0.2         0.4         0.6         0.4   

 

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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

 

10. Equity

Changes in equity for the three months ended September 30, 2014 and 2013 are as follows:

 

Three months ended September 30, 2014

   Shareholders’ equity              
In millions    Outstanding
shares
    Common
stock
     Additional
paid-in
capital
    Retained
earnings
    Accumulated
other
comprehensive
loss
    Non-controlling
interests
    Total
equity
 

Balance at June 30, 2014

     168.4      $ 2       $ 2,925      $ 750      $ (144   $ 157      $ 3,690   

Net income

     0        0         0        106        0        2        108   

Other comprehensive income

     0        0         0        0        (97     0        (97

Dividends declared

     0        0         0        (1     0        0        (1

Non-controlling interests distribution

     0        0         0        0        0        (4     (4

Non-controlling interest contribution

     0        0         0        0        0        4        4   

Stock repurchases

     (1.1     0         (44     0        0        0        (44

Share-based employee compensation

     0.1        0         5        0        0        0        5   

Exercises of stock options

     0.3        0         10        0        0        0        10   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

     167.7      $ 2       $ 2,896      $ 855      $ (241   $ 159      $ 3,671   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the three months ended September 30, 2014, the company purchased and retired 1.1 million of its common shares for $44 million.

 

Three months ended September 30, 2013

   Shareholders’ equity              
In millions    Outstanding
shares
     Common
stock
     Additional
paid-in
capital
     Retained
earnings
     Accumulated
other
comprehensive
loss
    Non-controlling
interests
    Total
equity
 

Balance at June 30, 2013

     177.4       $ 2       $ 3,275       $ 237       $ (225   $ 9      $ 3,298   

Net income

     0         0         0         80         0        0        80   

Other comprehensive loss

     0         0         0         0         37        0        37   

Dividends declared

     0         0         0         0         0        0        0   

Non-controlling interests distribution

     0         0         0         0         0        (5     (5

Sale of non-controlling interest

     0         0         0         0         0        (2     (2

Share-based employee compensation

     0         0         5         0         0        0        5   

Exercises of stock options

     0.4         0         11         0         0        0        11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

     177.8       $ 2       $ 3,291       $ 317       $ (188   $ 2      $ 3,424   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

 

Changes in equity for the nine months ended September 30, 2014 and 2013 are as follows:

 

Nine months ended September 30, 2014

   Shareholders’ equity              
In millions    Outstanding
shares
    Common
stock
     Additional
paid-in
capital
    Retained
earnings
    Accumulated
other
comprehensive
loss
    Non-controlling
interests
    Total
equity
 

Balance at December 31, 2013

     174.4      $ 2       $ 3,172      $ 950      $ (180   $ 155      $ 4,099   

Net income

     0        0         0        210        0        2        212   

Other comprehensive income

     0        0         0        0        (61     0        (61

Dividends declared

     0        0         0        (305     0        0        (305

Non-controlling interests distribution

     0        0         0        0        0        (7     (7

Non-controlling interest contribution

     0        0         0        0        0        9        9   

Stock repurchases

     (9.0     0         (351     0        0        0        (351

Share-based employee compensation

     0.3        0         21        0        0        0        21   

Exercises of stock options

     2.0        0         54        0        0        0        54   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

     167.7      $ 2       $ 2,896      $ 855      $ (241   $ 159      $ 3,671   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the nine months ended September 30, 2014, the company repurchased and retired 9.0 million of its common shares for $351 million through a combination of an accelerated share repurchase program and open market repurchases. In October 2014, the company purchased and retired an additional 1.0 million of its common shares for $43 million which completed the 2014 repurchase program. These purchases were made pursuant to a $394 million repurchase program approved by the Board of Directors on January 27, 2014 and funded by proceeds from the sale of its U.S. forestlands and related assets to Plum Creek Timber Company, Inc. (“Plum Creek”) in the fourth quarter of 2013.

 

Nine months ended September 30, 2013

   Shareholders’ equity              
In millions    Outstanding
shares
     Common
stock
     Additional
paid-in
capital
    Retained
earnings
    Accumulated
other
comprehensive
loss
    Non-controlling
interests
    Total
equity
 

Balance at December 31, 2012

     175.4       $ 2       $ 3,234      $ 288      $ (184   $ 18      $ 3,358   

Net income

     0         0         0        162        0        (2     160   

Other comprehensive loss

     0         0         0        0        (4     0        (4

Dividends declared

     0         0         0        (133     0        0        (133

Non-controlling interests distribution

     0         0         0        0        0        (7     (7

Purchase of non-controlling interest

     0         0         (8     0        0        (5     (13

Sale of non-controlling interest

     0         0         0        0        0        (2     (2

Share-based employee compensation

     0.2         0         11        0        0        0        11   

Exercises of stock options

     2.2         0         54        0        0        0        54   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

     177.8       $ 2       $ 3,291      $ 317      $ (188   $ 2      $ 3,424   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Changes in accumulated other comprehensive loss by component for the three months ended September 30, 2014 and 2013 are as follows:

 

Three months ended September 30, 2014

                         
In millions    Foreign currency
translation1
    Pension and other
benefit plans1
    Derivative
instruments1
     Total  

Balance as of June 30, 2014

   $ (27   $ (117   $ 0       $ (144

Other comprehensive (loss) income before reclassifications

     (123     21        4         (98

Amounts reclassified from accumulated other comprehensive loss

     0        1        0         1   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive (loss) income, net

     (123     22        4         (97
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance as of September 30, 2014

   $ (150   $ (95   $ 4       $ (241
  

 

 

   

 

 

   

 

 

    

 

 

 

 

Three months ended September 30, 2013

                        
In millions    Foreign currency
translation1
    Pension and other
benefit plans1
    Derivative
instruments1
    Total  

Balance as of June 30, 2013

   $ (65   $ (160   $ 0      $ (225

Other comprehensive income (loss) before reclassifications

     26        12        (2     36   

Amounts reclassified from accumulated other comprehensive loss

     0        1        0        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net

     26        13        (2     37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2013

   $ (39   $ (147   $ (2   $ (188
  

 

 

   

 

 

   

 

 

   

 

 

 

 

1  All amounts are net of tax.

Changes in accumulated other comprehensive loss by component for the nine months ended September 30, 2014 and 2013 are as follows:

 

Nine months ended September 30, 2014

                        
In millions    Foreign currency
translation1
    Pension and other
benefit plans1
    Derivative
instruments1
    Total  

Balance as of December 31, 2013

   $ (60   $ (119   $ (1   $ (180

Other comprehensive (loss) income before reclassifications

     (90     21        4        (65

Amounts reclassified from accumulated other comprehensive loss

     0        3        1        4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net

     (90     24        5        (61
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2014

   $ (150   $ (95   $ 4      $ (241
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Nine months ended September 30, 2013

                        
In millions    Foreign currency
translation1
    Pension and other
benefit plans1
    Derivative
instruments1
    Total  

Balance as of December 31, 2012

   $ 25      $ (205   $ (4   $ (184

Other comprehensive (loss) income before reclassifications

     (64     35        (1     (30

Amounts reclassified from accumulated other comprehensive loss

     0        23        3        26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net

     (64     58        2        (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2013

   $ (39   $ (147   $ (2   $ (188
  

 

 

   

 

 

   

 

 

   

 

 

 

 

1  All amounts are net of tax.

 

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Reclassifications out of accumulated other comprehensive loss for the three months ended September 30, 2014 and 2013 are as follows:

 

Details about accumulated other
comprehensive income components

   Amounts reclassified from
accumulated other comprehensive loss
   

Affected line item in the consolidated
statements of operations

     Three months ended      
In millions    September 30,
2014
    September 30,
2013
     

Derivative instruments

      

Foreign currency cash flow hedges

   $ 1      $ 0      Net sales

Natural gas cash flow hedges

     (1     0      Cost of sales
  

 

 

   

 

 

   

Total before tax

     0        0     

Tax benefit

     0        0     
  

 

 

   

 

 

   

Total, net of tax

   $ 0      $ 0     
  

 

 

   

 

 

   

Amortization of pension and other benefit plan items

      

Prior service cost

     0        (1   Cost of sales and selling, general and administrative expenses

Net actuarial loss

     (1     (3   Cost of sales and selling, general and administrative expenses
  

 

 

   

 

 

   

Total before tax

     (1     (4  

Tax benefit

     0        3     
  

 

 

   

 

 

   

Total, net of tax

   $ (1   $ (1  
  

 

 

   

 

 

   

Total reclassifications for the period, net of tax

   $ (1   $ (1  
  

 

 

   

 

 

   

 

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and Consolidated Subsidiary Companies

 

Reclassifications out of accumulated other comprehensive loss for the nine months ended September 30, 2014 and 2013 are as follows:

 

Details about accumulated other
comprehensive income components

   Amounts reclassified from
accumulated other comprehensive loss
   

Affected line item in the consolidated
statements of operations

     Nine months ended      
In millions    September 30,
2014
    September 30,
2013
     

Derivative instruments

      

Foreign currency cash flow hedges

   $ (1   $ (1   Net sales

Natural gas cash flow hedges

     0        (3   Cost of sales
  

 

 

   

 

 

   

Total before tax

     (1     (4  

Tax benefit

     0        1     
  

 

 

   

 

 

   

Total, net of tax

   $ (1   $ (3  
  

 

 

   

 

 

   

Amortization of pension and other benefit plan items

      

Prior service cost

   $ (1   $ (2   Cost of sales and selling, general and administrative expenses

Net actuarial loss

     (3     (35   Cost of sales and selling, general and administrative expenses
  

 

 

   

 

 

   

Total before tax

     (4     (37  

Tax benefit

     1        14     
  

 

 

   

 

 

   

Total, net of tax

   $ (3   $ (23  
  

 

 

   

 

 

   

Total reclassifications for the period, net of tax

   $ (4   $ (26  
  

 

 

   

 

 

   

 

11. Segment information

MWV’s segments are (i) Food & Beverage, (ii) Home, Health & Beauty (iii) Industrial, (iv) Specialty Chemicals, and (v) Community Development and Land Management.

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 world’s leading tobacco brand owners. The segment’s materials are manufactured in the U.S. and converted into packaging solutions at plants located in North America, Europe and Asia.

 

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and Consolidated Subsidiary Companies

 

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

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

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

The Community Development and Land Management segment is responsible for maximizing the value of 108,000 development acres in the Charleston, South Carolina region through a land development partnership with Plum Creek. The segment develops real estate including (i) selling development property, (ii) entitling and improving high-value tracts, and (iii) master planning of select landholdings. The earnings of this segment exclude the non-controlling interest attributable to Plum Creek.

Corporate and Other includes expenses associated with corporate support staff services, as well as income and expense items not directly associated with ongoing segment operations, such as restructuring charges, pension income and curtailment gains and losses, interest expense and income, non-controlling interest income and losses, certain legal settlements, including $27 million of income recognized in the nine months ended September 30, 2014 related to a favorable insurance settlement regarding litigation claims, gains and losses on certain asset sales and other items.

 

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Segment results for the three and nine months ended September 30, 2014 and 2013 are as follows:

 

Three months ended September 30, 2014

   Sales      Segment  
In millions    External      Inter-segment      Total      profit (loss)  

Food & Beverage

   $ 848       $ 6       $ 854       $ 107   

Home, Health & Beauty

     179         4         183         12   

Industrial

     150         0         150         26   

Specialty Chemicals

     283         0         283         69   

Community Development and Land Management

     8         0         8         (1
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,468       $ 10       $ 1,478         213   
  

 

 

    

 

 

    

 

 

    

Corporate and Other

              (67

Non-controlling interests

              2   
           

 

 

 

Consolidated total

            $ 148   
           

 

 

 

 

Three months ended September 30, 2013

   Sales      Segment  
In millions    External      Inter-segment      Total      profit (loss)  

Food & Beverage

   $ 795       $ 1       $ 796       $ 86   

Home, Health & Beauty

     185         0         185         6   

Industrial

     132         0         132         16   

Specialty Chemicals

     260         0         260         66   

Community Development and Land Management

     6         0         6         (3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,378       $ 1       $ 1,379         171   
  

 

 

    

 

 

    

 

 

    

Corporate and Other

              (71

Non-controlling interests

              0   
           

 

 

 

Consolidated total

            $ 100   
           

 

 

 

 

Nine months ended September 30, 2014

   Sales      Segment  
In millions    External      Inter-segment      Total      profit (loss)  

Food & Beverage

   $ 2,444       $ 19       $ 2,463       $ 255   

Home, Health & Beauty

     580         10         590         41   

Industrial

     420         1         421         59   

Specialty Chemicals

     800         0         800         189   

Community Development and Land Management

     13         0         13         (7
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,257       $ 30       $ 4,287         537   
  

 

 

    

 

 

    

 

 

    

Corporate and Other

              (239

Non-controlling interests

              2   
           

 

 

 

Consolidated total

            $ 300   
           

 

 

 

 

Nine months ended September 30, 2013

   Sales      Segment  
In millions    External      Inter-segment      Total      profit (loss)  

Food & Beverage

   $ 2,357       $ 2       $ 2,359       $ 178   

Home, Health & Beauty

     561         0         561         17   

Industrial

     401         1         402         47   

Specialty Chemicals

     746         0         746         176   

Community Development and Land Management

     14         0         14         (10
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,079       $ 3       $ 4,082         408   
  

 

 

    

 

 

    

 

 

    

Corporate and Other

              (267

Non-controlling interests

              (2
           

 

 

 

Consolidated total

            $ 139   
           

 

 

 

 

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and Consolidated Subsidiary Companies

 

12. Environmental and legal matters

The company has been notified by the U.S. Environmental Protection Agency 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 the company. 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, 2014, MeadWestvaco had recorded liabilities of approximately $4 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 $2 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. To date, the costs resulting from the litigation, including settlement costs, have not been significant. As of September 30, 2014, there were about 570 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. Management believes that 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, 2014, the company had recorded litigation liabilities of approximately $21 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.

 

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and Consolidated Subsidiary Companies

 

13. Other income, net

Other income, net is comprised of the following for the three and nine months ended September 30, 2014 and 2013:

 

In millions    Three months ended
September 30,
     Nine months ended
September 30,
 
     2014     2013      2014     2013  

Interest income1

   $ 15      $ 4       $ 42      $ 8   

Foreign currency exchange losses

     0        0         (4     (3

Insurance settlements

     0        5         0        8   

Other2

     (2     4         (11     11   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 13      $ 13       $ 27      $ 24   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

1 Interest income includes $11 million and $34 million for the three and nine months ended September 30, 2014, respectively, related to a long-term note receivable from the 2013 transaction with Plum Creek.
2 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 was deemed to be immaterial to the company’s consolidated financial statements for the nine months ended September 30, 2013 and the fourth quarter of 2012.

 

14. Dispositions

On June 1, 2014, the company completed the sale of its beauty and personal care folding carton packaging business in Europe for net cash proceeds of $11 million. The sale resulted in a pre-tax loss of $1 million and $14 million recognized in the three and nine months ended September 30, 2014, respectively, which is included within Corporate and Other for segment reporting purposes and reported in other income, net within the consolidated statements of operations.

On December 6, 2013, the company completed the sale of its U.S. forestlands and related assets to Plum Creek. The company received total consideration of $934 million, of which approximately $74 million was paid in cash and $860 million was in the form of a ten-year term installment note. The results of the forestry and certain minerals-related businesses are reported in discontinued operations in the consolidated financial statements. These businesses were previously reported within the Community Development and Land Management segment.

 

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and Consolidated Subsidiary Companies

 

The following table shows the major categories for discontinued operations in the consolidated statement of operations for the three and nine months ended September 30, 2014 and 2013:

 

In millions, except per share amounts    Three months ended
September 30,
     Nine months ended
September 30,
 
     2014     2013      2014     2013  

Net sales

   $ 0      $ 55       $ 0      $ 133   

Cost of sales

     0        18         0        49   

Selling, general and administrative expenses

     (1     2         (1     (2

Interest expense

     0        1         0        2   

Other expense (income), net

     0        0         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     1        34         1        84   

Income tax provision (benefit)

     0        15         0        33   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income

   $ 1      $ 19       $ 1      $ 51   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income per share

         

Basic

   $ 0.01      $ 0.11       $ 0.00      $ 0.29   

Diluted

     0.01        0.10         0.00        0.28   

There were no assets or liabilities classified as discontinued operations in the consolidated balance sheets at September 30, 2014 and December 31, 2013.

In connection with certain business dispositions, MeadWestvaco has provided certain guarantees and indemnities to the respective buyers and other parties. These obligations include both potential environmental matters as well as certain contracts with third parties. The total aggregate exposure to the company for these matters could be up to $40 million. The company has evaluated the fair value of these guarantees and indemnifications which did not result in a material impact to the company’s consolidated financial statements.

 

15. Income taxes

For the three and nine months ended September 30, 2014 and 2013, the effective tax rates attributable to continuing operations were as follows:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2014     2013     2014     2013  

Effective tax rate

     28     39     30     22

The differences in the effective tax rates for the three and nine months ended September 30, 2014 and 2013 compared to statutory rates are primarily from the mix and levels between domestic and foreign earnings as well as discrete items. For the nine months ended September 30, 2013, the discrete items include a $4 million benefit pursuant to an adjustment recorded to deferred taxes related to periods prior to 2013. The aforementioned adjustment attributable to periods prior to 2013 is deemed to be immaterial to the company’s consolidated financial statements for the current period and periods prior to 2013. In addition, for the three and nine months ended September 30, 2013, approximately $15 million and $33 million, respectively, of income taxes have been allocated to discontinued operations primarily related to the sale of the company’s U.S. forestlands and related assets to Plum Creek in the fourth quarter of 2013.

During the three and nine months ended September 30, 2014, there were no significant changes to the company’s uncertain tax positions.

 

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and Consolidated Subsidiary Companies

 

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

OVERVIEW

For the three and nine months ended September 30, 2014, MeadWestvaco Corporation (“MeadWestvaco”, “MWV” or the “company”) increased sales by 7% and 4%, respectively, driven by volume growth and improved pricing and product mix in targeted packaging and specialty chemicals markets compared to 2013. These improvements were partially offset by unfavorable foreign currency exchange compared to 2013, particularly from the weakening Brazilian Real, as well as the disposition of the company’s European beauty and personal care folding carton business in the second quarter of 2014 and the Brazilian folding carton business in 2013.

For the three months ended September 30, 2014, income from continuing operations before income taxes increased by 48% to $148 million and more than doubled to $300 million for the nine months ended September 30, 2014 compared to 2013. Earnings before interest, taxes, depreciation, and amortization (“EBITDA”), adjusted to exclude special items, increased 20% to $285 million, or 19.4% of sales, in the three months ended September 30, 2014 compared to $237 million, or 17.2% of sales, in 2013. EBITDA, adjusted to exclude special items, increased 23% to $733 million, or 17.2% of sales, in the nine months ended September 30, 2014 compared to $594 million, or 14.6% of sales, in 2013.

Continued execution of the company’s profitable growth strategies including strong commercial and operational performance, favorable productivity and cost reduction initiatives expanded margins and drove earnings growth for both the three months and nine months ended September 30, 2014 compared to 2013.

Refer to the “Use of Non-GAAP Measures” section herein for further information regarding the operational measures of both consolidated and segment-level EBITDA and EBITDA margins.

For the three months ended September 30, 2014, income from continuing operations attributable to the company was $105 million, or $0.60 per share, compared to $61 million, or $0.34 per share, for the three months ended September 30, 2013. The results from continuing operations attributable to the company for the three months ended September 30, 2014 include after-tax restructuring and other charges of $4 million, or $0.03 per share. The results from continuing operations attributable to the company for the three months ended September 30, 2013 include after-tax restructuring charges of $4 million, or $0.02 per share, an after-tax pension settlement charge of $1 million, with no impact to earnings per share, and discrete income tax items of $2 million, or $0.01 per share.

For the nine months ended September 30, 2014, income from continuing operations attributable to the company was $209 million, or $1.22 per share, compared to $111 million, or $0.62 per share, for the nine months ended September 30, 2013. The results from continuing operations attributable to the company for the nine months ended September 30, 2014 include after-tax restructuring and other charges of $47 million, or $0.27 per share, and after-tax income of $17 million, or $0.10 per share from an insurance settlement regarding litigation claims. The results from continuing operations attributable to the company for the nine months ended September 30, 2013 include after-tax restructuring charges of $25 million, or $0.14 per share, an after-tax pension settlement charge of $11 million, or $0.06 per share, and discrete income tax benefits of $13 million, or $0.08 per share.

During the third quarter of 2014, the company purchased and retired 1.1 million of its common shares for $44 million and in October of 2014, the company completed its 2014 repurchase program by purchasing and retiring an additional 1.0 million shares of its common shares for $43 million. With the completion of this repurchase program, the company has repurchased a total of 13.8 million common shares for $525 million throughout the duration of the program. Including the special dividend paid during the first quarter of 2014 as well as the above share repurchases, the company has returned to shareholders approximately $700 million using proceeds received from the sale of forestlands and related assets to Plum Creek in the fourth quarter of 2013.

 

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Savings associated with the previously announced margin improvement program were $56 million for the nine months ended September 30, 2014. The company expects to exceed its target of $75 million of savings in 2014 and achieve its target of $125 million by the end of 2015.

OUTLOOK

For the fourth quarter of 2014, earnings excluding special items are expected to be above year-ago levels on a continuing operations basis. The company expects ongoing benefits from solid execution of its commercial and operational excellence strategies, as well as continued contributions from its growth and productivity investments and cost savings initiatives.

The principal benefits that are expected to drive the company’s improvement in the fourth quarter are:

 

    Increases in consumer and industrial packaging volumes;

 

    Ongoing value-based pricing initiatives across all packaging businesses;

 

    Productivity improvements and continued positive operating leverage from increased mill and plant utilization rates; and

 

    Continuing cost reduction efforts, including the company’s ongoing margin improvement program

These principal benefits may be partially offset by:

 

    Continued weak global economic conditions, especially in Brazil and the Eurozone;

 

    Continued demand challenges in liquid packaging and North American frozen and processed food markets;

 

    Continued higher costs for wood fiber; and

 

    Negative impact from foreign currency exchange, principally the Euro and the Real

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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and Consolidated Subsidiary Companies

 

RESULTS OF OPERATIONS

Presented below are results for the three and nine months ended September 30, 2014 and 2013 reported in accordance with accounting principles generally accepted in the U.S. All per share amounts are presented on an after-tax basis.

 

In millions, except per share amounts    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Net sales

   $ 1,468      $ 1,378      $ 4,257      $ 4,079   

Cost of sales

     1,135        1,095        3,359        3,363   

Selling, general and administrative expenses

     144        157        465        484   

Interest expense

     54        39        160        117   

Other income, net

     (13     (13     (27     (24
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     148        100        300        139   

Income tax provision

     41        39        89        30   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     107        61        211        109   

Income from discontinued operations, net of income taxes

     1        19        1        51   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     108        80        212        160   

Less: Net income (loss) attributable to non-controlling interests, net of income taxes

     2        0        2        (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to the company

   $ 106      $ 80      $ 210      $ 162   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations attributable to the company

   $ 105      $ 61      $ 209      $ 111   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to the company – basic:

        

Income from continuing operations

   $ 0.62      $ 0.34      $ 1.23      $ 0.62   

Income from discontinued operations

     0.01        0.11        0.00        0.29   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to the company

   $ 0.63      $ 0.45      $ 1.23      $ 0.91   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to the company – diluted:

        

Income from continuing operations

   $ 0.60      $ 0.34      $ 1.22      $ 0.62   

Income from discontinued operations

     0.01        0.10        0.00        0.28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to the company

   $ 0.61      $ 0.44      $ 1.22      $ 0.90   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute net income per share attributable to the company:

        

Basic

     168.8        178.0        169.2        177.3   

Diluted

     171.6        180.8        172.0        180.1   

Sales increased 7% to $1.47 billion for the three months ended September 30, 2014 compared to $1.38 billion for the three months ended September 30, 2013. Sales increased 4% to $4.26 billion for the nine months ended September 30, 2014 compared to $4.08 billion for the nine months ended September 30, 2013. Refer to the segment discussions herein for further information regarding the increase in sales for both the three and nine months ended September 30, 2014.

Cost of sales (“COS”) was $1.14 billion for the three months ended September 30, 2014 compared to $1.10 billion for the three months ended September 30, 2013. The increase in COS for the three months ended September 30, 2014 was primarily driven by the impacts of volume growth and inflation partially offset by improved productivity compared to 2013. COS was $3.36 billion for both the nine months ended September 30, 2014 and 2013, reflecting improved productivity which offset the impacts of volume growth year-over-year.

 

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Selling, general and administrative expenses (“SG&A”) was $144 million, or 9.8% of sales, for the three months ended September 30, 2014 compared to $157 million, or 11.4% of sales, for the three months ended September 30, 2013. The 160 basis point reduction in SG&A as a percent of sales was primarily driven by benefits from the company’s cost savings initiatives, including a 16% reduction in corporate department costs compared to 2013. Selling, general and administrative expenses were $465 million, or 10.9% of sales, for the nine months ended September 30, 2014 compared to $484 million, or 11.9% of sales, for the nine months ended September 30, 2013. The decrease in SG&A for the nine months ended September 30, 2014 was primarily driven by benefits from the company’s cost savings initiatives, including a 16% reduction in corporate department costs, as well as $27 million related to a favorable insurance settlement regarding litigation claims compared to 2013. These benefits were partially offset by higher year-over-year restructuring charges of $30 million, as noted below.

In January 2014, the company initiated a margin improvement program designed to achieve a leaner organization, align the corporate infrastructure to the revenue base and reassess participation within certain business lines and markets. During 2013, the company initiated certain restructuring actions to reduce its overhead across its global operations. Restructuring charges incurred during the three and nine months ended September 30, 2014 and 2013 were pursuant to these actions. Cumulative charges included in the results from continuing operations through September 30, 2014 since the inception of the 2014 margin improvement program were $43 million.

Restructuring charges attributable to individual segments and by nature of cost, as well as cost of sales and selling, general and administrative expense classification in the consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013 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, 2014

 

In millions    Employee-related costs      Asset write-downs and other costs      Total  
   COS     SG&A      Total      COS     SG&A      Other
income,
net
     Total      COS     SG&A      Other
income,
net
     Total  

Food & Beverage

   $ (1   $ 1       $ 0       $ 0      $ 0       $ 0       $ 0       $ (1   $ 1       $ 0       $ 0   

Home, Health & Beauty

     1        0         1         (1     0         1         0         0        0         1         1   

Industrial

     1        0         1         0        0         0         0         1        0         0         1   

Other

     0        1         1         0        2         0         2         0        3         0         3   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total charges

   $ 1      $ 2       $ 3       $ (1   $ 2       $ 1       $ 2       $ 0      $ 4       $ 1       $ 5   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Three months ended September 30, 2013

 

In millions    Employee-related costs     Asset write-downs
and other costs
     Total  
   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   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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Nine months ended September 30, 2014

 

In millions    Employee-related costs      Asset write-downs and other costs      Total  
   COS     SG&A      Total      COS      SG&A      Other
income,
net
     Total      COS      SG&A      Other
income,
net
     Total  

Food & Beverage

   $ (1   $ 5       $ 4       $ 1       $ 0       $ 1       $ 2       $ 0       $ 5       $ 1       $ 6   

Home, Health & Beauty

     2        5         7         1         0         14         15         3         5         14         22   

Industrial

     2        2         4         0         0         0         0         2         2         0         4   

All other

     0        16         16         0         14         0         14         0         30         0         30   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $ 3      $ 28       $ 31       $ 2       $ 14       $ 15       $ 31       $ 5       $ 42       $ 15       $ 62   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nine months ended September 30, 2013

 

In millions    Employee-related costs      Asset write-downs
and other costs
     Total  
   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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Pension income, excluding settlements, curtailments and termination benefits, attributable to continuing operations was $30 million for both the three months ended September 30, 2014 and 2013. Pension income, excluding settlements, curtailments and termination benefits, attributable to continuing operations was $91 million and $74 million for the nine months ended September 30, 2014 and 2013, respectively. Pension income is reported in Corporate and Other for segment reporting purposes. Refer to Note 8 of the Notes to Consolidated Financial Statements for further information regarding settlements, curtailments and termination benefits included in net periodic benefit income.

Other income, net is comprised of the following for the three and nine months ended September 30, 2014 and 2013:

 

In millions    Three months ended
September 30,
     Nine months ended
September 30,
 
     2014     2013      2014     2013  

Interest income 1

   $ 15      $ 4       $ 42      $ 8   

Foreign currency exchange losses

     0        0         (4     (3

Insurance settlements

     0        5         0        8   

Other

     (2     4         (11     11   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 13      $ 13       $ 27      $ 24   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1)  Interest income includes $11 million and $34 million for the three and nine months ended September 30, 2014, respectively, related to a long-term note receivable from the 2013 transaction with Plum Creek.

Interest expense from continuing operations was $54 million for the three months ended September 30, 2014 and was comprised of $32 million related to bond and bank debt, $11 million related to long-term obligations non-recourse to

 

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MWV, $7 million related to borrowings on insurance policies and $4 million related to other items. 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 $160 million for the nine months ended September 30, 2014 and was comprised of $98 million related to bond and bank debt, $33 million related to long-term obligations non-recourse to MWV, $19 million related to borrowings on insurance policies and $10 million related to other items. Interest expense from continuing operations was $117 million for the nine months ended September 30, 2013 and was comprised of $90 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.

For the three and nine months ended September 30, 2014, the effective tax rates attributable to continuing operations were approximately 28% and 30%, respectively. For the three and nine months ended September 30, 2013, the effective tax rates attributable to continuing operations were approximately 39% and 22%, respectively. The differences in the effective tax rates for the three and nine months ended September 30, 2014 and 2013 compared to statutory rates are primarily from the mix and levels between domestic and foreign earnings as well as discrete items. In addition, for the three and nine months ended September 30, 2013, approximately $15 million and $33 million, respectively, of income taxes have been allocated to discontinued operations pursuant to the sale of the company’s U.S. forestlands and related assets in the fourth quarter of 2013.

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.

Food & Beverage

 

In millions    Three months ended
September 30,
     Nine months ended
September 30,
 
     2014      2013      2014      2013  

Sales

   $ 854       $ 796       $ 2,463       $ 2,359   

Segment profit (1)

     107         86         255         178   

 

(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 world’s leading tobacco brand owners. The segment’s materials are manufactured in the U.S. and converted into packaging solutions at plants located in North America, Europe and Asia.

Sales for the Food & Beverage segment were $854 million and $796 million for the three months ended September 30, 2014 and 2013, respectively. Sales increased in 2014 due to volume growth and improved pricing and product mix across targeted paperboard end-markets compared to 2013. Global food packaging sales increased 4%, driven by gains

 

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in food service which more than offset weakness in the packaged food market. Global beverage packaging sales increased 3% as gains with new Asian beer customers and gains within the growing craft beer market in North America drove volume growth that exceeded relative market trends within these regions. Sales also increased by 19% in global tobacco packaging, driven by gains in North America and new customers in Asia.

Profit for the Food & Beverage segment was $107 million and $86 million for the three months ended September 30, 2014 and 2013, respectively. Profit increased in 2014 due to $21 million from favorable pricing and product mix, $12 million from higher volumes and $9 million from favorable productivity, including savings from cost reduction initiatives and benefits from the biomass boiler at the company’s mill in Covington, VA compared to 2013. These benefits were partially offset by $20 million from inflation and $1 million of unfavorable foreign currency exchange and other items compared to 2013. EBITDA increased 16% to $161 million for the three months ended September 30, 2014 compared to $139 million for the same period of 2013. Refer to the “Use of Non-GAAP Measures” section herein for further information.

Sales for the Food & Beverage segment were $2.5 billion and $2.4 billion for the nine months ended September 30, 2014 and 2013, respectively. Sales increased in 2014 due to volume growth and improved pricing and product mix across targeted paperboard end-markets compared to 2013. Volume growth in global food packaging was primarily driven by food service and liquid packaging which more than offset weakness in the packaged food market compared to 2013. Global beverage packaging sales increased as gains with new Asian beer customers and gains within the growing craft beer market in North America drove volume growth that exceeded relative market trends within these regions. Sales also increased in global tobacco packaging, driven by gains in North America and new customers in Asia primarily during the third quarter of 2014 which partially offset unfavorable volumes during the first six months of 2014.

Profit for the Food & Beverage segment was $255 million and $178 million for the nine months ended September 30, 2014 and 2013, respectively. Profit increased in 2014 due to $72 million from favorable pricing and product mix, $56 million from favorable productivity, including savings from cost reduction initiatives and benefits from the biomass boiler at the company’s mill in Covington, VA, $12 million from higher volumes and $4 million from favorable foreign currency exchange and other items compared to 2013. These benefits were partially offset by $37 million from inflation and $30 million of costs related to severe winter weather disruptions in the U.S. compared to 2013. EBITDA increased 22% to $417 million for the nine months ended September 30, 2014 compared to $341 million for the same period of 2013. Refer to the “Use of Non-GAAP Measures” section herein for further information.

Home, Health & Beauty

 

In millions    Three months ended
September 30,
     Nine months ended
September 30,
 
     2014      2013      2014      2013  

Sales

   $ 183       $ 185       $ 590       $ 561   

Segment profit (1)

     12         6         41         17   

 

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

The Home, Health & Beauty segment designs and produces packaging solutions for the global personal care, fragrance, home care, lawn and garden, prescription drug and healthcare end markets. For the global beauty and personal care market, the segment produces pumps for fragrances, lotions, creams and soaps, flip-top and applicator closures for bath and body products and lotions, and paperboard and plastic packaging for hair and skin care products. For the global home and garden market, the segment produces trigger sprayers for surface cleaners and fabric care, aerosol actuators for air fresheners, hose-end sprayers for lawn and garden maintenance, and spouted and applicator closures for a

 

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variety of other home and garden products. For the global healthcare market, the segment produces secondary packages designed to enhance patient adherence for prescription drugs, as well as healthcare dispensing systems, paperboard packaging and closures for over-the-counter and prescription drugs. Paperboard and plastic materials are converted into packaging solutions at plants located in North America, South America, Europe and Asia.

Sales for the Home, Health & Beauty segment were $183 million and $185 million for the three months ended September 30, 2014 and 2013, respectively. Sales of dispensing products were up 6% compared to 2013 primarily driven by volume growth in fragrance pumps, trigger sprayers for home cleaning and aerosol actuators for air care. Sales growth in the third quarter of 2014 was also driven by the positive impacts from multiple new product launches within the home and garden market. In healthcare packaging, particularly adherence solutions, volumes grew compared to 2013 due to completing the transition to Shellpak Renew with a major retail customer. These improvements were more than offset by lower volumes attributed to the exit of the beauty and personal care folding carton packaging business in Europe in the second quarter of 2014 and the exit of the folding carton operations in Brazil in 2013.

Profit for the Home, Health & Beauty segment was $12 million and $6 million for the three months ended September 30, 2014 and 2013, respectively. Profit increased in 2014 due to $6 million from favorable productivity, including savings from cost reduction initiatives, $4 million from improved pricing and product mix and $1 million from favorable foreign currency exchange and other items compared to 2013. These benefits were partially offset by $5 million from inflation compared to 2013. EBITDA increased 12% to $28 million for the three months ended September 30, 2014 compared to $25 million for the same period of 2013. Refer to the “Use of Non-GAAP Measures” section herein for further information.

Sales for the Home, Health & Beauty segment were $590 million and $561 million for the nine months ended September 30, 2014 and 2013, respectively. Sales increased in 2014 primarily due to the rebound in the North American lawn and garden market which drove volume growth in home and garden dispensing solutions. Sales also increased due to volume gains with new innovative and higher-value products, particularly in the healthcare dispensing and fragrance markets, trigger sprayers for home cleaning and aerosol actuators for air care, compared to 2013. Within the healthcare packaging market, volume growth in 2014 was driven by continued gains in medical dispensers compared to 2013. These benefits were partially offset by lower volumes in 2014 from the exit of the beauty and personal care folding carton packaging business in Europe in the second quarter of 2014 and the exit of the folding carton operations in Brazil in 2013.

Profit for the Home, Health & Beauty segment was $41 million and $17 million for the nine months ended September 30, 2014 and 2013, respectively. Profit increased in 2014 due to $22 million from favorable productivity, including savings from cost reduction initiatives, $6 million from higher volumes, $6 million from improved pricing and product mix, and $5 million from favorable foreign currency exchange and other items compared to 2013. These benefits were partially offset by $14 million from inflation and $1 million from transformation costs to repurpose the segment’s Brazilian folding carton facility to manufacture higher value plastic pumps and dispensers compared to 2013. EBITDA increased 32% to $90 million for the nine months ended September 30, 2014 compared to $68 million for the same period of 2013. Refer to the “Use of Non-GAAP Measures” section herein for further information.

 

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Industrial

 

In millions    Three months ended
September 30,
     Nine months ended
September 30,
 
     2014      2013      2014      2013  

Sales

   $ 150       $ 132       $ 421       $ 402   

Segment profit (1)

     26         16         59         47   

 

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

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

Sales for the Industrial segment were $150 million and $132 million for the three months ended September 30, 2014 and 2013, respectively. Sales growth in 2014 was primarily driven by higher volumes of corrugated packaging and high-quality linerboard in Brazil, as well as growth in India where sales increased by 28% compared to 2013. Sales also increased due to improved pricing and product mix from initiatives designed to offset inflation primarily in Brazil compared to 2013.

Profit for the Industrial segment was $26 million and $16 million for the three months ended September 30, 2014 and 2013, respectively. Profit increased in 2014 due to $6 million from improved pricing and product mix, $6 million from improved productivity, including savings from cost reduction initiatives, $2 million from higher volumes and $2 million from favorable foreign currency exchange and other items compared to 2013. These benefits were partially offset by $6 million from inflation compared to 2013. EBITDA increased 48% to $37 million for the three months ended September 30, 2014 compared to $25 million for the same period of 2013. Refer to the “Use of Non-GAAP Measures” section herein for further information.

Sales for the Industrial segment were $421 million and $402 million for the nine months ended September 30, 2014 and 2013, respectively. Sales growth in 2014 was driven by increased sales of higher-quality paperboard, higher volumes of corrugated solutions and improved pricing and product mix from initiatives designed to offset inflation compared to 2013. These benefits were partially offset by unfavorable foreign currency exchange compared to 2013.

Profit for the Industrial segment was $59 million and $47 million for the nine months ended September 30, 2014 and 2013, respectively. Profit increased in 2014 due to $34 million from improved pricing and product mix, $8 million from improved productivity, including savings from cost reduction initiatives, and $3 million from higher volumes compared to 2013. These benefits were partially offset by $23 million from inflation and $10 million from unfavorable foreign currency exchange and other items compared to 2013. EBITDA increased 20% to $91 million for the nine months ended September 30, 2014 compared to $76 million for the same period of 2013. Refer to the “Use of Non-GAAP Measures” section herein for further information.

 

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Specialty Chemicals

 

In millions    Three months ended
September 30,
     Nine months ended
September 30,
 
     2014      2013      2014      2013  

Sales

   $ 283       $ 260       $ 800       $ 746   

Segment profit (1)

     69         66         189         176   

 

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

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

Sales for the Specialty Chemicals segment were $283 million and $260 million for the three months ended September 30, 2014 and 2013, respectively. The sales increase in 2014 was driven by volume growth and pricing and product mix improvements from gains in high value strategic markets for oilfield services, asphalt and carbon technologies compared to 2013.

Profit for the Specialty Chemicals segment was $69 million and $66 million for the three months ended September 30, 2014 and 2013, respectively. Profit in 2014 increased due to $6 million from higher volumes, $5 million from favorable productivity, including savings from cost reduction initiatives, and $4 million from improved pricing and product mix compared to 2013. These benefits were partially offset by $3 million from inflation and $9 million of unfavorable foreign currency exchange and other items, including $7 million of favorable impact from legal and insurance settlements compared to 2013. EBITDA increased 4% to $77 million for the three months ended September 30, 2014 compared to $74 million for the same period of 2013. Refer to the “Use of Non-GAAP Measures” section herein for further information.

Sales for the Specialty Chemicals segment were $800 million and $746 million for the nine months ended September 30, 2014 and 2013, respectively. The sales increase in 2014 was driven by volume growth and pricing and product mix improvements from gains in high value strategic markets for oilfield services, asphalt and carbon technologies compared to 2013. These gains were partially offset by unfavorable foreign currency exchange compared to 2013.

Profit for the Specialty Chemicals segment was $189 million and $176 million for the nine months ended September 30, 2014 and 2013, respectively. Profit increased in 2014 primarily due to $14 million from higher volumes, $9 million from favorable pricing and product mix and $8 million from favorable productivity, including savings from cost reduction initiatives compared to 2013. These benefits were partially offset by $7 million of inflation and $11 million from unfavorable foreign currency exchange and other items, including $7 million of favorable impact from legal and insurance settlements compared to 2013. EBITDA increased 6% to $213 million for the nine months ended September 30, 2014 compared to $201 million for the same period of 2013. Refer to the “Use of Non-GAAP Measures” section herein for further information.

 

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Community Development and Land Management

 

In millions    Three months ended
September 30,
    Nine months ended
September 30,
 
     2014     2013     2014     2013(2)  

Sales

   $ 8      $ 6      $ 13      $ 14   

Loss (1)

     (1     (3     (7     (10

 

(1)  Loss is measured as results before restructuring charges, pension income, interest expense and income, and income taxes.
(2)  Results for 2013 have been recast to exclude the discontinued operations of the forestry and certain minerals-related businesses.

The Community Development and Land Management segment is responsible for maximizing the value of 108,000 development acres in the Charleston, South Carolina region through a land development partnership with Plum Creek Timber Company, Inc. The segment develops real estate including (i) selling development property, (ii) entitling and improving high-value tracts, and (iii) master planning of select landholdings. The earnings of the segment exclude the non-controlling interest attributable to Plum Creek.

Sales for the Community Development and Land Management segment were $8 million and $6 million for the three months ended September 30, 2014 and 2013, respectively. Segment loss for the three months ended September 30, 2014 was $1 million compared to a loss of $3 million for the same period of 2013. Sales were $13 million and $14 million for the nine months ended September 30, 2014 and 2013, respectively. Segment loss for the nine months ended September 30, 2014 was $7 million compared to a loss of $10 million for the same period of 2013.

LIQUIDITY AND CAPITAL RESOURCES

The company’s cash flow from continuing operations, current cash levels and other sources of currently available liquidity are expected to be adequate to fund scheduled debt payments, dividends to shareholders and capital expenditures in 2014. In addition, the company’s U.S. qualified retirement plans remain well over funded and management does not anticipate any required regulatory funding contributions to such plans in the foreseeable future.

During the third quarter of 2014, the company purchased and retired 1.1 million of its common shares for $44 million and in October of 2014, the company completed its 2014 repurchase program by purchasing and retiring an additional 1.0 million shares of its common shares for $43 million. With the completion of this repurchase program, the company has repurchased a total of 13.8 million common shares for $525 million throughout the duration of the program. Including the special dividend paid during the first quarter of 2014 as well as the above share repurchases, the company has returned to shareholders approximately $700 million using proceeds received from the sale of forestlands and related assets to Plum Creek in the fourth quarter of 2013.

Cash and cash equivalents totaled $400 million at September 30, 2014, of which 48% was held in the U.S. with the remaining portions of 22% in Brazil, 17% in Europe, and 13% in other foreign jurisdictions. The credit quality of the company’s portfolio of short-term investments remains strong with 55% of its cash and cash equivalents invested in U.S. government securities at September 30, 2014.

Funding for the company’s domestic operating, investing and financing activities in the foreseeable future is expected to come from sources of liquidity within its U.S. operations, including cash holdings, operating cash flow and bank-committed credit capacity. As such, the company’s offshore cash holdings are not a key source of liquidity to its U.S. operations and management does not intend to transfer cash held by foreign subsidiaries to the U.S. that would be subject to potential tax impacts associated with the repatriation of undistributed earnings on foreign subsidiaries.

 

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Operating activities

Cash provided by operating activities from continuing operations was $83 million for the nine months ended September 30, 2014 compared to $164 million for the nine months ended September 30, 2013. During 2014, cash flow generated by higher year-over-year earnings was more than offset by a non-recurring alternative minimum tax payment of $98 million from the sale of the company’s U.S. forestlands in the fourth quarter of 2013. The alternative minimum tax payment of $98 million will be largely recovered by the end of 2016 through lower federal tax payments. In addition, working capital levels were higher in 2014 due to increased customer receivables following strong commercial performance, as well as increased inventory levels to meet customer demand in 2014. Cash provided by operating activities from discontinued operations was $1 million for the nine months ended September 30, 2014 compared to $96 million for the nine months ended September 30, 2013.

Investing activities

Cash used in investing activities from continuing operations was $136 million for the nine months ended September 30, 2014 compared to $315 million for the nine months ended September 30, 2013. The year-over-year decrease was primarily due to lower overall investment spending compared to 2013.

Cash used in investing activities from continuing operations for the nine months ended September 30, 2014 was driven by capital expenditures of $214 million and contributions to joint ventures of $5 million, partially offset by treasury grant proceeds of $39 million as a result of the company’s application for a U.S. Treasury Section 1603 Grant for Specified Energy property associated with the construction of a biomass boiler and steam turbine generator at the company’s Covington, VA paperboard mill. Cash used in investing activities from continuing operations was also partially offset by proceeds from dispositions of assets of $41 million and other sources of funds of $3 million. Cash used in investing activities from continuing operations for the nine months ended September 30, 2013 was driven by capital expenditures of $337 million, contributions to joint ventures of $9 million, and other uses of funds of $9 million, partially offset by proceeds from dispositions of assets of $42 million. Cash used in investing activities from discontinued operations was $2 million for the nine months ended September 30, 2013.

Capital spending in 2014 is expected to be about $350 million driven primarily by growth investments and productivity initiatives, as well as maintenance capital and environmental compliance.

Financing activities

Cash used in financing activities from continuing operations was $601 million for the nine months ended September 30, 2014 compared to $129 million for the nine months ended September 30, 2013. The year-over-year increase was primarily driven by the returning to shareholders, through stock repurchases and a special dividend, proceeds from the company’s sale of its U.S. forestlands and related assets to Plum Creek during the fourth quarter of 2013.

Cash used in financing activities from continuing operations for the nine months ended September 30, 2014 was driven by stock repurchases of $345 million (including $307 million pursuant to an accelerated share repurchase program), dividend payments of $302 million (including a special dividend of $175 million), and repayment of long-term debt of $96 million (including the repayment of $50 million from credit facility borrowings). Cash provided by financing activities from continuing operations for the nine months ended September 30, 2014 included proceeds from the issuance of long-term debt of $77 million (including proceeds from credit facility borrowings of $50 million), proceeds from exercise of employee stock options of $45 million, proceeds from notes payable and other short-term borrowings of $10 million, net changes in bank overdrafts of $2 million, and other sources of funds of $8 million.

Cash used in financing activities from continuing operations for the nine months ended September 30, 2013 was driven by dividend payments of $133 million, repayment of long-term debt of $56 million, the purchase of the remaining 50% non-controlling interest in a pharmaceutical packaging company for $13 million and net changes in bank overdrafts of

 

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$5 million. Cash provided by financing activities from continuing operations for the nine months ended September 30, 2013 included proceeds from exercises of employee stock options of $46 million, proceeds from notes payable and other short-term borrowings of $24 million, and proceeds from the issuance of long-term debt of $8 million.

MeadWestvaco has a $600 million five-year revolving credit facility with a syndicate of banks. The credit facility is scheduled to expire on January 30, 2017. The principal purpose of the credit facility is to obtain funds for general corporate purposes. The company borrowed $50 million on March 18, 2014 from this credit facility bearing interest at a rate of 1.335% and subsequently repaid the borrowings on April 22, 2014. The credit facility’s agreement contains a financial covenant limiting the percentage of total debt to total capitalization (including deferred taxes) to 55%, as well as certain other covenants with which the company was in compliance as of September 30, 2014.

The company’s percentage of total debt to total capital (shareholders’ equity and total debt) was 35% at September 30, 2014 and 32% at December 31, 2013.

The effects of foreign currency exchange rate changes on cash and cash equivalents had an unfavorable impact of $4 million for the nine months ended September 30, 2014 compared to an unfavorable impact of $17 million for the nine months ended September 30, 2013.

ENVIRONMENTAL AND LEGAL MATTERS

Our operations are subject to extensive regulation by federal, state and local authorities, as well as regulatory authorities with jurisdiction over foreign operations of the company. Due to changes in environmental laws and regulations, the application of such regulations, and changes in environmental control technology, it is not possible for us to predict with certainty the amount of capital expenditures to be incurred for environmental purposes. Taking these uncertainties into account, we estimate that we will incur $40 million and $75 million in environmental capital expenditures in 2014 and 2015, respectively. Approximately $32 million was spent on environmental capital projects in 2013. Included in the 2014 and 2015 estimated expenditures are capital costs associated with compliance with the Maximum Achievable Compliance Technology for industrial boilers rules that were finalized by the U.S. Environmental Protection Agency in January 2013. Total expenditures for compliance with this rule are estimated to be in a range of $10 million to $30 million over the period of 2014 through 2015.

The company has been notified by the U.S. Environmental Protection Agency 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 the company. 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, 2014, MeadWestvaco had recorded liabilities of approximately $4 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 $2 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. To date, the costs resulting

 

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from the litigation, including settlement costs, have not been significant. As of September 30, 2014, there were about 570 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. Management believes that 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, 2014, the company had recorded litigation liabilities of approximately $21 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.

CRITICAL ACCOUNTING POLICIES

The company’s principal accounting policies are described in the Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements of the Annual Report on Form 10-K for the year ended December 31, 2013. Those accounting policies that management believes require the exercise of judgment, where a different set of judgments could result in the greatest changes to reported results, are detailed in Critical Accounting Policies of Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2013. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Management has discussed the development and selection of the critical accounting estimates with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the company’s disclosure.

NEW ACCOUNTING GUIDANCE

In January 2014, the company adopted new guidance regarding foreign currency matters. The new guidance clarifies existing guidance regarding circumstances when cumulative translation adjustments should be released into earnings. The impact of adoption did not have an effect on the company’s consolidated financial statements.

In January 2014, the company adopted new accounting guidance regarding the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance requires an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, unless certain exceptions are met. The impact of adoption did not have an effect on the company’s consolidated financial statements.

In April 2014, the FASB issued new guidance regarding the requirements for reporting discontinued operations. The new guidance requires that a disposal of a component of an entity or a group of components of an entity be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The new guidance is effective on a prospective basis for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted for disposals (or

 

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classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The company has elected to early adopt the new provisions for disposals or classifications as held for sale in 2014. The impact of adoption did not have a material effect on the company’s consolidated financial statements.

In May 2014, the FASB issued new guidance regarding revenue recognition requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance is effective for annual reporting periods beginning after December 31, 2016, including interim periods within that reporting period. The new guidance is to be applied retrospectively to each reporting period presented or retrospectively with the cumulative effect of initially applying the new guidance at the date of initial application. The impact of adoption is not expected to have a material effect on the company’s consolidated financial statements.

In June 2014, the FASB issued new guidance regarding accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The new guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The new guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the new guidance either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The impact of adoption is not expected to have a material effect on the company’s consolidated financial statements.

In August 2014, the FASB issued new guidance regarding management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. The new guidance is effective for annual reporting periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The impact of adoption is not expected to have a material effect on the company’s consolidated financial statements.

During the nine months ended September 30, 2014, there were no other new accounting standards issued by the FASB that would have an impact on the company’s consolidated financial statements.

 

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USE OF NON-GAAP MEASURES

The company has presented the operational measures of consolidated and segment-level EBITDA and EBITDA Margins (excluding special items) under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which have not been prepared in accordance with GAAP and has provided a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP as shown below. The company believes these non-GAAP operational measures provide investors, potential investors, securities analysts and others with useful information to evaluate the operating performance of the business.

Set forth below is a reconciliation of the operational measures of both consolidated and segment-level EBITDA and EBITDA Margins (excluding special items) to the most directly comparable GAAP measures, net sales, net income, and segment profit.

Consolidated EBITDA, as adjusted and EBITDA Margins, as adjusted

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
($ in millions)    2014     2013     2014     2013  

Net income

   $ 108      $ 80      $ 212      $ 160   

Add:

        

Restructuring and other charges

     7        5        65        37   

Pension settlement charge

     —          1        —          18   

Depreciation, depletion, and amortization

     93        96        279        289   

Interest expense

     54        39        160        117   

Income tax provision

     41        39        89        30   

Non-controlling interests

     —          —          —          2   

Deduct:

        

Insurance settlements

     —          —          (27     —     

Interest income

     (15     (4     (42     (8

Income from discontinued operations

     (1     (19     (1     (51

Non-controlling interests

     (2     —          (2     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA, as adjusted

   $ 285      $ 237      $ 733      $ 594   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

   $ 1,468      $ 1,378      $ 4,257      $ 4,079   

EBITDA Margin

     19.4     17.2     17.2     14.6

 

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Segment EBITDA and EBITDA Margins

 

($ in millions)    Sales      Segment
profit
    Depreciation
and
amortization
     EBITDA     EBITDA
Margins
 

Three Months Ended September 30, 2014

            

Food & Beverage

   $ 854       $ 107      $ 54       $ 161        18.9

Home, Health & Beauty

     183         12        16         28        15.3

Industrial

     150         26        11         37        24.7

Specialty Chemicals

     283         69        8         77        27.2

Community Development and Land Management

     8         (1     —           (1     NM   

Three Months Ended September 30, 2013

            

Food & Beverage

   $    796       $   86      $ 53       $ 139        17.5

Home, Health & Beauty

     185         6        19           25        13.5

Industrial

     132         16        9         25        18.9

Specialty Chemicals

     260         66        8         74        28.5

Community Development and Land Management

     6         (3     —           (3     NM   

 

($ in millions)    Sales      Segment
profit
    Depreciation
and
amortization
     EBITDA     EBITDA
Margins
 

Nine Months Ended September 30, 2014

            

Food & Beverage

   $ 2,463       $ 255      $ 162       $ 417        16.9

Home, Health & Beauty

     590         41        49         90        15.3

Industrial

     421         59        32         91        21.6

Specialty Chemicals

     800         189        24         213        26.6

Community Development and Land Management

     13         (7     1         (6     NM   

Nine Months Ended September 30, 2013

            

Food & Beverage

   $ 2,359       $ 178      $ 163       $ 341        14.5

Home, Health & Beauty

     561         17        51         68        12.1

Industrial

     402         47        29         76        18.9

Specialty Chemicals

     746         176        25         201        26.9

Community Development and Land Management

     14         (10     1         (9     NM   

 

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FORWARD-LOOKING STATEMENTS

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. Such information includes, without limitation, the business outlook, assessment of market conditions, anticipated financial and operating results, strategies, future plans, contingencies and contemplated transactions of the company. Such forward-looking statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors which may cause or contribute to actual results of company operations, or the performance or achievements of the company, or industry results, to differ materially from those expressed or implied by the forward-looking statements. In addition to any such risks, uncertainties and other factors discussed elsewhere herein, risks, uncertainties, and other factors that could cause or contribute to actual results differing materially from those expressed or implied by the forward-looking statements include, but are not limited to, events or circumstances which affect the ability of MeadWestvaco to realize improvements in operating earnings from the company’s ongoing cost reduction initiatives; the ability of MeadWestvaco to close announced and pending transactions; competitive pricing for the company’s products; impact from unpredictable costs of energy and raw materials, including wood fiber and other input costs; fluctuations in demand and changes in production capacities; relative growth or decline in the United States and international economies; government policies and regulations, including, but not limited to those affecting the environment, climate change, tax policies and the tobacco industry; the company’s continued ability to reach agreement with its unionized employees on collective bargaining agreements; the company’s ability to maximize the value of its development land holdings; adverse results in current or future litigation; currency movements; volatility or deterioration of the capital markets; and other risk factors discussed in the company’s Annual Report on Form 10-K for the year ended December 31, 2013, and in other filings made from time to time with the SEC. MeadWestvaco undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. Investors are advised, however, to consult any further disclosures made on related subjects in the company’s reports filed with the SEC.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of the company’s exposure to market risk, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in the company’s Annual Report on Form 10-K for the year ended December 31, 2013. There was no material change in the company’s exposure to market risk from December 31, 2013 to September 30, 2014.

 

Item 4. CONTROLS AND PROCEDURES

Evaluation of the Company’s Disclosure Controls and Procedures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, we evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934). This evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Based on the evaluation of disclosure controls and procedures, our CEO and CFO have concluded that the disclosure controls and procedures were effective, as of September 30, 2014, to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our CEO and CFO, and other persons responsible for preparing such reports to allow timely decisions regarding required disclosure and that it is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting.

During the three months ended September 30, 2014, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially effect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

During the three months ended September 30, 2014, there have been no material changes to legal proceedings from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Item 1A. RISK FACTORS

During the three months ended September 30, 2014, there have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Common stock shares repurchased by the company during the three months ended September 30, 2014 are as follows:

 

     Total
Number of
Shares Purchased
     Average Price
Paid per Share
     Total Number of
Shares Purchased as
Part of Publicly

Announced Plans or
Programs
     Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs 1
 

July 1, 2014 – July 31, 2014

     —           —           —           4,417,154   

August 1, 2014 – August 31, 2014

     —           —           —           4,417,154   

September 1, 2014 – September 30, 2014

     1,065,908       $ 41.76         1,065,908         4,417,154   
  

 

 

    

 

 

    

 

 

    
     1,065,908       $ 41.76         1,065,908      

 

1  On January 28, 2013, the company’s Board of Directors authorized a stock repurchase plan of 5 million shares. Any purchases made under this plan are made opportunistically. There were no stock purchases related to this program in the third quarter of 2014. The number of shares available under this program at September 30, 2014 was 4,417,154 shares. This program will expire upon the purchase of the remaining available shares.

On January 27, 2014 the company’s Board of Directors approved approximately $394 million of share repurchases which comprised of $307 million under an accelerated share repurchase program and $87 million pursuant to open market repurchases.

During the third quarter of 2014, the company purchased and retired 1,065,908 common shares under the open market repurchases program for $44 million. In October 2014, the company purchased and retired 1,064,571 common shares for $43 million. The third quarter and October 2014 purchases completed the $394 million share repurchase program.

 

Item 5. OTHER INFORMATION

On October 30, 2014, MeadWestvaco Corporation (the “company”) entered into an agreement (the “Agreement”) with Mr. James A. Buzzard , its former President, for Mr. Buzzard to provide advisory services to management in support of the company’s manufacturing and commercial activities. Under the Agreement, Mr. Buzzard will serve as a consultant through November 30, 2014 and receive a monthly retainer of $15,000. The Agreement may be extended on a month-to-month basis subject to approval of the parties.

This summary of the Agreement is qualified in its entirety by a copy of the Agreement which is attached as Exhibit 10.2 and incorporated by reference herein.

 

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MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

 

Item 6. EXHIBITS

 

  10.1    Agreement between MeadWestvaco Corporation and Mark T. Watkins, dated September 30, 2014
  10.2    Agreement between MeadWestvaco Corporation and James A. Buzzard, dated October 1, 2014
  31.1    Rule 13a-14(a) Certification by Chief Executive Officer
  31.2    Rule 13a-14(a) Certification by Chief Financial Officer
  32.1    Section 1350 Certification by Chief Executive Officer
  32.2    Section 1350 Certification by Chief Financial Officer
101    XBRL Instance Document and Related Items

 

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Table of Contents

MEADWESTVACO CORPORATION

and Consolidated Subsidiary Companies

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    MEADWESTVACO CORPORATION
    (Registrant)

November 4, 2014

     

/s/ E. Mark Rajkowski

      E. Mark Rajkowski
      Chief Financial Officer

 

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