Item 1. Business
General
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.
On January 26, 2015, MWV announced it has entered into a Business Combination Agreement (the “Combination Agreement”) with Rock-Tenn Company (“Rock-Tenn”) to create a leading global provider of consumer and corrugated packaging (“TopCo”). Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies, MWV stockholders will receive 0.78 shares of TopCo for each share of MWV held. Rock-Tenn shareholders will be entitled to elect to receive either (a) 1.00 shares of TopCo or (b) cash in an amount equal to the volume weighted average price of Rock-Tenn common stock during a five-day period ending three trading days prior to closing for each share of Rock-Tenn held. The cash and stock elections by Rock-Tenn shareholders will be subject to proration such that the resulting ownership of TopCo will be approximately 50.1% by MWV shareholders and 49.9% by Rock-Tenn shareholders, and it is estimated that approximately 7% of Rock-Tenn shares will be converted into cash in lieu of stock.
The completion of the Mergers is subject to the satisfaction or waiver of certain conditions, including (i) the adoption of the Combination Agreement by the affirmative vote of the holders of a majority of all outstanding shares of MWV Common Stock entitled to vote thereon; (ii) the approval of the Combination Agreement by the affirmative vote of the holders of a majority of all outstanding shares of Rock-Tenn Common Stock entitled to vote thereon; (iii) the receipt of certain domestic and foreign governmental approvals; (iv) the receipt of certain tax opinions; (v) the absence of any law or order prohibiting the Mergers; (vi) the effectiveness of the Form S-4; and (vii) the absence of a material adverse effect on Rock-Tenn or MWV. Both parties target closing the transaction in the second calendar quarter of 2015.
The Combination Agreement contains mutual customary representations and warranties made by each of Rock-Tenn and MWV, and also contains mutual customary pre-closing covenants, including covenants, among others, (i) to operate its businesses in the ordinary course consistent with past practice and to refrain from taking certain actions without the other party’s consent, (ii) not to solicit, initiate, knowingly encourage or take any other action designed to facilitate, and, subject to certain exceptions, not to participate in any discussions or negotiations, or cooperate in any way with respect to, any inquiries or the making of, any proposal of an alternative transaction or to withdraw the support of its Board of Directors for the Mergers, and (iii) to use their respective reasonable best efforts to obtain governmental, regulatory and third party approvals.
The Combination Agreement contains certain termination rights for each of MWV and Rock-Tenn, including in the event that (i) the Mergers are not consummated on or before January 25, 2016, (ii) the approval of the stockholders of MWV or the shareholders of Rock-Tenn is not obtained at a shareholder meeting or (iii) either MWV or Rock-Tenn terminates the Combination Agreement to enter into a binding agreement providing for a superior alternative transaction. The Combination Agreement further provides that, upon termination of the Combination Agreement under specified circumstances, including a change
in the recommendation of the Board of Directors of MWV or Rock-Tenn or a termination of the Combination Agreement by MWV or Rock-Tenn to enter into a binding agreement providing for a superior alternative transaction, MWV or Rock-Tenn, as the case may be, will pay to the other party a termination fee equal to $230 million in cash.
TopCo will have a Board of Directors consisting initially of fourteen directors, (i) eight of whom will be persons designated by Rock-Tenn from the directors of Rock-Tenn as of the date of the Combination Agreement, one of whom will be Mr. Steven C. Voorhees, and (ii) six of whom will be persons designated by MWV from the directors of MWV as of the date of the Combination Agreement, one of whom will be Mr. John A. Luke, Jr.
Under the terms of the Combination Agreement, as of the Effective Time, Mr. Voorhees will be appointed as the Chief Executive Officer and President of TopCo and Mr. Luke will be designated as Non-Executive Chairman of TopCo.
The Combination Agreement provides that, at the Effective Time, the MWV stock options and other equity awards and the Rock-Tenn stock options and other equity awards generally will convert upon the Effective Time into stock options and equity awards with respect to TopCo Common Stock, after giving effect to appropriate adjustments to reflect the consummation of the Mergers.
Additional information about the Combination Agreement is set forth in our Current Report on Form 8-K filed with the SEC on January 28, 2015.
Refer to Part I, Item 1A
Item 1A. Risk factors
Risks relating to the Merger Transaction
On January 25, 2015, the company entered into a Business Combination Agreement (the “Combination Agreement,” and the transactions contemplated thereby, collectively, the “Combination Transaction”, “Business Combination” or “Merger Transaction”) with Rock-Tenn to create a leading global provider of consumer and corrugated packaging. In the Combination Agreement, MWV and Rock-Tenn have agreed, subject to the terms and conditions of the Combination Agreement, to effect a strategic combination of their respective businesses by: (i) Rock-Tenn forming a new holding company organized under the laws of Delaware, the name of which will be mutually agreed upon by Rock-Tenn and MWV (“TopCo”), (ii) Rock-Tenn merging with a newly formed wholly owned direct subsidiary of TopCo, with Rock-Tenn surviving such merger as a direct wholly owned subsidiary of TopCo (the “Rock-Tenn Merger”), and (iii) MWV merging with and into a newly formed wholly owned direct subsidiary of TopCo, with such subsidiary surviving such merger as a direct wholly owned subsidiary of TopCo (the “MWV Merger” and, together with the Rock-Tenn Merger, the “Mergers”). Refer to Part I, Item 1 Business, for further details regarding the above transaction.
Failure to complete the proposed Combination Transaction could adversely affect the company’s business and the market price of our common stock.
There is no assurance that the closing of the proposed Combination Transaction will occur. Consummation of the Combination Transaction is subject to various conditions, including the adoption of the Combination Agreement by the stockholders of MWV and the shareholders of Rock-Tenn, the receipt of certain domestic and foreign governmental approvals, the absence of any law or order prohibiting the Mergers and certain other conditions. The company cannot predict with certainty whether and when any of these conditions will be satisfied. In addition, the Merger Agreement may be terminated under certain specified circumstances, including, but not limited to, a change in the recommendation of the Board of Directors of MWV or Rock-Tenn or a termination of the Combination Agreement by MWV or Rock-Tenn
to enter into a binding agreement providing for a superior alternative transaction. If the Combination Transaction is not consummated, and there are no other parties willing and able to enter into an alternative transaction with the company on terms acceptable to MWV, our stock price will likely decline as our stock has recently traded at prices based on the announcement of the proposed Business Combination. A failed transaction may also result in negative publicity and a negative impression of the company in the investment community. If the Combination Agreement is not adopted by our stockholders and the Rock-Tenn shareholders, or if the Mergers are not consummated for any other reason, there can be no assurance that any other transaction acceptable to us will be offered or that our business, prospects or results of operations will not be adversely affected. Upon termination of the Combination Agreement by us or Rock-Tenn under specified conditions, we may be required to pay a termination fee of $230 million to Rock-Tenn, or our remedy may be limited to receipt of a termination fee of $230 million from Rock-Tenn, and under some circumstances, we would not be entitled to receive any termination fee. The occurrence of any of these events individually or in combination could have a material adverse impact on the company’s results of operations and stock price.
We will incur substantial transaction-related costs in connection with the Merger Transaction.
The company has incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Business Combination, as well as the direction of management resources towards the Business Combination. We expect to incur additional costs associated with completing the Business Combination and combining the operations of the company and Rock-Tenn. Additional unanticipated costs may be incurred in the future.
MWV will be subject to business uncertainties and contractual restrictions while the combination transaction is pending.
Uncertainty about the effect of the combination on employees, suppliers and customers may have an adverse effect on MWV and consequently on the combined company. These uncertainties may impair each party’s ability to attract, retain and motivate key personnel until the combination is completed, and could cause suppliers, customers and others that deal with the parties to seek to change existing business relationships with them. Retention of certain employees may be challenging during the pendency of the combination, as certain employees may experience uncertainty about their future roles. If key employees depart because of issues related to the uncertainty and difficulty of integration or a desire not to remain with the businesses, the combined company’s business following the combination could be negatively impacted. In addition, the combination agreement restricts each of MWV and Rock-Tenn from making certain acquisitions and expenditures, entering into certain contracts, and taking other specified actions until the mergers occurs without the consent of the other party. These restrictions may prevent MWV from pursuing attractive business opportunities that may arise prior to the completion of the combination.
Putative stockholder class actions challenging the Business Combination have been filed, and an unfavorable judgment or ruling in any of these lawsuits could prevent or delay the consummation of the Business Combination and result in substantial costs.
Putative class actions challenging the Business Combination have been filed on behalf of the company’s stockholders. Among other remedies, the plaintiffs seek to enjoin the Business Combination from proceeding. The outcome of any such litigation is uncertain. Moreover, additional lawsuits related to the Business Combination may be filed against us, Rock-Tenn, and our affiliates and directors. These lawsuits could prevent or delay completion of Business Combination and/or result in substantial costs to us, including any costs associated with the indemnification of our directors. The company believes these actions are without merit.
Risks relating to our business
On January 8, 2015, the company announced approval of a plan to fully separate the Specialty Chemicals business. The separation is expected to be executed by means of a tax-free spinoff of the Specialty Chemicals business to MWV shareholders, resulting in two independent, publicly traded companies. The spinoff is expected to be completed by the end of 2015 and is subject to a legal opinion on the tax-free nature of the transaction. Failure to complete the transaction could adversely impact the market price of our common stock.
If the transaction is not completed for any reason, the price of MWV common stock may decline to the extent that the market price of MWV common stock reflects positive market assumptions that the transaction will be completed and the related benefits realized. The company may also be subject to additional risks if the transaction is not completed including potential disruption to the company’s Specialty Chemicals business and the distraction of its workforce and management team.
U.S. and global economic conditions could have an adverse effect on the profitability of some or all of our businesses.
Consumer and business confidence, the availability and cost of credit, consumer spending and business investment, the volatility and strength of the capital markets, and inflation all affect the business and economic environment and, ultimately, the profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower business investment and lower consumer spending, the demand for our products would be adversely affected. Adverse developments in the U.S., Europe or emerging markets, including Brazil and China, could negatively affect earnings and have a material adverse effect on our business, results of operations, cash flows and financial position. Such adverse effects could include the interruption of production at the facilities of our customers, the reduction, delay or cancellation of customer orders, delays in or the inability of customers to obtain financing to purchase our products, and bankruptcy of customers or other related parties. While we have procedures to monitor and limit exposure to credit risk, there can be no assurance such procedures will effectively limit our credit risk and avoid losses, which could have a material adverse effect on our operating results. In a challenging and uncertain economic environment, we cannot predict whether or when such adverse economic circumstances may occur, or what impact, if any, such circumstances could have on our business, results of operations, cash flow and financial position.
The company has announced a margin improvement program. If we fail to execute fully on this initiative, we may not realize all the improvements we have publicly announced.
In January of 2014, the company announced a program to generate increased earnings and cash flow. As of December 31, 2014, the company realized $85 million in savings. The program is expected to deliver total cumulative pre-tax cost savings of approximately $135 million by the end of 2015. Management is committed to achieving these goals and believes they are attainable. The company’s degree of success in attaining these objectives will affect its operating earnings and cash flow.
The company’s businesses are subject to significant cost pressures. Pricing volatility and our ability to pass higher costs on to our customers through price increases or other adjustments is uncertain and dependent on market conditions and may materially impact our results of operations.
The pricing environment for raw materials used in a number of our businesses can fluctuate. The company sources all wood fiber for its U.S. mills from third parties. Additionally, energy costs remain volatile and unpredictable. Further unpredictable increases in the cost of various essential materials, energy or freight may materially impact our results of operations. Depending on market forces and the terms of customer contracts, our ability to recover these costs through increased pricing may be limited.
The company faces intense competition in each of its businesses, and competitive challenges from lower cost manufacturers. If we cannot successfully compete in an increasingly global market place, our results of operations may be adversely affected.
The company operates in competitive domestic and international markets and competes with many large, well-established and highly competitive manufacturers and service providers, both domestically and on a global basis. The company’s businesses are facing competition from lower cost manufacturers in Asia and elsewhere. All of these conditions can contribute to substantial pricing and demand pressures, which could adversely affect the company’s operating results.
A key component of the company’s competitive position is MeadWestvaco’s ability to both innovate and manage expenses successfully. This requires continuous management focus on producing new and innovative products and solutions and reducing costs and improving efficiency through cost controls, productivity enhancements and regular appraisal of our asset portfolio.
The company’s markets are global. Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business, by fluctuations in currency exchange rates and other factors related to our international sales and operations.
For the year ended December 31, 2014, sales outside the U.S. were approximately 52% of total sales, which includes 19% of export sales to our foreign customers. We completed a substantial expansion of our corrugated packaging operations in Brazil as well as expanded our participation in other emerging markets, including China and India. As our international operations and activities expand, we inevitably have greater exposure to the risks of operating in many foreign countries. These factors include:
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Changes in foreign currency exchange rates which could adversely affect our competitive position, selling prices and manufacturing costs, and therefore the demand for our products in a particular market.
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Trade protection measures in favor of local producers of competing products, including government subsidies, tax benefits, trade actions (such as anti-dumping proceedings) and other measures giving local producers a competitive advantage over the company.
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Changes generally in political, regulatory or economic conditions in the countries in which we conduct business.
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Commercial and regulatory difficulties in markets where corrupt practices are frequently encountered.
These risks could affect the cost of manufacturing and selling our products, our pricing, sales volume, and ultimately our financial performance. The likelihood of such occurrences and their potential effect on the company vary from country to country and are unpredictable.
The company is subject to extensive regulation under various environmental laws and regulations, and is involved in various legal proceedings related to the environment. Environmental regulation and legal proceedings have the potential for involving significant costs and liability for the company.
The company’s operations are subject to a wide range of general and industry-specific environmental laws and regulations. The company has been focused for some time on improving energy efficiency which also reduces its emissions of carbon dioxide. In recent years, acting unilaterally, the company has reduced its carbon dioxide emissions from fossil fuels even as overall production has increased.
We report the direct greenhouse gas emissions for our major U.S. manufacturing facilities to the U.S. EPA which are publicly available on the EPA website, www.epa.gov, we also report the consolidated greenhouse gas emissions from all of our manufacturing facilities worldwide to the Carbon Disclosure Project (“CDP”).
The U.S. Environmental Protection Agency has announced, proposed or finalized numerous air emission regulations covering greenhouse gas emissions, new emission standards for industrial boilers and establishment of more stringent ambient air quality standards. Changes in environmental laws and regulations, or their application, could subject the company to significant additional capital expenditures and operating expenses in future years. However, any such changes are uncertain and, therefore, it is not possible for the company to predict with certainty the amount of additional capital expenditures or operating expenses that could be necessary for compliance with respect to any such changes.
The company is also subject to various environmental proceedings and may be subject to additional proceedings in the future. In the case of known potential liabilities, it is management’s 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. The company could also be subject to new environmental proceedings which could cause the company to incur substantial additional costs with resulting impact on results of operations.
Material disruptions at one of our major manufacturing facilities could negatively impact our financial results.
We take appropriate measures to minimize the risks of disruption at our facilities. A material operational disruption in one of our major facilities could negatively impact production and our financial results. Such a disruption could occur as a result of any number of events including but not limited to a major equipment failure, labor stoppages, inadequate supply of fiber, transportation failures affecting the supply and shipment of materials, severe weather conditions and disruptions in utility services.
The real estate industry is highly competitive and economically cyclical.
The company engages in value-added real estate development activities in the Charleston, South Carolina region, including obtaining entitlements and establishing joint ventures and other development-related arrangements. Our ability to execute our plans to realize the greater value associated with our development land holdings may be affected by the following factors, among others:
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General economic conditions, including credit markets and interest rates.
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Local real estate market conditions, including competition from sellers of land and real estate developers.
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Impact of federal, state and local laws and regulations affecting land use, land use entitlements, land protection and zoning.
Item 1B.
Item 1B. Unresolved staff comments
None.
Item 2.
Item 2. Properties
MeadWestvaco’s global headquarters are located in Richmond, Virginia. MeadWestvaco believes that its facilities have sufficient capacity to meet current production requirements. The locations of MeadWestvaco’s production facilities by reporting segment and research facilities are currently as follows:
Food & Beverage
Ajax, Ontario, Canada
Lanett, Alabama
Appomattox, Virginia
Low Moor, Virginia
Atlanta, Georgia
Moscow, Russian Federation (Leased)
Bilbao, Spain
Roosendaal, The Netherlands
Bristol, United Kingdom
Săo Paulo, Săo Paulo, Brazil (Leased)
Buenos Aires, Argentina (Leased)
Santiago de Chile, Chile (Leased)
Chicago, Illinois
Shimada, Japan
Cottonton, Alabama
Silsbee, Texas
Covington, Virginia
Smyrna, Georgia
Deols, France
Svitavy, Czech Republic
Evadale, Texas
Trier, Germany
Graz, Austria
Venlo, The Netherlands
Krakow, Poland
Home, Health & Beauty
Aqua Branca, Săo Paulo, Brazil
St. Petersburg, FL (Leased)
Barcelona, Spain
Tecate, Mexico (Leased)
Dublin, Ireland (Leased)
Tijuana, Mexico (Leased)
Grandview, Missouri
Valinhos, Săo Paulo, Brazil
Hemer, Germany
Vicenza, Italy
Mebane, North Carolina
Vise, Belgium (Leased)
Milan, Italy
Waalwijk, The Netherlands (Leased)
San Luis Potosi, Mexico
Winfield, Kansas
Sion, Switzerland (Leased)
Wuxi, People’s Republic of China
Slatersville, Rhode Island (Leased)
Industrial
Araçatuba, Săo Paulo, Brazil
Pune, India
Blumenau, Santa Catarina, Brazil
Tres Barras, Santa Catarina, Brazil
Morai, Gujarat, India
Valinhos, Săo Paulo, Brazil
Pacajus, Ceara, Brazil
Vapi, India
Specialty Chemicals
Covington, Virginia
Palmeira, Santa Catarina, Brazil
DeRidder, Louisiana
Waynesboro, Georgia
Duque de Caxias, Rio de Janeiro, Brazil
Wickliffe, Kentucky
North Charleston, South Carolina
Wuijang, People’s Republic of China
Community Development and Land Management Group and Forestry Centers
Ridgeville, South Carolina
Tres Barras, Santa Catarina, Brazil
Summerville, South Carolina
Woodbine, Georgia
Research Facilities
North Charleston, South Carolina
Shekou Shenzhen, People’s Republic of China
Richmond, Virginia (Leased)
Tres Barras, Santa Catarina, Brazil
Leases
For financial data on MeadWestvaco’s lease commitments, see Note I of Notes to Consolidated Financial Statements included in Part II, Item 8.
Other information
MeadWestvaco owns all of the facilities listed above, except as noted.
A limited number of MeadWestvaco facilities are owned, in whole or in part, by municipal or other public authorities pursuant to standard industrial revenue bond financing arrangements and are accounted for as property owned by MeadWestvaco. MeadWestvaco holds options under which it may purchase each of these facilities from such authorities by paying a nominal purchase price and assuming the indebtedness of the industrial revenue bonds at the time of the purchase.
As of December 31, 2014, MeadWestvaco owned approximately 94,000 acres of development landholdings in the Charleston, South Carolina region and approximately 135,000 acres of forestlands in Brazil (more than 1,200 miles from the Amazon rainforest).
Item 3.
Item 3. Legal proceedings
MeadWestvaco is involved in various litigation and administrative proceedings arising in the normal course of business. Although the ultimate outcome of such matters cannot be predicted with certainty, MeadWestvaco does not believe that the currently expected outcome of any proceeding, lawsuit or claim that is pending or threatened, or all of them combined, will have a material adverse effect on its 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.
Additional information is included in the “Environmental laws and regulations” discussion within Part I, Item 1, and in Note P of Notes to Consolidated Financial Statements included in Part II, Item 8. These sections are incorporated herein by reference.
Item 4.
Item 4. Mine safety disclosures
Not applicable.
Executive officers of the registrant
* As of February 23, 2015
** Director of MeadWestvaco
MeadWestvaco’s officers are elected by the Board of Directors annually for one-year terms. There are no family relationships among any of our directors or executive officers or understandings between any executive officer and any other person pursuant to which the officer was selected as an officer.
John A. Luke, Jr., President and Chief Executive Officer, 2002-2003; Chairman of the Board, Chief Executive Officer and President of Westvaco, 1996-2002;
Robert K. Beckler, Senior Vice President, 2012-2014; President, Rigesa, 2010-2014; President, Specialty Chemicals, 2007-2010; Vice President, Specialty Chemicals, 2004-2007;
Robert A. Feeser, Senior Vice President, 2010-2014; President, Packaging Resources Group 2004-2010; Vice President, Packaging Group 2002-2004; President, Containerboard Division 2000-2002; President, Gilbert Paper Company 1997-2000;
E. Mark Rajkowski, Vice President, Eastman Kodak Company and General Manager Worldwide Operations for Kodak’s Digital and Film Imaging Systems Business, 2003-2004; Chief Operating Officer of Eastman Kodak’s Consumer Digital Business, 2003; Vice President, Finance of Eastman Kodak, 2001-2002; Corporate Controller of Eastman Kodak, 1998-2001;
Peter C. Durette, Vice President and Chief Strategy Officer, 2009-2012; Vice President of Strategy & Business Development at Textron Inc., 2008-2009; Principal/Partner at Marakon Associates, 2004-2008;
Linda V. Schreiner, Senior Vice President of Westvaco, 2000-2002; Manager of Strategic Leadership Development, 1999-2000; Senior Manager of Arthur D. Little, Inc., 1998-1999; Vice President of Signet Banking Corporation, 1988-1998;
Wendell L. Willkie, II, Senior Vice President and General Counsel of Westvaco, 1996-2002;
Robert E. Birkenholz, Treasurer, 2004-2011, Assistant Treasurer, 2003-2004; Assistant Treasurer, Amerada Hess Corporation, 1997-2002;
Donna O. Cox, Director, External Communications, 2003-2005; Manager, Integration/Internal Communications, 2002-2003; Public Affairs Manager of Westvaco’s Packaging Resources Group, 1999-2002;
Brent A. Harwood, Assistant Controller, 2006-2012; Controller, Cadmus Communications Corporation, 2001-2006; Deloitte & Touche LLP, 1990-2001.
Part II
Item 5.
Item 5. Market for the registrant’s common equity, related stockholder matters and issuer purchases of equity securities
(a) Market and price range of common stock
MeadWestvaco’s common stock is traded on the New York Stock Exchange under the symbol MWV.
This table reflects the range of market prices of MeadWestvaco common stock as quoted in the New York Stock Exchange Composite Transactions.
(b) Approximate number of common shareholders
At January 30, 2015, the number of shareholders of record of MeadWestvaco common stock was approximately 17,000. This number includes approximately 10,000 current or former employees of the company who were MeadWestvaco shareholders by virtue of their participation in our savings and investment plans.
(c) Dividends
The following table reflects historical dividend information for MeadWestvaco for the periods indicated.
(1) Dividends per share for the first quarter of 2014 include a special dividend of $1.00 per share paid on March 3, 2014.
On January 26, 2015 the Board of Directors of MeadWestvaco approved a regular quarterly dividend of $0.25 per common share, to be paid on March 2, 2015 to shareholders of record as of February 5, 2015.
(d) Stock repurchases
Common stock shares repurchased by the company during the three months ended December 31, 2014 are as follows:
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 fourth quarter of 2014. The number of shares available under this program at December 31, 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. Purchases in the fourth quarter of 2014 completed the $394 million share repurchase program.
Item 6.
Item 6. Selected financial data
Dollars in millions, except per share data
2014 results include after-tax restructuring and other charges of $81 million, or $0.47 per share, after-tax income of $17 million, or $0.10 per share, related to an insurance settlement regarding litigation claims and discrete income tax benefits of $9 million, or $0.05 per share.
2013 results include after-tax income from the release of reserves for alternative fuel mixture credits of $165 million, or $0.92 per share, after-tax restructuring and other charges of $32 million, or $0.18 per share, after-tax pension settlement charges of $11 million, or $0.06 per share, and discrete income tax benefits of $13 million, or $0.07 per share. 2013 results also include after-tax income from discontinued operations of $519 million, or $2.88 per share.
2012 results include after-tax restructuring charges of $17 million, or $0.10 per share, an after-tax benefit from cellulosic biofuel producer credits, net of exchange of alternative fuel mixture credits of $9 million, or $.06 per share. 2012 results also include after-tax income from discontinued operations of $52 million, or $0.29 per share.
2011 results include after-tax restructuring charges of $19 million, or $0.11 per share and an after-tax benefit plan charge of $6 million or $0.03 per share. 2011 results also include after-tax income from discontinued operations of $69 million, or $0.40 per share.
2010 results include after-tax restructuring charges of $34 million, or $0.20 per share, tax benefits of $29 million, or $0.17 per share, from cellulosic biofuel producer credits and audit settlements, an after-tax gain of $5 million, or $0.03 per share, related to post-retirement and pension curtailments, and an after-tax charge of $4 million, or $0.02 per share, from early extinguishment of debt. 2010 results also include an after-tax loss from discontinued operations of $31 million, or $0.17 per share.
Dividends declared in 2014 include a special dividend of $1.00 per share paid on March 3, 2014.
Item 7.
Item 7. Management’s discussion and analysis of financial condition and results of operations
OVERVIEW
For the year ended December 31, 2014, the company increased sales by 5% 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, as well as the impacts from the dispositions 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 year ended December 31, 2014, income from continuing operations before income taxes increased by 79% to $397 million compared to $222 million in 2013. Earnings before interest, taxes, depreciation, and amortization (“EBITDA”), adjusted to exclude special items, increased 22% to $979 million, or 17.4% of sales, for the year ended December 31, 2014 compared to $802 million, or 14.9% 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 the year ended December 31, 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 year ended December 31, 2014, income from continuing operations attributable to the company was $262 million, or $1.53 per share, compared to $320 million, or $1.78 per share, for the year ended December 31, 2013. The results from continuing operations attributable to the company for the year ended December 31, 2014 include after-tax restructuring and other charges of $81 million, or $0.47 per share, after-tax income of $17 million, or $0.10 per share from an insurance settlement regarding litigation claims, and discrete income tax benefits of $9 million, or $0.05 per share. The results from continuing operations attributable to the company for the year ended December 31, 2013 include after-tax restructuring and other charges of $32 million, or $0.18 per share, an after-tax pension settlement charge of $12 million, or $0.06 per share, after-tax income from the release of reserves for alternative fuel mixture credits of $166 million, or $0.92 per share, and discrete income tax benefits of $13 million, or $0.07 per share.
Cash provided by operating activities from continuing operations increased to $381 million for the year ended December 31, 2014 compared to $358 million for the year ended December 31, 2013, primarily reflecting improved cash earnings compared to 2013. Capital expenditures declined to $346 million for the year ended December 31, 2014 compared to $506 million for the year ended December 31, 2013, reflecting lower overall investment spending primarily related to the Covington biomass boiler, which was completed in the fourth quarter of 2013.
Savings associated with the previously announced margin improvement program were $85 million for the year ended December 31, 2014. The company expects to achieve approximately $135 million of cumulative savings by the end of 2015.
OUTLOOK
For the first quarter of 2015, earnings excluding special items are expected to be modestly above year-ago levels on a continuing operations basis. The company expects to generate improvement across each of its business segments from ongoing benefits of its commercial and operational excellence strategies, continued contributions from its growth and productivity investments, and savings from its margin improvement initiatives. Benefits from these internal improvement drivers will be substantially offset by non-operational factors of lower pension income and unfavorable foreign exchange. Pension income is expected to be approximately $62 million pre-tax in 2015, excluding impacts from any settlements, curtailments and termination benefits, due largely to the recently revised mortality assumptions and lower interest rates. As such, pension income is expected to be approximately $15 million pre-tax in the first quarter of 2015 compared to $30 million pre-tax in the first quarter of 2014. Unfavorable foreign exchange, principally the Euro and the Real, is expected to negatively impact first quarter 2015 pre-tax earnings by about $10 million on a year-over-year basis.
Recent Developments
On January 26, 2015, MWV announced it has entered into a definitive combination agreement with Rock-Tenn to create a leading global provider of consumer and corrugated packaging (“TopCo”). Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies, MWV stockholders will receive 0.78 shares of TopCo for each share of MWV held. Rock-Tenn shareholders will be entitled to elect to receive either (a) 1.00 shares of TopCo or (b) cash in an amount equal to the volume weighted average price of Rock-Tenn common stock during a five-day period ending three trading days prior to closing for each share of Rock-Tenn held. The cash and stock elections by Rock-Tenn shareholders will be subject to proration such that the resulting ownership of TopCo will be approximately 50.1% by MWV shareholders and 49.9% by Rock-Tenn shareholders, and it is estimated that approximately 7% of Rock-Tenn shares will be converted into cash in lieu of stock. The transaction requires the approval of shareholders of both MWV and Rock-Tenn and is subject to receipt of certain regulatory approvals and other customary closing conditions. The company targets closing the transaction in the second calendar quarter of 2015. Refer to Part I, Item 1A Risk Factors, for further details regarding the above transaction.
On January 22, 2015, the company announced it has signed a definitive agreement to sell its European Tobacco Folding Carton business to AR Packing Group AB. Pre-tax restructuring charges of $30 million related to asset write-downs were recorded in the fourth quarter of 2014. The transaction is expected to be completed during the first half of 2015.
On January 8, 2015, the company announced its Board of Directors has approved a plan to fully separate its Specialty Chemicals business from the rest of the company. The separation is expected to be executed by means of a tax-free spinoff of the Specialty Chemicals business. The spinoff is expected to be completed by the end of 2015. Refer to Part I, Item 1A Risk Factors, for further details regarding the above transaction.
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 report.
RESULTS OF OPERATIONS
The following table summarizes MWV’s results for the years ended December 31, 2014, 2013 and 2012, as reported in accordance with accounting principles generally accepted in the U.S (“GAAP”). All references to per share amounts are presented on an after-tax basis.
Comparison of Years Ended December 31, 2014 and 2013
Sales increased 5% to $5.63 billion for the year ended December 31, 2014 compared to $5.39 billion for the year ended December 31, 2013. Refer to the segment discussions herein for further information regarding the increase in sales for the year ended December 31, 2014.
Cost of sales (“COS”) was $4.47 billion for the year ended December 31, 2014 compared to $4.43 billion for the year ended December 31, 2013. The increase in COS for the year ended December 31, 2014 was primarily driven by the impacts of volume growth as well as input cost inflation for energy, raw materials and freight which were $67 million higher compared to 2013. These impacts were partially offset by improved productivity compared to 2013.
Selling, general and administrative expenses (“SG&A”) was $607 million, or 10.8% of sales, for the year ended December 31, 2014 compared to $638 million, or 11.8% of sales, for the year ended December 31, 2013. The 100 basis point reduction in SG&A as a percent of sales was primarily driven from the
company’s cost savings program, including a 17% 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 $32 million, as noted below.
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 years ended December 31, 2014, 2013 and 2012 are presented below. Although these charges related to individual segments, such amounts are included in Corporate and Other for segment reporting purposes.
Year ended December 31, 2014
Year ended December 31, 2013
Pension income from continuing operations was $101 million (net of charges for curtailments, settlements and termination benefits of $20 million) for the year ended December 31, 2014 and $85 million (net of charges for settlements and termination benefits of $21 million) for the year ended December 31, 2013. Pension income is recorded in COS (approximately 75%) and SG&A (approximately 25%) and is included in Corporate and Other for segment reporting purposes. Pension income is expected to be approximately $62 million in 2015, excluding impacts from any settlements, curtailments and termination benefits. Lower expected pension income in 2015 compared to 2014 is due in part to the impact of the company’s adoption of recently published mortality assumptions.
Interest expense was $213 million for the year ended December 31, 2014 and was comprised of $134 million related to bond and bank debt, $44 million related to long-term obligations non-recourse to MWV, $25 million related to borrowings under life insurance policies and $10 million related to other borrowings. Interest expense was $159 million for the year ended December 31, 2013 and was comprised of $121 million related to bond and bank debt, $4 million related to a long-term obligation non-recourse to MWV, $24 million related to borrowings under life insurance policies and $10 million related to other borrowings.
Other income, net was $51 million and $59 million for the years ended December 31, 2014 and 2013, respectively, and was comprised of the following:
Interest income includes $45 million for the year ended December 31, 2014 related to a long-term note receivable from the 2013 transaction with Plum Creek.
In the fourth quarter of 2013, the company released $24 million of reserves related to alternative fuel mixture credits. In the fourth quarter of 2012, the company made a determination to claim cellulosic biofuel producer credits in 2013 in exchange for the repayment of $15 million of alternative fuel mixture credits received from excise tax filings during 2009 and 2010
For the year ended December 31, 2014, Other, net includes restructuring charges of $14 million associated with the loss on the sale of the European beauty and personal care folding carton business and $6 million related to goodwill impairment associated with the planned sale of the European tobacco folding carton business.
The company’s effective tax rate attributable to continuing operations was 29% for the year ended December 31, 2014 and the effective tax rate benefit attributable to continuing operations was 44% for the year ended December 31, 2013. The differences in the effective tax rate for the year ended December 31, 2014 compared to statutory rates were primarily from the mix and levels of domestic and foreign earnings as well as discrete items. For the year ended December 31, 2013, an income tax benefit of $142 million related to the release of reserves for alternative fuel mixture credit as a result of the settlement of certain audits is reflected within the tax provision. In addition, for the year ended December 31, 2013 differences in the effective rate compared to statutory rates were primarily from the mix and levels of domestic and foreign earnings as well as other discrete items.
Discontinued operations presented in the consolidated statements of operations for the years ended December 31, 2014, 2013 and 2012 primarily relate to the sale of the company’s forestry and minerals-related businesses on December 6, 2013 and the spinoff of the Consumer & Office Products business on May 1, 2012. Refer to Note S of Notes to Consolidated Financial Statements included in Part II, Item 8 for further information.
In addition to the information discussed above, the following sections discuss the results of operations for each of the company’s segments. 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 Item 1 Business for a description of each of the company’s segments.
Refer to Note U of Notes to Consolidated Financial Statements included in Part II, Item 8 for a reconciliation of the sum of the results of the segments and Corporate and Other to consolidated income from continuing operations before income taxes. 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 alternative fuel mixture credits, restructuring charges, pension income and curtailment gains and losses, interest expense and income, certain legal settlements, gains and losses on certain asset sales and other items.
Food & Beverage
Segment profit is measured as results before restructuring charges, pension income, interest expense and income, income taxes, and non-controlling interest income and losses.
Sales for the Food & Beverage segment were $3.2 billion and $3.1 billion for the years ended December 31, 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 as well as out-performance of market trends within premium paperboard 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 as well as offset unfavorable foreign currency exchange compared to 2013. Sales also increased in global tobacco packaging, driven by gains in North America and new customers in Asia compared to 2013.
Profit for the Food & Beverage segment was $326 million and $239 million for the years ended December 31, 2014 and 2013, respectively. Profit increased in 2014 primarily due to $85 million from favorable pricing and product mix, $65 million from favorable productivity, including savings from cost reduction initiatives and benefit from the biomass boiler at the company’s mill in Covington, Virginia, $14 million from higher volumes, and $3 million from other drivers compared to 2013. These benefits were partially offset by $50 million from inflation and $30 million of costs related to severe winter weather disruptions in the U.S. compared to 2013. EBITDA increased 19% to $543 million for the year ended December 31, 2014 compared to $456 million for the year ended December 31, 2013. Refer to the “Use of Non-GAAP Measures” section herein for further information.
Home, Health & Beauty
Segment profit is measured as results before restructuring charges, pension income, interest expense and income, income taxes, and non-controlling interest income and losses.
Sales for the Home, Health & Beauty segment were $781 million and $743 million for the years ended December 31, 2014 and 2013, respectively. Sales increased in 2014 due to volume gains with new innovative and higher-value products, particularly in the fragrance markets, trigger sprayers for home cleaning, and aerosol actuators for air care compared to 2013. Sales also increased in 2014 primarily due to the rebound in the North American lawn and garden market which drove volume growth in hose-end sprayers compared to 2013. Within the healthcare packaging market, sales growth in 2014 was driven by gains in secondary and adherence packaging 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 $55 million and $21 million for the years ended December 31, 2014 and 2013, respectively. Profit increased in 2014 due to $26 million from improved productivity, including savings from cost reduction initiatives, $9 million from higher volumes, $9 million from improved pricing and product mix, and $9 million from other drivers compared to 2013. These benefits were partially offset by $18 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 $119 million for the year ended December 31, 2014 compared to $90 million for the year ended December 31, 2013. Refer to the “Use of Non-GAAP Measures” section herein for further information.
Industrial
Segment profit is measured as results before restructuring charges, pension income, interest expense and income, income taxes, and non-controlling interest income and losses.
Sales for the Industrial segment were $560 million and $548 million for the years ended December 31, 2014 and 2013, respectively. Sales increased in 2014 due to volume growth and improved pricing and product mix across targeted paperboard and corrugated markets compared to 2013. Sales growth in Brazil 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. Sales growth in India was driven by enhanced machine productivity and execution of commercial strategies with key brand owners compared to 2013. These benefits were partially offset by unfavorable foreign currency exchange compared to 2013.
Profit for the Industrial segment was $86 million and $65 million for the years ended December 31, 2014 and 2013, respectively. Profit increased in 2014 due to $42 million from improved pricing and product mix, $18 million from improved productivity, including savings from cost reduction initiatives, and $2 million from higher volumes compared to 2013. These benefits were partially offset by $28 million from inflation and $13 million from unfavorable foreign currency exchange and other drivers compared to 2013. EBITDA increased 22% to $128 million for the year ended December 31, 2014 compared to $105 million for the year ended December 31, 2013. Refer to the “Use of Non-GAAP Measures” section herein for further information.
Specialty Chemicals
Segment profit is measured as results before restructuring charges, pension income, interest expense and income, income taxes, and non-controlling interest income and losses.
Sales for the Specialty Chemicals segment were $1.0 billion and $980 million for the years ended December 31, 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 $242 million and $229 million for the years ended December 31, 2014 and 2013, respectively. Profit increased in 2014 primarily due to $18 million from higher volumes, $15 million from favorable productivity, including savings from cost reduction initiatives, and $6 million from favorable pricing and product mix compared to 2013. These benefits were partially offset by $14 million from unfavorable foreign currency exchange and other items and $12 million of inflation compared to 2013. EBITDA increased 5% to $275 million for the year ended December 31, 2014 compared to $262 million for the year ended December 31, 2013. Refer to the “Use of Non-GAAP Measures” section herein for further information.
Community Development and Land Management
Segment profit (loss) is measured as results before restructuring charges, pension income, interest expense and income, and income taxes.
Sales for the Community Development and Land Management segment were $58 million in 2014 compared to $20 million in 2013. Segment profit was $6 million in 2014 compared to a loss of $14 million in 2013. Sales and profit improvement in 2014 was driven by accelerated progress in real estate development projects and the ongoing improvement in the Charleston, South Carolina region market fundamentals.
Comparison of Years Ended December 31, 2013 and 2012
Sales from continuing operations increased 2% to $5.40 billion in 2013 compared to $5.29 billion in 2012. Refer to the segment discussions herein for further information regarding the increase in sales for the year ended December 31, 2013.
Costs of sales were $4.43 billion and $4.26 billion for the years ended December 31, 2013 and 2012, respectively. In 2013, costs increased in line with the sales contributions from the corrugated business in India and the pine chemicals business in Brazil which were both acquired during the fourth quarter of 2012. In addition, input costs for energy, raw materials and freight included in cost of sales were $28 million higher compared to 2012.
Selling, general and administrative expenses were $638 million, or 11.8% of sales, and $682 million, or 12.9% of sales, for the years ended December 31, 2013 and 2012, respectively. In 2013, lower overall selling, general and administrative expenses compared to 2012 reflect lower variable employee incentive and equity compensation, savings associated with the company’s cost reduction initiative, and higher pension income compared to 2012.
Restructuring charges attributable to individual segments and by nature of cost, as well as COS and SG&A classifications in the consolidated statements of operations for the years ended December 31, 2013 and 2012 are presented below. Although these charges related to individual segments, such amounts are included in Corporate and Other for segment reporting purposes.
Year ended December 31, 2013
Year ended December 31, 2012
Pension income from continuing operations was $85 million (net of charges for settlements and termination benefits of $21 million) and $69 million for the years ended December 31, 2013 and 2012, respectively.
Interest expense was $159 million for the year ended December 31, 2013 and was comprised of $121 million related to bond and bank debt, $4 million related to long-term obligations non-recourse to MWV, $24 million related to borrowings under life insurance policies and $10 million related to other borrowings. Interest expense was $152 million for the year ended December 31, 2012 and was comprised of $117 million related to bond and bank debt, $3 million related to a long-term obligation non-recourse to MWV, $23 million related to borrowings under life insurance policies and $9 million related to other borrowings.
Other income, net was $59 million and $14 million for the years ended December 31, 2013 and 2012, respectively, and was comprised of the following:
(1) In the fourth quarter of 2013, the company released $24 million of reserves related to alternative fuel mixture credits. In the fourth quarter of 2012, the company made a determination to claim cellulosic biofuel producer credits in 2013 in exchange for the repayment of $15 million of alternative fuel mixture credits received from excise tax filings during 2009 and 2010.
The company’s effective tax rate benefit attributable to continuing operations was 44% for the year ended December 31, 2013 and the effective tax rate provision attributable to continuing operations was 26% for the year ended December 31, 2012. For the year ended December 31, 2013, an income tax benefit of $142 million related to the release of reserves for alternative fuel mixture credit as a result of the settlement of certain audits is reflected within the tax provision. For the year ended December 31, 2012, an income tax benefit of $24 million related to cellulosic biofuel producer credits is reflected within the tax provision. For both 2013 and 2012, the effective tax rates also reflect the mix and levels of earnings between the company’s domestic and foreign operations.
Food & Beverage
Segment profit is measured as results before restructuring charges, pension income, interest expense and income, income taxes, and non-controlling interest income and losses.
Sales for the Food & Beverage segment were $3.11 billion in both 2013 and 2012. In 2013, benefits from growth in targeted food and beverage markets and favorable foreign currency exchange were offset by overall lower sales in tobacco packaging compared to 2012. Food packaging sales increased in 2013 primarily due to gains with major brand owners in a range of applications, including frozen food and club store packaging, as well as liquid packaging in Asia and Europe. In beverage packaging, sales were down compared to 2012 as strong sales in emerging markets and continued gains with large strategic soft drink and beer customers were more than offset by lower volumes across more developed markets. In tobacco packaging, the decline in sales was primarily due to the residual effects from economic impacts during the first half of 2013.
Profit for the Food & Beverage segment was $239 million in 2013 compared to $309 million in 2012. Profit in 2013 was negatively impacted by $28 million in higher costs from planned mill maintenance outages and $5 million from the negative impacts from operating challenges following a system implementation at the company’s paperboard mill in Covington, Virginia. The decline in 2013 was also driven by $27 million from inflation and $26 million from unfavorable pricing and product mix compared to 2012. Profit in 2013 benefited by $11 million from improved productivity, $3 million from increased volume and $2 million from favorable foreign currency exchange and other items compared to 2012.
EBITDA decreased 14% to $456 million for the year ended December 31, 2013 compared to $531 million for the year ended December 31, 2012. Refer to the “Use of Non-GAAP Measures” section herein for further information.
Home, Health & Beauty
Segment profit is measured as results before restructuring charges, pension income, interest expense and income, income taxes, and non-controlling interest income and losses.
Sales for the Home, Health & Beauty segment were $743 million in 2013 compared to $770 million in 2012. Sales decreased in 2013 primarily due to significant volume declines in home and garden packaging as well as beauty and personal care folding carton packaging in Europe and Brazil. The decline in beauty and personal care folding carton packaging was primarily due to the repurposing of the Brazilian folding carton facility. The strong lawn and garden season which drives volumes in home and garden packaging did not materialize due to unseasonably cool and wet weather in North America, and as a result, the overall market volume was down compared to 2012. In addition to the negative volume impacts of these market trends in home and garden packaging, volumes in 2013 were also negatively impacted by customer transitions to the next generation trigger sprayers in North America. These impacts were partially offset by volume gains in higher value beauty and personal care solutions, including strong gains in fragrance and airless dispensers compared to 2012. Healthcare sales increased from continued gains in medical dispensers compared to 2012.
Profit for the Home, Health & Beauty segment was $21 million in 2013 compared to $35 million in 2012. Profit in 2013 was negatively impacted by $18 million from inflation, $3 million from transformation costs to repurpose the segment’s Brazilian folding carton facility to manufacture higher value plastic pumps and dispensers and $3 million from certain asset write-downs compared to 2012. Profit in 2013 benefited by $6 million from favorable foreign currency exchange and other items, $2 million from improved productivity, $1 million from higher volume and $1 million from favorable pricing and product mix compared to 2012. EBITDA decreased 13% to $90 million for the year ended December 31, 2013 compared to $103 million for the year ended December 31, 2012. Refer to the “Use of Non-GAAP Measures” section herein for further information.
Industrial
Segment profit is measured as results before restructuring charges, pension income, interest expense and income, income taxes, and non-controlling interest income and losses.
Sales for the Industrial segment were $548 million in 2013 compared to $457 million in 2012. Sales growth in 2013 was driven by price improvement across targeted Brazilian packaging markets and revenue benefits from the addition of the high-quality industrial packaging materials business in India. During 2013, the segment increased prices in the Brazilian market to offset labor and input cost inflation. Volumes in Brazil were modestly higher year-over-year as gains in high-quality paper sales more than offset lower corrugated box sales. Volumes of corrugated products declined in 2013 due to pricing actions
the segment took to offset inflation and due to the sale of the Feira de Santana box plant early in the third quarter of 2013. Sales in 2013 were also impacted by unfavorable foreign currency exchange compared to 2012.
Profit for the Industrial segment was $65 million in 2013 compared to $49 million in 2012. Profit in 2013 benefited by $49 million from improved pricing and product mix, $4 million from improved productivity, and $2 million from higher volumes compared to 2012. Profit in 2013 was negatively impacted by $26 million from inflation, principally fiber and labor, and $13 million from unfavorable foreign currency exchange and other items compared to 2012. EBITDA increased 44% to $105 million for the year ended December 31, 2013 compared to $73 million for the year ended December 31, 2012. Refer to the “Use of Non-GAAP Measures” section herein for further information.
Specialty Chemicals
Segment profit is measured as results before restructuring charges, pension income, interest expense and income, income taxes, and non-controlling interest income and losses.
Sales for the Specialty Chemicals segment were $980 million in 2013 compared to $940 million in 2012. Sales increase in 2013 was led by benefits from the addition of the Brazilian pine chemicals business, which was acquired during the fourth quarter of 2012, as well as solid volume growth in targeted pine chemicals markets. During 2013, the segment continued to penetrate higher-value pine chemicals end markets of adhesives, asphalt and oilfield services. Carbon technology volumes increased during 2013 as global automobile manufacturers increased production in response to strong global demand. These gains were partially offset by unfavorable pricing in more standard product lines and unfavorable foreign currency exchange compared to 2012.
Profit for the Specialty Chemicals segment was $229 million in 2013 compared to $224 million in 2012. Profit in 2013 benefited by $14 million from non-recurring items related to certain legal and insurance settlements and contributions from the recently acquired pine chemicals business in Brazil, $5 million from higher volumes, and $2 million from improved productivity compared to 2012. Profit in 2013 was negatively impacted by $10 million from unfavorable pricing in more standard product lines and product mix and $6 million from planned and unplanned maintenance outages at the segment’s pine chemicals and carbon facilities compared to 2012. EBITDA increased 2% to $262 million for the year ended December 31, 2013 compared to $257 million for the year ended December 31, 2012. Refer to the “Use of Non-GAAP Measures” section herein for further information.
Community Development and Land Management
Segment profit is measured as results before restructuring charges, pension income, interest expense and income, and income taxes.
Sales on a continuing operations basis for the Community Development and Land Management segment were $20 million in 2013 compared to $18 million in 2012. Segment loss on a continuing operations basis was $14 million in 2013 compared to $13 million in 2012 and primarily reflects costs related to the ramp-up of the development business.
LIQUIDITY AND CAPITAL RESOURCES
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 2015. In addition, the company’s U.S. qualified retirement plans remain well over funded.
Cash and cash equivalents totaled $454 million at December 31, 2014, of which 54% was held in the U.S. with the remaining portions of 11% in Europe, 22% in Brazil and 13% in other foreign jurisdictions. The credit quality of the company’s portfolio of short-term investments remains strong with the majority of its cash equivalents invested in U.S. government securities. Of the company’s cash and cash equivalents, approximately 61% were invested in U.S. government securities at December 31, 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.
Operating activities
Cash provided by operating activities from continuing operations was $381 million in 2014, compared to $358 million in 2013 and $220 million in 2012. During 2014, cash flow generated by higher year-over-year cash earnings was partially 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 is expected to be largely recovered by the end of 2016 through lower federal tax payments. The increase in cash flow in 2013 compared to 2012 was primarily attributable to lower working capital levels.
Cash provided by operating activities from discontinued operations was $1 million in 2014, $79 million in 2013 and $218 million in 2012. Refer to Note S of Notes to Consolidated Financial Statements included in Part II, Item 8 for information regarding discontinued operations.
Investing activities
Cash used in investing activities from continuing operations was $260 million in 2014 compared to $481 million in 2013 and $736 million in 2012. The decrease in 2014 compared to the prior years was primarily due to lower overall investment spending, as described below.
Cash used in investing activities from continuing operations in 2014 was driven by capital expenditures of $346 million and contributions to joint ventures of $6 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, Virginia paperboard mill. Cash used in investing activities from continuing operations was also partially offset by proceeds from dispositions of assets of $51 million and other sources of funds of $2 million.
Cash used in investing activities from continuing operations in 2013 was driven by capital expenditures of $506 million, of which $127 million related to the new bio-mass boiler at the company’s paperboard mill in Covington, Virginia. Cash used in investing activities from continuing operations also reflects contributions to joint ventures of $20 million, payments for acquired businesses (net of cash acquired) of $2 million, and other uses of funds of $5 million, offset in part by proceeds from dispositions of assets of $52 million.
Cash used in investing activities from continuing operations in 2012 was driven by capital expenditures of $654 million, payments for acquired businesses (net of cash acquired) of $101 million, and contributions to joint ventures of $13 million, offset in part by proceeds from dispositions of assets of $29 million and other sources of funds of $3 million.
There were no cash flows in investing activities from discontinued operations for 2014. Cash provided by investing activities from discontinued operations was $70 million in 2013 and cash used in investing activities from discontinued operations was $63 million in 2012. Cash provided by discontinued operations in 2013 relates to proceeds received from the sale of certain assets related to the transaction with Plum Creek. Cash used in investing activities from discontinued operations in 2012 was driven primarily by cash deposits totaling $59 million held by the Consumer & Office Products business that was spun-off and subsequently merged with ACCO Brands Corporation on May 1, 2012.
Capital spending in 2015 is expected to be about $375 million driven primarily by certain productivity initiatives, maintenance capital and environmental compliance.
Financing activities
Cash used in financing activities from continuing operations was $708 million in 2014 compared to cash provided by financing activities from continuing operations of $393 million in 2013 and $378 million in 2012. The use of cash in 2014 was primarily driven by the returning to shareholders, through stock repurchases and a special dividend, proceeds from the sale of the company’s U.S. forestlands and related assets to Plum Creek during the fourth quarter of 2013.
Cash used in financing activities from continuing operations in 2014 was driven by stock repurchases of $399 million (including $307 million pursuant to an accelerated share repurchase program), dividend payments of $344 million (including a special dividend of $175 million), repayment of long-term debt of $101 million (including the repayment of $50 million from credit facility borrowings), and other uses of funds of $6 million. Cash provided by financing activities from continuing operations in 2014 included proceeds from the issuance of long-term debt of $77 million (including proceeds from credit facility borrowings of $50 million), proceeds from the exercise of employee stock options of $56 million, proceeds from notes payable and other short-term borrowings of $9 million.
Cash provided by financing activities from continuing operations in 2013 includes $774 million in proceeds under a secured financing agreement with a bank associated with the 2013 transaction with Plum Creek. Refer to Note R in Notes to Consolidated Financial Statements for further discussion of the 2013 transaction with Plum Creek. Cash provided by financing activities from continuing operations in 2013 also includes a non-controlling interest contribution of $152 million related to the formation of the land development partnership with Plum Creek, as well as proceeds from the exercises of stock options of $54 million, proceeds from notes payable and other short-term borrowings of $35 million and proceeds from long-term debt borrowings of $8 million. Cash used in financing activities from continuing operations in 2013 includes repayment of long-term debt of $293 million, dividend payments of $177 million, stock repurchases of $126 million, purchase of the remaining 50% non-controlling interest in a pharmaceutical packaging company for $13 million, and other uses of funds of $21 million.
Cash provided by financing activities from continuing operations in 2012 included proceeds from debt instruments totaling $460 million received in connection with the spin-off of the Consumer & Office Products business. Cash provided by financing activities from continuing operations in 2012 also included proceeds from the issuance of long-term debt of $357 million, proceeds from the exercises of stock options of $61 million, and other sources of funds of $8 million, offset in part by repayment of long-term debt of $327 million, dividend payments of $173 million, net repayments of notes payable and other short-term borrowings of $4 million, and the purchase of a non-controlling interest for $4 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 credit facility’s agreement contains a financial covenant limiting the percentage of total debt to total capital (including deferred taxes) to 55%, as well as certain other covenants with which the company was in compliance as of December 31, 2014.
The company’s percentage of total debt to total capital (shareholders’ equity and total debt) was 37% at December 31, 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 $17 million in 2014 compared to $25 million in 2013 and $10 million in 2012.
On January 26, 2015, the company’s Board of Directors declared a regular quarterly dividend of $0.25 per common share to be paid on March 2, 2015 to shareholders of record as of February 5, 2015.
EFFECTS OF INFLATION
Prices for energy, including natural gas, oil and electricity, as well as for raw materials and freight, increased in 2014 compared to 2013. During 2014, pre-tax input costs of energy, raw materials and freight were $67 million higher than in 2013 on a continuing operations basis. During 2013, pre-tax input costs of energy, raw materials and freight were $28 million higher than in 2012 on a continuing operations basis.
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 $48 million and $67 million in environmental capital expenditures in 2015 and 2016, respectively. Approximately $16 million was spent on environmental capital projects in 2014. Included in the 2015 and 2016 estimated expenditures are capital costs associated with compliance with the Maximum Achievable Compliance Technology for industrial boilers rules that were finalized by the United States Environmental Protection Agency in January 2013. Total expenditures for compliance with this rule are estimated to be in a range of $3 million to $8 million during 2015 and possibly extending into 2016.
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 December 31, 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 at December 31, 2014 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 December 31, 2014, there were approximately 630 lawsuits. Management believes that the company has substantial indemnification protection and insurance coverage, subject to applicable deductibles and policy limits, with respect to asbestos claims. The company has valid defenses to these claims and intends to continue to defend them vigorously. Additionally, based on its historical experience in asbestos cases and an analysis of the current cases, the company believes that it has adequate amounts accrued for potential settlements and judgments in asbestos-related litigation. At December 31, 2014, the company had recorded litigation liabilities of approximately $22 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.
CONTRACTUAL OBLIGATIONS
The company enters into various contractual obligations throughout the year. Presented below are the contractual obligations of the company as of December 31, 2014, and the time period in which payments under the obligations are due. Disclosures related to long-term debt, capital lease obligations and operating lease obligations are included in Note G and Note I of Notes to Consolidated Financial Statements included in Part II, Item 8. Also included below are disclosures regarding the amounts due under purchase obligations. A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on the company and that specifies all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The company has included in the below disclosure all normal and recurring purchase orders, take-or-pay contracts, supply arrangements as well as other purchase commitments that management believes meet the above definition of a purchase obligations.
(1) Amounts are based on weighted-average interest rates of 7.7% for the company’s fixed-rate long-term debt for 2015. The weighted-average interest rate for 2016 and thereafter, is 7.9% for the company’s fixed rate debt. See related discussion in Note G of Notes to Consolidated Financial Statements included in Part II, Item 8.
(2) Amounts include both principal and interest payments.
(3) Other long-term obligations include $85 million of unrecognized tax benefits and $75 million of related accrued interest and penalties at December 31, 2014 due to the uncertainty of timing of payment. See Note O of Notes to Consolidated Financial Statements included in Part II, Item 8 for additional information.
(4) Total excludes $1.1 billion of liabilities that are held by consolidated special purpose entities and non-recourse to MeadWestvaco. See related discussion in Note R of Notes to Consolidated Financial Statements included in Part II, Item 8.
CRITICAL ACCOUNTING POLICIES
Our principal accounting policies are described in the Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Part II, Item 8. 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 believes the accounting policies discussed below represent those accounting policies requiring the exercise of judgment where a different set of judgments could result in the greatest changes to reported results. 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.
Environmental and legal liabilities: We record accruals for estimated environmental liabilities when remedial efforts are probable and the costs can be reasonably estimated. These estimates reflect assumptions and judgments as to the probable nature, magnitude and timing of required investigation, remediation and monitoring activities, as well as availability of insurance coverage and contribution by other potentially responsible parties. Due to the numerous uncertainties and variables associated with these assumptions and judgments, and changes in governmental regulations and environmental technologies, accruals are subject to substantial uncertainties, and actual costs could be materially greater or less than the estimated amounts. We record accruals for other legal contingencies, which are also subject to numerous uncertainties and variables associated with assumptions and judgments, when the loss is probable and reasonably estimable. Liabilities recorded for claims are limited to pending cases based on the company’s historical experience, consultation with outside counsel and consultation with an actuarial specialist concerning the feasibility of reasonably estimating liabilities associated with claims that may arise in the future. We recognize insurance recoveries when collection is reasonably assured.
Restructuring and other charges: We periodically record charges for the reduction of our workforce, the closure of manufacturing facilities and other actions related to broad cost reduction actions and productivity initiatives. These events require estimates of liabilities for employee separation payments and related benefits, demolition, facility closures and other costs, which could differ from actual costs incurred.
Pension and postretirement benefits: Assumptions used in the determination of net pension cost and postretirement benefit expense, including the discount rate, the expected return on plan assets, and increases in future compensation and medical costs, are evaluated by the company, reviewed with the plan actuaries annually and updated as appropriate. Actual asset returns and compensation and medical costs, which are more favorable than assumptions, can have the effect of lowering expense and cash contributions, and, conversely, actual results, which are less favorable than assumptions, could increase expense and cash contributions. In accordance with generally accepted accounting principles, actual results that differ from assumptions are accumulated and amortized over future periods and, therefore, affect expense in such future periods.
In 2014, the company recorded pre-tax pension income from continuing operations of $101 million (net of charges for curtailments, settlements and termination benefits of $20 million), compared to $85 million (net of charges for settlements and termination benefits of $21 million) in 2013 and $69 million in 2012. The company currently estimates pre-tax pension income in 2015 from its domestic and foreign plans to be approximately $62 million before the impacts from settlements and curtailments. This estimate assumes a long-term rate of return on plan assets of 7.2%, and a discount rate of 4.1% for the U.S. plans. The company determined the discount rate for the U.S. plans by referencing the Aon Hewitt Aa Only Above Median curve. The company believes that using a yield curve approach most accurately reflects changes in the present value of liabilities over time since each cash flow is discounted at the rate at which it could effectively be settled.
If the expected rate of return on plan assets were to change by 0.5%, annual pension income in 2015 would change by approximately $19 million. Similarly, if the discount rate were to change by 0.5%, annual pension income in 2015 would change by approximately $6 million.
At December 31, 2014, the aggregate value of pension fund assets had increased to $4.2 billion from $3.9 billion at December 31, 2013. For further details regarding pension fund assets, see Note L of Notes to Consolidated Financial Statements included in Part II, Item 8.
Prior service cost and unrecognized actuarial gains and losses in the retirement and postretirement benefit plans subject to amortization are amortized over the average remaining service periods, which are about 10 years for the salaried plan, about 11 years for the bargained hourly plan, and about 8 years for the postretirement benefit plan, and are a component of accumulated other comprehensive loss. Prior service cost and unrecognized actuarial gains and losses associated with the Envelope Products salaried plan are being amortized over the average remaining life expectancy of the plan participants which is about 23 years. The Envelope Products salaried plan was retained by the company.
Long-lived assets useful lives: Useful lives of tangible and intangible assets are based on management’s estimates of the periods over which the assets will be productively utilized in the revenue-generation process or for other useful purposes. Factors that affect the determination of lives include prior experience with similar assets, product life expectations and industry practices. The determination of useful lives dictates the period over which tangible and intangible long-lived assets are depreciated or amortized, typically using the straight-line method.
Impairment of long-lived assets: We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to carrying value to determine whether impairment exists. For an asset that is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. Considerable judgment must be exercised as to determining future cash flows and their timing and, possibly, choosing business value comparables or selecting discount rates to use in any value computations.
Intangible assets: Business acquisitions often result in recording intangible assets. Intangible assets are recognized at the time of an acquisition, based upon their fair value. Similar to long-lived tangible assets, intangible assets with finite lives are subject to periodic impairment reviews whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As with tangible assets, considerable judgment must be exercised. Periodic impairment reviews of intangible assets assigned an indefinite life are required, at least annually, as well as when events or circumstances change. As with our review of impairment of tangible assets and goodwill, we employ significant assumptions in assessing our indefinite-lived intangible assets for impairment (primarily Calmar trademarks and trade names). An income approach (the relief from royalty method) is used to determine the fair values of our indefinite-lived intangible assets. Although our estimate of fair values of the company’s indefinite-lived intangible assets under the income approach exceed the respective carrying values, different assumptions regarding projected performance and other factors could result in significant non-cash impairment charges in the future. Based on our annual review of our indefinite-lived intangible assets as of October 1, 2014, there was no indication of impairment.
Goodwill: Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. As with tangible and other intangible assets, periodic impairment reviews are required, at least annually, as well as when events or circumstances change. We review the recorded value of our goodwill annually on October 1 or sooner, if events or changes in circumstances indicate that the carrying amount may exceed fair value. As with our review of impairment of tangible and intangible assets, we employ significant assumptions in assessing goodwill for impairment. These assumptions include relevant considerations of market-participant data. When it is determined that the two-step impairment test is required, an income approach is generally used to determine the fair values of our reporting units.
In applying the income approach in assessing goodwill for impairment, changes in assumptions could materially affect the determination of fair value for a reporting unit. Although our fair value estimates of the company’s reporting units under the income approach exceed the respective carrying values, different assumptions regarding projected performance and other factors could result in significant non-cash impairment charges in the future. The following are key assumptions to our income approach:
Business projections - Projections are based on three-year forecasts that are developed internally by management and reviewed by the company’s Board of Directors. These projections include significant assumptions such as estimates of future revenues, profits, working capital requirements, operating plans, costs of restructuring actions and capital expenditures. Assumptions surrounding macro-economic data and estimates include industry projections, inflation, foreign currency exchange rates and costs of energy, raw materials and freight.
Growth rates - A growth rate based on market participant data considerations is used to calculate the terminal value of a reporting unit. The growth rate is the expected rate at which a reporting unit’s earnings stream is projected to grow beyond the three-year forecast period.
Discount rates - Future cash flows are discounted at a rate that is consistent with a weighted average cost of capital for a potential market participant. The weighted average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise. The discount rates selected for the reporting units are based on existing conditions within the respective markets and reflect appropriate adjustments for potential risk premiums in those markets as well as appropriate weighting of the market cost of equity versus debt.
Tax rates - Tax rates are based on estimates of the tax rates that a market participant would realize in the respective primary markets and geographic areas in which the reporting units operate.
Based on the company’s annual review of recorded goodwill at October 1, 2014, there was no indication of impairment. In January 2015, the company entered into a definitive agreement to sell its European tobacco folding carton business. The sale was deemed probable as of December 31, 2014 and goodwill of $6 million was written off. Refer to Note S of Notes to Consolidated Financial Statements included in Part II, Item 8, for further discussion. The Industrial - India reporting unit included within the Industrial reporting segment had $39 million of goodwill at December 31, 2014. The estimated fair value of this reporting unit exceeded its carrying value by approximately 15% at December 31, 2014, representing the lowest headroom coverage of the company’s reporting units. Holding other valuation assumptions constant, it would take a downward shift in operating profits of approximately 15% from projected levels before the fair value of the Industrial - India reporting unit would be below its carrying value, thereby triggering the requirement to perform further analysis which may indicate potential goodwill impairment. The projections used in the impairment analysis for this reporting unit reflect the strategic direction of the Industrial - India leadership, most notably certain growth, productivity improvement and cost reduction initiatives. Different assumptions regarding projected performance and other factors associated with this reporting unit could result in a significant non-cash impairment charge in the future.
See Note D of Notes to Consolidated Financial Statements included in Part II, Item 8 for further information regarding goodwill.
Revenue recognition: We recognize revenue at the point when title and the risk of ownership passes to the customer. Substantially all of our revenues are generated through product sales, and shipping terms generally indicate when title and the risk of ownership have passed. Revenue is recognized at shipment for sales when shipping terms are FOB (freight on board) shipping point unless risk of loss is maintained under freight terms. For sales where shipping terms are FOB destination, revenue is recognized when the goods are received by the customer. We provide for all allowances for estimated returns and other customer credits such as discounts and volume rebates, when the revenue is recognized, based on historical experience, current trends and any notification of pending returns. The customer allowances are, in many instances, subjective and are determined with significant management judgment and are reviewed regularly to determine the adequacy of the amounts. Changes in economic conditions, markets and customer relationships may require adjustments to these allowances from period to period. Also included in net sales is service revenue, which is recognized as the service is performed. Revenue is recognized for leased equipment to customers on a straight-line basis over the estimated term of the lease and is included in net sales of the company.
Income taxes: Income taxes are accounted for in accordance with the guidelines provided by the Financial Accounting Standards Board, which recognizes deferred tax assets and liabilities based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the enacted tax laws.
We evaluate the need for a deferred tax asset valuation allowance by assessing whether it is more likely than not that the company will realize its deferred tax assets in the future. The assessment of whether or not a valuation allowance is required often requires significant judgment, including the forecast of future taxable income and the valuation of tax planning initiatives. Adjustments to the deferred tax valuation allowance are made to earnings in the period when such assessment is made.
The company has tax jurisdictions located in many areas of the world and is subject to audit in these jurisdictions. Tax audits by their nature are often complex and can require several years to resolve. In the preparation of the company’s financial statements, management exercises judgments in estimating the potential exposure to unresolved tax matters. The company recognizes the tax benefit from an uncertain tax position if it is more likely than not that the position is sustainable. For those tax positions that meet the more likely than not criteria, the company records only the portion of the tax benefit that is greater than 50% likely to be realized upon settlement with the respective taxing authority. Interest and penalties related to unrecognized tax benefits are recorded within income tax expense in the consolidated statements of operations. While actual results could vary, in management’s judgment, the company has adequate tax accruals with respect to the ultimate outcome of such unresolved tax matters.
Each quarter, we estimate our effective tax rate for the full year. This estimate includes assumptions about the level of income that will be achieved for the full year in both our domestic and international operations. The forecast of full-year earnings includes assumptions about markets in each of our businesses as well as the timing of certain transactions, including gains from forestland sales and restructuring charges. Should business performance or the timing of certain transactions change during the year, the level of income achieved may not meet the level of income estimated earlier in the year at interim periods. This change in the income levels and mix of earnings can result in significant adjustments to the tax provision in the quarter in which the estimate is refined.
NEW ACCOUNTING GUIDANCE
Refer to the “New accounting guidance” section within the Notes to Consolidated Financial Statements included in Part II, Item 8 for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on the company’s consolidated financial statements.
USE OF NON-GAAP MEASURES
The company has presented certain financial measures, defined below, which have not been prepared in accordance with generally accepted accounting principles (“GAAP”) and have provided a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP. These financial measures are not meant to be considered in isolation or as a substitute for the most directly comparable financial measure calculated in accordance with GAAP. The company believes these non-GAAP measures provide investors, potential investors, securities analysts and others with useful information to evaluate the performance of the business, because such measures, when viewed together with our financial results computed in accordance with GAAP, provide a more complete understanding of factors and trends affecting our historical financial performance and projected future results.
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
Segment EBITDA and EBITDA Margins
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, including whether or when the business combination with Rock-Tenn Company (“Rock-Tenn”) will occur (the “Merger Transaction”), and whether and when the spin-off of Specialty Chemicals will occur; 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 this Annual Report on Form 10-K for the year ended December 31, 2014, and in other filings made from time to time with the SEC. Forward-looking statements include, but are not limited to, statements regarding the anticipated closing date of the Merger Transaction, the ability to obtain regulatory and shareholder approvals and satisfy the other conditions to the closing of the Merger Transaction, the successful closing of the Merger Transaction and the integration of Rock-Tenn and MeadWestvaco as well as opportunities for operational improvement including but not limited to cost reduction and capital investment, the strategic opportunity and perceived value to Rock-Tenn’s and MeadWestvaco’s respective shareholders of the Merger Transaction, the Merger Transaction’s impact on, among other things, the combined company’s prospective business mix, margins, transitional costs and integration to achieve the synergies and the timing of such costs and synergies. With respect to these statements, MeadWestvaco and Rock-Tenn have made assumptions regarding, among other things, whether and when the proposed Merger Transaction will be approved; whether and when the proposed Merger Transaction will close; and the results and impacts of the proposed Merger Transaction. 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.
Item 7A.
Item 7A. Quantitative and qualitative disclosures about market risk
Interest rates
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 may utilize interest-rate swap agreements. There were no outstanding interest-rate swaps at December 31, 2014 and 2013. See Note H of Notes to Consolidated Financial Statements included in Part II, Item 8
Item 8. Financial statements and supplementary data
Index
Report of Independent Registered Public Accounting Firm
To Board of Directors and Shareholders of MeadWestvaco Corporation
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, equity, and cash flows present fairly, in all material respects, the financial position of MeadWestvaco Corporation and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
February 23, 2015
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
MEADWESTVACO CORPORATION AND CONSOLIDATED SUBSIDIARY COMPANIES
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
The accompanying notes are an integral part of these financial statements.
MEADWESTVACO CORPORATION AND CONSOLIDATED SUBSIDIARY COMPANIES
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
MEADWESTVACO CORPORATION AND CONSOLIDATED SUBSIDIARY COMPANIES
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EQUITY
The accompanying notes are an integral part of these financial statements.
MEADWESTVACO CORPORATION AND CONSOLIDATED SUBSIDIARY COMPANIES
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
MEADWESTVACO CORPORATION AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of significant accounting policies
Basis of consolidation and preparation of financial statements: The consolidated financial statements include all majority-owned or controlled entities of MeadWestvaco Corporation (“MeadWestvaco”, “MWV”, or the “company”), and all significant inter-company transactions are eliminated. MWV’s segments are (i) Food & Beverage, (ii) Home, Health & Beauty, (iii) Industrial, (iv) Specialty Chemicals, and (v) Community Development and Land Management.
Estimates and assumptions: The preparation of financial statements in accordance with generally accepted accounting principles 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.
Translation of foreign currencies: The local currency is the functional currency for substantially all of the company’s significant operations outside the U.S. The assets and liabilities of the company’s foreign subsidiaries are translated into U.S. dollars using period-end exchange rates, and adjustments resulting from these financial statement translations are included in accumulated other comprehensive loss in the consolidated balance sheets. Revenues and expenses are translated at average rates prevailing during the period.
Cash equivalents: Highly liquid securities with an original maturity of three months or less are considered to be cash equivalents.
Accounts receivable and allowance for doubtful accounts: Trade accounts receivable are recorded at the invoice amount and generally do not bear interest. The allowance for doubtful accounts is the company’s best estimate of the amount of probable loss in the existing accounts receivable. The company determines the allowance based on historical write-off experience by business. Past due balances over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance when it is probable that the receivable will not be recovered.
Inventories: Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out method for substantially all raw materials, finished goods and production materials of U.S. manufacturing operations. Cost of all other inventories, including stores and supplies inventories and inventories of non-U.S. manufacturing operations, is determined by the first-in, first-out or average cost methods.
Property, plant, equipment and forestlands: Owned assets are recorded at cost. Also included in the cost of these assets is interest on funds borrowed during the construction period. When assets are sold, retired or disposed of, their cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in cost of sales. Gains and losses on sales of corporate real estate are recorded in other income, net. Costs of renewals and betterments of properties are capitalized; costs of maintenance and repairs are charged to expense.
Depreciation and depletion: The cost of plant and equipment is depreciated, utilizing the straight-line method, over the estimated useful lives of the assets, which range from 20 to 40 years for buildings and 5 to 30 years for machinery and equipment.
Impairment of long-lived assets: The company periodically evaluates whether current events or circumstances indicate that the carrying value of its long-lived assets, including intangible assets with finite lives, to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to carrying value to determine whether impairment exists.
If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. The company reports an asset to be disposed of at the lower of its carrying value or its estimated net realizable value.
Intangible assets assigned indefinite lives are to be tested at least annually or more often if events or changes in circumstances indicate that the fair value of an intangible asset is below its carrying value. The fair values of the company’s indefinite-lived intangible assets (primarily Calmar trademarks and trade names) are estimated using an income approach (the relief from royalty method). Although the estimate of the fair values of the company’s indefinite-lived intangible assets under the income approach exceed the respective carrying values, different assumptions regarding projected performance and other factors could result in significant non-cash impairment charges in the future. Based on the company’s annual review of the indefinite-lived intangible assets as of October 1, 2014, there was no indication of impairment.
Goodwill: Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. The company reviews the recorded value of goodwill at least annually on October 1, or sooner if events or changes in circumstances indicate that the fair value of a reporting unit is below its carrying value. The company may elect to use a qualitative approach to determine if goodwill is required to be tested. If goodwill is required to be tested for impairment, a two-step process is utilized. The first step is to identify a potential impairment and the second step is to measure the amount of the impairment loss, if any. Goodwill is deemed to be impaired if the carrying amount of a reporting unit’s goodwill exceeds its estimated fair value. Goodwill has been allocated to the company’s respective reporting units based on its nature and synergies expected to be achieved. The fair value of each reporting unit is estimated primarily using an income approach, specifically the discounted cash flow method. The company employs significant assumptions in evaluating its goodwill for impairment. These assumptions include relevant considerations of market-participant data.
In applying the income approach in assessing goodwill for impairment, changes in assumptions could materially affect the determination of fair value for a reporting unit. Although the fair value estimates of the company’s reporting units under the income approach exceed the respective carrying values, different assumptions regarding projected performance and other factors could result in significant non-cash impairment charges in the future.
The following are key assumptions to the company’s income approach:
Business projections - Projections are based on three-year forecasts that are developed internally by management and reviewed by the company’s Board of Directors. These projections include significant assumptions such as estimates of future revenues, profits, working capital requirements, operating plans, costs of restructuring actions and capital expenditures. Assumptions surrounding macro-economic data and estimates include industry projections, inflation, foreign currency exchange rates and costs of energy, raw materials and freight.
Growth rates - A growth rate based on market participant data considerations is used to calculate the terminal value of a reporting unit. The growth rate is the expected rate at which a reporting unit’s earnings stream is projected to grow beyond the three-year forecast period.
Discount rates - Future cash flows are discounted at a rate that is consistent with a weighted average cost of capital for a potential market participant. The weighted average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise. The discount rates selected for the reporting units are based on existing conditions within the respective markets and reflect appropriate adjustments for potential risk premiums in those markets as well as appropriate weighting of the market cost of equity versus debt.
Tax rates - Tax rates are based on estimates of the tax rates that a market participant would realize in the respective primary markets and geographic areas in which the reporting units operate.
Based on the company’s annual review of recorded goodwill at October 1, 2014, there was no indication of impairment. In January 2015, the company entered into a definitive agreement to sell its European tobacco folding carton business. The sale was deemed probable as of December 31, 2014 and goodwill of $6 million was written off. Refer to Note S for further discussion. See Note D for further information regarding goodwill.
Other assets: Capitalized software for internal use, equipment leased to customers and other amortizable and indefinite-lived intangible assets are included in other assets. Capitalized software and other amortizable intangibles are amortized using the straight-line and cash flows methods over their estimated useful lives of 3 to 21 years. Equipment leased to customers is amortized using the sum-of-the-years-digits method over the estimated useful life of the machine, generally 10 years. Revenue is recognized for the leased equipment on a straight-line basis over the life of the lease and is included in net sales. The company records software development costs in accordance with the accounting guidance provided by the Financial Accounting Standards Board. See Note D and Note E for further information.
Financial instruments: The company utilizes well-defined financial derivatives in the normal course of its operations as a means to manage some of its interest rate, foreign currency and commodity risks. All derivative instruments are required to be recorded in the consolidated balance sheets as assets or liabilities, measured at fair value. The fair value estimates are based on relevant market information, including market rates and prices. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is 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 income or loss and is recognized in the consolidated statements of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash-flow hedges are recognized in earnings. If a derivative is not designated as a qualifying hedge, changes in fair value are recognized in earnings. See Note H for further information.
Environmental and legal liabilities: Environmental expenditures that increase useful lives of assets are capitalized, while other environmental expenditures are expensed. Liabilities are recorded when remedial efforts are probable and the costs can be reasonably estimated. The company recognizes a liability for other legal contingencies when a loss is probable and reasonably estimable. Liabilities recorded for claims are limited to pending cases based on the company’s historical experience, consultation with outside counsel and consultation with an actuarial specialist concerning the feasibility of reasonably estimating liabilities associated with claims that may arise in the future. The company recognizes insurance recoveries when collection is reasonably assured. Fees for third-party legal services are expensed as incurred. See Note P for further information.
Asset retirement obligations: The company has certain conditional and unconditional asset retirement obligations associated with owned or leased property, plant and equipment, including surface impoundments, asbestos, and water supply wells. The company records a liability for the fair value of an asset retirement obligation when incurred if the fair value of the liability can be reasonably estimated. Management does not have sufficient information to estimate the fair value of certain obligations, primarily associated with surface impoundments and asbestos, because the settlement date or range of potential settlement dates has not been specified and information is not available to apply expected present value techniques. Subsequent to initial measurement, the company recognizes changes in the amounts of the obligations, as necessary, resulting from the passage of time and revisions to either the timing or amount of estimated cash flow.
Revenue recognition: The company recognizes revenues at the point when title and the risk of ownership passes to the customer. Substantially all of the company’s revenues are generated through product sales,
and shipping terms generally indicate when title and the risk of ownership have passed. Revenue is recognized at shipment for sales where shipping terms are FOB (freight on board) shipping point unless risk of loss is maintained under freight terms. For sales where shipping terms are FOB destination, revenue is recognized when the goods are received by the customer. The company provides allowances for estimated returns and other customer credits such as discounts and volume rebates, when the revenue is recognized, based on historical experience, current trends and any notification of pending returns. Also included in net sales is service revenue, which is recognized as the service is performed. Revenue is recognized for leased equipment to customers on a straight-line basis over the estimated term of the lease and is included in net sales of the company. Sales of landholdings are included in net sales in the consolidated statements of operations.
Shipping and handling costs: Shipping and handling costs are classified as a component of cost of sales. Amounts billed to a customer in a sales transaction related to shipping and handling are classified as revenue.
Research and development: Included in cost of sales and selling, general and administrative expenses are expenditures for research and development of $41 million, $44 million and $45 million for the years ended December 31, 2014, 2013 and 2012, respectively, which were expensed as incurred.
Income taxes: Deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the enacted tax rates in effect for the years the differences are expected to reverse. The company evaluates the need for a deferred tax asset valuation allowance by assessing whether it is more likely than not that it will realize its deferred tax assets in the future.
The company has tax jurisdictions located in many areas of the world and is subject to audit in these jurisdictions. Tax audits by their nature are often complex and can require several years to resolve. In the preparation of the company’s financial statements, management exercises judgments in estimating the potential exposure to unresolved tax matters. The company recognizes the tax benefit from an uncertain tax position if it is more likely than not that the position is sustainable. For those tax positions that meet the more likely than not criteria, the company records only the portion of the tax benefit that is greater than 50% likely to be realized upon settlement with the respective taxing authority. Interest and penalties related to unrecognized tax benefits are recorded within income tax expense in the consolidated statements of operations. While actual results could vary, in management’s judgment, the company has adequate tax accruals with respect to the ultimate outcome of such unresolved tax matters.
Share-based compensation: The company records compensation expense for graded and cliff vesting awards on a straight-line basis over the vesting period, which is generally three years. The company uses the “long-haul” method to determine the pool of tax benefits or deficiencies resulting from tax deductions related to awards of equity instruments that exceed or are less than the cumulative compensation cost for those instruments recognized for financial reporting. Substantially all compensation expense related to share-based awards is recorded as a component of selling, general and administrative expenses in the consolidated statements of operations. For stock-settled awards, the company issues previously authorized new shares. See Note K for further detail on share-based compensation.
Net income per share: Basic net income per share for all the periods presented has been calculated using the company’s 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 have been added to weighted average shares outstanding, if dilutive. For both of the years ended December 31, 2014 and 2013 approximately 500 thousand equity awards were excluded from the calculation of weighted average shares outstanding and for the year ended December 31, 2012 approximately 2 million equity awards were excluded from the calculation of weighted average shares outstanding because to do so would have been anti-dilutive.
Related party transactions: The company has certain related party transactions in the ordinary course of business that are insignificant.
New accounting guidance
In January 2014, the company adopted new accounting 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 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.
In November 2014, the FASB issued new guidance regarding pushdown accounting. The new guidance provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The new guidance was effective on November 18, 2014 and after the effective date an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. The impact of adoption is not expected to have a material effect on the company’s consolidated financial statements.
There were no other accounting standards issued in 2014 that had or are expected to have a material impact on the company’s financial position or results of operations.
A. Fair value measurements
The following information is presented for assets and liabilities that are recorded in the consolidated balance sheet at fair value at December 31, 2014 and 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 2014 and 2013.
(1) Quoted prices in active markets for identical assets.
(2) Quoted prices for similar assets and liabilities in active markets.
(3) Significant unobservable inputs.
(a) 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 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.
(b) Equity investments, preferred stock, and other pension (payables) receivables are valued using quoted market prices multiplied by the number of shares owned. Dealer quotes are used for less liquid markets. Valuation models with market inputs are used for securities that do not trade in transparent markets. The other pension (payables) receivables that are classified as Level 3 investments are valued using contract value, which approximates fair value, and include unobservable inputs such as illiquidity.
(c) Government securities include treasury and agency debt. The Level 2 investments are valued using a broker quote in an active market. The Level 3 investments include unobservable inputs that are valued using third-party pricing information without adjustments.
(d) The corporate debt investments category is primarily comprised of U.S. dollar denominated investment grade and non-investment grade securities. It also includes investments in non-U.S. dollar denominated corporate debt securities issued in both developed and emerging markets. Corporate debt investments are valued utilizing a market approach that includes various valuation techniques and sources such as value generation models, broker quotes in active and inactive markets, benchmark yields and securities, reported trades, issuer spreads, and/or other applicable reference data. The Level 3 investments include unobservable inputs that are valued using third-party pricing information without adjustments.
(e) The plan’s derivative investments are forward contracts on foreign currencies, interest rate swaps, swaptions, futures on Treasury bonds, and futures on euro dollars. These investments are traded in both over-the-counter markets and on futures exchanges. The Level 2 investments are valued using models with market inputs such as dealer quoted interest rates and exchange rates. The Level 3 investments are valued based on valuation models such as Black Scholes Option Pricing Model.
(f) Common collective trusts, registered investment companies, and 103-12 investment entities are commingled funds for which there is no exchange quoted price. These commingled funds are valued at their net asset value per share multiplied by the number of shares held. The determination of net asset value for the commingled funds includes market pricing of the underlying assets as well as broker quotes and other valuation techniques. The funds invest mainly in liquid, transparent markets such as domestic and international equities, U.S. government bonds, and corporate bonds.
(g) Partnerships and joint ventures are commingled investments. The plan owns interests in limited partnerships or funds rather than direct investments in the underlying asset classes such as real estate. Valuation is based on input from the general partner if no independent source is available. The valuation policies of the general partner are in compliance with accounting standards and the partnerships are audited by nationally recognized auditors. Various valuation techniques and inputs are considered in valuing private portfolio investments, including EBITDA multiples in other comparable third-party transactions, price to earnings ratios, market conditions, liquidity, current operating results, and other pertinent information.
(h) Real estate investments are commingled investments. The fair values of the real estate partnerships are determined based on a combination of third party appraisals, discounted present value of estimated future cash flows, replacement cost, and comparable market prices.
(i) 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.
(j) Hedge funds are commingled investments in limited partnerships. The funds’ investments consist of public stocks traded on public exchanges and illiquid stocks valued based on dealer quotes.
While the company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value as of the reporting date.
The following information is presented for those assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at December 31, 2014 and 2013:
Long-lived assets held for sale with a carrying value of $78 million were written down to their estimated fair value of $50 million, resulting in pre-tax impairment charges attributable to continuing operations of $28 million for the year ended December 31, 2014. Additionally, long-lived assets held and used with a carrying value of $11 million were written off for the year ended December 31, 2014 due to the discontinuance of certain projects. These pre-tax charges are included in cost of sales and selling, general and administrative expenses.
At December 31, 2014, the book value of financial instruments included in debt is $1.8 billion and the fair value is estimated to be $2.2 billion. The difference between book value and fair value is derived from the difference between the December 31, 2014 market interest rate and the stated rate for the company’s fixed-rate debt. The company has estimated the fair value of financial instruments 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. This fair value measurement is classified as Level 2.
B. Current assets
Cash equivalents of $369 million and $943 million at December 31, 2014 and 2013, respectively, are valued at cost, which approximates fair value. As of December 31, 2014 and 2013, the majority of the company’s cash equivalents were invested in U.S. government securities. Trade receivables have been reduced by an allowance for doubtful accounts of $10 million and $12 million at December 31, 2014 and 2013, respectively. Receivables also include $93 million and $69 million from sources other than trade at December 31, 2014 and 2013, respectively. At December 31, 2014 and 2013, other current assets include $49 million and $59 million of prepaid expenses, respectively. Inventories at December 31, 2014 and 2013 are comprised of:
Approximately 65% and 58% of inventories at December 31, 2014 and 2013, respectively, are valued using the last-in, first-out (“LIFO”) method. If inventories had been valued at current cost, they would have been $859 million and $858 million at December 31, 2014 and 2013, respectively. The effects of LIFO layer decrements were not significant to the consolidated statements of operations for the years ended December 31, 2014, December 31, 2013 and December 31, 2012.
C. Property, plant, equipment and forestlands
Depreciation and depletion expense for the years ended December 31, 2014, 2013 and 2012 was:
Property, plant, equipment and forestlands consist of the following:
D. Goodwill and other intangible assets
Goodwill allocated to each of the company’s segments at December 31, 2014 and 2013 was:
The changes in the carrying amount of goodwill for the years ended December 31, 2014 and 2013 are as follows:
In January 2015, the company entered into a definitive agreement to sell its European tobacco folding carton business. The sale was deemed probable as of December 31, 2014 and goodwill of $6 million was written off. Refer to Note S for further discussion.
Represents foreign currency translation.
The following table summarizes intangible assets subject to amortization included in other assets:
Included in other assets are indefinite-lived intangible assets with carrying values of:
Amortization expense relating to intangible assets subject to amortization for the years ended December 31, 2014, 2013 and 2012 was:
Based on the current carrying values of intangible assets subject to amortization, estimated amortization expense for the next five years is as follows:
E. Other assets
Other assets consist of the following:
F. Accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following:
G. Notes payable and long-term debt
Notes payable and current maturities of long-term debt and capital lease obligations consist of the following:
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 $600 million revolving credit facility was undrawn at December 31, 2014. The credit facility’s agreement contains a financial covenant limiting the percentage of total debt to total capital (including deferred taxes) to 55%, as well as certain other covenants with which the company was in compliance as of December 31, 2014.
Long-term debt consists of the following:
As of December 31, 2014, outstanding debt maturing in the next five years is as follows:
As of December 31, 2014, capital lease obligations maturing in the next five years are as follows:
The weighted average interest rate on the company’s fixed-rate long-term debt was 7.6% for 2014 and 2013. The weighted average interest rate on the company’s variable-rate long term debt was 6.3% during 2014 and 1.4% during 2013.
The percentage of total debt to total capital (shareholders’ equity and total debt) was 37% at December 31, 2014 and 32% at December 31, 2013.
H. 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 recognized in earnings are generally offset 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 income (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 income (loss) for the years ended December 31, 2014 and 2013 are presented below:
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 fair value hedges or those derivatives not designated as hedges.
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 are presented below:
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. The company’s natural gas usage is relatively predictable month-by-month. The company hedges primarily with financial instruments that are priced based on New York Mercantile Exchange (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 for hedged consumption in Million British Thermal Units (“MMBTU’s”) at December 31, 2014 and 2013 are presented below.
Unrealized gains and losses on contracts maturing in future months are recorded in accumulated other comprehensive income (loss) and are charged or credited to earnings for the ineffective portion of the hedge. Once a contract matures, the company has a realized gain or loss on the contract up to the quantities of natural gas in the contract 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 is $6 million during the next twelve months. As of December 31, 2014, the maximum remaining term of existing hedges was two years. For the years ended December 31, 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 foreign inter-company loans, foreign cash deposits, foreign currency sales and purchases of its international operations, and foreign sales of its U.S. operations. These contracts are used to hedge the variability of exchange rates on the company’s cash flows and foreign cash deposits.
The foreign currency forward contracts related to certain inter-company loans and foreign cash deposits 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 December 31, 2014 and 2013 are presented below.
Other foreign currency forward contracts, which are for terms of up to 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 $11 million. As of December 31, 2014, the maximum remaining term of existing hedges was one year. For the years ended December 31, 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 December 31, 2014 and 2013 are presented below.
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 may utilize interest-rate swap agreements. 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. For the year ended December 31, 2014, the company terminated its interest-rate swaps on its fixed rate debt and realized $4 million in net cash proceeds. For the year ended December 31, 2014, the interest-rate swaps were an effective hedge and, therefore, required no charge to earnings due to ineffectiveness. There were no interest-rate swap agreements outstanding at December 31, 2014 and 2013.
I. Lease commitments
The company leases a variety of assets for use in its operations. Leases for administrative offices, converting plants and storage facilities generally contain options which allow the company to extend lease terms for periods up to 25 years or to purchase the properties. Certain leases provide for escalation of the lease payments as maintenance costs and taxes increase. Minimum rental payments pursuant to agreements as of December 31, 2014 under operating leases that have non-cancelable lease terms in excess of 12 months and under capital leases are as follows:
Rental expense under operating leases for the years ended December 31, 2014, 2013 and 2012 was:
J. Shareholders’ equity
The value included in common stock at December 31, 2014 and 2013 reflects the outstanding shares of common stock at $0.01 par value per share.
During 2014, the company repurchased and retired 10 million of its common shares for $394 million through a combination of an accelerated share repurchase program and open market repurchases. 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 the company’s U.S. forestlands and related assets to Plum Creek in the fourth quarter of 2013.
During 2013, the company purchased and retired 4 million of its common shares for $131 million. At December 31, 2014, there were approximately 4.4 million shares available for purchase under an existing authorization provided by the company’s Board of Directors on January 28, 2013. Any purchases made under this authorization will be made opportunistically.
At December 31, 2014, there were authorized and available for issue 30 million shares of preferred stock, par value $0.01 per share, of which 6 million shares were designated as Series A Junior Participating Preferred Stock and previously reserved for issuance upon exercise of certain rights.
Dividends declared and paid were $2.00 per share and $344 million, respectively, for the year ended December 31, 2014, which included a special dividend of $175 million, or $1.00 per share, paid on March 3, 2014 using proceeds from the sale of the company’s U.S. forestlands and related assets to Plum Creek in the fourth quarter of 2013. Dividends declared were $1.00 per share for each of the years ended December 31, 2013, and 2012, respectively. Dividends paid were $177 million and $173 million for the years ended December 31, 2013, and 2012, respectively.
Changes in accumulated other comprehensive loss by component for the years ended December 31, 2014 and 2013 are as follows:
All amounts are net of tax.
Reclassifications out of accumulated other comprehensive loss for the years ended December 31, 2014 and 2013 are as follows:
K. Share-based compensation
Officers, key employees, and non-employee directors have been granted share-based awards under the 2005 Performance Incentive Plan, as amended and restated (the “Plan”). There were an aggregate of 33 million shares reserved under the Plan for the granting of stock options, stock appreciation rights (“SARs”), restricted stock and restricted stock units. At December 31, 2014, there were approximately 6 million shares available for grant under this plan.
The vesting of awards granted to officers and key employees may be conditioned upon either a specified period of time or the attainment of specific performance goals as determined by the plan. Non-employee members of the Board of Directors are granted restricted stock units, which vest immediately and are distributed in the form of stock shares on the date that a director ceases to be a member of the Board of Directors.
In March 2014, the company paid a special dividend of $1.00 per share and pursuant to existing anti-dilution provisions in the company’s equity plans, the number of outstanding stock options and SARs as well as the exercise prices were modified. The objective of the modification was to maintain the fair value of these equity awards subsequent to the special dividend. There was no incremental compensation expense recorded as a result of these modifications.
In connection with the 2012 spin off of the C&OP business (the “Spin off”), and pursuant to existing anti-dilution provisions in the company’s equity plans, the number of outstanding stock options, SARs and restricted stock units as well as the exercise prices of such stock options and SARs were modified on May 1, 2012, the effective date of the Spin off. The objective of the modification was to maintain the fair value of these equity awards subsequent to the Spin off. There was no incremental compensation expense recorded as a result of these modifications.
Stock options and stock appreciation rights
Stock options and SARs become exercisable in one-third increments on each anniversary of the award date and are fully exercisable after the third anniversary and expire no later than 10 years from the date of grant. The exercise price of all stock options equals the market price of the company’s stock on the date of grant.
The company estimates the fair value of its stock option and SAR awards using a lattice-based option valuation model. Lattice-based option valuation models utilize ranges of assumptions over the expected term of the options and SARs. Expected volatilities are based on the historical and implied volatility of the company’s stock. The company uses historical data to estimate option and SAR exercises and employee terminations within the valuation model. The expected term of options and SARs granted is derived from the output of the valuation model and represents the period of time that options and SARs granted are expected to be outstanding. The risk-free rate for the period within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The company measures compensation expense related to the SARs at the end of each period.
Changes in the fair value of options (in the event of an award modification) and SARs are reflected as an adjustment to compensation expense in the periods in which the changes occur.
A summary of the assumptions is as follows:
The following table summarizes stock option and SAR activity in the plans.
At December 31, 2014, there was approximately $5 million of unrecognized pre-tax compensation cost related to nonvested stock options and SARs, which is expected to be recognized over a weighted-average period of one year.
Pre-tax compensation expense for stock options and SARs and the tax benefit associated with this expense for the years ended December 31, 2014, 2013 and 2012 was:
Total cash received from the exercise of share-based awards in 2014 was $56 million.
Restricted stock units
A restricted stock unit is the right to receive a share of company stock. Employee restricted stock units vest over a three- to five-year period. Awards granted in 2014, 2013 and 2012 consisted of both service-based restricted stock units and performance-based restricted stock units. Under the employee plans, the grantee of the restricted stock units is entitled to receive dividends, but will forfeit the accrued stock and accrued dividends if the individual holder separates from the company during the vesting period or if predetermined goals are not accomplished. The fair value of each restricted stock unit is the closing market price of the company’s stock on the date of grant, and the compensation expense is charged to operations over the vesting period.
The following table summarizes restricted stock unit activity in the employee and director plans.
At December 31, 2014, there was approximately $20 million of unrecognized pre-tax compensation cost related to non-vested restricted stock units, which is expected to be recognized over a weighted-average period of one year.
Pre-tax compensation expense for restricted stock units and the tax benefit associated with this expense for the years ended December 31, 2014, 2013 and 2012 was:
L. Employee retirement, postretirement and postemployment benefits
Retirement plans
MeadWestvaco provides retirement benefits for substantially all U.S. and certain non-U.S. employees under several noncontributory and contributory trusteed plans and also provides benefits to employees whose retirement benefits exceed maximum amounts permitted by current tax law under unfunded benefit plans. U.S. benefits are based on either a final average pay formula or a cash balance formula for the salaried plans and a unit-benefit formula for the bargained hourly plan. Contributions are made to the U.S. funded plans in accordance with ERISA requirements.
The components of net periodic benefit (income) cost for the company’s retirement plans for the years ended December 31, 2014, 2013 and 2012 are presented below.
For the year ended December 31, 2014, the company recorded curtailments, settlements and termination benefits pursuant to the 2014 margin improvement program.
For the year ended December 31, 2013, the company recorded a settlement pursuant to the 2013 lump sum window program offered to vested terminated employees.
For the year ended December 31, 2012, the company recorded within discontinued operations a curtailment gain of $21 million pursuant to the spin-off of the company’s C&OP business and subsequent merger of that business with ACCO Brands Corporation on May 1, 2012.
The pre-tax components of other changes in plan assets and benefit obligations recognized in other comprehensive income (loss):
Actuarial gains and losses and prior service cost (benefit) subject to amortization are amortized on a straight-line basis over the average remaining service, which is about 10 years for the salaried plan, about 11 years for the bargained hourly plan, and over the average remaining life expectancy of the plan
participants of the envelope salaried plan which is about 23 years. The estimated pre-tax net actuarial loss and prior service cost for the defined benefit retirement plans that will be amortized from accumulated other comprehensive income (loss) into net periodic pension income in 2015 is $26 million and $3 million, respectively.
Postretirement benefits
MeadWestvaco provides life insurance for substantially all retirees and medical benefits to certain retirees in the form of cost subsidies until Medicare eligibility is reached and to certain other retirees, medical benefits up to a maximum lifetime amount. The company funds certain medical benefits on a current basis with retirees paying a portion of the costs. Certain retired employees of businesses acquired by the company are covered under other medical plans that differ from current plans in coverage, deductibles and retiree contributions.
The components of net postretirement benefits cost (income) for the years ended December 31, 2014, 2013 and 2012 are presented below.
For the year ended December 31, 2012, the company recorded within discontinued operations a curtailment gain pursuant to the spin-off of the company’s C&OP business and subsequent merger of that business with ACCO Brands Corporation on May 1, 2012.
The pre-tax components of other changes in plan assets and benefit obligations recognized in other comprehensive income (loss):
During 2014, the company announced the elimination of retiree life coverage, effective January 1, 2015 and the elimination of retiree medical coverage, effective January 1, 2017. Accordingly, the U.S. postretirement plan was remeasured on June 30, 2014 and September 30, 2014 resulting in a gain of $33 million recorded in other comprehensive loss for the year ended December 31, 2014.
Actuarial gains and losses and prior service cost subject to amortization are amortized over the average remaining service period, which is about 8 years. The pre-tax net actuarial gain for the postretirement plans that will be amortized from accumulated other comprehensive income (loss) into net periodic postretirement benefits income is $10 million in 2015.
The following table also sets forth the funded status of the plans and amounts recognized in the consolidated balance sheets at December 31, 2014 and 2013, based on a measurement date of December 31 for each period.
Obligations, assets and funded status
The accumulated benefit obligation for all defined benefit plans was $2.98 billion and $2.58 billion at December 31, 2014 and 2013, respectively.
Information for pension plans with an accumulated benefit obligation in excess of plan assets as of December 31:
Assumptions
The weighted average assumptions used to determine the company’s benefit obligations at December 31:
The weighted average assumptions used to determine net periodic pension income and net postretirement benefits (income) cost for the years presented:
The company adopted the new mortality tables issued by the Society of Actuaries in October 2014 for the valuation of its U.S. pension and postretirement plans at December 31, 2014. Based on the results of a mortality experience study, and in consultation with its actuaries, the company utilized the collar adjusted RD-2014 mortality table and MP-2014 improvement scale. The adoption of the new mortality tables increased the company’s U.S. pension plan liability by $154 million.
MeadWestvaco’s approach to developing capital market assumptions combines an analysis of historical performance, the drivers of investment performance by asset class and current economic fundamentals. For returns, the company utilizes a building block approach starting with an inflation expectation and adds an expected real return to arrive at a long-term nominal expected return for each asset class. Long-term expected real returns are derived in the context of future expectations for the U.S. Treasury yield curve. The company derives return assumptions for all other equity and fixed income asset classes by starting with either the U.S. Equity or U.S. Fixed Income return assumption and adding a risk premium, which reflects any additional risk inherent in the asset class.
The company determined the discount rates for 2014, 2013, and 2012 by referencing the Aon Hewitt Aa Only Above Median Curve. The company believes that using a yield curve approach most accurately reflects changes in the present value of liabilities over time since each cash flow is discounted at the rate at which it could effectively be settled.
The annual rate of increase in U.S. healthcare and prescription drug costs is assumed to decline ratably each year until reaching 4.5% in 2024 and thereafter. The effect of a 1% increase in the assumed combined cost trend rate would increase the December 31, 2014 accumulated postretirement benefit obligation by $5 million and total service and interest cost for 2014 by $0.6 million. The effect of a 1% decrease in the assumed healthcare cost trend rate would decrease the December 31, 2014 accumulated postretirement benefit obligation by $4 million and total service and interest cost for 2014 by $0.5 million.
The company also has defined contribution plans that cover substantially all U.S. and certain non-U.S. based employees. Expense for company matching contributions under these plans was $22 million, $23 million and $23 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Retirement plan assets
The MeadWestvaco U.S. retirement plan asset allocation at December 31, 2014 and 2013, long-term target allocation, and expected long-term rate of return by asset category are as follows:
The MeadWestvaco Master Retirement Trust maintains a well-diversified investment program through both the long-term allocation of trust fund assets among asset classes and the selection of investment managers whose various styles are fundamentally complementary to one another and serve to achieve satisfactory rates of return. Target asset allocation among asset classes is set through periodic asset/liability studies that emphasize protecting the funded status of the plan.
Portfolio risk and return is evaluated based on capital market assumptions for asset class long-term rates of return, volatility, and correlations. Target allocation to asset classes is set so that target expected asset returns modestly outperform expected liability growth while expected portfolio risk is low enough to make it unlikely that the funded status of the plan will drop below 100%. The asset allocation is dynamic such that target allocations to riskier asset classes are reduced if funded status changes dramatically. Active management of assets is used in asset classes and strategies where there is the potential to add value over a benchmark. The equity class of securities is expected to provide the long-term growth necessary to cover the growth of the plans’ obligations.
Equity market risk is the most concentrated type of risk in the trust which has significant investments in common stock and in collective trusts with equity exposure. This risk is mitigated by maintaining diversification in geography and market capitalization. Investment manager guidelines limit the amount that can be invested in any one security. Approximately 3.7% of the trust’s equity portfolio is hedged against equity market risk. The policy also allows allocation of funds to other asset classes that serve to enhance long-term, risk-adjusted return expectations.
Liquidity risk is present in the trust’s investments in partnerships/joint ventures, real estate, registered investment companies, and 103-12 investment entities. The policy limits target allocations to these asset classes to 18.4%.
Concentrated interest rate risk, credit spread risk, and inflation risk are present in the trust’s investments in government securities, corporate debt instruments, and common collective trusts. These investment risks are meant to offset the risks in the plan liabilities. Long-duration fixed income securities and interest rate swaps are used to better match the interest rate sensitivity of plan assets and liabilities. The portfolio’s interest rate risk is hedged at approximately 100% of the value of the plans’ accumulated benefit obligation. Corporate debt instruments mitigate the credit risk in the discount rate used to value the plan liabilities. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews. A portion of the overall fund will remain in short-term fixed income investments in order to meet the ongoing operating cash requirements of the plans.
Funding of plans and payments of benefits
The company does not anticipate any required contributions to the U.S. qualified retirement plans in the foreseeable future as the plans are not required to make any minimum regulatory funding contributions. However, the company expects to contribute $2 million to the funded non-U.S. pension plans in 2015.
The company expects to pay $21 million in benefits to participants of the nonqualified and unfunded non-U.S. retirement and postretirement plans in 2015. The table below presents estimated future benefit payments, substantially all of which are expected to be funded from plan assets.
Postemployment benefits
MeadWestvaco provides limited post-employment benefits to former or inactive employees, including short-term and long-term disability, workers’ compensation, severance, and health and welfare benefit continuation.
M. Restructuring charges
In January 2014, the company initiated a margin improvement program, which was 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 and 2012, the company initiated certain restructuring actions to reduce its overhead across its global operations. Cumulative charges included in the results from continuing operations through December 31, 2014 since the inception of the 2014 program were $47 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 years ended December 31, 2014, 2013 and 2012 are presented below.
Year ended December 31, 2014
Year ended December 31, 2013
Year ended December 31, 2012
Summary of restructuring accruals
The activity in the accrued restructuring balances was as follows for the year ended December 31, 2011 to the year ended December 31, 2014:
N. Other income, net
Components of other income, net are as follows:
Interest income includes $45 million for the year ended December 31, 2014 related to a long-term note receivable from the 2013 transaction with Plum Creek.
In the fourth quarter of 2013, the company released $24 million of reserves related to alternative fuel mixture credits. In the fourth quarter of 2012, the company made a determination to claim cellulosic biofuel producer credits in 2013 in exchange for the repayment of $15 million of alternative fuel mixture credits received from excise tax filings during 2009 and 2010.
For the year ended December 31, 2014, Other, net includes restructuring charges of $14 million associated with the loss on the sale of the European beauty and personal care folding carton business and $6 million related to goodwill impairment associated with the planned sale of the European tobacco folding carton business.
O. Income taxes
Earnings from continuing operations before income taxes are comprised of the following:
The significant components of the income tax provision are as follows:
The following table summarizes the major differences between taxes computed at the U.S. federal statutory rate and the actual income tax provision attributable to continuing operations:
The current and non-current deferred tax assets and liabilities are as follows:
The company has U.S. federal, state and foreign tax net operating loss carry-forwards which are available to reduce future taxable income in U.S. federal and various state and foreign jurisdictions. The company’s valuation allowance against deferred tax assets primarily relates to the state and foreign tax net operating losses for which the ultimate realization of future benefits is uncertain.
At December 31, 2014 and 2013 there were no deferred income taxes provided for the company’s share of undistributed net earnings of foreign operations.
The cumulative undistributed earnings, including foreign currency translation adjustments, totaled $1.36 billion and $1.47 billion for the years ended December 31, 2014 and 2013, respectively. Management’s intent is to reinvest such amounts indefinitely. The determination of the amount of such unrecognized tax liability is not practical because of the complexities with its hypothetical calculation. The company provides current or deferred income taxes on earnings of its international subsidiaries in the period that the company determines it will remit those earnings.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows for the years ended December 31, 2014, 2013 and 2012:
The company has operations in many areas of the world and is subject, at times, to tax audits in these jurisdictions. These tax audits by their nature are complex and can require several years to resolve. The final resolution of any such tax audits could result in either a reduction in the company’s accruals or an increase in its income tax provision, both of which could have an impact on the results of operations in any given period. With a few exceptions, the company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2004. The company regularly evaluates, assesses and adjusts these accruals in light of changing facts and circumstances, which could cause the effective tax rate to fluctuate from period to period. Of the total $85 million liability for unrecognized tax benefits at December 31, 2014, $76 million could impact the company’s effective tax rate in future periods. The remaining balance of this liability would be adjusted through the consolidated balance sheet without impacting the company’s effective tax rate.
It is anticipated that audits in certain foreign jurisdictions and certain domestic states will be completed in 2014. Based on the resolution of these various audits, it is reasonably possible that the balance of unrecognized tax benefits may be reduced by $1 million to $69 million during 2015.
The company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense in the consolidated statements of operations. During the years ended December 31, 2014 and 2013, the company recognized a benefit of $3 million and $9 million, respectively, related to interest and penalties. During the year ended December 31, 2012, the company recognized expense of $20 million related to interest and penalties. The company accrued $75 million and $89 million for the payment of interest and penalties at December 31, 2014 and 2013, respectively.
Approximately $82 million deferred tax benefit and $53 million of deferred income tax expense was provided in components of other comprehensive income during the years ended December 31, 2014 and 2013, respectively. Approximately $14 million and $11 million of current income tax benefit was provided in components of additional paid in capital during the year ended December 31, 2014 and 2013, respectively.
P. 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 December 31, 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 December 31, 2014, there were approximately 630 lawsuits. Management believes that the company has substantial indemnification protection and insurance coverage, subject to applicable deductibles and policy limits, with respect to asbestos claims. The company has valid defenses to these claims and intends to continue to defend them vigorously. Additionally, based on its historical experience in asbestos cases and an analysis of the current cases, the company believes that it has adequate amounts accrued for potential settlements and judgments in asbestos-related litigation. At December 31, 2014, the company had recorded litigation liabilities of approximately $22 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.
Q. Acquisitions
On December 11, 2012, the company acquired the remaining 50% interest in a Brazilian company specializing in rubber emulsifiers, adhesive resins and lubricants. The purchase price of this acquisition was $8 million. In addition, the company assumed debt of $6 million that was repaid prior to December 31, 2012. The total purchase price was allocated based on the fair values of the assets acquired and liabilities assumed including identifiable intangible assets totaling $1 million that are being amortized over a period of 3 years and goodwill of $4 million. The results of operations from the date of this acquisition are included in the Specialty Chemicals segment. This acquisition did not have a material effect on the company’s consolidated financial statements and as such, pro forma results for this acquisition are not presented.
On November 30, 2012, the company acquired a corrugated paperboard manufacturer located in India. The purchase price of this acquisition was $94 million. The total purchase price was allocated based on the fair values of the assets acquired and liabilities assumed including identifiable intangible assets totaling $9 million that are being amortized over a period of 2 to 5 years and goodwill of $46 million. The results of operations from the date of this acquisition are included in the Industrial segment. This acquisition did not have a material effect on the company’s consolidated financial statements and as such, pro forma results for this acquisition are not presented.
R. Special purpose entities
Pursuant to the sale of the company’s remaining U.S. forestlands which occurred on December 6, 2013, the company received an installment note in the amount of $860 million (the “Installment Note”). The Installment Note does not require any principal payments until its maturity in December 2023 and bears interest at a fixed rate of 5.207%. Using the Installment Note as collateral, the company received $774 million in proceeds under a secured financing agreement with a bank. Under the terms of the agreement, the liability from this transaction is non-recourse to the company and shall be paid from the Installment Note proceeds upon its maturity. As a result, the Installment Note is not available to satisfy the obligations of the company. The non-recourse liability does not require any principal payments until its maturity in December 2023 and bears interest at a fixed rate of 5.425%. As of December 31, 2014 and 2013 the Installment Note of $860 million is included within restricted assets held by special purpose entities and the secured financing liability of $774 million is included within liabilities held by special purpose entities. Both the Installment Note and the secured financing liability are included within a special purpose entity which is consolidated by the company.
Pursuant to the sale of certain large-tract forestlands in 2007, the company received an installment note in the amount of $398 million (the “Timber Note”). The Timber Note does not require any principal payments until its maturity in October 2027 and bears interest at a rate approximating the London Interbank Offered Rate (“LIBOR”). In addition, the Timber Note is supported by a bank-issued irrevocable letter of credit obtained by the buyer of the forestlands. Using the Timber Note as collateral, the company received $338 million in proceeds under a secured financing agreement with a bank. Under the terms of the agreement, the liability from this transaction is non-recourse to MeadWestvaco and shall be paid from the Timber Note proceeds upon its maturity. As a result, the Timber Note is not available to satisfy the obligations of MeadWestvaco. The non-recourse liability does not require any principal payments until its maturity in October 2027 and bears interest at a rate approximating LIBOR. As of December 31, 2014 and 2013 the Timber Note of $398 million is included within restricted assets held by special purpose entities and the secured financing liability of $338 million is included within liabilities held by special purpose entities. Both the Timber Note and the secured financing liability are included within a special purpose entity which is consolidated by the company.
S. Dispositions
On January 22, 2015, the company entered into a definitive agreement to sell its European tobacco folding carton business. Restructuring charges of $30 million related to asset write-downs for this business were recorded in Cost of sales and Other income, net within the consolidated statements of operations for the year ended December 31, 2014. Assets of $92 million and liabilities of $19 million were classified as assets held for sale in the consolidated balance sheet at December 31, 2014. The transaction is expected to close during the first half of 2015. This business is reported within the Food & Beverage segment.
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 $14 million, which is included within restructuring charges and reported in Other income, net within the consolidated statements of operations for the year ended December 31, 2014. This business was previously reported within the Home, Health & Beauty segment.
On December 6, 2013, the company completed the sale of its U.S. forestlands and related assets to Plum Creek, resulting in the recognition of a pre-tax gain of $780 million presented within discontinued operations on an after-tax basis. 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. Using the installment note as collateral, the company received $774 million in proceeds under a non-recourse secured financing agreement with a bank on December 20, 2013. The results of the forestry and certain minerals-related businesses, as well as the gain, are reported in discontinued operations in the consolidated financial statements. These businesses were previously reported within the Community Development and Land Management segment.
On May 1, 2012, MeadWestvaco completed the spin-off of its C&OP business and subsequent merger of that business with ACCO Brands Corporation. MeadWestvaco shareholders received approximately one share of ACCO Brands Corporation stock for every three shares of MeadWestvaco stock they owned of record as of April 24, 2012, resulting in their collective ownership on May 1, 2012 of 50.5% of the outstanding common shares of ACCO Brands Corporation. In accordance with the terms of the transaction, MeadWestvaco received cash distributions on a tax-free basis totaling $460 million during April 2012 pursuant to loan proceeds from new debt obligations of the C&OP business. The net assets of the C&OP business included cash totaling $59 million pursuant to MeadWestvaco satisfying a working capital provision of the transaction, subject to certain post-closing adjustments. For the year ended December 31, 2012, the operating results of the C&OP business are reported in discontinued operations in the consolidated statements of operations on an after-tax basis. The assets and liabilities of the C&OP business, including the debt obligations discussed above, were recorded as a dividend to MeadWestvaco’s shareholders and resulted in a $15 million decrease to consolidated shareholders’ equity as of May 1, 2012.
Below are amounts attributed to the above dispositions included in discontinued operations in the consolidated statements of operations.
There were no assets and liabilities classified as discontinued operations in the consolidated balance sheet at December 31, 2014 or December 31, 2013.
The following table shows the major categories of assets and liabilities that are classified as held for sale in the consolidated balance sheet at December 31, 2014:
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 $35 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.
T. Cash flow
Changes in current assets and liabilities, net of acquisitions and dispositions, were as follows:
U. 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.
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 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 primarily for 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 94,000 development acres in the Charleston, South Carolina region through a land development partnership with Plum Creek Timber Company, Inc (“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 alternative fuel mixture credits, restructuring charges, pension income and curtailment gains and losses, interest expense and income, non-controlling interest income and losses, certain legal settlements, gains and losses on certain asset sales and other items.
The segments are measured on operating profits before restructuring charges, interest expense and income, minority interest income and losses and income taxes. The segments follow the same accounting principles described in the Summary of Significant Accounting Policies. Sales between the segments are recorded primarily at market prices.
No single customer or foreign country other than Brazil accounted for 10% or more of consolidated trade sales or assets in the periods presented. The below table reflects amounts on a continuing operations basis.
Net sales are attributed to countries based on location of the seller.
Export sales from the U.S. were $1.1 billion, $990 million, and $919 million for the years ended December 31, 2014, 2013, and 2012, respectively.
Financial information by segment and Corporate and Other follows:
Assets of discontinued operations at December 31, 2012 represent the U.S. forestlands sold in 2013. See Notes R and S for further discussion.
Consolidated totals represent results from continuing operations, except as otherwise noted.
Segment profit in 2013 for the Home, Health & Beauty segment included a charge for $3 million related to certain depreciation adjustments. The aforementioned charge was attributable to periods prior to 2013 and is deemed immaterial to the segment’s results in 2013 and prior periods.
V. Selected quarterly information
The below information is unaudited.
First quarter 2014 results include after-tax restructuring charges of $25 million, or $0.15 per share, and income from an after-tax insurance settlement regarding litigation claims of $17 million, or $0.10 per share. Second quarter 2014 results include after-tax restructuring charges of $18 million, or $0.10 per share. Third quarter 2014 results include after-tax restructuring charges of $4 million, or $0.03 per share. Fourth quarter 2014 results include after-tax restructuring charges of $34 million, or $0.20 per share and discrete income tax benefits of $9 million, or $.05 per share.
First quarter 2013 results include after-tax restructuring charges of $18 million, or $0.10 per share, and after-tax income from discontinued operations of $13 million, or $0.07 per share. First quarter of 2013 results also include after-tax income of $3 million pursuant to certain value added tax matters related to the fourth quarter of 2012. The aforementioned adjustment attributable to periods prior to the first quarter of 2013 is deemed immaterial to the company’s consolidated financial statements for all periods. Second quarter 2013 results include after-tax restructuring charges of $4 million, or $0.02 per share, pension settlement charge of $11 million, or $0.06 per share and after-tax income from discontinued operations of $19 million or $0.11 per share. Second quarter of 2013 results also include after-tax charges of $6 million primarily related to the write-offs of inventories overstated in the fourth quarter of 2012 (after-tax charge of $1 million) and first quarter of 2013 (after-tax charge of $5 million). The aforementioned adjustment attributable to periods prior to the first quarter of 2013 is deemed immaterial to the company’s consolidated financial statements for all periods. Third quarter 2013 results include after-tax restructuring charges of $3 million, or $0.02 per share, Brazil tax adjustment of $2 million, or $0.01 per share and after-tax income from discontinued operations of $19 million, or $0.10 per share. Fourth quarter 2013 results include after-tax restructuring charges of $5 million, or $0.03 per share, pension settlement charge of $1 million, or $.01 per share, CDLM transaction costs of $2 million, or $.01 per share, AFMC income of $165 million, or $0.92 per share and after-tax income from discontinued operations of $468 million, or $2.61 per share. Fourth quarter of 2013 results include after-tax charges of $2 million related to depreciation adjustments associated with an acquisition that occurred in 2006. The aforementioned adjustment attributable to periods prior to 2013 is deemed immaterial to the company’s consolidated financial statements for all periods.
W. Subsequent events
On January 26, 2015, MWV announced it has entered into a Business Combination Agreement (the “Combination Agreement”) with Rock-Tenn Company (“Rock-Tenn”) to create a leading global provider of consumer and corrugated packaging (“TopCo”). Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies, MWV stockholders will receive 0.78 shares of TopCo for each share of MWV held. Rock-Tenn shareholders will be entitled to elect to receive either (a) 1.00 shares of TopCo or (b) cash in an amount equal to the volume weighted average price of Rock-Tenn common stock during a five-day period ending three trading days prior to closing for each share of Rock-Tenn held. The cash and stock elections by Rock-Tenn shareholders will be subject to proration such that the resulting ownership of TopCo will be approximately 50.1% by MWV shareholders and 49.9% by Rock-Tenn shareholders, and it is estimated that approximately 7% of Rock-Tenn shares will be converted into cash in lieu of stock.
The completion of the Mergers is subject to the satisfaction or waiver of certain conditions, including (i) the adoption of the Combination Agreement by the affirmative vote of the holders of a majority of all outstanding shares of MWV Common Stock entitled to vote thereon; (ii) the approval of the Combination Agreement by the affirmative vote of the holders of a majority of all outstanding shares of Rock-Tenn Common Stock entitled to vote thereon; (iii) the receipt of certain domestic and foreign governmental approvals; (iv) the receipt of certain tax opinions; (v) the absence of any law or order prohibiting the Mergers; (vi) the effectiveness of the Form S-4; and (vii) the absence of a material adverse effect on Rock-Tenn or MWV. Both parties expect to close the transaction in the second calendar quarter of 2015.
The Combination Agreement contains mutual customary representations and warranties made by each of Rock-Tenn and MWV, and also contains mutual customary pre-closing covenants, including covenants, among others, (i) to operate its businesses in the ordinary course consistent with past practice and to refrain from taking certain actions without the other party’s consent, (ii) not to solicit, initiate, knowingly encourage or take any other action designed to facilitate, and, subject to certain exceptions, not to participate in any discussions or negotiations, or cooperate in any way with respect to, any inquiries or the making of, any proposal of an alternative transaction or to withdraw the support of its Board of Directors for the Mergers, and (iii) to use their respective reasonable best efforts to obtain governmental, regulatory and third party approvals.
The Combination Agreement contains certain termination rights for each of MWV and Rock-Tenn, including in the event that (i) the Mergers are not consummated on or before January 25, 2016, (ii) the approval of the stockholders of MWV or the shareholders of Rock-Tenn is not obtained at a shareholder meeting or (iii) either MWV or Rock-Tenn terminates the Combination Agreement to enter into a binding agreement providing for a superior alternative transaction. The Combination Agreement further provides that, upon termination of the Combination Agreement under specified circumstances, including a change in the recommendation of the Board of Directors of MWV or Rock-Tenn or a termination of the Combination Agreement by MWV or Rock-Tenn to enter into a binding agreement providing for a superior alternative transaction, MWV or Rock-Tenn, as the case may be, will pay to the other party a termination fee equal to $230 million in cash.
TopCo will have a Board of Directors consisting initially of fourteen directors, (i) eight of whom will be persons designated by Rock-Tenn from the directors of Rock-Tenn as of the date of the Combination Agreement, one of whom will be Mr. Steven C. Voorhees, and (ii) six of whom will be persons designated by MWV from the directors of MWV as of the date of the Combination Agreement, one of whom will be Mr. John A. Luke, Jr.
Under the terms of the Combination Agreement, as of the Effective Time, Mr. Voorhees will be appointed as the Chief Executive Officer and President of TopCo for a three year term and Mr. Luke will be designated as Non-Executive Chairman of TopCo for a three year term.
The Combination Agreement provides that, at the Effective Time, the MWV stock options and other equity awards and the Rock-Tenn stock options and other equity awards generally will convert upon the Effective Time into stock options and equity awards with respect to TopCo Common Stock, after giving effect to appropriate adjustments to reflect the consummation of the Mergers.
On January 22, 2015, the company announced it has signed a definitive agreement to sell its European tobacco folding carton business to AR Packaging Group AB. The transaction is expected to be completed during the first half of 2015.
On January 8, 2015, the company announced its Board of Directors has approved a plan to fully separate its Specialty Chemicals business from the rest of the company. The separation is expected to be executed by means of a tax-free spinoff of the Specialty Chemicals business. The spinoff is expected to be completed by the end of 2015.
Item 9.
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure
None.
Item 9A.
Item 9A. Controls and procedures
Management’s report on internal control over financial reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. In order to evaluate the effectiveness of internal control over financial reporting, management has conducted an assessment, including testing, using the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The company’s internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 (“Exchange Act”), is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on our assessment, under the criteria established in Internal Control - Integrated Framework (2013), issued by the COSO, management has concluded that the company maintained effective internal control over financial reporting as of December 31, 2014. In addition, the effectiveness of the company’s internal control over financial reporting as of December 31, 2014 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Part II, Item 8.
Evaluation of the company’s disclosure controls and procedures.
As of the end of the period covered by this Annual Report on Form 10-K, we evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Exchange Act). 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 and operating to the reasonable assurance level, as of December 31, 2014, to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 have been 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 fiscal quarter ended December 31, 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.
Item 9B.
Item 9B. Other information
None.
Part III
Item 10.
Item 10. Directors, executive officers and corporate governance
Information required by this item for MeadWestvaco’s directors will be contained in a subsequent filing of an amendment to our Form 10-K to be filed with the SEC within 120 days of our fiscal year ended December 31, 2014. Portions of the information required by this item for MeadWestvaco’s code of conduct and executive officers are also contained in Part I of this report under the captions “Available information” and “Executive officers of the registrant,” respectively.
Item 11.
Item 11. Executive compensation
Information required by this item will be contained in a subsequent filing of an amendment to our Form 10-K to be filed with the SEC within 120 days of our fiscal year ended December 31, 2014.
Item 12.
Item 12. Security ownership of certain beneficial owners and management and related stockholder matters
Information required by this item will be contained in a subsequent filing of an amendment to our Form 10-K to be filed with the SEC within 120 days of our fiscal year ended December 31, 2014.
Item 13.
Item 13. Certain relationships and related transactions, and director independence
Information required by this item will be contained in a subsequent filing of an amendment to our Form 10-K to be filed with the SEC within 120 days of our fiscal year ended December 31, 2014.
Item 14.
Item 14. Principal accounting fees and services
Information required by this item will be contained in a subsequent filing of an amendment to our Form 10-K to be filed with the SEC within 120 days of our fiscal year ended December 31, 2014.
Part IV
Item 15.
Item 15. Exhibits, financial statement schedules
(a) Documents filed as part of this report:
1. Consolidated financial statements
The consolidated financial statements of MeadWestvaco Corporation and consolidated subsidiaries are listed in the index which is included in Part II, Item 8.
2. Consolidated financial statement schedules
All financial statement schedules have been omitted because they are inapplicable, not required, or shown in the consolidated financial statements and notes thereto contained herein.
3. Exhibits
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
We agree to furnish copies of other instruments defining the rights of holders of long-term debt to the Commission upon its request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.