Attached files

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EX-32.1 - EX-32.1 - WestRock Cowrk-ex321_8.htm
EX-31.2 - EX-31.2 - WestRock Cowrk-ex312_7.htm
EX-31.1 - EX-31.1 - WestRock Cowrk-ex311_6.htm
EX-10.6 - EX-10.6 - WestRock Cowrk-ex106_103.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2018

or

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from               to             

Commission File Number 001-37484

WestRock Company

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

47-3335141

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1000 Abernathy Road NE, Atlanta, Georgia

 

30328

(Address of Principal Executive Offices)

 

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (770) 448-2193

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

(Do not check if smaller reporting company)

 

Smaller reporting company

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

 

Outstanding as of April 20, 2018

Common Stock, $0.01 par value

 

256,451,876

 


WESTROCK COMPANY

INDEX

 

 

 

 

Page

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and six months ended March 31, 2018 and 2017

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2018 and 2017

4

 

 

 

 

Condensed Consolidated Balance Sheets at March 31, 2018 and September 30, 2017

5

 

 

 

 

Condensed Consolidated Statement of Equity for the six months ended March 31, 2018

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2018 and 2017

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

49

 

 

 

Item 4.

Controls and Procedures

49

 

 

 

PART II

OTHER INFORMATION

50

 

 

 

Item 1.

Legal Proceedings

50

 

 

 

Item 1A.

Risk Factors

50

 

 

 

Item 6.

Exhibits

51

 

 

 

 

Index to Exhibits

52

 

 

2


PART I: FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS (UNAUDITED)

WESTROCK COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In Millions, Except Per Share Data)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales

 

$

4,017.0

 

 

$

3,656.3

 

 

$

7,911.0

 

 

$

7,103.5

 

Cost of goods sold

 

 

3,220.4

 

 

 

2,980.9

 

 

 

6,332.0

 

 

 

5,836.8

 

Selling, general and administrative, excluding intangible

   amortization

 

 

381.2

 

 

 

349.1

 

 

 

747.4

 

 

 

685.4

 

Selling, general and administrative intangible

   amortization

 

 

75.2

 

 

 

49.6

 

 

 

147.7

 

 

 

102.2

 

Multiemployer pension withdrawal

 

 

 

 

 

 

 

 

180.0

 

 

 

 

Pension lump sum settlement

 

 

 

 

 

28.7

 

 

 

 

 

 

28.7

 

Land and Development impairment

 

 

 

 

 

42.7

 

 

 

27.6

 

 

 

42.7

 

Restructuring and other costs

 

 

31.7

 

 

 

18.3

 

 

 

48.0

 

 

 

99.3

 

Operating profit

 

 

308.5

 

 

 

187.0

 

 

 

428.3

 

 

 

308.4

 

Interest expense, net

 

 

(78.3

)

 

 

(52.9

)

 

 

(143.1

)

 

 

(107.0

)

Gain (loss) on extinguishment of debt

 

 

0.1

 

 

 

(0.1

)

 

 

(0.9

)

 

 

(0.1

)

Other income, net

 

 

1.1

 

 

 

1.3

 

 

 

3.6

 

 

 

2.4

 

Equity in income of unconsolidated entities

 

 

11.9

 

 

 

6.5

 

 

 

15.7

 

 

 

20.2

 

Income before income taxes

 

 

243.3

 

 

 

141.8

 

 

 

303.6

 

 

 

223.9

 

Income tax (expense) benefit

 

 

(18.8

)

 

 

(43.6

)

 

 

1,054.4

 

 

 

(47.2

)

Consolidated net income

 

 

224.5

 

 

 

98.2

 

 

 

1,358.0

 

 

 

176.7

 

Less: Net (income) loss attributable to noncontrolling

   interests

 

 

(1.3

)

 

 

4.9

 

 

 

0.3

 

 

 

7.3

 

Net income attributable to common stockholders

 

$

223.2

 

 

$

103.1

 

 

$

1,358.3

 

 

$

184.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share attributable to common

   stockholders

 

$

0.87

 

 

$

0.41

 

 

$

5.32

 

 

$

0.73

 

Diluted earnings per share attributable to common

   stockholders

 

$

0.86

 

 

$

0.40

 

 

$

5.23

 

 

$

0.72

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

256.1

 

 

 

251.2

 

 

 

255.5

 

 

 

251.2

 

Diluted weighted average shares outstanding

 

 

260.3

 

 

 

254.6

 

 

 

259.7

 

 

 

254.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.43

 

 

$

0.40

 

 

$

0.86

 

 

$

0.80

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

3


WESTROCK COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In Millions)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Consolidated net income

 

$

224.5

 

 

$

98.2

 

 

$

1,358.0

 

 

$

176.7

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

54.2

 

 

 

89.3

 

 

 

12.3

 

 

 

(21.4

)

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred gain (loss) on cash flow hedges

 

 

0.1

 

 

 

(0.2

)

 

 

 

 

 

(0.1

)

Reclassification adjustment of net loss on cash

   flow hedges included in earnings

 

 

 

 

 

 

 

 

0.5

 

 

 

 

Unrealized gain on available for sale security

 

 

 

 

 

 

 

 

0.8

 

 

 

 

Reclassification adjustment of gain on available for

   sale security included in earnings

 

 

(1.5

)

 

 

 

 

 

(1.5

)

 

 

 

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial gain arising during the period

 

 

 

 

 

30.7

 

 

 

 

 

 

20.5

 

Amortization and settlement recognition of net

   actuarial loss, included in pension cost

 

 

3.3

 

 

 

22.4

 

 

 

6.6

 

 

 

26.8

 

Prior service cost arising during the period

 

 

 

 

 

(0.9

)

 

 

(2.7

)

 

 

(0.9

)

Amortization and curtailment recognition of prior

   service cost, included in pension cost

 

 

 

 

 

(0.5

)

 

 

 

 

 

(0.3

)

Other comprehensive income, net of tax

 

 

56.1

 

 

 

140.8

 

 

 

16.0

 

 

 

24.6

 

Comprehensive income

 

 

280.6

 

 

 

239.0

 

 

 

1,374.0

 

 

 

201.3

 

Less: Comprehensive (income) loss attributable to

   noncontrolling interests

 

 

(1.5

)

 

 

4.6

 

 

 

(0.1

)

 

 

7.5

 

Comprehensive income attributable to common

   stockholders

 

$

279.1

 

 

$

243.6

 

 

$

1,373.9

 

 

$

208.8

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

4


WESTROCK COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In Millions, Except Per Share Data)  

 

 

 

March 31,

2018

 

 

September 30,

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

266.5

 

 

$

298.1

 

Restricted cash

 

 

5.9

 

 

 

5.9

 

Accounts receivable (net of allowances of $48.9 and $45.8)

 

 

1,950.2

 

 

 

1,886.8

 

Inventories

 

 

1,888.2

 

 

 

1,797.3

 

Other current assets

 

 

311.4

 

 

 

329.2

 

Assets held for sale

 

 

154.5

 

 

 

173.6

 

Total current assets

 

 

4,576.7

 

 

 

4,490.9

 

Property, plant and equipment, net

 

 

9,056.8

 

 

 

9,118.3

 

Goodwill

 

 

5,583.0

 

 

 

5,528.3

 

Intangibles, net

 

 

3,311.7

 

 

 

3,329.3

 

Restricted assets held by special purpose entities

 

 

1,284.3

 

 

 

1,287.4

 

Prepaid pension asset

 

 

407.5

 

 

 

368.0

 

Other assets

 

 

1,219.7

 

 

 

966.8

 

Total Assets

 

$

25,439.7

 

 

$

25,089.0

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of debt

 

$

1,113.5

 

 

$

608.7

 

Accounts payable

 

 

1,442.9

 

 

 

1,492.1

 

Accrued compensation and benefits

 

 

333.2

 

 

 

416.7

 

Other current liabilities

 

 

455.9

 

 

 

492.3

 

Total current liabilities

 

 

3,345.5

 

 

 

3,009.8

 

Long-term debt due after one year

 

 

5,613.0

 

 

 

5,946.1

 

Pension liabilities, net of current portion

 

 

261.2

 

 

 

279.4

 

Postretirement benefit liabilities, net of current portion

 

 

150.8

 

 

 

153.4

 

Non-recourse liabilities held by special purpose entities

 

 

1,157.9

 

 

 

1,161.9

 

Deferred income taxes

 

 

2,305.8

 

 

 

3,410.2

 

Other long-term liabilities

 

 

1,018.5

 

 

 

737.4

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

4.8

 

 

 

4.7

 

Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 30.0 million shares authorized; no

   shares outstanding

 

 

 

 

 

 

Common Stock, $0.01 par value; 600.0 million shares authorized;

   256.4 million and 254.5 million shares outstanding at March 31,

   2018 and September 30, 2017, respectively

 

 

2.6

 

 

 

2.5

 

Capital in excess of par value

 

 

10,684.6

 

 

 

10,624.9

 

Retained earnings

 

 

1,302.4

 

 

 

172.4

 

Accumulated other comprehensive loss

 

 

(441.7

)

 

 

(457.3

)

Total stockholders’ equity

 

 

11,547.9

 

 

 

10,342.5

 

Noncontrolling interests

 

 

34.3

 

 

 

43.6

 

Total equity

 

 

11,582.2

 

 

 

10,386.1

 

Total Liabilities and Equity

 

$

25,439.7

 

 

$

25,089.0

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

5


WESTROCK COMPANY

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

(In Millions, Except Per Share Data)  

 

 

 

Number of

Shares of

Common

Stock

Outstanding

 

 

Common

Stock

 

 

Capital in

Excess of

Par Value

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

WestRock

Company

Stockholders’

Equity

 

 

Non

controlling

Interests

 

 

Total

Equity

 

Balance at September 30,

   2017

 

 

254.5

 

 

$

2.5

 

 

$

10,624.9

 

 

$

172.4

 

 

$

(457.3

)

 

$

10,342.5

 

 

$

43.6

 

 

$

10,386.1

 

Net income attributable to

   common stockholders

 

 

 

 

 

 

 

 

 

 

 

1,358.3

 

 

 

 

 

 

1,358.3

 

 

 

 

 

 

1,358.3

 

Other comprehensive

   income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15.6

 

 

 

15.6

 

 

 

 

 

 

15.6

 

Compensation expense

   under share-based plans

 

 

 

 

 

 

 

 

33.7

 

 

 

 

 

 

 

 

 

33.7

 

 

 

 

 

 

33.7

 

Cash dividends declared

   (per share - $0.86) (1)

 

 

 

 

 

 

 

 

 

 

 

(221.9

)

 

 

 

 

 

(221.9

)

 

 

 

 

 

(221.9

)

Distributions and

  adjustments to

  noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9.3

)

 

 

(9.3

)

Shares issued under

   restricted stock plan

 

 

0.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock,

   net of stock received for

   minimum tax

   withholdings

 

 

1.2

 

 

 

0.1

 

 

 

26.0

 

 

 

(6.4

)

 

 

 

 

 

19.7

 

 

 

 

 

 

19.7

 

 

Balance at March 31, 2018

 

 

256.4

 

 

$

2.6

 

 

$

10,684.6

 

 

$

1,302.4

 

 

$

(441.7

)

 

$

11,547.9

 

 

$

34.3

 

 

$

11,582.2

 

 

(1)  Includes cash dividends paid, and dividends declared but unpaid, related to the shares reserved but unissued to satisfy Smurfit-Stone Container Corporation (“Smurfit-Stone”) bankruptcy claims.

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

6


WESTROCK COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Millions)

 

 

 

Six Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

Consolidated net income

 

$

1,358.0

 

 

$

176.7

 

Adjustments to reconcile consolidated net income to net cash provided

   by operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

625.4

 

 

 

539.1

 

Cost of real estate sold

 

 

27.1

 

 

 

124.6

 

Deferred income tax benefit

 

 

(1,222.7

)

 

 

(55.5

)

Share-based compensation expense

 

 

33.9

 

 

 

34.5

 

Loss on extinguishment of debt

 

 

0.9

 

 

 

0.1

 

Loss (gain) on disposal of plant, equipment and other, net

 

 

4.0

 

 

 

(8.5

)

Equity in income of unconsolidated entities

 

 

(15.7

)

 

 

(20.2

)

Pension and other postretirement funding (more) than expense (income)

 

 

(49.8

)

 

 

(10.0

)

Multiemployer pension withdrawal

 

 

180.0

 

 

 

 

Loss on sale or deconsolidation of subsidiaries

 

 

1.5

 

 

 

1.7

 

Cash surrender value increase in excess of premiums paid

 

 

(17.1

)

 

 

(18.4

)

Distributed earnings from equity investments

 

 

12.1

 

 

 

12.7

 

Other non-cash items

 

 

(0.2

)

 

 

(21.7

)

Land and Development impairments

 

 

27.6

 

 

 

42.7

 

Impairment adjustments

 

 

10.4

 

 

 

45.0

 

Change in operating assets and liabilities, net of acquisitions and

   divestitures:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(47.5

)

 

 

(90.8

)

Inventories

 

 

(83.0

)

 

 

(50.7

)

Other assets

 

 

(49.4

)

 

 

(52.8

)

Accounts payable

 

 

(67.3

)

 

 

218.7

 

Income taxes

 

 

94.1

 

 

 

10.3

 

Accrued liabilities and other

 

 

(87.2

)

 

 

(60.4

)

Net cash provided by operating activities

 

 

735.1

 

 

 

817.1

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(426.7

)

 

 

(365.3

)

Cash paid for purchase of businesses, net of cash acquired

 

 

(185.2

)

 

 

(31.7

)

Investment in unconsolidated entities

 

 

(111.0

)

 

 

(1.4

)

Corporate-owned life insurance premium paid

 

 

(1.1

)

 

 

(0.8

)

Cash related to sale or deconsolidation of subsidiary

 

 

(1.7

)

 

 

 

Return of capital from unconsolidated entities

 

 

7.5

 

 

 

12.6

 

Proceeds from sale of property, plant and equipment

 

 

15.7

 

 

 

29.6

 

Net cash used for investing activities

 

 

(702.5

)

 

 

(357.0

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of notes

 

 

1,197.3

 

 

 

 

Additions to revolving credit facilities

 

 

94.3

 

 

 

65.6

 

Additions to debt

 

 

853.2

 

 

 

1.2

 

Repayments of debt

 

 

(2,010.4

)

 

 

(175.9

)

Changes in commercial paper, net

 

 

63.3

 

 

 

 

Other financing (repayments) additions, net

 

 

(24.5

)

 

 

7.8

 

Debt issuance costs

 

 

(24.0

)

 

 

 

Issuances of common stock, net of related minimum tax withholdings

 

 

17.4

 

 

 

7.2

 

Purchases of common stock

 

 

 

 

 

(93.0

)

Excess tax benefits from share-based compensation

 

 

 

 

 

1.5

 

Repayments to unconsolidated entity

 

 

(0.9

)

 

 

(0.9

)

 

7


 

 

Six Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Cash dividends paid to stockholders

 

 

(219.4

)

 

 

(201.1

)

Cash distributions paid to noncontrolling interests

 

 

(8.6

)

 

 

(22.1

)

Net cash used for financing activities

 

 

(62.3

)

 

 

(409.7

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(1.9

)

 

 

(6.0

)

(Decrease) increase in cash and cash equivalents

 

 

(31.6

)

 

 

44.4

 

Cash and cash equivalents at beginning of period

 

 

298.1

 

 

 

340.9

 

Cash and cash equivalents at end of period

 

$

266.5

 

 

$

385.3

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes, net of refunds

 

$

69.8

 

 

$

90.6

 

Interest, net of amounts capitalized

 

$

135.1

 

 

$

115.5

 

 

Supplemental schedule of non-cash investing and financing activities:

Liabilities assumed in the six months ended March 31, 2018 primarily relate to the Plymouth Acquisition (as hereinafter defined). Liabilities assumed in the six months ended March 31, 2017 relate to the Star Pizza Acquisition (as hereinafter defined). See “Note 2. Acquisitions and Investment” for more information.

 

 

 

Six Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Fair value of assets acquired, including goodwill

 

$

228.0

 

 

$

35.5

 

Cash consideration for the purchase of businesses, net of cash

   acquired

 

 

(187.4

)

 

 

(35.2

)

Deferred payments and unpaid working capital

 

 

(26.3

)

 

 

0.4

 

Liabilities assumed

 

$

14.3

 

 

$

0.7

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

 

8


WESTROCK COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Six Month Periods Ended March 31, 2018

(Unaudited)

Unless the context otherwise requires, “we, “us, “our, “WestRock and “the Company refer to the business of WestRock Company, its wholly-owned subsidiaries and its partially-owned consolidated subsidiaries.

 

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 operating and business locations spanning North America, South America, Europe, Asia and Australia. We also sell real estate primarily in the Charleston, SC region.

 

Note 1.

Basis of Presentation and Significant Accounting Policies

Basis of Presentation

 

Our independent registered public accounting firm has not audited our accompanying interim financial statements. We derived the Condensed Consolidated Balance Sheet at September 30, 2017 from the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 (the “Fiscal 2017 Form 10-K”). In the opinion of our management, the Condensed Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of our statements of income for the three and six months ended March 31, 2018 and March 31, 2017, our comprehensive income for the three and six months ended March 31, 2018 and March 31, 2017, our financial position at March 31, 2018 and September 30, 2017, our cash flows for the six months ended March 31, 2018 and March 31, 2017, and our statement of equity for the six months ended March 31, 2018.

 

We completed the sale of Home, Health and Beauty (“HH&B”), a former division of our Consumer Packaging segment on April 6, 2017 (the “HH&B Sale”). We used the proceeds from the HH&B Sale in connection with completing the acquisition of Multi Packaging Solutions International Limited (“MPS”) on June 6, 2017 (“MPS Acquisition”). MPS is a global provider of print-based specialty packaging solutions and its differentiated product offering includes premium folding cartons, inserts, labels and rigid packaging. We report MPS in our Consumer Packaging segment. See “Note 8. Assets Held For Sale” and “Note 6. Merger, Acquisitions and Investment” of the Notes to Consolidated Financial Statements section of the Fiscal 2017 Form 10-K for more information.

 

During the first quarter of fiscal 2018, we presented our interest expense and interest income in a single line item, “interest expense, net”, in our statements of income. The interest income was previously presented in the line item “interest income and other income (expense), net”, and is now presented as “other income, net”. The presentation of these two line items for the three and six months ended March 31, 2017 has been changed to conform to the current year presentation.

 

We have condensed or omitted certain notes and other information from the interim financial statements presented in this report. Therefore, these interim financial statements should be read in conjunction with our Fiscal 2017 Form 10-K. The results for the three and six months ended March 31, 2018 are not necessarily indicative of results that may be expected for the full year.

 

Significant Accounting Policies

 

See “Note 1. Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements section of the Fiscal 2017 Form 10-K for a summary of our significant accounting policies.

 

 

9


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

 

Recent Accounting Developments

 

New Accounting Standards - Recently Adopted

 

See “Note 1. Description of Business and Summary of Significant Accounting Policies — New Accounting Standards - Recently Adopted” of the Notes to Consolidated Financial Statements section of the Fiscal 2017 Form 10-K for information on new accounting standards adopted on October 1, 2017. The adoption of those standards did not have a material effect on our consolidated financial statements.

 

New Accounting Standards - Recently Issued

 

See “Note 1. Description of Business and Summary of Significant Accounting Policies — New Accounting Standards - Recently Issued” of the Notes to Consolidated Financial Statements section of the Fiscal 2017 Form 10-K for information on new accounting standards issued prior to the beginning of fiscal 2018 but not yet adopted and where we do not expect that the adoption will have a material effect on our consolidated financial statements. Refer below for new accounting standards for which (i) we are in the process of evaluating the impact on our financial statements or (ii) we have determined that the new standard could have an impact on our consolidated financial statements.

 

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The amendments in this update provide financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”) (or portion thereof) is recorded. The ASU requires financial statement preparers to disclose (i) a description of the accounting policy for releasing income tax effects from accumulated other comprehensive income; (ii) whether they elect to reclassify the stranded income tax effects from the Tax Act; and (iii) information about the other income tax effects that are reclassified. The amendments affect any organization that is required to apply the provisions of Accounting Standards Codification (“ASC”) 220, “Income Statement—Reporting Comprehensive Income”, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by generally accepted accounting principles in the United States (“GAAP”). The ASU is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact of this ASU.

 

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”. The amendments in this ASU better align an entity’s risk management activities and financial reporting for such activities. The amendments in this ASU make certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. In addition, the ASU also expands hedge accounting for certain qualifying financial and nonfinancial risk components. These provisions are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and should be applied prospectively. Early adoption is permitted. We are currently evaluating the impact of adopting this ASU, but do not expect this ASU to have a material impact on our consolidated financial statements.

 

In March 2017, the FASB issued ASU 2017-07, “Compensation: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. The guidance in this update requires that an employer disaggregate the service cost component from the other components of net benefit cost. Non-service cost components of net periodic pension cost are required to be presented in the income statement separately from the service cost component and outside the subtotal of operating income. The amendments in the update also allow only the service cost component to be eligible for capitalization for internally developed capital projects. The amendments in this update are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The guidance on the presentation of the components of net periodic benefit cost in the income statement will be applied retrospectively. The guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. The guidance includes a practical expedient that permits companies to estimate amounts for comparative periods using the information previously disclosed in their pension and other postretirement plan footnote. We are currently evaluating the impact of this ASU.

 

10


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

 

 

In February 2017, the FASB issued ASU 2017-05, “Other Income: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”. The ASU provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. Specifically, the ASU clarifies the scope of an “in substance nonfinancial asset”, clarifies the treatment of partial sales of nonfinancial assets and clarifies guidance on accounting for contributions of nonfinancial assets to joint ventures and equity method investees. The amendments in this update are effective for annual periods beginning after December 15, 2017 including interim reporting periods within those annual reporting periods. Early adoption is permitted. The ASU may be applied by either a full or modified retrospective approach. We are currently evaluating the impact of this ASU.

 

In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business”, which amends the guidance in ASC 805, “Business Combinations”. The ASU clarifies the definition of a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods, and early adoption is permitted. The ASU will be applied prospectively to any transactions occurring within the period of adoption. Subject to future events or transactions, we do not expect this ASU to have a material impact on our consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18, “Restricted Cash”, which amends the guidance in the FASB’s ASC 230, “Statement of Cash Flows”. The new ASU clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. These provisions are effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2017, applied retrospectively for each period presented. Early adoption is permitted. We do not expect this ASU to have a material impact on our consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15 “Classification of Certain Cash Receipts and Cash Payments”, which amends the guidance in ASC 230, “Statement of Cash Flows”. The ASU clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows for the following transactions: debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, distributions received from equity method investees and beneficial interest in securitization transactions. The ASU also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance requires retrospective adoption and is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted and an entity that elects early adoption must adopt all of the amendments in the period of adoption. We are currently evaluating the impact of this ASU.

 

In February 2016, the FASB issued ASU 2016-02 “Leases”, which is codified in ASC 842 “Leases” and supersedes current lease guidance in ASC 840. These provisions require lessees to put a right-of-use asset and lease liability on their balance sheet for operating and financing leases that have a term of more than one year. Expense will be recognized in the income statement similar to current accounting guidance. For lessors, the ASU modifies the classification criteria and the accounting for sales-type and direct financing leases. Entities will need to disclose qualitative and quantitative information about their leases, including characteristics and amounts recognized in the financial statements. These provisions are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Entities are required to use a modified retrospective approach upon adoption to recognize and measure leases at the beginning of the earliest comparative period presented in the financial statements. While we have not completed our assessment, we expect that the adoption of ASC 842 as of October 1, 2019 will result in recording additional assets and liabilities not previously reflected on our consolidated balance sheets, but we do not expect the adoption to have a

 

11


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

 

significant impact on the recognition, measurement, or presentation of lease expenses within the consolidated statements of income or the consolidated statements of cash flows.

 

In May 2014, the FASB issued ASU 2014-09, which is codified in ASC 606 “Revenue from Contracts with Customers” and supersedes both the revenue recognition requirement in ASC 605 “Revenue Recognition” and most industry-specific guidance. The core principle of ASC 606 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. To achieve that core principle, an entity should apply the five steps set forth in ASC 606. An entity must also disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date,” which deferred the effective date of ASU 2014-09 by one year. Therefore, these provisions are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that annual period, and can be applied using a full retrospective or modified retrospective approach. The FASB has clarified this guidance in various updates (e.g., ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20 and ASU 2017-05) since May 2014, all of which have the same effective date as the original guidance.

 

We will adopt the revenue standard as of October 1, 2018 and expect to use the modified retrospective approach. We have substantially completed the evaluation of the new standard and are in the process of quantifying the impact of adoption on the consolidated financial statements. We manufacture certain products that have no alternative use to us (since such products are made to specific customer orders), and we believe that for certain customers we have a legally enforceable right to payment for performance completed to date on these manufactured products, including a reasonable profit. For those manufactured products that meet these two criteria, we will recognize revenue “over time” upon the adoption of ASC 606. This could result in (a) revenue recognition prior to the date of shipment or title transfer for these products and (b) an increase in unbilled receivables balances and a reduction in finished goods inventory balances on our balance sheet from historic and current levels. We are continuing to evaluate the impact of the provisions on our financial position, results of operations and cash flows.

 

Note 2.

Acquisitions and Investment

We account for acquisitions in accordance with ASC 805, “Business Combinations”. The estimated fair values of all assets acquired and liabilities assumed in acquisitions are provisional and may be revised as a result of additional information obtained during the measurement period of up to one year from the acquisition date. See “Note 6. Merger, Acquisitions and Investment” of the Notes to Consolidated Financial Statements section of the Fiscal 2017 Form 10-K for information about our prior year acquisitions or investment. No changes in the three and six months ended March 31, 2018 to our fiscal 2017 provisional fair value estimates of assets and liabilities assumed in acquisitions have been significant, and we do not anticipate future changes to these acquisitions to be significant.

Planned KapStone Acquisition

 

On January 29, 2018, we announced that a definitive agreement had been signed for us to acquire all of the outstanding shares of KapStone Paper and Packaging Corporation (“KapStone”) for $35.00 per share and the assumption of approximately $1.36 billion in net debt, for a total enterprise value of approximately $4.9 billion (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 United States, Canada and Mexico. KapStone stockholders will have the option to receive $35.00 per share in cash, or to elect to receive 0.4981 WestRock shares per KapStone share, with elections of stock consideration capped at 25% of the outstanding KapStone shares but no limit on the number of KapStone shares that can receive cash consideration. KapStone’s chairman, Roger Stone, and president and chief executive officer, Matt Kaplan, have entered into voting agreements, pursuant to which they have agreed to vote their shares in support of the transaction, subject to certain limitations. We expect to finance the cash consideration, including existing

 

12


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

 

KapStone debt to be assumed as part of the transaction upon closing, through our utilization of our Delayed Draw Credit Facilities (as hereinafter defined), as well as our other existing credit facilities.

 

As disclosed in our form 8-K filed with the SEC on April 16, 2018, on April 13, 2018 the Company and KapStone received requests for additional information and documentary materials from the U.S. Department of Justice. The requests were issued under notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Completion of the proposed transaction remains subject to KapStone stockholder approval and other customary closing conditions. The transaction is expected to close by the end of the quarter ending September 30, 2018 or during the following quarter.

Plymouth Packaging Acquisition

We completed the acquisition of substantially all of the assets of Plymouth Packaging, Inc. (“Plymouth”) on January 5, 2018 (the “Plymouth Packaging Acquisition”) to further enhance our platform and drive differentiation and innovation.  Plymouth’s “Box on Demand” systems are located on customers’ sites under multiyear exclusive agreements and use fanfold corrugated to produce custom, on-demand corrugated packaging that is accurately sized for any product type according to the customers’ specifications. The estimated purchase price of $201.9 million, net of cash received of $3.1 million, is subject to an estimated payment of $26.3 million consisting of a deferred payment, a tax make-whole payment related to stepping up the assets for tax purposes and an estimated working capital adjustment. We have included the financial results of the acquired assets since the date of the acquisition in our Corrugated Packaging segment.

The preliminary allocation of consideration primarily included $86.4 million of customer relationship intangible assets, $33.1 million of goodwill, $35.2 million of property, plant and equipment, $29.2 million of other long-term assets consisting of assets leased to customers and equity method investments, and $12.6 million of liabilities. We are amortizing the customer relationship intangibles over 12.0 years based on a straight-line basis because the amortization pattern was not reliably determinable. The fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced reach of the combined organization and other synergies), and the assembled work force, as well as due to establishing deferred taxes for the difference between book and tax basis of the assets and liabilities acquired. The goodwill and intangibles are amortizable for income tax purposes. We are in the process of reviewing the estimated fair values of all assets acquired and liabilities assumed, including, among other things, obtaining final third-party valuations of certain tangible and intangible assets as well as the fair value of certain contracts and the determination of certain tax balances; thus, the allocation of the purchase price is preliminary and subject to revision.

Grupo Gondi Investment

On October 20, 2017, we increased our ownership interest in Gondi, S.A. de C.V. (“Grupo Gondi”), our joint venture in Mexico, from 27.0% to 32.3% through a $108 million capital contribution, which followed the joint venture entity having a stock redemption from a minority partner in April 2017. The capital contribution is being used to support the joint venture’s capital expansion plans, which include a greenfield linerboard and corrugated medium (“containerboard”) mill and several converting plants. The joint venture operates paper machines, corrugated packaging and high graphic folding carton facilities across various production sites. The agreement governing our investment in Grupo Gondi continues to include future put and call rights with respect to the respective parties’ ownership interest in the joint venture.

Note 3.

Restructuring and Other Costs

Summary of Restructuring and Other Initiatives

We recorded pre-tax restructuring and other costs of $31.7 million and $48.0 million for the three and six months ended March 31, 2018 and $18.3 million and $99.3 million for the three and six months ended March 31, 2017, respectively. These amounts are not comparable since the timing and scope of the individual actions associated with a restructuring, acquisition or integration can vary. We present our restructuring and other costs in more detail below.

 

13


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

 

The following table summarizes our Restructuring and other costs (in millions):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Restructuring

 

$

21.2

 

 

$

0.3

 

 

$

25.6

 

 

$

62.6

 

Other

 

 

10.5

 

 

 

18.0

 

 

 

22.4

 

 

 

36.7

 

Restructuring and other costs

 

$

31.7

 

 

$

18.3

 

 

$

48.0

 

 

$

99.3

 

 

Restructuring

Our restructuring charges are primarily associated with plant closures and employee costs due to merger and acquisition-related workforce reductions. When we close a facility, if necessary, we recognize an impairment charge primarily to reduce the carrying value of equipment or other property to their estimated fair value less cost to sell, and record charges for severance and other employee-related costs. Any subsequent change in fair value less cost to sell prior to disposition is recognized as identified; however, no gain is recognized in excess of the cumulative loss previously recorded unless the actual selling price exceeds the original carrying value when sold. At the time of each announced closure, we generally expect to record future period costs for equipment relocation, facility carrying costs, costs to terminate a lease or contract before the end of its term and employee-related costs.

Although specific circumstances vary, our strategy has generally been to consolidate our sales and operations into large well-equipped plants that operate at high utilization rates and take advantage of available capacity created by operational excellence initiatives and/or further optimize our system following mergers and acquisitions or a changing business environment. Therefore, we have transferred a substantial portion of each closed plant’s assets and production to our other plants. We believe these actions have allowed us to more effectively manage our business.

 

14


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

 

 

While restructuring costs are not charged to our segments and, therefore, do not reduce segment income, we highlight the segment to which the charges relate. The following table presents a summary of restructuring charges related to active restructuring initiatives that we incurred during the three and six months ended March 31, 2018 and March 31, 2017, the cumulative recorded amount since we started the initiative, and our estimate of the total we expect to incur (in millions):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Cumulative

 

 

Total

Expected

 

Corrugated Packaging

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net property, plant and equipment costs

 

$

0.3

 

 

$

(2.7

)

 

$

0.9