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 endedSeptember 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 inNorth America ,South America ,Europe ,Asia andAustralia . 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 theCharleston, 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. See "Note 1. Basis of Presentation and Significant Accounting Policies-Basis of Presentation" and "Note 7. Segment Information" for more information.
Acquisitions
OnNovember 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 ownsVictory Packaging , a packaging solutions distribution company with facilities in theU.S. ,Canada andMexico . We have included the financial results of KapStone in ourCorrugated Packaging segment since the date of the KapStone 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 March 31, Six Months Ended March 31, (In millions) 2020 2019 2020 2019 Net sales$ 4,447.3 $ 4,620.0 $ 8,871.0 $ 8,947.4 Segment income$ 335.3 $ 396.0 $ 666.3 $ 720.4 Net sales of$4,447.3 million for the second quarter of fiscal 2020 decreased$172.7 million , or 3.7%, compared to the second quarter of fiscal 2019. This decrease was primarily due to lower pulp and corrugated prices and lower consumer paperboard volumes, as well as unfavorable foreign currency impacts across our segments, in each case compared to the prior year quarter. COVID-19 did not have a significant impact on our earnings in the second quarter of fiscal 2020. Segment income decreased$60.7 million in the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019, primarily due to lowerCorrugated Packaging segment income partially offset by higherConsumer Packaging segment income. A detailed review of our performance appears below under "Results of Operations (Consolidated)" and "Results of Operations (Segment Data)". 46
--------------------------------------------------------------------------------
COVID-19 Response WestRock Pandemic Action Plan We are executing our differentiated strategy with financial strength and substantial liquidity, and we are adapting quickly to changing market conditions. Given the uncertainties associated with the severity and duration of COVID-19, we are implementing the WestRock Pandemic Action Plan, which we expect will provide an additional$1 billion in cash that we will be able to use through the end of fiscal 2021 to reduce our outstanding indebtedness. Pursuant to the WestRock Pandemic Action Plan, we are:
• Protecting the safety and well-being of our teammates,
• Continuing to match our supply with our customers' demand,
• Decreasing the salaries of our senior executive team by up to 25% from
2020 through
board of directors by 25% for the third and fourth calendar quarters of 2020,
in addition to reducing discretionary expenses,
• Expecting to use Common Stock to pay our annual incentive and Company funded
401(k) contributions in calendar 2020,
• Expecting to reduce fiscal 2020 capital investments by approximately
million to a level of
range of
• Postponing
calendar year 2020, pursuant to relief offered under the Coronavirus Aid,
Relief and Economic Security ("CARES") Act, and
• Resetting our quarterly dividend to
$0.80 per share.
We expect that the actions that we take under the WestRock Pandemic Action Plan will position us to sustain our business in a range of economic and market conditions and position us for long-term success.
Health and Safety of our Teammates
Our first priority is the health and safety of our teammates, and we have taken, and continue to take, actions to protect the health and safety of our teammates during COVID-19. We are:
• Cleaning and disinfecting workstations and common surfaces frequently and
arranging for deep cleaning and sanitizing of our sites, as needed,
• Encouraging the use of face coverings generally and complying with specific
requirements where use is mandated,
• Enforcing quarantine guidelines for team members affected or potentially
exposed to COVID-19, and
• Supporting flexible and alternative work arrangements, including a
work-from-home strategy for team members whose jobs can be performed remotely.
We have also implemented temperature screenings in compliance with applicable law and launched an onlineCoronavirus Resource Center to keep our teammates up to date on Company and health authority information, including information from theWorld Health Organization and theU.S. Centers for Disease Control and Prevention . Business Continuity Our business is an essential part of the global supply chain. Our paper and packaging products enable our customers to package essential food, beverage, health products, cleaning products and other goods. We are continuing to operate and meet or exceed our customers' needs in this rapidly evolving demand environment. 47
-------------------------------------------------------------------------------- We have formed a business continuity team comprised of senior leaders throughout our organization that develops and implements business continuity plans to ensure that our operations are well positioned to continue producing and delivering products to customers without disruption. The business continuity team meets daily to identify and address issues as they arise and focuses on taking actions that address current circumstances associated with COVID-19 while positioning us for future growth.
Financial Flexibility and Liquidity
We believe that we have substantial liquidity to navigate the current dynamic environment. Our cash and cash equivalents and long-term committed available borrowings aggregated to more than$2.5 billion of liquidity atMarch 31, 2020 . We have limited debt maturities prior toMarch 2022 . We remain focused on maintaining our investment grade rating and managing our working capital and taking appropriate actions to ensure our access to necessary liquidity. The Coronavirus Aid, Relief, and Economic Security ("CARES") Act allows employers to postpone paying their share of employment taxes incurred through the end of calendar year 2020. We expect to postpone an estimated$120 million of such payments over the next three quarters and will be required to pay 50% of these amounts inDecember 2021 and the remaining 50% inDecember 2022 .
End Market Segment Demand Trends
End market demand trends are changing quickly. We experienced strong demand from e-commerce in the second fiscal quarter and we expect that e-commerce demand may remain strong in the third fiscal quarter. During the second fiscal quarter, pantry stocking by consumers at the end of March positively impacted demand in the food, beverage, household cleaning and paper products, diapers and liquid packaging markets segments. We expect that demand levels in these market segments will return to more normal levels. The protein markets have shifted from being strongly positive to negative during the second half of April and early May due to disruptions at protein plants caused by COVID-19, although, we expect that these disruptions are likely transitory. COVID-19 has also negatively impacted demand from our industrial and distribution customers due to shelter in place and similar orders and our foodservice and commercial print market segments are continuing a pattern of decline. These trends among our end market segments have continued into April. More than 130 of our customers have reported temporary plant closures and reduced shifts due to COVID-19. We are not certain whether these trends will continue into future reporting periods and, if so, for how long. We believe that our diverse portfolio of paper and packaging products positions us well to adapt and meet our customers' changing needs across a broad cross-section of the economy.
Expectations for the Third Quarter of Fiscal 2020
We believe that recent trends that we have experienced in our end market segment demand are likely to cause our sales and earnings in the fiscal third quarter to decline sequentially compared to our sales and earnings in the second quarter of fiscal 2020. Changing demand trends across many of our end markets will likely negatively impact volumes in specific portions of our business. In addition to an uncertain volume outlook, our financial results in the fiscal third quarter will reflect the flow through of the published price reductions for linerboard that were announced inJanuary 2020 and the published price reductions for SBS and recycled boxboard paper grades that were announced inFebruary 2020 . Our business in the third fiscal quarter will also likely be negatively impacted by rising recycled fiber costs. The cost of recycled fiber has risen by more than$50 per ton sinceDecember 2019 .
During the fiscal third quarter, we expect to provide one-time recognition awards to our teammates who work in manufacturing and operations.
48
--------------------------------------------------------------------------------
Goodwill AtMarch 31, 2020 , we evaluated the current economic environment, including our current assessment of the impact of COVID-19, and we believe that there were no indicators of impairment of our long-lived assets, including goodwill that required a quantitative test to be performed. Our estimates involve numerous assumptions about the future growth and potential volatility in revenues and costs, capital expenditures, industry and global economic factors, interest rate environment and future business strategy. Accordingly, our accounting estimates may materially change from period to period due to changing market factors, including those driven by COVID-19. We will continue to monitor future events, changes in circumstances and the potential impact thereof. If actual results are not consistent with our assumptions and estimates, we may be exposed to impairment losses that could be material. See Item 1A. "Risk Factors - We Have a Significant Amount ofGoodwill and Other Intangible Assets and a Write-Down Would Adversely Impact Our Operating Results and Shareholders" in the Fiscal 2019 Form 10-K. 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
49 --------------------------------------------------------------------------------
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 Six Months Ended March 31, March 31, 2020 2019 2020 2019 Earnings per diluted share$ 0.57 $ 0.62 $ 1.10 $ 1.15 Restructuring and other items 0.04 0.10 0.13 0.31North Charleston and Florence transition and reconfiguration costs 0.06 - 0.11 - Accelerated depreciation on major capital projects and certain plant closures 0.02 0.02 0.05 0.05 Losses at closed plants, transition and start-up costs 0.03 0.01 0.04 0.02 Brazil indirect tax - - (0.09 ) - Direct (recoveries) expenses from Hurricane Michael, net of related proceeds - - (0.05 ) 0.12 Litigation recovery (0.03 ) - (0.03 ) - Gain on sale of certain closed facilities (0.02 ) - (0.02 ) (0.15 ) Land and Development impairment and operating results (1) - 0.04 - 0.04 Inventory stepped-up in purchase accounting, net of LIFO - - - 0.07 Interest accretion and other - - - (0.02 ) Impact of Tax Cuts and Jobs Act - - - 0.02 Other - 0.01 0.02 0.02 Adjusted Earnings Per Diluted Share$ 0.67 $ 0.80 $ 1.26 $ 1.63
(1) Includes a
months endedMarch 31, 2019 . 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) and the impact of Noncontrolling interests), for the periods indicated (in millions): 50
--------------------------------------------------------------------------------
Three Months Ended March 31, 2020 Six Months Ended March 31, 2020 Pre-Tax Tax Net of Tax Pre-Tax Tax Net of Tax GAAP Results$ 206.7 $ (57.8 ) $
148.9
16.4 (3.9 ) 12.5 46.5 (11.6 ) 34.9North Charleston and Florence transition and reconfiguration costs 21.8 (5.4 ) 16.4 37.1 (9.1 ) 28.0 Accelerated depreciation on major capital projects and certain plant closures 5.5 (1.3 ) 4.2 17.1 (4.2 ) 12.9 Losses at closed plants, transition and start-up costs 9.1 (2.5 ) 6.6 13.5 (3.6 ) 9.9 Multiemployer pension withdrawal 0.9 (0.2 ) 0.7 0.9 (0.2 ) 0.7 Loss on extinguishment of debt 0.5 (0.1 ) 0.4 0.5 (0.1 ) 0.4 Brazil indirect tax (1.3 ) 0.3 (1.0 ) (35.1 ) 10.9 (24.2 ) Hurricane Michael recovery of direct costs, net (0.6 ) 0.2 (0.4 ) (16.6 ) 4.1 (12.5 ) Litigation recovery (11.5 ) 2.8 (8.7 ) (11.5 ) 2.8 (8.7 ) Gain on sale of certain closed facilities (5.0 ) 1.2 (3.8 ) (5.5 ) 1.3 (4.2 ) Land and Development operating results - - - (1.3 ) 0.3 (1.0 ) Other 0.8 (0.2 ) 0.6 6.1 (1.5 ) 4.6 Adjusted Results$ 243.3 $ (66.9 ) $ 176.4 $ 444.4 $ (115.2 ) $ 329.2 Noncontrolling interests (0.8 ) (1.8 ) Adjusted Net Income$ 175.6 $ 327.4 Three Months Ended March 31, 2019 Six Months Ended March 31, 2019 Pre-Tax Tax Net of Tax Pre-Tax Tax Net of Tax GAAP Results$ 209.1 $ (47.2 ) $
161.9
34.8 (8.0 ) 26.8 89.2 (8.9 ) 80.3 Direct expenses from Hurricane Michael, net of related proceeds (1.1 ) 0.3 (0.8 ) 38.7 (9.5 ) 29.2 Inventory stepped-up in purchase accounting, net of LIFO - - - 24.7 (6.0 ) 18.7 Accelerated depreciation on major capital projects 8.7 (2.2 ) 6.5 17.6 (4.5 ) 13.1 Land and Development impairment and operating results (1) 12.5 (3.1 ) 9.4 11.8 (2.9 ) 8.9 Losses at closed plants, transition and start-up costs 4.5 (1.3 ) 3.2 6.8 (1.9 ) 4.9 Gain on extinguishment of debt (0.4 ) 0.1 (0.3 ) 1.5 (0.4 ) 1.1 Gain on sale of certain closed facilities - - - (50.5 ) 12.4 (38.1 ) Interest accretion and other - - - (5.5 ) 1.3 (4.2 ) Impact of Tax Cuts and Jobs Act - - - - 4.1 4.1 Other 2.7 (0.6 ) 2.1 6.5 (1.5 ) 5.0 Adjusted Results$ 270.8 $ (62.0 ) $ 208.8 $ 552.4 $ (127.7 ) $ 424.7 Noncontrolling interests (1.5 ) (2.2 ) Adjusted Net Income$ 207.3 $ 422.5
(1) Includes a
months endedMarch 31, 2019 . 51
--------------------------------------------------------------------------------
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