MeadWestvaco Corporation (MWV) delivered a strong third quarter with operating earnings per share (EPS) of 63 cents, outperforming Zacks Consensus Estimate of 55 cents and improving 37% significantly from 46 cents in the prior-year quarter.
GAAP EPS in the third quarter included some special items, which amounted to 64 cents, a decline of 9.8% from 71 cents in the year-earlier quarter.
The special items included in GAAP EPS are tax benefit from cellulosic biofuel producer of 9 cents, after-tax restructuring charges of 6 cents and after-tax charge of 2 cents from early retirement of debt.
The company delivered net sales of $1.6 billion surpassing $1.5 billion in the year-ago quarter. However, the sales fell short of the Zacks Consensus Estimate of $1.7 billion. The improvement in sales was mainly driven by sales growth in emerging markets and improved productivity.
Cost and Margins
Cost of sales inched up 1% year over year to $1,208 million; while selling, general and administrative expenses shot-up 11% to $197 million from the year-earlier quarter.
Gross profit for the company increased 12.8% year over year to $352 million, increasing the gross margin by 193 basis points to 22.6%.
Segmental Performance
Packaging Resource: The segment reported net sales of $703 million, spiked 12.3% year over year, driven by the increased shipments of the company’s CNK®-branded coated unbleached kraft paperboard. The segment volumes surged 4%.
Operating profits accelerated 23% from the year-ago quarter to $91 million, led by improved pricing and product mix and higher volumes, partially offset by higher cost of raw material and unfavorable foreign currency exchange.
Consumer Solutions: The sales for the segment inched down 2% year over year to $455 million. The segment also witnessed 1% increase in volumes driven by continued growth in home and garden and in personal care dispensing solutions, particularly higher value fragrance and airless products, partially offset by deliberate exits from lower return product lines.
Operating profit as reported by the company increased 41% year over year to $38 million due to higher volume of core products, favorable foreign currency exchange, partially offset by higher cost and freight.
Consumer & Office Products: The segment sales dropped 5% from the year-earlier quarter to $288 million. Due to the onset of school season, the segment saw a 6% surge in volumes of its brands like Mead®, FiveStar® and Trapper Keeper®.
The operating profit for the segment decreased modestly by 2% year over year to $50 million driven by higher cost of raw materials and largely offset by improved productivity.
Specialty Chemicals: This segment’s sales witnessed a maximum hike of 22% year over year of all the segments to $189 million, mainly driven by continuous penetration in the emerging markets, gains in the market share for adhesive solutions and increased auto production, particularly in North America and Europe.
Operating profit rose significantly by 83% from the prior-year quarter to $44 million led by favorable price/cost mix, improved productivity and higher volumes, partially offset by increased cost of materials and freight.
Community Development and Land Management: Sales in the segment plunged significantly by 37% to $26 million compared with the year-earlier quarter.
Operating profit declined drastically to $2 million from $20 million in the prior-year quarter. The decrease in sales and profits was due to the lower level of activities in the real estate. During the third quarter, 2,200 acres of land was sold compared with 11,300 acres in the prior-year quarter.
Financial Position
Cash and cash equivalents as of September 30, 2010 amounted to $774 million, down from the $850 million as of December 31, 2009. Long-term debt declined to $2.04 billion from $2.15 billion as of December 31, 2009.
Cash from operations declined to approximately $350 million for the first three quarters of 2010 compared with $530 million during the comparable period, due to the cash receipt from alternative fuel mixture credits amounting to $248 million in 2009.
Capital expenditure remained unchanged at $137 million compared with the prior-year comparable period.
Debt-to-capital ratio as of September 30, 2010 was 38.7%, 40.5% as of June 30, 2010 and 39.3% as of March 31, 2010.
During the quarter, the company repurchased 2.6 million of its common shares for $60 million under existing authorizations, with an average price of $23.08 per share.
Divestitures
On September 30, 2010, MeadWestvaco completed the sales of media and entertainment packaging business for cash proceeds of $68 million resulting in an after-tax loss on disposition of $122 million.
Outlook
The company believes that the demand across all its markets will remain stable but below the pre-recession levels. The company is well positioned to capitalize the increasing demand in Europe, North America and other emerging markets.
The company’s strategy to focus on the higher return markets, drive supply chain and working capital efficiencies are likely to expand operating margins and earnings in the fourth quarter of 2010.
We currently have a Zacks #3 Rank (short-term Hold rating) on the stock.
MeadWestvaco Corporation provides solutions to the companies operating in the healthcare, beauty and personal care, food, beverage, home and garden, tobacco, and commercial print industry. The company comprise of five segments viz. Packaging Resource Consumer Solutions Consumer & Office Products Specialty Chemicals Community Development and Land Management.
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