WESTROCK COMPANY The following discussion should be read in conjunction with the condensed consolidated financial statements and Notes thereto included herein and our audited Consolidated Financial Statements and Notes thereto for the fiscal year endedSeptember 30, 2019 , as well as the information under the heading "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" that are part of the Fiscal 2019 Form 10-K. The following discussion includes certain non-GAAP financial measures. See our reconciliations of non-GAAP financial measures in the "Non-GAAP Financial Measures" section below.
Overview
We are a multinational provider of paper and packaging solutions for consumer and corrugated packaging markets. We partner with our customers to provide differentiated paper and packaging solutions that help them win in the marketplace. Our team members support customers around the world from our operating and business locations inNorth America ,South America ,Europe ,Asia andAustralia . Presentation We report our financial results of operations in the following three reportable segments:Corrugated Packaging , which consists of our containerboard mills, corrugated packaging and distribution operations, as well as our merchandising displays and recycling procurement operations;Consumer Packaging , which consists of our consumer mills, food and beverage and partition operations; and Land and Development, which previously sold real estate primarily in theCharleston, SC region. Certain income and expenses are not allocated to our segments and, thus, the information that management uses to make operating decisions and assess performance does not reflect these amounts. Items not allocated are reported as non-allocated expenses or in other line items in the table below after segment income. In addition, see "Note 1. Basis of Presentation and Significant Accounting Policies-Basis of Presentation" for more information. Acquisitions OnNovember 2, 2018 , we completed the KapStone Acquisition. KapStone is a leading North American producer and distributor of containerboard, corrugated products and specialty papers, including liner and medium containerboard, kraft papers and saturating kraft. KapStone also ownsVictory Packaging , a packaging solutions distribution company with facilities in theU.S. ,Canada andMexico . We have included the financial results of KapStone in ourCorrugated Packaging segment since the date of the acquisition. See "Note 3. Acquisitions and Investment" of the Notes to Consolidated Financial Statements section in the Fiscal 2019 Form 10-K and "Note 3. Acquisitions" of the Notes to Condensed Consolidated Financial Statements for more information. Executive Summary Three Months Ended December 31, (In millions) 2019 2018 Net sales$ 4,423.7 $ 4,327.4 Segment income $ 331.0 $ 324.4 Net sales of$4,423.7 million for the first quarter of fiscal 2020 increased$96.3 million , or 2.2%, compared to the first quarter of fiscal 2019. The increase was primarily due to the KapStone Acquisition as the prior year period included only two months of KapStone ownership as the transaction closed onNovember 2, 2018 . This increase was partially offset by lower pulp and corrugated prices and lower consumer paperboard volumes as well as unfavorable foreign currency impacts across our segments compared to the prior year quarter.
Segment income increased
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Packaging segment income. A detailed review of our performance appears below
under "Results of Operations (Consolidated)" and "Results of Operations (Segment
Data)".
During the first quarter of fiscal 2020, we made substantial progress executing
our differentiated strategy in markets that were characterized by stable demand,
increasing supply and customers with ever-growing needs for innovative,
sustainable packaging solutions.
Our capital expenditures during the first quarter of fiscal 2020 of $375 million
included $132 million for strategic projects, including a new paper machine at
our mill in Florence, SC and an upgrade of our mill in Brazil . We expect fiscal
2020 capital expenditures to be approximately $1.1 billion , that our capital
expenditures in the remaining quarters of fiscal 2020 will be lower than our
capital expenditures in the first quarter of fiscal 2020, and that our capital
expenditures will decline in fiscal 2021 to an annual rate of $900 million to $1
billion . While these investments negatively impacted our results in the first
quarter of fiscal 2020, we believe these projects will deliver substantial
benefits for us in the near and long term.
We expect that the new paper machine at our mill in
We are continuing to focus on executing our differentiated strategy with our commercial excellence, operational excellence and digital programs, and believe these efforts will position us to generate profitable organic growth and productivity improvements, as well as a level of cash flow that will allow us to return to reduce our leverage. We expect our leverage will peak in the second quarter of fiscal 2020 before declining in the second half of fiscal 2020.
For the second quarter of fiscal 2020, we expect:
• modest seasonal volume increases across our
• some negative impact from the
price reductions of $10 per ton for domestic linerboard and $15 per ton
for domestic medium; and
• that productivity improvements and lower sequential healthcare costs to
more than offset higher sequential wage costs and the payroll tax reset
that occurs at the beginning of each calendar year.
Non-GAAP Financial Measures
We report our financial results in accordance with GAAP. However, we have included financial measures that were not prepared in accordance with GAAP. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our GAAP results. The non-GAAP financial measures we present may differ from similarly captioned measures of other companies.
We use the non-GAAP financial measures "Adjusted Net Income" and "Adjusted Earnings Per Diluted Share". Management believes these non-GAAP financial measures provide our board of directors, investors, potential investors, securities analysts and others with useful information to evaluate our performance because the measures exclude restructuring and other costs and other specific items that management believes are not indicative of the ongoing operating results of the business. We and our board of directors use this information to evaluate our performance relative to other periods. We believe that the most directly comparable GAAP measures to Adjusted Net Income and Adjusted Earnings Per Diluted Share are Net income attributable to common stockholders and Earnings per diluted share, respectively. Earnings per diluted share were$0.53 in the first quarter of fiscal 2020 compared to$0.54 in the first quarter of fiscal 2019. Adjusted Earnings Per Diluted Share were$0.58 and$0.83 in the first quarter of fiscal 2020 and 2019, respectively. 43
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Set forth below is a reconciliation of the non-GAAP financial measure Adjusted Earnings Per Diluted Share to Earnings per diluted share, the most directly comparable GAAP measure (in dollars per share) for the periods indicated.
Three Months Ended
December 31,
2019 2018
Earnings per diluted share $ 0.53 $ 0.54
Restructuring and other items 0.09 0.21Direct (recoveries) expenses from Hurricane Michael, net of
related proceeds (0.05 )
0.12
Inventory stepped-up in purchase accounting, net
of LIFO -
0.07
Gain on sale of certain closed facilities - (0.15 ) Accelerated depreciation on major capital projects and certain plant closures 0.03
0.02
Interest accretion and other - (0.02 ) Losses at closed plants, transition and start-up costs 0.01
-
reconfiguration costs 0.04
-
Brazil indirect tax (0.09 )
-
Loss on extinguishment of debt -
0.01
Impact of Tax Cuts and Jobs Act -
0.02
Other 0.02
0.01
Adjusted Earnings Per Diluted Share$ 0.58 $ 0.83 The GAAP results in the tables below for Pre-Tax, Tax and Net of Tax are equivalent to the line items "Income before income taxes", "Income tax expense" and "Consolidated net income", respectively, as reported on the statements of income. Set forth below are reconciliations of Adjusted Net Income to the most directly comparable GAAP measure, Net income attributable to common stockholders (represented in the table below as the GAAP Results for Consolidated net income (i.e. Net of Tax) plus Noncontrolling interests), for the periods indicated (in millions): Three Months Ended December 31, 2019 Pre-Tax Tax Net of Tax GAAP Results$ 186.0 $ (46.5 ) $ 139.5 Restructuring and other items 30.1 (7.7 ) 22.4 Hurricane Michael recovery of direct costs, net (16.0 ) 3.9 (12.1 ) Gain on sale of certain closed facilities (0.5 ) 0.1 (0.4 ) Accelerated depreciation on major capital projects and certain plant closures 11.6 (2.9 ) 8.7 Losses at closed plants, transition and start-up costs 4.4 (1.1 ) 3.3
reconfiguration costs 15.3 (3.7 ) 11.6 Brazil indirect tax (33.8 ) 10.6 (23.2 ) Land and Development operating results (1.3 ) 0.3 (1.0 ) Other 5.3 (1.3 ) 4.0 Adjusted Results$ 201.1 $ (48.3 ) $ 152.8 Noncontrolling interests (1.0 ) Adjusted Net Income$ 151.8 44
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Three Months Ended December 31, 2018
Pre-Tax Tax Net of Tax
GAAP Results $ 202.5 $ (62.7 ) $ 139.8
Restructuring and other items 54.4 (0.9 ) 53.5
Direct expenses from Hurricane Michael, net of
related proceeds 39.8 (9.8 ) 30.0
Inventory stepped-up in purchase accounting, net
of LIFO 24.7 (6.0 ) 18.7 Gain on sale of certain closed facilities (50.5 ) 12.4 (38.1 ) Accelerated depreciation on major capital projects 8.9 (2.3 ) 6.6 Interest accretion and other (5.5 ) 1.3 (4.2 ) Losses at closed plants and transition costs 2.3 (0.6 ) 1.7 Loss on extinguishment of debt 1.9 (0.5 ) 1.4 Land and Development operating results (0.7 ) 0.2 (0.5 ) Impact of Tax Cuts and Jobs Act - 4.1 4.1 Other 3.8 (0.9 ) 2.9 Adjusted Results$ 281.6 $ (65.7 ) $ 215.9 Noncontrolling interest (0.7 ) Adjusted Net Income$ 215.2
We discuss certain of these charges in more detail in "Note 4. Restructuring and Other Costs" of the Notes to Condensed Consolidated Financial Statements.
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