10-Q 1 wrk-10q_20181231.htm 10-Q wrk-10q_20181231.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 December 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 001-38736

WestRock Company

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

37-1880617

(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 every Interactive Data File required to be submitted 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 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.

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

 

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 January 25, 2019

Common Stock, $0.01 par value

 

255,372,759

 


WESTROCK COMPANY

INDEX

 

 

 

 

Page

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

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

3

 

 

 

 

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

4

 

 

 

 

Condensed Consolidated Balance Sheets at December 31, 2018 and September 30, 2018

5

 

 

 

 

Condensed Consolidated Statements of Equity for the three months ended December 31, 2018 and 2017

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2018 and 2017

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements

10

 

 

 

Item 2.

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

41

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

56

 

 

 

Item 4.

Controls and Procedures

56

 

 

 

PART II

OTHER INFORMATION

58

 

 

 

Item 1.

Legal Proceedings

58

 

 

 

Item 1A.

Risk Factors

58

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

 

 

 

Item 6.

Exhibits

58

 

 

 

 

Index to Exhibits

59

 

 

2


PART I: FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS (UNAUDITED)

WESTROCK COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 31,

 

(In millions, except per share data)

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

4,327.4

 

 

$

3,894.0

 

Cost of goods sold

 

 

3,545.6

 

 

 

3,120.5

 

Selling, general and administrative, excluding

   intangible amortization

 

 

400.9

 

 

 

380.8

 

Selling, general and administrative intangible

   amortization

 

 

92.9

 

 

 

72.5

 

(Gain) loss on disposal of assets

 

 

(43.8

)

 

 

1.1

 

Multiemployer pension withdrawals

 

 

 

 

 

180.0

 

Land and Development impairments

 

 

 

 

 

27.6

 

Restructuring and other costs

 

 

54.4

 

 

 

16.3

 

Operating profit

 

 

277.4

 

 

 

95.2

 

Interest expense, net

 

 

(94.4

)

 

 

(64.8

)

Loss on extinguishment of debt

 

 

(1.9

)

 

 

(1.0

)

Pension and other postretirement non-service income

 

 

17.3

 

 

 

24.6

 

Other (expense) income, net

 

 

(2.7

)

 

 

2.5

 

Equity in income of unconsolidated entities

 

 

6.8

 

 

 

3.8

 

Income before income taxes

 

 

202.5

 

 

 

60.3

 

Income tax (expense) benefit

 

 

(62.7

)

 

 

1,073.2

 

Consolidated net income

 

 

139.8

 

 

 

1,133.5

 

Less: Net (income) loss attributable to noncontrolling

   interests

 

 

(0.7

)

 

 

1.6

 

Net income attributable to common stockholders

 

$

139.1

 

 

$

1,135.1

 

 

 

 

 

 

 

 

 

 

Basic earnings per share attributable to common

   stockholders

 

$

0.55

 

 

$

4.45

 

Diluted earnings per share attributable to common

   stockholders

 

$

0.54

 

 

$

4.38

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

254.8

 

 

 

255.0

 

Diluted weighted average shares outstanding

 

 

259.5

 

 

 

259.2

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.455

 

 

$

0.43

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

3


WESTROCK COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 31,

 

(In millions)

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Consolidated net income

 

$

139.8

 

 

$

1,133.5

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

 

(64.9

)

 

 

(41.9

)

Derivatives:

 

 

 

 

 

 

 

 

Deferred loss on cash flow hedges

 

 

 

 

 

(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

 

Defined benefit pension and other postretirement benefit plans:

 

 

 

 

 

 

 

 

Amortization and settlement recognition of net

   actuarial loss, included in pension cost

 

 

4.9

 

 

 

3.3

 

Prior service cost arising during the period

 

 

 

 

 

(2.7

)

Amortization and settlement recognition of prior

   service cost, included in pension cost

 

 

0.5

 

 

 

 

Other comprehensive loss, net of tax

 

 

(59.5

)

 

 

(40.1

)

Comprehensive income

 

 

80.3

 

 

 

1,093.4

 

Less: Comprehensive (income) loss attributable to

   noncontrolling interests

 

 

(0.7

)

 

 

1.4

 

Comprehensive income attributable to common

   stockholders

 

$

79.6

 

 

$

1,094.8

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

4


WESTROCK COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In millions, except per share data)

 

December 31,

2018

 

 

September 30,

2018

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

260.7

 

 

$

636.8

 

Accounts receivable (net of allowances of $47.9 and $49.7)

 

 

2,315.5

 

 

 

2,010.7

 

Inventories

 

 

2,101.8

 

 

 

1,829.6

 

Other current assets

 

 

508.9

 

 

 

248.5

 

Assets held for sale

 

 

39.1

 

 

 

59.5

 

Total current assets

 

 

5,226.0

 

 

 

4,785.1

 

Property, plant and equipment, net

 

 

10,969.7

 

 

 

9,082.5

 

Goodwill

 

 

7,320.3

 

 

 

5,577.6

 

Intangibles, net

 

 

4,352.0

 

 

 

3,122.0

 

Restricted assets held by special purpose entities

 

 

1,279.4

 

 

 

1,281.0

 

Prepaid pension asset

 

 

428.4

 

 

 

420.0

 

Other assets

 

 

1,091.1

 

 

 

1,092.3

 

Total Assets

 

$

30,666.9

 

 

$

25,360.5

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of debt

 

$

1,092.8

 

 

$

740.7

 

Accounts payable

 

 

1,679.5

 

 

 

1,716.8

 

Accrued compensation and benefits

 

 

365.2

 

 

 

399.3

 

Other current liabilities

 

 

592.4

 

 

 

476.5

 

Total current liabilities

 

 

3,729.9

 

 

 

3,333.3

 

Long-term debt due after one year

 

 

9,728.0

 

 

 

5,674.5

 

Pension liabilities, net of current portion

 

 

253.3

 

 

 

261.3

 

Postretirement benefit liabilities, net of current portion

 

 

139.0

 

 

 

134.8

 

Non-recourse liabilities held by special purpose entities

 

 

1,151.6

 

 

 

1,153.7

 

Deferred income taxes

 

 

2,932.6

 

 

 

2,321.5

 

Other long-term liabilities

 

 

1,113.2

 

 

 

994.8

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

3.8

 

 

 

4.2

 

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;

   255.2 million and 253.5 million shares outstanding at December 31,

   2018 and September 30, 2018, respectively

 

 

2.6

 

 

 

2.5

 

Capital in excess of par value

 

 

10,720.6

 

 

 

10,588.9

 

Retained earnings

 

 

1,635.3

 

 

 

1,573.3

 

Accumulated other comprehensive loss

 

 

(754.8

)

 

 

(695.3

)

Total stockholders’ equity

 

 

11,603.7

 

 

 

11,469.4

 

Noncontrolling interests

 

 

11.8

 

 

 

13.0

 

Total equity

 

 

11,615.5

 

 

 

11,482.4

 

Total Liabilities and Equity

 

$

30,666.9

 

 

$

25,360.5

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

5


WESTROCK COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

 

 

 

 

Three Months Ended

 

 

 

December 31,

 

(In millions, except per share data)

 

2018

 

 

2017

 

 

 

 

 

Number of Shares of Common Stock Outstanding:

 

 

 

 

 

 

 

 

Balance at beginning of fiscal year

 

 

253.5

 

 

 

254.5

 

Shares issued under restricted stock plan

 

 

0.3

 

 

 

 

Issuance of common stock, net of stock received for minimum tax

   withholdings (1)

 

 

2.4

 

 

 

0.4

 

Purchases of common stock

 

 

(1.0

)

 

 

 

Balance at end of fiscal year

 

 

255.2

 

 

 

254.9

 

Common Stock:

 

 

 

 

 

 

 

 

Balance at beginning of fiscal year

 

$

2.5

 

 

$

2.5

 

Issuance of common stock, net of stock received for minimum tax

   withholdings (1)

 

 

0.1

 

 

 

 

Balance at end of fiscal year

 

 

2.6

 

 

 

2.5

 

Capital in Excess of Par Value:

 

 

 

 

 

 

 

 

Balance at beginning of fiscal year

 

 

10,588.9

 

 

 

10,624.9

 

Compensation expense under share-based plans

 

 

17.9

 

 

 

14.3

 

Issuance of common stock, net of stock received for minimum tax

   withholdings (1)

 

 

84.8

 

 

 

12.5

 

Fair value of share-based awards issued in business combinations

 

 

70.8

 

 

 

 

Purchases of common stock

 

 

(41.8

)

 

 

 

Balance at end of fiscal year

 

 

10,720.6

 

 

 

10,651.7

 

Retained Earnings:

 

 

 

 

 

 

 

 

Balance at beginning of fiscal year

 

 

1,573.3

 

 

 

172.4

 

Adoption of revenue from contracts with customers standard

 

 

43.5

 

 

 

 

Net income attributable to common stockholders

 

 

139.1

 

 

 

1,135.1

 

Dividends declared (per share - $0.455 and $0.43) (2)

 

 

(117.8

)

 

 

(110.7

)

Issuance of common stock, net of stock received for minimum tax

   withholdings

 

 

(0.4

)

 

 

 

Purchases of common stock

 

 

(2.4

)

 

 

 

Balance at end of fiscal year

 

 

1,635.3

 

 

 

1,196.8

 

Accumulated Other Comprehensive Loss:

 

 

 

 

 

 

 

 

Balance at beginning of fiscal year

 

 

(695.3

)

 

 

(457.3

)

Other comprehensive loss, net of tax

 

 

(59.5

)

 

 

(40.3

)

Balance at end of fiscal year

 

 

(754.8

)

 

 

(497.6

)

Total Stockholders’ equity

 

 

11,603.7

 

 

 

11,353.4

 

Noncontrolling Interests: (3)

 

 

 

 

 

 

 

 

Balance at beginning of fiscal year

 

 

13.0

 

 

 

43.6

 

Net income (loss)

 

 

0.3

 

 

 

(1.1

)

Contributions

 

 

0.2

 

 

 

 

Distributions and adjustments to noncontrolling interests

 

 

(1.7

)

 

 

(2.3

)

Balance at end of fiscal year

 

 

11.8

 

 

 

40.2

 

Total equity

 

$

11,615.5

 

 

$

11,393.6

 

 

 

(1)

Included in the issuance of common stock in the three months ended December 31, 2018 is the issuance of approximately 1.6 million shares of Common Stock (as hereinafter defined) valued at $70.1 million in connection with the KapStone Acquisition (as hereinafter defined).

 

(2)

Includes cash dividends paid, dividend equivalent units on certain restricted stock awards and dividends declared but unpaid related to the shares reserved but unissued at the time of the acquisition for the resolution of Smurfit-Stone Container Corporation (“Smurfit-Stone”) bankruptcy claims.

 

6


 

(3)

Excludes amounts related to contingently redeemable noncontrolling interests, which are separately classified outside of permanent equity in the Condensed Consolidated Balance Sheets.

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

7


WESTROCK COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Three Months Ended

 

 

 

December 31,

 

(In millions)

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

Consolidated net income

 

$

139.8

 

 

$

1,133.5

 

Adjustments to reconcile consolidated net income to net cash provided

   by operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

359.1

 

 

 

306.2

 

Cost of real estate sold

 

 

11.0

 

 

 

7.6

 

Deferred income tax expense (benefit)

 

 

14.3

 

 

 

(1,234.6

)

Share-based compensation expense

 

 

17.4

 

 

 

14.6

 

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

 

 

(12.8

)

 

 

(23.9

)

Multiemployer pension withdrawals

 

 

 

 

 

180.0

 

Land and Development impairments

 

 

 

 

 

27.6

 

Other impairment adjustments

 

 

2.8

 

 

 

6.4

 

Gain on disposal of plant and equipment and other, net

 

 

(43.2

)

 

 

 

Other

 

 

(18.3

)

 

 

(23.0

)

Change in operating assets and liabilities, net of acquisitions and

   divestitures:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

169.7

 

 

 

(28.9

)

Inventories

 

 

(71.4

)

 

 

(74.0

)

Other assets

 

 

(17.8

)

 

 

3.4

 

Accounts payable

 

 

(148.5

)

 

 

(89.4

)

Income taxes

 

 

(11.5

)

 

 

118.2

 

Accrued liabilities and other

 

 

(87.5

)

 

 

(78.3

)

Net cash provided by operating activities

 

 

303.1

 

 

 

245.4

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(322.0

)

 

 

(214.1

)

Cash (paid) received related to business combinations, net of cash acquired

 

 

(3,342.9

)

 

 

3.4

 

Cash receipts on sold trade receivables

 

 

 

 

 

116.6

 

Investment in unconsolidated entities

 

 

 

 

 

(110.7

)

Proceeds from sale of property, plant and equipment

 

 

88.0

 

 

 

12.1

 

Proceeds from property, plant and equipment insurance settlement

 

 

 

 

 

1.5

 

Other

 

 

4.1

 

 

 

0.6

 

Net cash used for investing activities

 

 

(3,572.8

)

 

 

(190.6

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of notes

 

 

1,498.5

 

 

 

 

Additions to revolving credit facilities

 

 

133.6

 

 

 

87.6

 

Additions to debt

 

 

3,806.1

 

 

 

475.3

 

Repayments of debt

 

 

(2,847.9

)

 

 

(1,050.6

)

Changes in commercial paper, net

 

 

447.7

 

 

 

554.7

 

Other financing additions (repayments), net

 

 

14.6

 

 

 

(13.5

)

Issuances of common stock, net of related minimum tax withholdings

 

 

12.9

 

 

 

11.4

 

Purchases of common stock

 

 

(44.2

)

 

 

 

Cash dividends paid to stockholders

 

 

(116.1

)

 

 

(109.6

)

Cash distributions paid to noncontrolling interests

 

 

(2.2

)

 

 

(1.5

)

Other

 

 

(6.4

)

 

 

0.7

 

Net cash provided by (used for) financing activities

 

 

2,896.6

 

 

 

(45.5

)

Effect of exchange rate changes on cash, cash equivalents

   and restricted cash

 

 

(3.0

)

 

 

(1.0

)

(Decrease) increase in cash, cash equivalents and restricted cash

 

 

(376.1

)

 

 

8.3

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

636.8

 

 

 

304.0

 

Cash, cash equivalents and restricted cash at end of period

 

$

260.7

 

 

$

312.3

 

 

8


 

 

Three Months Ended

 

 

 

December 31,

 

(In millions)

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes, net of refunds

 

$

55.8

 

 

$

41.8

 

Interest, net of amounts capitalized

 

$

25.0

 

 

$

27.2

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

Three Months Ended

 

 

 

December 31,

 

(In millions)

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Deferred purchase price of trade receivables sold

 

$

 

 

$

110.8

 

 

Liabilities assumed in the three months ended December 31, 2018 primarily relate to the KapStone Acquisition (as hereinafter defined). See “Note 3. Acquisitions” for more information.

 

 

 

Three Months Ended

 

 

 

December 31,

 

(In millions)

 

2018

 

 

 

 

 

Fair value of assets acquired, including goodwill

 

$

5,910.2

 

Cash consideration for the purchase of businesses, net of cash

   acquired

 

 

(3,343.8

)

Stock issued for the purchase of a business

 

 

(70.1

)

Fair value of share-based awards issued in the purchase of a

   business

 

 

(70.8

)

Deferred payments

 

 

16.6

 

Liabilities assumed

 

$

2,442.1

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

 

9


WESTROCK COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Month Period Ended December 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 our operating and business locations in 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, 2018 from the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018 (the “Fiscal 2018 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 months ended December 31, 2018 and December 31, 2017, our comprehensive income for the three months ended December 31, 2018 and December 31, 2017, our financial position at December 31, 2018 and September 30, 2018, our cash flows for the three months ended December 31, 2018 and December 31, 2017, and our statement of equity for the three months ended December 31, 2018 and December 31, 2017.

 

On October 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, which is codified in Accounting Standards Codification (“ASC”) 606 “Revenue from Contracts with Customers” (“ASC 606”). See “Note 2. Revenue Recognition” for more information on the impact of adoption of ASC 606.

 

We adopted ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” on October 1, 2018 on a retrospective basis. During the first quarter of fiscal 2019, upon the adoption of this ASU, we began presenting the non-service components of our pension and other postretirement income separately from the service cost components and outside the subtotal of operating profit. For the three months ended December 31, 2017, we reclassified $24.6 million to “Pension and other postretirement non-service income”, which was previously reported in “Cost of goods sold” for $10.0 million and “Selling, general and administrative, excluding intangible amortization” for $14.6 million on our condensed consolidated statements of income.

We adopted the provisions of ASU 2016-15 “Classification of Certain Cash Receipts and Cash Payments” on October 1, 2018 on a retrospective basis. The adoption resulted in a change in classification of proceeds received for beneficial interests obtained for transferring trade receivables in securitization transactions as investing activities instead of operating activities in the statement of cash flows. Although this aspect of the ASU does not have a material effect on our consolidated financial statements on a prospective basis (from October 1, 2018) because the creation of beneficial interest was eliminated under the terms of our A/R Sales Agreement (as defined herein) effective as of September 25, 2018, we have applied the provisions of this ASU retrospectively to prior years. As a result, cash provided by operating activities for the three months ended December 31, 2017 decreased by $116.6 million with a corresponding increase to cash provided by investing activities. The other provisions of ASU 2016-15 did not have a material impact on our condensed consolidated statements of cash flows.

We adopted the provisions of ASU 2016-18, “Restricted Cash” on October 1, 2018 on a retrospective basis. As a result of the adoption, we began including amounts generally described as restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period

 

 

10


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

amounts shown on the condensed consolidated statements of cash flows. Due to the minimal amount of restricted cash on our condensed consolidated balance sheets, the impact was not material.

 

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 2018 Form 10-K. The results for the three months ended December 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 2018 Form 10-K for a summary of our significant accounting policies.

 

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 2018 Form 10-K for information on new accounting standards adopted on October 1, 2018. Other than as discussed in the Basis of Presentation section above, 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 2018 Form 10-K for information on new accounting standards issued prior to the beginning of fiscal 2019 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 a material impact on our consolidated financial statements.

 

In October 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-18 “Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606”, which provides targeted amendments to ASC 808, “Collaborative arrangements” (“ASC 808”) and ASC 606. The amendments in this ASU require transactions between participants in a collaborative arrangement to be accounted for under ASC 606 when the counterparty is a customer. The ASU precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. The ASU also amends ASC 808 to refer to the unit-of-account guidance in ASC 606 and requires it to be used only when assessing whether a transaction is in scope of ASC 606. This ASU is effective for fiscal years ending after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of this ASU.

 

In October 2018, the FASB issued ASU 2018-17 “Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities.” The ASU changes how all entities evaluate decision-making fees under the variable interest entity guidance. To determine whether decision-making fees represent a variable interest, an entity considers indirect interests held through related parties under common control on a proportionate basis, rather than in their entirety, as currently required under generally accepted accounting principles in the United States (“GAAP”). This ASU is effective for fiscal years ending after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of this ASU.

 

In August 2018, the FASB issued ASU 2018-15 “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing

 

11


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

implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. The provisions may be adopted prospectively or retrospectively. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact of this ASU.

 

In August 2018, the FASB issued ASU 2018-14 “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans”. The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans to remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. These provisions will be applied retrospectively. This ASU is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We are currently evaluating the impact of this ASU.

 

In February 2018, the FASB issued 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 the period of adoption or retrospectively in each period in which the effect of the change in the United States (“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 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 GAAP. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the impact of this ASU but do not expect this provision to have a material impact on our consolidated financial statements.

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 hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this ASU also 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 October 2018, the FASB issued ASU 2018-16, “Derivatives and Hedging: Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting”, that adds the overnight index rate based on the Secured Overnight Financing Rate to the list of US benchmark interest rates in ASC 815 that are eligible to be hedged. The provisions of ASU 2017-12 and ASU 2018-16 are concurrently 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 ASU 2017-12 and ASU 2018-16 but do not expect these provisions to have a material impact on our consolidated financial statements.

 

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. Prior to the FASB issuing ASU 2018-11 “Leases”, entities were 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. In July 2018, the FASB issued ASU 2018-11, which provides entities the option to initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the

 

12


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

period of adoption. Consequently, the comparative periods presented in the financial statements would continue to be in accordance with current GAAP. In December 2018, the FASB issued ASU 2018-20 “Leases: Narrow-scope Improvements for Lessors” to help lessors apply ASC 842, which allows lessors to make an accounting policy election not to evaluate sales taxes and other similar taxes collected from lessees, requires lessors to exclude from variable payments certain lessor costs paid directly by lessee to third parties on the lessor’s behalf and provides clarification on variable payments allocated to lease and non-lease components. 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 material impact on the recognition, measurement, or presentation of lease expenses within the consolidated statements of income or the consolidated statements of cash flows.

 

Note 2.Revenue Recognition

 

We adopted ASC 606 and all related amendments on October 1, 2018 using the modified retrospective method.  We recorded the transition adjustment to the opening balance of retained earnings to account for the cumulative effect of adopting ASC 606. Since we used the modified retrospective method, we have not restated comparative information, which continues to be reported under the accounting standard in effect for those periods.

 

We manufacture certain customized products that (i) have no alternative use to us (since they are made to specific customer orders), and (ii) we believe that for certain customers we have a legally enforceable right to payment for performance completed to date on these products, including a reasonable profit. For manufactured products that meet these two criteria, we now recognize revenue “over time”. This results in (i) revenue recognition prior to the date of shipment or title transfer for these products and (ii) increases the contract asset (unbilled receivables) balance with a corresponding reduction in finished goods inventory on our balance sheet. Due to the recurring nature of our sales of these customized products, the impact of adopting ASC 606 is not expected to have a material impact on our condensed consolidated financial statements in future periods.

 

The transition adjustment resulted in revenue acceleration of $183.7 million with a corresponding acceleration of cost of $133.4 million. Thus, the net increase to opening balance of retained earnings was $43.5 million (net of tax expense of $6.8 million) as of October 1, 2018 due to the cumulative impact of adopting the new revenue standard. The adoption of ASC 606 had the following impact on our condensed consolidated financial statements:

 

Condensed Consolidated Statement of Income

 

 

 

Three Months Ended December 31, 2018

 

(In millions)

 

As Reported

 

 

Balances Without Adoption of ASC 606

 

 

Impact of Adoption Increase/(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

4,327.4

 

 

$

4,335.5

 

 

$

(8.1

)

Cost of goods sold

 

$

3,545.6

 

 

$

3,554.6

 

 

$

(9.0

)

Income tax expense

 

$

(62.7

)

 

$

(62.5

)

 

$

(0.2

)

Consolidated net income

 

$

139.8

 

 

$

139.1

 

 

$

0.7

 

 

Condensed Consolidated Balance Sheet

 

 

 

December 31, 2018

 

(In millions)

 

As Reported

 

 

Balances Without Adoption of ASC 606

 

 

Impact of Adoption Increase/(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories

 

$

2,101.8

 

 

$

2,238.0

 

 

$

(136.2

)

Other current assets

 

$

508.9

 

 

$

320.3

 

 

$

188.6

 

Other current liabilities

 

$

592.4

 

 

$

592.2

 

 

$

0.2

 

Retained earnings

 

$

1,635.3

 

 

$

1,591.1

 

 

$

44.2

 

 

 

13


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

Condensed Consolidated Statement of Cash Flows

 

 

 

Three Months Ended December 31, 2018

 

(In millions)

 

As Reported

 

 

Balances Without Adoption of ASC 606

 

 

Impact of Adoption Increase/(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net income

 

$

139.8

 

 

$

139.1

 

 

$

0.7

 

Other assets

 

$

(17.8

)

 

$

(25.9

)

 

$

8.1

 

Inventories

 

$

(71.4

)

 

$

(62.4

)

 

$

(9.0

)

Income taxes

 

$

(11.5

)

 

$

(11.7

)

 

$

0.2

 

 

Disaggregated Revenue

 

ASC 606 requires that we disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The table below disaggregates our revenue by geographical market and product type (segment).

 

 

 

Three Months Ended December 31, 2018

 

(In millions)

 

Corrugated Packaging

 

 

Consumer Packaging

 

 

Land and Development

 

 

Intersegment Sales

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Primary Geographical Markets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

2,606.5

 

 

$

1,247.0

 

 

$

13.9

 

 

$

(38.1

)

 

$

3,829.3

 

South America

 

 

108.8

 

 

 

19.5

 

 

 

 

 

 

 

 

 

128.3

 

Europe

 

 

 

 

 

269.3

 

 

 

 

 

 

 

 

 

269.3

 

Asia Pacific

 

 

18.5

 

 

 

83.0

 

 

 

 

 

 

(1.0

)

 

 

100.5

 

Total (1)

 

$

2,733.8

 

 

$

1,618.8

 

 

$

13.9

 

 

$

(39.1

)

 

$

4,327.4

 

 

(1)

Net sales are attributed to geographical markets based on the location of the seller.

 

Revenue Contract Balances

 

Contract assets are rights to consideration in exchange for goods that we have transferred to a customer when that right is conditional on something other than the passage of time. Contract assets are reduced when title and risk of loss passes to the customer. Contract liabilities represent obligations to transfer goods or services to a customer for which we have received consideration. Contract liabilities are reduced once control of the goods is transferred to the customer.

 

The opening and closing balances of our contract assets and contract liabilities are as follows. Contract assets and contract liabilities are aggregated within Other current assets and Other current liabilities, respectively, on the condensed consolidated balance sheet.

 

(In millions)

 

Contract Assets

(Short-Term)

 

 

Contract Liabilities

(Short-Term)

 

 

 

 

 

 

 

 

 

 

Beginning balance - October 1, 2018

 

$

183.7

 

 

$

7.9

 

Impact of acquisition

 

 

13.0

 

 

 

 

Ending balance - December 31, 2018

 

 

188.6

 

 

 

10.2

 

(Decrease) / increase

 

$

(8.1

)

 

$

2.3

 

 

 

Performance Obligations and Significant Judgments

 

We primarily derive revenue from fixed consideration. Certain contracts may also include variable consideration, typically in the form of cash discounts and volume rebates. If a contract with a customer includes variable consideration, we estimate the expected cash discounts and other customer refunds based on historical experience.

 

14


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

We concluded this method is consistent with the most likely amount method under ASC 606 and this method allows us to make the best estimate of the consideration we will be entitled to from customers.

 

Contracts or purchase orders with customers could include a single type of product or multiple types/grades of products. Regardless, the contracted price with the customer is agreed to at the individual product level outlined in the customer contracts or purchase orders. Management has concluded that the prices negotiated with each individual customer are representative of the stand-alone selling price of the product.

 

Practical Expedients and Exemptions

 

As permitted by the standard, we elected to use certain practical expedients. We treat shipping and handling activities as fulfillment activities. We treat costs associated with obtaining new contracts as expenses when incurred if the amortization period of the asset we would recognize is one year or less. We do not record interest income when the difference in timing of control transfer and customer payment is one year or less. The election of these practical expedients results in accounting treatments that we believe are consistent with our historical accounting policies and, therefore, these elections and expedients do not have a material impact on comparability of our financial statements.

 

 

Note 3.

Acquisitions

 

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 2. Mergers, Acquisitions and Investment” of the Notes to Consolidated Financial Statements section of the Fiscal 2018 Form 10-K for information about our prior year acquisitions or investment. No changes in the three months ended December 31, 2018 to our fiscal 2018 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.

 

 KapStone Acquisition

 

On November 2, 2018, pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of January 28, 2018, among WRKCo Inc. (formerly known as WestRock Company), which we refer to as “WRKCo”, KapStone Paper and Packaging Corporation (“KapStone”), the Company (formerly known as Whiskey Holdco, Inc.), Whiskey Merger Sub, Inc. and Kola Merger Sub, Inc., the Company acquired all of the outstanding shares of KapStone through a transaction in which: (i) Whiskey Merger Sub, Inc. merged with and into WRKCo, with WRKCo surviving such merger as a wholly owned subsidiary of Company (the “WestRock Merger”) and (ii) Kola Merger Sub, Inc. merged with and into KapStone, with KapStone surviving such merger as a wholly owned subsidiary of the Company (the “KapStone Merger” and, together with the WestRock Merger, the “KapStone Acquisition”). Effective as of the effective time of the KapStone Acquisition (the “Effective Time”), Whiskey Holdco, Inc. changed its name to “WestRock Company” and WRKCo changed its name to “WRKCo Inc.”

 

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.

 

Pursuant to the KapStone Acquisition, at the Effective Time (a) each issued and outstanding share of common stock, par value $0.01 per share, of WRKCo (“WRKCo common stock”) was converted into one share of common stock, par value $0.01 per share, of the Company (“Company common stock”) and (b) each issued and outstanding share of common stock, par value $0.0001 per share, of KapStone (“KapStone common stock”) (other than shares of KapStone common stock owned by (i) KapStone or any of its subsidiaries or (ii) any KapStone stockholder who properly exercised appraisal rights with respect to its shares of KapStone common stock in accordance with Section 262 of the Delaware General Corporation Law) was automatically canceled and converted into the right to receive (1) $35.00 per share in cash, without interest (the “Cash Consideration”), or, at the election of the holder of such share of KapStone common stock, (2) 0.4981 shares of Company common stock (the “Stock Consideration”) and cash in lieu of fractional shares, subject to proration procedures designed to ensure that the

 

15


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

Stock Consideration would be received in respect of no more than 25% of the shares of KapStone common stock issued and outstanding immediately prior to the Effective Time (the “Maximum Stock Amount”). Each share of KapStone common stock in respect of which a valid election of Stock Consideration was not made by 5:00 p.m. New York City time on September 5, 2018 was converted into the right to receive the Cash Consideration. KapStone stockholders elected to receive Stock Consideration that was less than the Maximum Stock Amount and no proration was required.

 

The consideration for the KapStone Acquisition was $4.9 billion including debt assumed, a long-term financing obligation and an estimate of equity awards to be replaced with WestRock equity awards with identical terms. As a result, KapStone stockholders received in the aggregate approximately $3.3 billion in cash and 1.6 million shares of WestRock common stock with a value of approximately $70.1 million, or approximately 0.6% of the issued and outstanding shares of WestRock common stock immediately following the Effective Time. Pursuant to the Merger Agreement, at the Effective Time, the Company assumed any outstanding awards granted under the equity-based incentive plans of WRKCo and KapStone (including the shares underlying such awards), the award agreements evidencing the grants of such awards and, in the case of the WRKCo equity-based incentive plans, the remaining shares available for issuance under the applicable plan, in each case subject to adjustments to such awards in the manner set forth in the Merger Agreement. Included in the consideration was approximately $70.8 million related to outstanding KapStone equity awards that were replaced with WestRock equity awards with identical terms for pre-combination service. The amount related to post-combination service will be expensed over the remaining service period of the awards.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. We are in the process of analyzing the estimated values of all assets acquired and liabilities assumed including, among other things, finalizing 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; therefore, the allocation of the purchase price is preliminary and subject to material revision.

Opening balance effective November 2, 2018 (in millions):

 

Cash and cash equivalents

 

$

8.6

 

Current assets, excluding cash and cash equivalents

 

 

878.9

 

Property, plant and equipment, net

 

 

1,910.3

 

Goodwill

 

 

1,755.0

 

Intangible assets

 

 

1,336.1

 

Other long-term assets

 

 

27.9

 

Total assets acquired

 

 

5,916.8

 

 

 

 

 

 

Current portion of debt

 

 

33.3

 

Current liabilities

 

 

337.5

 

Long-term debt due after one year

 

 

1,333.4

 

Accrued pension and other long-term benefits

 

 

9.8

 

Deferred income taxes

 

 

609.7

 

Other long-term liabilities

 

 

118.4

 

Total liabilities assumed

 

 

2,442.1

 

Net assets acquired

 

$

3,474.7

 

 

16


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

The fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced geographic reach of the combined organization, increased vertical integration and other synergistic opportunities), the assembled work force of KapStone as well as due to establishing deferred tax liabilities for the assets and liabilities acquired. The goodwill and intangibles resulting from the acquisition will not be amortizable for tax purposes.

The following table summarizes the weighted average life and the allocation to intangible assets recognized in the KapStone Acquisition, excluding goodwill (in millions):

 

 

Weighted Avg.

Life

 

 

Gross Carrying Amount

 

Customer relationships

 

 

11.6

 

 

$

1,270.0

 

Trademarks and tradenames

 

 

17.0

 

 

 

56.9

 

Favorable contracts

 

 

5.9

 

 

 

9.2

 

Total

 

 

11.8

 

 

$

1,336.1

 

 

None of the intangibles has significant residual value. The intangibles are expected to be amortized over estimated useful lives ranging from one to 20 years based on the approximate pattern in which the economic benefits are consumed or straight-line if the pattern was not reliably determinable.

 

Note 4.

Restructuring and Other Costs

Summary of Restructuring and Other Initiatives

We recorded pre-tax restructuring and other costs of $54.4 million for the three months ended December 31, 2018 and $16.3 million for the three months ended December 31, 2017. These amounts are not comparable since the timing and scope of the individual actions associated with a restructuring, acquisition, divestiture or integration can vary. We present our restructuring and other costs in more detail below.

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

 

 

 

Three Months Ended