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Financial Analysis of Meadwestvaco -
February 19th, 2011
MeadWestvaco (NYSE: MWV), which started calling itself MWV in March 2008, makes customized and printed packaging and office paper. Its customers include companies in the food and beverage, media and entertainment, personal care and health care industries. It operates in more than 30 countries and sells its products in over 100, although 69% of 2007 sales came from the United States. In addition to its paper product lines, MWV's Community Development and Land Management Group manages the 952,000 acres of forestland that the firm owns in the U.S. and Brazil. In 2007, the firm sold approximately 393,000 acres of forestland, generating an after-tax gain of $169 million.
In 2007, MWV's revenue was $6.9 billion (5.8% gain over 2006) and its 2007 net income was $285 million (206.5% gain over 2006). The large growth in net income in 2007 reflects an after-tax gain of $169 million from the sale of 393,000 acres of U.S. forestland.
The other main issue facing MWV is the proliferation of digital technology and its negative impact on the use of paper and packaging products. For example, email is replacing pen and paper memos, and downloaded music is becoming more popular than purchases of CDs in their special injection-molded cases, a specialty of MWV. Because of this trend, 2007 sales growth in MWV's Consumer and Office Solutions segment was stagnant, and 2007 net income in its Consumer Solutions division (responsible for injection-molded cases) fell by 8%.
1 Business Overview
1.1 Financial Metrics
1.2 Business Segments
1.2.1 Packaging Resources (42% of pre-tax profit)
1.2.2 Consumer Solutions (11% of pre-tax profit)
1.2.3 Consumer & Office Products (18% of pre-tax profit)
1.2.4 Specialty Chemicals (5% of pre-tax profit)
1.2.5 Corporate and Other (-24% of pre-tax profit)
2 Key Trends and Forces
2.1 Environmental concerns take a toll on MWV's bottom line.
2.2 Changing delivery methods for music and video entertainment reduce demand for some of MWV's specialty packaging.
2.3 Digital communications reduce paper consumption, hurting MWV's Consumer & Office Products segment.
MeadWestvaco, which rebranded itself as MWV in March 2008, produces and sells paperboard (a raw material used in packaging), customized and printed packaging, home and office paper products and specialty chemicals that are byproducts of the paper and packaging businesses. Additionally, the firm owns 952,000 acres of forestland in the U.S. and Brazil, strategically managing, buying and selling them to produce revenue.
MWV's Revenue, Net Income and Profit Margin: 2005-2007
The following table shows MWV's revenue and net income, as well as the percentage changes in each, for 2005-2007.
(millions USD) 2005 2006 2007
Revenue $6,170 $6,530 $6,906
% change 1.8% 5.8% 5.8%
Net income $28 $93 $285
% change 108% 232.1% 206.5%
MWV's breakdown of pre-tax profit by business segment
MeadWestvaco is broken down into five reported business segments: Packaging Resources, Consumer Solutions, Consumer & Office Products, Specialty Chemicals and Corporate and Other.
Packaging Resources (42% of pre-tax profit)
The Packaging Resources segment produces paperboard and other raw packaging materials. It is the largest division of MWV, with $3.02 billion in 2007 sales. Customers include producers of media, beverages, produce, cosmetics, tobacco, pharmaceuticals and healthcare products.
Consumer Solutions (11% of pre-tax profit)
The Consumer Solutions segment produces customized and printed consumer packaging for products including CDs and DVDs, cosmetics, beverage and tobacco products. It also produces packaging equipment for sale or lease to other firms. In 2007, Consumer Solutions sales increased 12% to $2.43 billion.
Consumer & Office Products (18% of pre-tax profit)
The Consumer & Office Products division produces school and office supplies under brands including AT-A-GLANCE, Cambridge, Five Star, Mead and Trapper Keeper. This segment's sales increased by less than 1% in 2007, to $1.15 billion, due to decreases in volume (see Trends/Forces below). However, its profit still increased 9% to $139 million due to price increases, changes in the product mix and productivity improvements.
Specialty Chemicals (5% of pre-tax profit)
The Specialty Chemicals section of MWV produces chemicals that are derived from sawdust or other byproducts of the paper-making process. These chemicals include activated carbon for use in vehicle emission-control systems, as well as chemicals used in printing inks, asphalt paving, adhesives and lubricants. Sales in this division remained level with 2006 at $493 million: higher prices were offset by declining volumes due to decreased car production and lower demand in the publication inks industry.
Corporate and Other (-24% of pre-tax profit)
This segment includes all forestry operations, as well as income and charges related to corporate, restructuring, legal and pension matters. The $184 million loss in 2007 was an improvement over the $448 million loss in 2006, largely due to the sale of 393,000 acres of forestland, which brought in a before-tax gain of $250 million.
Key Trends and Forces
Environmental concerns take a toll on MWV's bottom line.
The firm was found to be liable for environmental cleanup costs at certain sites it had used in the past; this cost $21 million in 2007, and the company anticipates that this figure, too, may grow in the years following that. Additionally in 2007, MWV spent $19 million on environmental capital in order achieve its sustainability goals, and it expects this expenditure to steadily increase in the coming years. Without these two expenditures totaling $40 million, MWV's 2007 net income would have been 14% higher.
Changing delivery methods for music and video entertainment reduce demand for some of MWV's specialty packaging.
The Consumer Solutions segment, which contributed 35% of total 2007 revenue, produces the special injection-molded cases used to package CDs and DVDs. Profits in the Consumer Solutions division fell 8% in 2007, to $86M. The proliferation of computer ownership and broadband internet access have changed the way people access media. As opposed to buying music and movies in CD or DVD format, many consumers simply download them over the internet. In fact, Apple's iTunes music store became the top music retailer in the U.S. in 2008, surpassing the 5-billion-song milestone on June 19, 2008. Globally, sales of music on CDs and DVDs fell 13% in 2007, while sales of downloaded songs increased 34%.
Digital communications reduce paper consumption, hurting MWV's Consumer & Office Products segment.
In the world's wealthiest countries, per-capita consumption of paper fell 6% between 2000 and 2005. This trend has hurt MWV's Consumer & Office Products segment, which contributed $1.15 billion of revenue in 2007. This was a gain of only 0.88% over 2006; growth was hampered by declining volume. Similarly, the widespread proliferation of internet access has decreased the demand for consumer paper products in many areas. For example, e-mail is eliminating the need for MWV's paper memo pads, letter paper and envelopes, and people can use calendar software rather than MWV's At-A-Glance brand of calendars.
MWV's competes with other firms that produce paperboard, packaging and paper-based office products. The industry is made up of large companies, with the top four companies shown in the table below. International Paper Company (IP) and Smurfit-Stone Container (SSCC) produce similar product mixes to MWV, while Weyerhaeuser Company (WY) also produces wood products like raw timber.
(millions USD) Net Sales Net Income
International Paper Company (IP) $21,890 $1,168
Weyerhaeuser Company (WY) $16,308 $790
Smurfit-Stone Container (SSCC) $7,420 ($103)
MWV $6,906 $285
Last edited by netrashetty; February 19th, 2011 at 03:18 PM..