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MarketScreener Homepage  >  Equities  >  Nyse  >  WestRock Company    WRK

WESTROCK COMPANY

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WESTROCK : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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01/31/2020 | 03:32pm EDT
The following discussion should be read in conjunction with the condensed
consolidated financial statements and Notes thereto included herein and our
audited Consolidated Financial Statements and Notes thereto for the fiscal year
ended September 30, 2019, as well as the information under the heading "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" that are part of the Fiscal 2019 Form 10-K. The following discussion
includes certain non-GAAP financial measures. See our reconciliations of
non-GAAP financial measures in the "Non-GAAP Financial Measures" section below.

Overview


We are a multinational provider of paper and packaging solutions for consumer
and corrugated packaging markets. We partner with our customers to provide
differentiated paper and packaging solutions that help them win in the
marketplace. Our team members support customers around the world from our
operating and business locations in North America, South America, Europe, Asia
and Australia.

Presentation

We report our financial results of operations in the following three reportable
segments: Corrugated Packaging, which consists of our containerboard mills,
corrugated packaging and distribution operations, as well as our merchandising
displays and recycling procurement operations; Consumer Packaging, which
consists of our consumer mills, food and beverage and partition operations; and
Land and Development, which previously sold real estate primarily in the
Charleston, SC region. Certain income and expenses are not allocated to our
segments and, thus, the information that management uses to make operating
decisions and assess performance does not reflect these amounts. Items not
allocated are reported as non-allocated expenses or in other line items in the
table below after segment income. In addition, see "Note 1. Basis of
Presentation and Significant Accounting Policies-Basis of Presentation" for more
information.

Acquisitions



On November 2, 2018, we completed the KapStone Acquisition. KapStone is a
leading North American producer and distributor of containerboard, corrugated
products and specialty papers, including liner and medium containerboard, kraft
papers and saturating kraft. KapStone also owns Victory Packaging, a packaging
solutions distribution company with facilities in the U.S., Canada and Mexico.
We have included the financial results of KapStone in our Corrugated Packaging
segment since the date of the acquisition.

See "Note 3. Acquisitions and Investment" of the Notes to Consolidated Financial
Statements section in the Fiscal 2019 Form 10-K and "Note 3. Acquisitions" of
the Notes to Condensed Consolidated Financial Statements for more information.

Executive Summary



                     Three Months Ended December 31,
(In millions)          2019                   2018

Net sales        $        4,423.7$        4,327.4
Segment income   $          331.0       $          324.4




Net sales of $4,423.7 million for the first quarter of fiscal 2020 increased
$96.3 million, or 2.2%, compared to the first quarter of fiscal 2019. The
increase was primarily due to the KapStone Acquisition as the prior year period
included only two months of KapStone ownership as the transaction closed on
November 2, 2018. This increase was partially offset by lower pulp and
corrugated prices and lower consumer paperboard volumes as well as unfavorable
foreign currency impacts across our segments compared to the prior year quarter.



Segment income increased $6.6 million in the first quarter of fiscal 2020 compared to the first quarter of fiscal 2019, primarily due to increased Corrugated Packaging segment income partially offset by lower Consumer

                                       42

--------------------------------------------------------------------------------


Packaging segment income. A detailed review of our performance appears below
under "Results of Operations (Consolidated)" and "Results of Operations (Segment
Data)".



During the first quarter of fiscal 2020, we made substantial progress executing
our differentiated strategy in markets that were characterized by stable demand,
increasing supply and customers with ever-growing needs for innovative,
sustainable packaging solutions.



Our capital expenditures during the first quarter of fiscal 2020 of $375 million
included $132 million for strategic projects, including a new paper machine at
our mill in Florence, SC and an upgrade of our mill in Brazil. We expect fiscal
2020 capital expenditures to be approximately $1.1 billion, that our capital
expenditures in the remaining quarters of fiscal 2020 will be lower than our
capital expenditures in the first quarter of fiscal 2020, and that our capital
expenditures will decline in fiscal 2021 to an annual rate of $900 million to $1
billion. While these investments negatively impacted our results in the first
quarter of fiscal 2020, we believe these projects will deliver substantial
benefits for us in the near and long term.



We expect that the new paper machine at our mill in Florence, SC will begin operation during the first half of calendar 2020 and that we will achieve a $40 million annual run rate of benefits from the reconfiguration of our North Charleston, SC mill by the end of calendar 2020.




We are continuing to focus on executing our differentiated strategy with our
commercial excellence, operational excellence and digital programs, and believe
these efforts will position us to generate profitable organic growth and
productivity improvements, as well as a level of cash flow that will allow us to
return to reduce our leverage. We expect our leverage will peak in the second
quarter of fiscal 2020 before declining in the second half of fiscal 2020.



For the second quarter of fiscal 2020, we expect:

• modest seasonal volume increases across our Corrugated Packaging and

Consumer Packaging segments;

• some negative impact from the January 2020 Pulp and Paper Week published

          price reductions of $10 per ton for domestic linerboard and $15 per ton
          for domestic medium; and

• that productivity improvements and lower sequential healthcare costs to

          more than offset higher sequential wage costs and the payroll tax reset
          that occurs at the beginning of each calendar year.






Non-GAAP Financial Measures

We report our financial results in accordance with GAAP. However, we have included financial measures that were not prepared in accordance with GAAP. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our GAAP results. The non-GAAP financial measures we present may differ from similarly captioned measures of other companies.


We use the non-GAAP financial measures "Adjusted Net Income" and "Adjusted
Earnings Per Diluted Share". Management believes these non-GAAP financial
measures provide our board of directors, investors, potential investors,
securities analysts and others with useful information to evaluate our
performance because the measures exclude restructuring and other costs and other
specific items that management believes are not indicative of the ongoing
operating results of the business. We and our board of directors use this
information to evaluate our performance relative to other periods. We believe
that the most directly comparable GAAP measures to Adjusted Net Income and
Adjusted Earnings Per Diluted Share are Net income attributable to common
stockholders and Earnings per diluted share, respectively.

Earnings per diluted share were $0.53 in the first quarter of fiscal 2020
compared to $0.54 in the first quarter of fiscal 2019. Adjusted Earnings Per
Diluted Share were $0.58 and $0.83 in the first quarter of fiscal 2020 and 2019,
respectively.



                                       43
--------------------------------------------------------------------------------

Set forth below is a reconciliation of the non-GAAP financial measure Adjusted Earnings Per Diluted Share to Earnings per diluted share, the most directly comparable GAAP measure (in dollars per share) for the periods indicated.



                                                                Three Months Ended
                                                                   December 31,
                                                                 2019          2018
Earnings per diluted share                                    $     0.53$  0.54
Restructuring and other items                                       0.09         0.21

Direct (recoveries) expenses from Hurricane Michael, net of

  related proceeds                                                 (0.05 )  

0.12

Inventory stepped-up in purchase accounting, net

  of LIFO                                                              -    

0.07

Gain on sale of certain closed facilities                              -        (0.15 )
Accelerated depreciation on major capital projects
  and certain plant closures                                        0.03    

0.02

Interest accretion and other                                           -        (0.02 )
Losses at closed plants, transition and start-up costs              0.01    

-

North Charleston and Florence transition and

  reconfiguration costs                                             0.04    

-

Brazil indirect tax                                                (0.09 )  

-

Loss on extinguishment of debt                                         -    

0.01

Impact of Tax Cuts and Jobs Act                                        -    

0.02

Other                                                               0.02    

0.01

Adjusted Earnings Per Diluted Share                           $     0.58$  0.83






The GAAP results in the tables below for Pre-Tax, Tax and Net of Tax are
equivalent to the line items "Income before income taxes", "Income tax expense"
and "Consolidated net income", respectively, as reported on the statements of
income. Set forth below are reconciliations of Adjusted Net Income to the most
directly comparable GAAP measure, Net income attributable to common stockholders
(represented in the table below as the GAAP Results for Consolidated net income
(i.e. Net of Tax) plus Noncontrolling interests), for the periods indicated (in
millions):



                                                         Three Months Ended December 31, 2019
                                                    Pre-Tax              Tax             Net of Tax

GAAP Results                                      $      186.0$      (46.5 )$      139.5
Restructuring and other items                             30.1               (7.7 )             22.4
Hurricane Michael recovery of direct costs, net          (16.0 )              3.9              (12.1 )
Gain on sale of certain closed facilities                 (0.5 )              0.1               (0.4 )
Accelerated depreciation on major capital
projects
  and certain plant closures                              11.6               (2.9 )              8.7
Losses at closed plants, transition and
start-up costs                                             4.4               (1.1 )              3.3

North Charleston and Florence transition and

  reconfiguration costs                                   15.3               (3.7 )             11.6
Brazil indirect tax                                      (33.8 )             10.6              (23.2 )
Land and Development operating results                    (1.3 )              0.3               (1.0 )
Other                                                      5.3               (1.3 )              4.0
Adjusted Results                                  $      201.1$      (48.3 )$      152.8
Noncontrolling interests                                                                        (1.0 )
Adjusted Net Income                                                                     $      151.8






                                       44
--------------------------------------------------------------------------------

                                                            Three Months Ended December 31, 2018
                                                       Pre-Tax              Tax             Net of Tax

GAAP Results                                         $      202.5$      (62.7 )$      139.8
Restructuring and other items                                54.4               (0.9 )             53.5

Direct expenses from Hurricane Michael, net of

  related proceeds                                           39.8               (9.8 )             30.0

Inventory stepped-up in purchase accounting, net

  of LIFO                                                    24.7               (6.0 )             18.7
Gain on sale of certain closed facilities                   (50.5 )             12.4              (38.1 )
Accelerated depreciation on major capital projects            8.9               (2.3 )              6.6
Interest accretion and other                                 (5.5 )              1.3               (4.2 )
Losses at closed plants and transition costs                  2.3               (0.6 )              1.7
Loss on extinguishment of debt                                1.9               (0.5 )              1.4
Land and Development operating results                       (0.7 )              0.2               (0.5 )
Impact of Tax Cuts and Jobs Act                                 -                4.1                4.1
Other                                                         3.8               (0.9 )              2.9
Adjusted Results                                     $      281.6$      (65.7 )$      215.9
Noncontrolling interest                                                                            (0.7 )
Adjusted Net Income                                                                        $      215.2

We discuss certain of these charges in more detail in "Note 4. Restructuring and Other Costs" of the Notes to Condensed Consolidated Financial Statements.

© Edgar Online, source Glimpses

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