WESTROCK COMPANY 
OVERVIEW
We are a multinational provider of sustainable fiber-based paper and packaging solutions. We partner with our customers to provide differentiated, sustainable 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 .
Organization
OnNovember 2, 2018 , we completed the KapStone Acquisition. As a result, among other things, the Company became the ultimate parent ofWRKCo , KapStone and their respective subsidiaries, and the Company changed its name to "WestRock Company " andWRKCo changed its name to "WRKCo Inc. ". See "Note 3. Acquisitions and Investments" of the Notes to Consolidated Financial Statements for additional information.
Presentation
We report our financial results of operations in the following two 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; andConsumer Packaging , which consists of our consumer mills, food and beverage and partition operations. Prior to the completion of our monetization program in fiscal 2020, we had a third reportable segment, Land and Development, which previously sold real estate, primarily in theCharleston, SC region. Following completion of the monetization of these assets, we ceased reporting the results of the Land and Development segment as a separate segment. We have not included a discussion of the Land and Development segment below as its net sales and segment income are not significant. See "Note 7. Segment Information" of the Notes to Consolidated Financial Statements for certain disclosures with respect to our former Land and Development segment. In the first quarter of fiscal 2022, we expect to realign our segments and will disclose three reportable segments: Packaging, which will consist of our converting operations and associated integrated profit from our mill system; Paper, which will consist of third-party paper sales and associated profit from our mill system; and Distribution, which will consist of our distribution business combined with our merchandising display assembly operations. A detailed discussion of the fiscal 2021 year-over-year changes can be found below and a detailed discussion of fiscal 2020 year-over-year changes can be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 . Acquisitions From time to time, we have completed acquisitions that have expanded our product and geographic scope, allowed us to increase our integration levels and impacted our comparative financials. We expect to continue to evaluate similar potential acquisitions in the future, although the size of individual acquisitions may vary. Below we summarize certain of these acquisitions. OnNovember 2, 2018 , we completed the KapStone Acquisition. KapStone was 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 ownedVictory 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 Investments" of the Notes to Consolidated Financial Statements for additional information. See also Item 1A. "Risk Factors - We May Be Unsuccessful in Making and Integrating Mergers, Acquisitions and Investments, and Completing Divestitures". 35 --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
In fiscal 2021, we continued to pursue our strategy of offering differentiated,
sustainable paper and packaging solutions that help our customers win. As a
result of our broad portfolio, 188 customers bought at least $1 million from
each of our Corrugated Packaging and Consumer Packaging segments in fiscal 2021.
Net sales of $18,746.1 million for fiscal 2021 increased $1,167.3 million , or
6.6%, compared to fiscal 2020 primarily due to higher selling price/mix and
higher volumes. In the second quarter of fiscal 2021, we experienced lost sales
associated with the Ransomware Incident and winter weather events (the "Events")
and we estimate these Events decreased net sales by approximately $189.1
million . Additionally, we experienced aggregate favorable impact of foreign
currency across our segments. Volumes in fiscal 2020 were negatively impacted by
COVID-19, primarily in the last half of the fiscal year.
Segment income increased $211.3 million in fiscal 2021 compared to fiscal 2020,
primarily due to higher Consumer Packaging and Corrugated Packaging segment
income. A detailed review of our performance appears below under "Results of
Operations".
We generated $2,279.9 million of net cash provided by operating activities in
fiscal 2021, compared to $2,070.7 million in fiscal 2020. The increase was
primarily due to a $141.0 million net decrease in the use of working capital
compared to the prior year period, including the payment of certain fiscal 2020
bonuses and the Company's 401(k) match and annual company contribution (i.e. up
to 5% and 2.5%, respectively) in the form of stock, rather than cash, and
deferral of certain payroll taxes in connection with the WestRock Pandemic
Action Plan. See "COVID-19 RESPONSE - WestRock Pandemic Action Plan" for more
information. We invested $815.5 million in capital expenditures in fiscal 2021
while returning $233.8 million in dividends to our stockholders and repurchasing
$122.4 million of Common Stock. We believe our strong balance sheet and cash
flow provide us the flexibility to continue to invest to sustain and improve our
operating performance. See "Liquidity and Capital Resources" for more
information.
Earnings per diluted share was $3.13 in fiscal 2021 compared to loss per diluted
share of $2.67 in fiscal 2020. Adjusted Earnings Per Diluted Share were $3.39
and $2.75 in fiscal 2021 and 2020, respectively. The loss per diluted share in
fiscal 2020 was driven by a pre-tax non-cash goodwill impairment of $1,333.2
million in our Consumer Packaging reporting unit.
A detailed review of our fiscal 2021 and 2020 performance appears below under "Results of Operations".
Ransomware Incident As previously disclosed, onJanuary 23, 2021 , we detected a ransomware incident impacting certain of our systems. Promptly upon our detection of this incident, we initiated response and containment protocols and our security teams, supplemented by leading cyber defense firms, worked to remediate this incident. These actions included taking preventative measures, including shutting down certain systems out of an abundance of caution, as well as taking steps to supplement existing security monitoring, scanning and protective measures. We notified law enforcement and contacted our customers to apprise them of the situation. We undertook extensive efforts to identify, contain and recover from this incident quickly and securely. Our teams worked to maintain our business operations and minimize the impact on our customers and teammates. In our second quarter Form 10-Q, we announced that all systems were back in service. All of our mills and converting locations began producing and shipping paper and packaging at pre-ransomware levels inMarch 2021 or earlier. Our mill system production was approximately 115,000 tons lower than planned for the quarter endedMarch 31, 2021 as a result of this incident. While shipments from some of our facilities initially lagged behind production levels, this gap closed as systems were restored during the second quarter of fiscal 2021. In locations where technology issues were identified, we used alternative methods, in many cases manual methods, to process and ship orders. We systematically brought our information systems back online in a controlled, phased approach. We estimate the pre-tax income impact of the lost sales and operational disruption of this incident on our operations in the second quarter of fiscal 2021 was approximately$50 million , as well as approximately$20 million of ransomware recovery costs, primarily professional fees. In addition, we incurred approximately$9 million of ransomware recovery costs in the third quarter of fiscal 2021. In the fourth quarter of fiscal 2021, we recorded a$15 million credit for preliminary recoveries - approximately$10 million as a reduction of selling, general, and administrative expenses ("SG&A") excluding intangible amortization and approximately$5 million as a reduction of 36 --------------------------------------------------------------------------------
cost of goods sold. We expect to recover substantially all of the remaining ransomware losses from cyber and business interruption insurance in future periods. Disputes over the extent of insurance coverage for claims are not uncommon, and there will be a time lag between the incurrence of costs and the receipt of any insurance proceeds.
In response to the ransomware event, we accelerated information technology investments that we had previously planned to make in future periods in order to further strengthen our information security and technology infrastructure. We engaged a leading cybersecurity defense firm that completed a forensics investigation of the ransomware incident and we are taking appropriate actions in response to the findings. For example, in the short-term, we reset all credentials Company-wide and strengthened security tooling across our servers and workstations. Longer term, in collaboration with our strategic partners, we established a roadmap to advance the maturity and effectiveness of our information security and resiliency capabilities. This roadmap includes initiatives to further strengthen our information security posture across the Company, and to enable us to potentially detect, respond to and recover from security and technical incidents in a faster and more effective manner. More specifically, we are progressing projects to bolster our security monitoring capabilities, strengthen our access controls, reduce risks associated with third-parties, and to enhance the information security of our mills and plants.
See Item 1A. "Risk Factors - We are Subject to Cyber-Security Risks, Including Related to Customer, Employee, Vendor or Other Company Data".
Expectations for the First Quarter of Fiscal 2022 and Fiscal 2022
In the first quarter of fiscal 2022, we expect a sequential decline in net sales and earnings from the fourth quarter of fiscal 2021 reflecting the normal season sequential volume declines in many of our businesses and scheduled mill maintenance outages. We expect lower volume with three fewer shipping days during the first quarter of fiscal 2022, although in line with shipping days in the first quarter of fiscal 2021. Due to delays in mill maintenance in fiscal 2021 for items such as COVID-19 and the Ransomware Incident, we expect approximately 200,000 tons of maintenance downtime, the peak maintenance outage period for fiscal 2022. We expect sequential cost inflation driven primarily by higher natural gas, transportation, and recycled and virgin fiber costs along with increased health insurance costs prior to the annual reset of employee deductibles. However, we expect the flow through of the previously published price increases we are implementing to more than offset inflation. In fiscal 2022, we expect solid demand across most of our end markets and continued flow through of the previously published price increases. We expect record sales and operating profit despite continued commodity input cost inflation and productivity unavoidably affected by supply chain challenges and higher labor costs that may persist through the fiscal year. We expect the implementation of previously published price increases will outpace inflation despite our expectation for higher recycled fiber, energy, virgin fiber, chemical and transportation costs. In addition, we expect to benefit from the fiscal 2021 completion of strategic investments such as the new paper machine at ourFlorence, SC mill and ourTres Barras mill upgrade. We expect our planned mill maintenance outage schedule will be approximately 100,000 tons higher than in fiscal 2021. With the completion of certain of our strategic projects in fiscal 2021, including the paper machine at ourFlorence, SC mill and the Tres Barras mill upgrade project, we expect capital expenditures of approximately$1.0 billion in fiscal 2022. COVID-19 RESPONSE WestRock Pandemic Action Plan Given the uncertainties associated with the severity and duration of the pandemic, inMay 2020 we announced, and began implementing, the WestRock Pandemic Action Plan. We are continuing to focus on the protection, safety and well-being of our teammates and continuing to match our supply with our customers' demand. We have modified the WestRock Pandemic Action Plan as the impact of COVID-19 has evolved. For example, we changed our capital expenditure assumptions, increased ourMay 2021 dividend, and inOctober 2021 , announced an 37 -------------------------------------------------------------------------------- incremental increase to ourNovember 2021 dividend, in each case as described below. We expect that the actions that we have undertaken and will continue to undertake pursuant to the plan will provide an additional approximately$1 billion in cash through the end of calendar 2021 that we will be able to use to reduce our outstanding indebtedness. In fiscal 2020, we achieved more than$350 million of the approximately$1 billion goal set forth in the WestRock Pandemic Action Plan, as modified. As ofSeptember 30, 2021 , we had achieved more than$975 million of the approximately$1 billion goal. The ultimate level achieved has been impacted by modifications such as increased capital investments and increased dividends as we modified the WestRock Pandemic Action Plan. Pursuant to the WestRock Pandemic Action Plan, we took a series of actions that were designed to protect the safety and well-being of our teammates and preserve cash that could be used to pay down our outstanding debt, all while continuing to match our supply with our customers' demand. For example, we committed to (i) reducing discretionary expenses, (ii) using Common Stock to make Company funded 401(k) match and annual contribution (i.e. up to 5% and 2.5%, respectively) fromJuly 1, 2020 throughSeptember 30, 2021 (final period funded inOctober 2021 ), (iii) targeting a reduction of fiscal 2021 capital investments to a range of$800 million to$900 million , up from an initial range of$600 to$800 million (we invested$815.5 million in fiscal 2021), and (iv) resetting our quarterly dividend to$0.20 per share for an annual rate of$0.80 per share, which we did inMay 2020 . We paid quarterly dividends of$0.24 per share inMay 2021 andAugust 2021 and inOctober 2021 , our board of directors declared a quarterly dividend of$0.25 per share, representing a$1.00 per share annualized dividend or an increase of 25% since ourFebruary 2021 dividend. The recent decisions to increase our dividend reflects the confidence we have in our business and our ability to generate strong cash flows, as well as the progress we have made in reducing debt since we began implementing the WestRock Pandemic Action Plan. In addition to the items addressed above, we (i) decreased the salaries of our senior executive team by up to 25% fromMay 1, 2020 throughDecember 31, 2020 and decreased the retainer for members of our board of directors by 25% for the third and fourth calendar quarters of 2020, (ii) used Common Stock to pay our annual incentive for fiscal 2020 for nearly all participants and set the payout level at 50% of the target opportunity subject to a safety modifier, as well as for Company funded 401(k) match and our annual contribution as noted above, and (iii) postponed$116.5 million of employment taxes incurred through the end of calendar year 2020, pursuant to relief offered under the Coronavirus Aid, Relief and Economic Security ("CARES") Act. We also reduced fiscal 2020 capital investments to$978.1 million after targeting to reduce them by approximately$150 million to approximately$950 million . We expect to pay the employment taxes deferred under the CARES Act as required, 50% byDecember 2021 and the remaining 50% byDecember 2022 . During fiscal 2021, we recorded$38.4 million of expense related to COVID-19, including$22.0 million of relief payments to employees in the first quarter of fiscal 2021. The balance was for increased costs for safety, cleaning and other items related to COVID-19. During fiscal 2020, we provided one-time COVID-19 recognition awards to our teammates who work in manufacturing and operations and recognized expense of$31.6 million for those awards. During fiscal 2020, we also incurred an additional expense of$32.4 million for cleaning, safety supplies and equipment, screening resources and other items. We began tracking the impact of costs related to COVID-19 in the third quarter of fiscal 2020. We expect to continue to incur expenses for these items as needed in the future. 38
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RESULTS OF OPERATIONS
The following table summarizes our consolidated results for the two years ended
September 30, 2021 :
Year Ended September 30,
(In millions) 2021 2020
Net sales $ 18,746.1 $ 17,578.8
Cost of goods sold 15,315.8 14,381.6
Gross profit 3,430.3 3,197.2
Selling, general and administrative, excluding
intangible
amortization 1,759.3 1,624.4
Selling, general and administrative intangible amortization 357.1
400.5
Loss (gain) on disposal of assets 4.1 (16.3 ) Multiemployer pension withdrawal income (2.9 ) (1.1 ) Restructuring and other costs 31.5 112.7 Goodwill impairment - 1,333.2 Operating profit (loss) 1,281.2 (256.2 ) Interest expense, net (372.3 ) (393.5 ) Loss on extinguishment of debt (9.7 ) (1.5 ) Pension and other postretirement non-service income 134.9
103.3
Other income, net 10.9
9.5
Equity in income of unconsolidated entities 40.9
15.8
Income (loss) before income taxes 1,085.9 (522.6 ) Income tax expense (243.4 ) (163.5 ) Consolidated net income (loss) 842.5 (686.1 ) Less: Net income attributable to noncontrolling interests (4.2 )
(4.8 )
Net income (loss) attributable to common stockholders
Net sales in fiscal 2021 increased$1,167.3 million , or 6.6%, compared to fiscal 2020 primarily due to higher selling price/mix and higher volumes. In the second quarter of fiscal 2021, we experienced lost sales associated with the Events that we estimate decreased net sales by approximately$189.1 million . Additionally, we experienced aggregate favorable impact of foreign currency across our segments. Volumes in fiscal 2020 were negatively impacted by COVID-19, primarily in the last half of the fiscal year. The change in net sales by segment is outlined below in "Results of Operations -Corrugated Packaging Segment" and "Results of Operations - Consumer Packaging Segment".
Cost of Goods Sold
Cost of goods sold increased to$15,315.8 million in fiscal 2021 compared to$14,381.6 million in fiscal 2020. Cost of goods sold as a percentage of net sales was 81.7% in fiscal 2021 compared to 81.8% in fiscal 2020. The increase in cost of goods sold in fiscal 2021 compared to fiscal 2020 was primarily due to higher volumes, increased cost inflation and other items, including operational disruption associated with the Events. These items were partially offset by productivity improvements and other items. In fiscal 2020, we incurred approximately$4.5 million of direct costs and property damage associated with Hurricane Michael, and received Hurricane Michael-related insurance proceeds of$32.3 million and recorded a reduction of cost of goods sold of$32.1 million in connection with an indirect tax claim inBrazil , primarily in theCorrugated Packaging segment. The Hurricane Michael-related insurance proceeds were for$20.6 million of direct costs and property damage and for$11.7 million for business interruption recoveries. In fiscal 2021, we recorded costs of goods sold of$35.4 million related to COVID-19 primarily for relief payments to employees and increased costs for safety, cleaning and other items related to COVID-19. We began to track and report the impact of COVID-19 on fiscal 2020 in the third fiscal quarter. Fiscal 2020 includes costs of goods sold of$56.5 million associated with COVID-19, including one-time recognition awards to our teammates who work in manufacturing and operations recorded in the third quarter of fiscal 2020, increased costs for safety, cleaning and other items related to COVID-19. We expect to continue to 39 -------------------------------------------------------------------------------- incur additional costs related to safety, cleaning and other items related to COVID-19 as needed in the foreseeable future. We discuss these items in greater detail below in "Results of Operations - Corrugated Packaging Segment" and "Results of Operations - Consumer Packaging Segment".
Selling, General and Administrative, Excluding Intangible Amortization
SG&A excluding intangible amortization increased$134.9 million to$1,759.3 million in fiscal 2021 compared to fiscal 2020 primarily due to a$119.8 million increase in bonus and stock-based compensation expense as a result of expected fiscal 2021 payments being higher than fiscal 2020 payments, including a$9.6 million acceleration of stock-based compensation in connection with the departure of our former Chief Executive Officer in the second quarter of fiscal 2021. In addition, we incurred increased aggregate costs for consulting, professional and legal fees of$21.2 million compared to the prior year period, primarily associated with the Ransomware Incident. These increases were partially offset by a$29.4 million decrease in bad debt expense compared to the prior year period, as well as a$18.4 million reduction in travel and entertainment associated with prolonged shelter-in-place orders in response to the ongoing effects of COVID-19. SG&A excluding intangible amortization as a percentage of net sales increased in fiscal 2021 to 9.4% from 9.2% in fiscal 2020.
Selling, General and Administrative Intangible Amortization
SG&A intangible amortization was$357.1 million and$400.5 million in fiscal 2021 and 2020, respectively. The decline was primarily attributable to certain intangibles from prior acquisitions reaching full amortization.
Restructuring and Other Costs
We recorded aggregate pre-tax restructuring and other costs of$31.5 million and$112.7 million for fiscal 2021 and 2020, respectively. These amounts are not comparable since the timing and scope of the individual actions associated with each restructuring, acquisition, integration or divestiture vary. We generally expect the integration of a closed facility's assets and production with other facilities to enable the receiving facilities to better leverage their fixed costs while eliminating fixed costs from the closed facility. See "Note 4. Restructuring and Other Costs" of the Notes to Consolidated Financial Statements for additional information, including a description of the type of costs incurred. We have restructured portions of our operations from time to time and it is likely that we will engage in additional restructuring opportunities in the future. See also Item 1A. "Risk Factors - We May Incur Additional Restructuring Costs and May Not Realize Expected Benefits from Restructuring".
Goodwill Impairment
In fiscal 2020, we recorded a pre-tax non-cash goodwill impairment of$1,333.2 million in ourConsumer Packaging reporting unit. The impairment was driven by the expected lower volumes and cash flows related to certain external SBS end markets, including commercial print, tobacco and plate and cup stock markets. In fiscal 2021, no impairments were recorded as all reporting units that have goodwill have a fair value that exceeded their carrying values by more than 20% each. Interest Expense, net Interest expense, net was$372.3 million and$393.5 million for fiscal 2021 and 2020, respectively. The decrease was primarily due to lower debt levels in the current fiscal year that was partially offset by higher interest rates in the current fiscal year. Additionally, fiscal 2020 was impacted by$20.5 million of interest income recorded in connection with an indirect tax claim inBrazil partially offset by a$15.0 million increase in interest expense associated with the remeasurement of our multiemployer pension liabilities. See "Note 17. Commitments and Contingencies - Indirect Tax Claim" of the Notes to Consolidated Financial Statements for additional information. See Item 1A. "Risk Factors - We Have Had Significant Levels of Indebtedness in the Past and May Incur Significant Levels of Indebtedness in the Future, Which Could Adversely Affect Our Financial Condition and Impair Our Ability to Operate Our Business".
Pension and Other Postretirement Non-Service Income
Pension and other postretirement non-service income was
40
--------------------------------------------------------------------------------expected return on plan assets for fiscal 2021. Customary pension and other postretirement (income) costs are included in segment income. See "Note 5. Retirement Plans" of the Notes to Consolidated Financial Statements for more information.
Other Income, net Other income, net was$10.9 million and$9.5 million in fiscal 2021 and 2020, respectively. Fiscal 2021 primarily included a$16.5 million gain on sale of theSummerville, SC sawmill and a$16.0 million gain on sale of a legacy cost method investment, which were partially offset by a$22.5 million charge associated with not exercising an option to purchase an additional equity interest in Grupo Gondi.
Equity in Income of Unconsolidated Entities
We recorded equity in income of unconsolidated entities of$40.9 million in fiscal 2021 compared to$15.8 million in fiscal 2020. The increase was driven by earnings improvement across the portfolio, most notably, our joint venture with Grupo Gondi. Provision for Income Taxes We recorded income tax expense of$243.4 million for fiscal 2021 at an effective tax rate of 22.4%, compared to an income tax expense of$163.5 million at an effective tax rate of (31.3)% in fiscal 2020, due to the loss before income tax in fiscal 2020. See "Note 6. Income Taxes" of the Notes to Consolidated Financial Statements for additional information, including a table reconciling the statutory federal tax rate to our effective tax rate. Excluding the effect of the goodwill impairment, which was largely not tax deductible, our effective tax rate was 22.5% in fiscal 2020.
Hurricane Michael
InOctober 2018 , our containerboard and pulp mill located inPanama City, FL sustained extensive damage from Hurricane Michael. We shut down the mill's operations in advance of the hurricane's landfall. Repair work was completed on the two paper machines and related infrastructure duringJune 2019 . In the first quarter of fiscal 2020, we settled our property damage and business interruption insurance claim for$212.3 million (net of our$15 million deductible) and received the remaining$32.3 million of insurance proceeds (we received$180.0 million in fiscal 2019 that consisted of$55.3 million of business interruption recoveries and$124.7 million for direct costs and property damage). The insurance proceeds received in fiscal 2020 consisted of$11.7 million of business interruption recoveries and$20.6 million for direct costs and property damage. Corrugated Packaging Segment
Corrugated Packaging Shipments
Corrugated Packaging shipments are expressed as a tons equivalent, which includes external and intersegment tons shipped from ourCorrugated Packaging mills plusCorrugated Packaging container shipments converted from billion square feet ("BSF") to tons. We have presented theCorrugated Packaging shipments in two groups: North American andBrazil /India because we believe investors, potential investors, securities analysts and others find this breakout useful when evaluating our operating performance. The table below reflects shipments in thousands of tons, BSF and millions of square feet ("MMSF") per shipping day. The number of shipping days vary by geographic location. 41
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North American Corrugated Packaging Shipments
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
Fiscal 2020
North American Corrugated Packaging
Shipments - thousands of tons 2,591.2 2,618.8 2,504.4 2,504.4 10,218.8
North American Corrugated Containers
Shipments - BSF 23.9 23.8 23.2 24.9 95.8
North American Corrugated Containers Per
Shipping Day - MMSF 385.9 371.2
369.3 388.0 378.6
Fiscal 2021North American Corrugated Packaging Shipments - thousands of tons 2,519.3 2,485.2 2,582.7 2,688.7 10,275.9 North American Corrugated Containers Shipments - BSF 25.4 24.7 25.3 24.6 100.0 North American Corrugated Containers Per Shipping Day - MMSF 416.7 391.5 402.0 383.6 398.2
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
Fiscal 2020
Brazil / India Corrugated Packaging
Shipments
- thousands of tons 168.1 182.5 176.4 185.1 712.1
Brazil / India Corrugated
Containers Shipments
- BSF 1.7 1.6 1.6 1.9 6.8
Brazil / India Corrugated
Containers Per Shipping
Day - MMSF 22.9 21.3 21.0 24.3 22.4
Fiscal 2021
Brazil / India Corrugated Packaging
Shipments
- thousands of tons 156.8 183.9 194.9 201.1 736.7
Brazil / India Corrugated
Containers Shipments
- BSF 1.8 1.9 1.9 2.1 7.7
Brazil / India Corrugated
Containers Per
Shipping Day - MMSF 23.5 24.5 26.0 26.4 25.1
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Corrugated Packaging Segment -
Segment Return
(In millions, except percentages) Net Sales (1) Income on Sales Fiscal 2020 First Quarter$ 2,909.5 $ 283.4 9.7 % Second Quarter 2,882.5 244.5 8.5 Third Quarter 2,728.8 227.9 8.4 Fourth Quarter 2,898.4 281.9 9.7 Total$ 11,419.2 $ 1,037.7 9.1 % Fiscal 2021 First Quarter$ 2,864.5 $ 215.0 7.5 % Second Quarter 2,913.4 205.3 7.0 Third Quarter 3,167.1 321.7 10.2 Fourth Quarter 3,398.7 374.8 11.0 Total$ 12,343.7 $ 1,116.8 9.0 %
(1)
Net sales before intersegment eliminations for theCorrugated Packaging segment increased$924.5 million in fiscal 2021 compared to fiscal 2020 primarily reflecting$675.7 million of higher selling price/mix and$298.0 million of higher volumes that was partially offset by$25.2 million of unfavorable impact of foreign currency. Volumes were negatively impacted by an estimated$77.0 million and$39.9 million due to the Ransomware Incident and winter weather, respectively, in the second quarter of fiscal 2021. Volumes in fiscal 2020 were negatively impacted by COVID-19, primarily in the last half of the fiscal year. Record North American per day box shipments during the fiscal year endedSeptember 30, 2021 increased 5.2% compared to the prior fiscal year.
Segment Income - Corrugated Packaging Segment
Segment income attributable to theCorrugated Packaging segment in fiscal 2021 increased$79.1 million compared to fiscal 2020, primarily due to$686.5 million of margin impact from higher selling price/mix,$93.7 million of higher volumes excluding the Events,$24.8 million of lower depreciation and amortization, primarily due to accelerated depreciation incurred in the prior year period associated with theFlorence, SC paper machine project and theNorth Charleston, SC reconfiguration project, an estimated$19.9 million of lower economic downtime and other items, including higher segment income related to ourNorth Charleston, SC mill and theFlorence, SC mill following last year's reconfiguration and paper machine projects. The impact of COVID-19 recognition awards to our manufacturing and operations teammates and increased costs for safety, cleaning and other items related to COVID-19 for fiscal 2020 was$33.5 million compared to$20.8 million in fiscal 2021. These items were partially offset by an estimated$553.3 million of net cost inflation, an estimated$69.6 million of lower productivity,$42.6 million of estimated impact from the Ransomware Incident,$27.8 million of Hurricane Michael insurance recoveries net of direct costs and$29.1 million of decreased indirect tax claims inBrazil both in the prior year period,$15.9 million of estimated impact from winter weather in the second quarter of fiscal 2021 and other items. Net cost inflation consisted primarily of higher recovered fiber, wage and other, energy, freight, chemical and virgin fiber costs compared to the prior fiscal year.
Consumer Packaging Segment
Consumer Packaging Shipments
Consumer Packaging shipments are expressed as a tons equivalent, which includes external and intersegment tons shipped from ourConsumer Packaging mills plusConsumer Packaging converting shipments converted from BSF to tons. The shipment data table excludes gypsum paperboard liner tons produced bySeven Hills since it is not consolidated. 43
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First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
Fiscal 2020
Consumer Packaging Shipments - thousands
of tons 922.4 987.7 984.5 976.8 3,871.4
Fiscal 2021 Consumer Packaging Shipments - thousands of tons 940.4 913.0 987.4 998.4 3,839.2
Consumer Packaging Segment -
Segment Return
(In millions, except percentages) Net Sales (1) Income on Sales Fiscal 2020 First Quarter$ 1,536.9 $ 46.2 3.0 % Second Quarter 1,616.3 90.8 5.6 Third Quarter 1,552.6 95.3 6.1 Fourth Quarter 1,627.2 91.4 5.6 Total$ 6,333.0 $ 323.7 5.1 % Fiscal 2021 First Quarter$ 1,595.1 $ 92.5 5.8 % Second Quarter 1,589.9 81.2 5.1 Third Quarter 1,734.7 132.0 7.6 Fourth Quarter 1,783.0 151.6 8.5 Total$ 6,702.7 $ 457.3 6.8 %
(1)
Net sales before intersegment eliminations for theConsumer Packaging segment increased$369.7 million in fiscal 2021 compared to the prior year primarily due to$202.6 million of higher selling price/mix,$78.3 million of higher volumes and$88.5 million of favorable impact of foreign currency. Volumes were negatively impacted by an estimated$40.5 million and$31.7 million due to the Ransomware Incident and winter weather, respectively, in the second quarter of fiscal 2021. Additionally, volumes in fiscal 2020 were negatively impacted by COVID-19, primarily in the last half of the fiscal year.
Segment Income - Consumer Packaging Segment
Segment income attributable to theConsumer Packaging segment in fiscal 2021 increased$133.6 million compared to the prior year. Segment income in the period increased primarily due to$168.3 million of margin impact from higher selling price/mix, an estimated$158.4 million of productivity improvements,$35.6 million of higher volumes excluding the Events, an estimated$31.0 million of lower economic downtime, and other items. The impact of COVID-19 recognition awards to our manufacturing and operations teammates and increased costs for safety, cleaning and other items related to COVID-19 for fiscal 2020 was$25.1 million compared to$15.8 million in fiscal 2021. These items were partially offset by an estimated$225.4 million of net cost inflation, an estimated$14.1 million impact of winter weather, an estimated$13.3 million impact of the Ransomware Incident, and other items. Net cost inflation consisted primarily of higher wage and other, recovered fiber, chemical, energy and freight costs. LIQUIDITY AND CAPITAL RESOURCES
We fund our working capital requirements, capital expenditures, mergers, acquisitions and investments, restructuring activities, dividends and stock repurchases from net cash provided by operating activities, borrowings
44
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under our credit facilities, proceeds from our accounts receivable sales
agreements, proceeds from the sale of property, plant and equipment removed from
service and proceeds received in connection with the issuance of debt and equity
securities. See "Note 13. Debt" of the Notes to Consolidated Financial
Statements for more information regarding our debt. Funding for our domestic
operations in the foreseeable future is expected to come from sources of
liquidity within our domestic operations, including cash and cash equivalents,
and available borrowings under our credit facilities. As such, our foreign cash
and cash equivalents are not expected to be a key source of liquidity to our
domestic operations.
We are a party to enforceable and legally binding contractual obligations
involving commitments to make payments to third parties. These obligations
impact our short-term and long-term liquidity and capital resource
needs. Certain contractual obligations are reflected on the consolidated balance
sheet as of September 30, 2021 , while others are considered future
obligations. Our contractual obligations primarily consist of items such as:
long-term debt, including current portion, lease obligations, purchase
obligations and other obligations. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Contractual
Obligations", for additional information.
Cash and cash equivalents were $290.9 million at September 30, 2021 and $251.1
million at September 30, 2020 . Approximately three-fourths of the cash and cash
equivalents at September 30, 2021 were held outside of the U.S. The proportion
of cash and cash equivalents held outside of the U.S. generally varies from
period to period. At September 30, 2021 , total debt was $8,194.1 million , $168.8
million of which was current. At September 30, 2020 , total debt was $9,430.6
million , $222.9 million of which was current. Included in our total debt at
September 30, 2021 was $192.4 million of non-cash acquisition related step-up.
Total debt was primarily impacted by net cash provided by operating activities
exceeding aggregate capital expenditures, dividends and stock repurchases.
At September 30, 2021 , we had approximately $3.7 billion of availability under
our long-term committed credit facilities and cash and cash equivalents. Our
primary availability is under our revolving credit facilities and receivables
securitization facility, the majority of which matures on November 21, 2024 .
This liquidity may be used to provide for ongoing working capital needs and for
other general corporate purposes, including acquisitions, dividends and stock
repurchases. On September 10, 2021 , we redeemed $400 million aggregate principal
amount of our 4.900% senior notes due March 2022 using cash and cash equivalents
and recorded a loss on extinguishment of debt of $8.6 million .
Certain restrictive covenants govern our maximum availability under our credit
facilities. We test and report our compliance with all of these covenants as
required by these facilities and were in compliance with all of these covenants
at September 30, 2021 .
At
We use a variety of working capital management strategies including supply chain
financing ("SCF") programs, vendor financing and commercial card programs,
monetization facilities where we sell short-term receivables to third-party
financial institutions and a receivables securitization facility. We describe
these programs below and in the Notes to Consolidated Financial Statements.
We engage in certain customer-based SCF programs to accelerate the receipt of
payment for outstanding accounts receivables from certain customers. Certain
costs of these programs are borne by the customer or us. Receivables transferred
under these customer-based supply chain finance programs generally meet the
requirements to be accounted for as sales in accordance with guidance under
Financial Accounting Standards Board's ("FASB") Accounting Standards
Codification ("ASC") 860, "Transfers and Servicing" ("ASC 860") resulting in
derecognition of such receivables from our consolidated balance sheets.
Receivables involved with these customer-based supply chain financing programs
constitute approximately 2% of our annual net sales. In addition, we have
monetization facilities that sell to third-party financial institutions all of
the short-term receivables generated from certain customer trade accounts. For a
discussion of our monetization facilities see "Note 12. Fair Value - A/R Sales
Agreements".
Our working capital management strategy includes working with our suppliers to
revisit terms and conditions, including the extension of payment terms. Our
current payment terms with the majority of our suppliers generally range from
payable upon receipt to 120 days and vary for items such as the availability of
cash discounts. We do
45
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not believe our payment terms will be shortened significantly in the near
future, and we do not expect our net cash provided by operating activities to be
significantly impacted by additional extensions of payment terms. Certain
financial institutions offer voluntary SCF programs that enable our suppliers,
at their sole discretion, to sell their receivables from us to the financial
institutions on a non-recourse basis at a rate that leverages our credit rating
and thus might be more beneficial to our suppliers. We and our suppliers agree
on commercial terms for the goods and services we procure, including prices,
quantities and payment terms, regardless of whether the supplier elects to
participate in SCF programs. The suppliers sell us goods or services and issue
the associated invoices to us based on the agreed-upon contractual terms. The
due dates of the invoices are not extended due to the supplier's participation
in SCF programs. Our suppliers, at their sole discretion if they choose to
participate in a SCF program, determine which invoices, if any, they want to
sell to the financial institutions. No guarantees are provided by us under SCF
programs and we have no economic interest in a supplier's decision to
participate in the SCF program. Therefore, amounts due to our suppliers that
elect to participate in SCF programs are included in the line item accounts
payable and accrued expenses in our consolidated balance sheets and the activity
is reflected in net cash provided by operating activities in our consolidated
statements of cash flows. Based on correspondence with the financial
institutions that are involved with our two primary SCF programs, while the
amount suppliers elect to sell to the financial institutions varies from period
to period, the amount generally averages approximately 15% of our accounts
payable balance.
We also participate in certain vendor financing and commercial card programs to
support our travel and entertainment expenses and smaller vendor purchases.
Amounts outstanding under these programs are classified as debt primarily
because we receive the benefit of extended payment terms and a rebate from the
financial institution that we would not have otherwise received without the
financial institutions' involvement. We also have a receivables securitization
facility that allows for borrowing availability based on the eligible underlying
accounts receivable and compliance with certain covenants. For a discussion of
our receivables securitization facility and the amount outstanding under our
vendor financing and commercial card programs see "Note 13. Debt" of the Notes
to Consolidated Financial Statements for additional information.
Cash Flow Activity
Year Ended September 30,
(In millions) 2021 2020
Net cash provided by operating activities
Net cash provided by operating activities during fiscal 2021 increased$209.2 million from fiscal 2020 primarily due to higher consolidated net income and a$141.0 million net decrease in the use of working capital compared to the prior year. Net cash used for investing activities of$676.0 million in fiscal 2021 consisted primarily of$815.5 million for capital expenditures that were partially offset by$58.5 million of proceeds from the sale of theSummerville, SC sawmill,$44.9 million of proceeds from corporate owned life insurance and$29.5 million of proceeds from the sale of investments. Net cash used for investing activities of$921.5 million in fiscal 2020 consisted primarily of$978.1 million for capital expenditures that were partially offset by$35.0 million of proceeds from the sale of property, plant and equipment and$16.9 million of proceeds from corporate owned life insurance. We invested$815.5 million in capital expenditures in fiscal 2021, which is in the range of the$800 million to$900 million we expected to invest heading into the year. With the completion of certain of our strategic projects in fiscal 2021, including the paper machine at ourFlorence, SC mill and the Tres Barras mill upgrade project, we expect capital expenditures of approximately$1.0 billion in fiscal 2022. At this level of capital investment, we are confident that we will continue to invest in the appropriate safety, environmental and maintenance projects while also making investments to support productivity and growth in our business. However, it is possible that our capital expenditure assumptions may change, project completion dates may change, or we may decide to invest a different amount depending upon opportunities we identify, or changes in market conditions, or to comply with environmental or other regulatory changes. 46 -------------------------------------------------------------------------------- In fiscal 2021, net cash used for financing activities of$1,580.4 million consisted primarily of a net decrease in debt of$1,241.3 million and cash dividends paid to stockholders of$233.8 million and stock repurchases of$122.4 million . In fiscal 2020, net cash used for financing activities of$1,021.1 million consisted primarily of a net decrease in debt of$673.9 million and cash dividends paid to stockholders of$344.5 million . We estimate that we will invest approximately$21 million for capital expenditures during fiscal 2022 in connection with matters relating to environmental compliance. We were obligated to purchase approximately$249 million of fixed assets atSeptember 30, 2021 for various capital projects. See Item 1A. "Risk Factors - Our Capital Expenditures May Not Achieve the Desired Outcomes or May Be Achieved at a Higher Cost than Anticipated". AtSeptember 30, 2021 , theU.S. federal, state and foreign net operating losses and otherU.S. federal and state tax credits available to us aggregated approximately$59 million in future potential reductions ofU.S. federal, state and foreign cash taxes. Based on our current projections, we expect to utilize nearly all of the remainingU.S. federal net operating losses and otherU.S. federal credits during the current fiscal year. Foreign and state net operating losses and credits will be used over a longer period of time. Our cash tax rate is highly dependent on our taxable income, utilization of net operating losses and credits, changes in tax laws or tax rates, capital expenditures and other factors. Barring significant changes in our current assumptions, including changes in tax laws or tax rates, forecasted taxable income, levels of capital expenditures and other items, we expect our fiscal 2022 cash tax rate will be slightly lower than our income tax rate. Our cash tax rate in fiscal 2023 and 2024 will be driven slightly higher than our income tax rate primarily due to the absence of certain nonrecurring tax credits, the expected release of a tax reserve and the reduction in capital investments, including the timing of depreciation on our qualifying capital investments as allowed under the Tax Cuts and Jobs Act. During fiscal 2021 and 2020, we made contributions of$23.2 million and$22.5 million , respectively, to ourU.S. and non-U.S. pension plans. Based on current facts and assumptions, we expect to contribute approximately$25 million to ourU.S. and non-U.S. pension plans in fiscal 2022. Based on current assumptions, including future interest rates, we estimate that minimum pension contributions to ourU.S. and non-U.S. pension plans will be approximately$23 million to$24 million annually in fiscal 2023 through 2026. We have made contributions and expect to continue to make contributions in the coming years to our pension plans in order to ensure that our funding levels remain adequate in light of projected liabilities and to meet the requirements of the Pension Act and other regulations. The net overfunded status of ourU.S. and non-U.S. pension plans atSeptember 30, 2021 was$405.1 million . See "Note 5. Retirement Plans" of the Notes to Consolidated Financial Statements. In the normal course of business, we evaluate our potential exposure to MEPPs, including with respect to potential withdrawal liabilities. In fiscal 2018, we submitted formal notification to withdraw from PIUMPF and Central States, Southeast and Southwest Areas Pension Plan ("Central States"), and recorded estimated withdrawal liabilities for each. We also have liabilities associated with other MEPPs that we, or legacy companies, have withdrawn from in the past. Currently, we pay approximately$14 million a year in withdrawal liabilities, excluding accumulated funding deficiency demands. With respect to certain other MEPPs, in the event we withdraw from one or more of the MEPPs in the future, it is reasonably possible that we may incur withdrawal liabilities in connection with such withdrawals. Our estimate of any such withdrawal liability, both individually and in the aggregate, is not material for the remaining plans in which we participate. AtSeptember 30, 2021 andSeptember 30, 2020 , we had withdrawal liabilities recorded of$247.1 million and$252.0 million , respectively, including liabilities associated with PIUMPF's accumulated funding deficiency demands. See "Note 5. Retirement Plans - Multiemployer Plans" of the Notes to Consolidated Financial Statements for additional information. See also Item 1A. "Risk Factors - We May Incur Withdrawal Liability and/or Increased Funding Requirements in Connection with MEPPs". InOctober 2021 , our board of directors declared a quarterly dividend of$0.25 per share, representing a$1.00 per share annualized dividend or an increase of 25% since ourFebruary 2021 dividend. The recent decisions to increase our dividend reflects the confidence we have in our business and our ability to generate strong cash flows, as well as the progress we have made in reducing debt since we began implementing the WestRock Pandemic Action Plan. In fiscal 2021, we paid an annual dividend of$0.88 per share (we paid a quarterly dividend of$0.24 ,$0.24 ,$0.20 and$0.20 per share inAugust 2021 ,May 2021 ,February 2021 andNovember 2020 , respectively) compared to$1.33 per share in fiscal 2020 (we paid a quarterly dividend of$0.20 ,$0.20 ,$0.465 and$0.465 per share inAugust 2020 ,May 2020 ,February 2020 andNovember 2019 , respectively) and$1.82 per share in fiscal 2019. InMay 2020 , we reduced our dividend given the uncertain market conditions at the time driven by COVID-19. We believe the reduction was prudent given the uncertain market conditions at the time and the reduction has allowed us to allocate additional cash to pay down our outstanding debt. Our short-term goal has 47
-------------------------------------------------------------------------------- been to reduce debt and leverage and return capital to stockholders through a competitive annual dividend. Longer term, our capital allocation priorities include (i) investing in our business, (ii) consistently growing our dividend, (iii) maintaining our investment grade profile, (iv) pursue tuck-in acquisitions that align to our strategy and generate attractive returns, and (v) opportunistic share repurchases. InJuly 2015 , our board of directors authorized a repurchase program of up to 40.0 million shares of our Common Stock, representing approximately 15% of our outstanding Common Stock as ofJuly 1, 2015 . Shares of our Common Stock may be purchased from time to time in open market or privately negotiated transactions. The timing, manner, price and amount of repurchases will be determined by management at its discretion based on factors, including the market price of our Common Stock, general economic and market conditions and applicable legal requirements. The repurchase program may be commenced, suspended or discontinued at any time. In fiscal 2021, we repurchased approximately 2.5 million shares of our Common Stock for an aggregate cost of$125.1 million (a portion of which settled afterSeptember 30, 2021 ). In fiscal 2020, we repurchased no shares of our Common Stock. In fiscal 2019, we repurchased approximately 2.1 million shares of our Common Stock for an aggregate cost of$88.6 million . As ofSeptember 30, 2021 , we had approximately 16.6 million shares of Common Stock available for repurchase under the program. We anticipate that we will be able to fund our capital expenditures, interest payments, dividends and stock repurchases, pension payments, working capital needs, note repurchases, restructuring activities, repayments of current portion of long-term debt and other corporate actions for the foreseeable future from cash generated from operations, borrowings under our credit facilities, proceeds from our accounts receivable sales agreements, proceeds from the issuance of debt or equity securities or other additional long-term debt financing, including new or amended facilities. In addition, we continually review our capital structure and conditions in the private and public debt markets in order to optimize our mix of indebtedness. In connection with these reviews, we may seek to refinance existing indebtedness to extend maturities, reduce borrowing costs or otherwise improve the terms and composition of our indebtedness.
Contractual Obligations
We summarize our enforceable and legally binding contractual obligations atSeptember 30, 2021 , and the effect these obligations are expected to have on our liquidity and cash flow in future periods in the following table. Certain amounts in this table are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties and other factors, including estimated minimum pension plan contributions and estimated benefit payments related to postretirement obligations, supplemental retirement plans and deferred compensation plans. Because these estimates and assumptions are subjective, the enforceable and legally binding obligations we actually pay in future periods may vary from those presented in the table. Payments Due by Period Fiscal 2023 Fiscal 2025 (In millions) Total Fiscal 2022 and 2024 and 2026 Thereafter Long-Term Debt, including current portion, excluding finance lease obligations (1)$ 7,787.9 $ 160.2 $ 1,258.2 $ 1,990.4 $ 4,379.1 Lease obligations (2) 1,108.9 207.0 311.3 184.0 406.6 Purchase obligations and other (3) (4) (5) 1,749.2 1,021.5 221.9 128.8 377.0 Total$ 10,646.0 $ 1,388.7 $ 1,791.4 $ 2,303.2 $ 5,162.7
(1) Includes only principal payments owed on our debt assuming that all of our
long-term debt will be held to maturity, excluding scheduled payments. We
have excluded
financing costs and unamortized bond discounts from the table to arrive at
actual debt obligations. See "Note 13. Debt" of the Notes to Consolidated
Financial Statements for information on the interest rates that apply to our
various debt instruments.
(2) See "Note 14. Leases" of the Notes to Consolidated Financial Statements for
additional information.
(3) Purchase obligations include agreements to purchase goods or services that
are enforceable and legally binding and that specify all significant terms,
including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provision; and the approximate timing of the transaction.
Purchase obligations exclude agreements that are cancelable without penalty.
48
--------------------------------------------------------------------------------(4) We have included future estimated minimum pension plan contributions, MEPP
withdrawal payments with definite payout terms and estimated benefit payments
related to postretirement obligations, supplemental retirement plans and
deferred compensation plans. Our estimates are based on factors, such as
discount rates and expected returns on plan assets. Future contributions are
subject to changes in our underfunded status based on factors such as
investment performance, discount rates, returns on plan assets and changes in
legislation. It is possible that our assumptions may change, actual market
performance may vary or we may decide to contribute different amounts. We
have excluded
deficiency, due to lack of definite payout terms for certain of the
obligations. See "Note 5. Retirement Plans - Multiemployer Plans" of the
Notes to Consolidated Financial Statements for additional information.
(5) We have not included the following items in the table:
• An item labeled "other long-term liabilities" reflected on our consolidated
balance sheet because these liabilities do not have a defined pay-out
schedule.
•
with liabilities, primarily for uncertain tax positions due to the
uncertainty as to the amount and timing of payment, if any.
In addition to the enforceable and legally binding obligations presented in the table above, we have other obligations for goods and services and raw materials entered into in the normal course of business. These contracts, however, are subject to change based on our business decisions.
Expenditures for Environmental Compliance
See Item 1. "Business - Governmental Regulation - Environmental" and "Business - Governmental Regulation - Climate Change" for a discussion of our expenditures for environmental compliance.
Guarantor Summarized Financial Information
Aggregate Principal
Amount Stated
(in millions) Coupon Rate Maturity Date Referred to as:
$ 500 3.000 % September 2024 the 2024 Notes
$ 600 3.750 % March 2025 the 2025 Notes
$ 750 4.650 % March 2026 the 2026 Notes
$ 500 3.375 % September 2027 the 2027 Notes
$ 600 4.000 % March 2028 the 2028 Notes
$ 500 3.900 % June 2028 the June 2028 Notes
$ 750 4.900 % March 2029 the 2029 Notes
$ 500 4.200 % June 2032 the 2032 Notes
$ 600 3.000 % June 2033 the June 2033 Notes
Upon issuance, the Notes maturing in 2024, 2025, 2027 and March 2028 were fully
and unconditionally guaranteed by the Company, WRKCo Inc. and WestRock RKT, LLC
("RKT") and WestRock MWV, LLC ("MWV", and together with RKT, the "Guarantor
Subsidiaries"). On November 2, 2018 , in connection with the consummation of the
KapStone Acquisition, Whiskey Holdco, Inc. became the direct parent of the
Issuer, changed its name to WestRock Company ("Parent") and fully and
unconditionally guaranteed these Notes. The remaining Notes were issued by the
Issuer subsequent to the consummation of the KapStone Acquisition and were fully
and unconditionally guaranteed at the time of issuance by the Parent and the
Guarantor Subsidiaries. Accordingly, each series of the Notes is fully and
unconditionally guaranteed on a joint and several basis by the Parent and the
Guarantor Subsidiaries (together, the "Guarantors"). Collectively, the Issuer
and the Guarantors are the "Obligor Group ".
49
--------------------------------------------------------------------------------
Each series of Notes and the related guarantees constitute unsecured
unsubordinated obligations of the applicable obligor. Each series of Notes and
the related guarantees ranks equally in right of payment with all of the
applicable obligor's existing and future unsecured and unsubordinated debt;
ranks senior in right of payment to all of the applicable obligor's existing and
future subordinated debt; is effectively junior to the applicable obligor's
existing and future secured debt to the extent of the value of the assets
securing such debt; and is structurally subordinated to all of the existing and
future liabilities of each subsidiary of the applicable obligor (that is not
itself an obligor) that does not guarantee such Notes.
The indentures governing each series of Notes contain covenants that, among
other things, limit our ability and the ability of our subsidiaries to grant
liens on our assets and enter into sale and leaseback transactions. In addition,
the indentures limit, as applicable, the ability of the Issuer and Guarantors to
merge, consolidate or sell, convey, transfer or lease our or their properties
and assets substantially as an entirety. The covenants contained in the
indentures do not restrict the Company's ability to pay dividends or
distributions to stockholders.
The guarantee obligations of the Guarantors under the Notes are also subject to
certain limitations and terms similar to those applicable to other guarantees of
similar instruments, including that (i) the guarantees are subject to fraudulent
transfer and conveyance laws and (ii) the obligations of each Guarantor under
its guarantee of each series of Notes will be limited to the maximum amount as
will result in the obligations of such Guarantor under its guarantee of such
Notes not to be deemed to constitute a fraudulent conveyance or fraudulent
transfer under federal or state law.
Under each indenture governing one or more series of the Notes, a Guarantor
Subsidiary will be automatically and unconditionally released from its guarantee
upon consummation of any transaction permitted under the applicable indenture
resulting in such Guarantor Subsidiary ceasing to be an obligor (either as
issuer or guarantor). Under the indentures, the guarantee of the Parent will be
automatically released and will terminate upon the merger of the Parent with or
into the Issuer or another guarantor, the consolidation of the Parent with the
Issuer or another guarantor or the transfer of all or substantially all of the
assets of the Parent to the Issuer or a guarantor. In addition, if the Issuer
exercises its defeasance or covenant defeasance option with respect to the Notes
of a series in accordance with the terms of the applicable indenture, each
guarantor will be automatically and unconditionally released from its guarantee
of the Notes of such series and all its obligations under the applicable
indenture.
The Issuer and each Guarantor is a holding company that conducts substantially
all of its business through subsidiaries. Accordingly, repayment of the Issuer's
indebtedness, including the Notes, is dependent on the generation of cash flow
by the Issuer's and each Guarantor's subsidiaries, as applicable, and their
ability to make such cash available to the Issuer and the Guarantors, as
applicable, by dividend, debt repayment or otherwise. The Issuer's and the
Guarantors' subsidiaries may not be able to, or be permitted to, make
distributions to enable them to make payments in respect of their obligations,
including with respect to the Notes in the case of the Issuer and the guarantees
in the case of the Guarantors. Each of the Issuer's and the Guarantors'
subsidiaries is a distinct legal entity and, under certain circumstances, legal
and contractual restrictions may limit the Issuer's and the Guarantors' ability
to obtain cash from their subsidiaries. In the event that the Issuer and the
Guarantors do not receive distributions from their subsidiaries, the Issuer and
the Guarantors may be unable to make required principal and interest payments on
their obligations, including with respect to the Notes and the guarantees.
Pursuant to amended Rule 3-10 of Regulation S-X, the summarized financial
information below is presented for the Obligor Group on a combined basis after
the elimination of intercompany balances and transactions among the Obligor
Group and equity in earnings from and investments in the non-Guarantor
Subsidiaries. The summarized financial information below should be read in
conjunction with the Company's consolidated financial statements contained
herein, as the summarized financial information may not necessarily be
indicative of results of operations or financial position had the subsidiaries
operated as independent entities.
50
--------------------------------------------------------------------------------SUMMARIZED STATEMENT OF OPERATIONS
Year Ended
September 30,
(In millions) 2021
Net sales to unrelated parties $ 1,550.4
Net sales to non-Guarantor Subsidiaries $ 1,049.5
Gross profit $ 631.5
Interest expense, net with non-Guarantor Subsidiaries $ (66.8 )
Net loss and net loss attributable to the
SUMMARIZED BALANCE SHEETS
September 30,
(In millions) 2021 2020
ASSETS
Total current assets $ 310.4 $ 334.8 Noncurrent amounts due from non-
Guarantor Subsidiaries$ 306.1 $ 310.0 Other noncurrent assets (1) 1,980.5 2,096.7 Total noncurrent assets$ 2,286.6 $ 2,406.7 LIABILITIES Current amounts due to non- Guarantor Subsidiaries$ 2,281.4 $ 1,520.1 Other current liabilities 130.4 237.9 Total current liabilities$ 2,411.8 $ 1,758.0
Noncurrent amounts due to non-
Guarantor Subsidiaries$ 3,437.4 $ 2,821.3
Other noncurrent liabilities 7,296.6 8,633.4
Total noncurrent liabilities
(1) Other noncurrent assets includes aggregate goodwill and
intangibles, net of $1,699.2 million and $1,797.2 million as
of September 30, 2021 and September 30, 2020 , respectively.
NON-GAAP FINANCIAL MEASURES
We report our financial results in accordance with generally accepted accounting
principles in the U.S. ("GAAP"). However, management believes certain non-GAAP
financial measures provide our board of directors, investors, potential
investors, securities analysts and others with additional meaningful financial
information that should be considered when assessing our ongoing performance.
Management also uses these non-GAAP financial measures in making financial,
operating and planning decisions, and in evaluating our performance. 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 presented by other companies.
We use the non-GAAP financial measures "Adjusted Net Income" and "Adjusted
Earnings Per Diluted Share". Management believes these measures provide our
board of directors, investors, potential investors, securities analysts and
others with useful information to evaluate our performance because they 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
51
--------------------------------------------------------------------------------Earnings Per Diluted Share are Net income (loss) attributable to common stockholders and Earnings (loss) per diluted share, respectively.
Set forth below is a reconciliation of the non-GAAP financial measure Adjusted Earnings Per Diluted Share to Earnings (loss) per diluted share, the most directly comparable GAAP measure (in dollars per share) for the periods indicated.
Years Ended September 30,
2021 2020
Earnings (loss) per diluted share$ 3.13 $ (2.67 ) Goodwill impairment -
5.07
Restructuring and other items 0.09 0.33 COVID-19 employee payments 0.06 0.09 Grupo Gondi option 0.06 - Ransomware recovery costs, net of insurance proceeds 0.05 - Accelerated compensation - former CEO 0.04 - Loss on extinguishment of debt 0.03 - Losses at closed plants, transition and start-up costs 0.01
0.07
reconfiguration costs -
0.13
Accelerated depreciation on major capital projects and
certain plant closures -
0.05
MEPP liability adjustment due to interest rates - 0.05 Gain on sale of investment (0.05 ) - Gain on sale of sawmill (0.03 ) - Brazil indirect tax claim - (0.14 ) Litigation recovery - (0.07 ) Adjustment related to Tax Cuts and Jobs Act - (0.06 ) Direct recoveries from Hurricane Michael, net of related costs - (0.05 ) Gain on sale of certain closed facilities - (0.05 ) Other -
0.02
Adjustment to reflect adjusted earnings on a fully diluted basis
- (0.02 )
Adjusted Earnings Per Diluted Share $ 3.39 $ 2.75
52
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The GAAP results in the tables below for Pre-Tax, Tax and Net of Tax are
equivalent to the line items "Income (loss) before income taxes", "Income tax
expense" and "Consolidated net income (loss)", respectively, as reported on the
Consolidated Statements of Operations. Set forth below are reconciliations of
Adjusted Net Income to the most directly comparable GAAP measure, Net income
(loss) attributable to common stockholders (represented in the table below as
the GAAP Results for Consolidated net income (loss) (i.e., Net of Tax) less net
income attributable to Noncontrolling interests), for the periods indicated (in
millions):
Year ended September 30, 2021 Year ended September 30, 2020
Pre-Tax Tax Net of Tax Pre-Tax Tax Net of Tax
As reported $ 1,085.9 $ (243.4 ) $
842.5
- - - 1,333.2 (18.9 ) 1,314.3
Restructuring and other items 31.5 (7.7 ) 23.8 112.7 (28.2 ) 84.5
COVID-19 employee payments 22.0 (5.4 ) 16.6 31.6 (7.7 ) 23.9
Grupo Gondi option 22.5 (6.7 ) 15.8 - - -
Ransomware recovery costs, net of
insurance
proceeds 18.9 (4.7 ) 14.2 - - -
Accelerated compensation - former
CEO 11.7 - 11.7 - - -
Loss on extinguishment of debt 9.7 (2.4 ) 7.3 1.5 (0.4 ) 1.1
Losses at closed plants,
transition and
start-up costs 3.0 (0.6 ) 2.4 21.9 (5.4 ) 16.5
Accelerated depreciation on major
capital
projects and certain plant
closures 0.7 (0.2 ) 0.5 17.3 (4.2 ) 13.1
North Charleston and Florence
transition and
reconfiguration costs - - - 43.4 (10.6 ) 32.8
Multiemployer pension withdrawal
expense - - - 0.9 (0.2 ) 0.7
Gain on sale of investment (16.0 ) 2.4 (13.6 ) - - -
Gain on sale of sawmill (16.5 ) 8.3 (8.2 ) - - -
Gain on sale of certain closed
facilities (0.9 ) 0.2 (0.7 ) (15.6 ) 3.8 (11.8 )
Brazil indirect tax claim (0.9 ) 0.3 (0.6 ) (51.9 ) 16.0 (35.9 )
MEPP liability adjustment due to
interest rates (0.4 ) 0.1 (0.3 ) 15.0 (3.7 ) 11.3
Litigation recovery - - - (23.9 ) 5.9 (18.0 )
Adjustment related to Tax Cuts
and Jobs Act - - - - (16.4 ) (16.4 )
Direct recoveries from Hurricane
Michael, net
of related costs - - - (16.1 ) 4.0 (12.1 )
Land and Development operating
results - - - (1.3 ) 0.3 (1.0 )
Other - - - 6.0 (1.5 ) 4.5
Adjusted Results $ 1,171.2 $ (259.8 ) $ 911.4 $ 952.1 $ (230.7 ) $ 721.4
Noncontrolling interests (4.2 ) (4.8 )
Adjusted Net Income $ 907.2 $ 716.6 We discuss certain of these charges in more detail in "Note 4. Restructuring and Other Costs", "Note 7. Segment Information" and "Note 17. Commitments and Contingencies - Indirect Tax Claim".
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING ESTIMATES
We have prepared our accompanying consolidated financial statements in conformity with GAAP, which requires management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. Certain significant accounting policies are described in "Note 1. Description of Business and Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements.
These critical accounting policies are both important to the portrayal of our
financial condition and results of operations and require some of management's
most subjective and complex judgments. The accounting for these
53
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matters involves the making of estimates based on current facts, circumstances
and assumptions that, in management's judgment, could change in a manner that
would materially affect management's future estimates with respect to such
matters and, accordingly, could cause our future reported financial condition
and results of operations to differ materially from those that we are currently
reporting based on management's current estimates.
We review the carrying value of our goodwill annually at the beginning of the fourth quarter of each fiscal year, or more often if events or changes in circumstances indicate that the carrying amount may exceed fair value as set forth in ASC 350, "Intangibles -Goodwill and Other." We test goodwill for impairment at the reporting unit level, which is an operating segment or one level below an operating segment, referred to as a component. ASC 350 allows an optional qualitative assessment, prior to a quantitative assessment test, to determine whether it is "more likely than not" that the fair value of a reporting unit exceeds its carrying amount. We generally do not attempt a qualitative assessment and move directly to the quantitative test. As part of the quantitative test, we utilize the present value of expected cash flows or, as appropriate, a combination of the present value of expected cash flows and the guideline public company method to determine the estimated fair value of our reporting units. This present value model requires management to estimate future cash flows, the timing of these cash flows, and a discount rate (based on a weighted average cost of capital), which represents the time value of money and the inherent risk and uncertainty of the future cash flows. The assumptions we use to estimate future cash flows are consistent with the assumptions that the reporting units use for internal planning purposes, which we believe would be generally consistent with that of a market participant. If we determine that the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If we determine that the carrying amount of the reporting unit exceeds its estimated fair value, we measure the goodwill impairment charge based on the excess of a reporting unit's carrying amount over its fair value as required under ASU 2017-04, "Simplifying the Test for Goodwill Impairment", which we early adopted starting with our fiscal 2020 annual goodwill impairment test onJuly 1, 2020 . We describe our accounting policy for goodwill further in "Note 1. Description of Business and Summary of Significant Accounting Policies -Goodwill and Long-Lived Assets" of the Notes to Consolidated Financial Statements. During the fourth quarter of fiscal 2021, we completed our annual goodwill impairment testing. We considered factors such as, but not limited to, our expectations for the short-term and long-term impacts of COVID-19, macroeconomic conditions, industry and market considerations, and financial performance, including planned revenue, earnings and capital investments of each reporting unit. The discount rate used for each reporting unit ranged from 8.0% to 12.0%. We used perpetual growth rates in the reporting units ranging from 0.5% to 1.0%. All reporting units that have goodwill were noted to have a fair value that exceeded their carrying values by more than 20% each. If we had concluded that it was appropriate to increase the discount rate we used by 100 basis points to estimate the fair value of each reporting unit, the fair value of each of our reporting units would have continued to exceed its carrying value. AtSeptember 30, 2021 , the North American Corrugated,Consumer Packaging ,Brazil Corrugated andVictory Packaging reporting units had$3,518.5 million ,$2,295.9 million ,$103.7 million and$41.1 million of goodwill, respectively. Our long-lived assets, including intangible assets remain recoverable. Subsequent to our annual test, we monitored industry economic trends until the end of our fiscal year and determined no additional testing for goodwill impairment was warranted. We have not made any material changes to our impairment loss assessment methodology during the past three fiscal years. Currently, we do not believe there is a reasonable likelihood that there will be a material change in future assumptions or estimates we use to calculate impairment losses. However, we cannot predict certain market factors with certainty, including the impact of COVID-19, and have certain risks inherent to our operations as described in Item 1A. "Risk Factors". If actual results are not consistent with our assumptions and estimates, we may be exposed to additional impairment losses that could be material. See Item 1A. "Risk Factors - We Have a Significant Amount ofGoodwill and Other Intangible Assets and a Write-Down Would Adversely Impact Our Operating Results and Shareholders' Equity". Long-Lived Assets
We follow the provisions included in ASC 360, "Property, Plant, and Equipment" in determining whether the carrying value of any of our long-lived assets, including right-of-use assets ("ROU") and amortizing intangibles
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other than goodwill, is impaired. We review long-lived assets for impairment
when events or changes in circumstances indicate that the carrying amount of the
long-lived asset might not be recoverable. If we determine that indicators of
impairment are present, we determine whether the estimated undiscounted cash
flows for the potentially impaired assets are less than the carrying value. This
requires management to estimate future cash flows through operations over the
remaining useful life of the asset and its ultimate disposition. The assumptions
we use to estimate future cash flows are consistent with the assumptions we use
for internal planning purposes, updated to reflect current expectations. If our
estimated undiscounted cash flows do not exceed the carrying value, we estimate
the fair value of the asset and record an impairment charge if the carrying
value is greater than the fair value of the asset. We estimate fair value using
discounted cash flows, observable prices for similar assets, or other valuation
techniques.
Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance. Future events could cause us to conclude that impairment indicators exist and that assets associated with a particular operation are impaired. Evaluating impairment also requires us to estimate future operating results and cash flows, which also require judgment by management.
Accounting for Income Taxes
Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits, reflect management's best assessment of estimated current and future taxes to be paid. Significant judgments and estimates are required in determining the consolidated income tax expense. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, recent financial operations and their associated valuation allowances, if any. We use significant judgment in (i) determining whether a tax position, based solely on its technical merits, is "more likely than not" to be sustained upon examination and (ii) measuring the tax benefit as the largest amount of benefit that is "more likely than not" to be realized upon ultimate settlement. We do not record any benefit for the tax positions where we do not meet the "more likely than not" initial recognition threshold. Income tax positions must meet a "more likely than not" recognition threshold at the effective date to be recognized. We generally recognize interest and penalties related to unrecognized tax benefits in income tax expense in the Consolidated Statements of Operations. Resolution of the uncertain tax positions could have a material adverse effect on our cash flows or materially benefit our results of operations in future periods depending upon their ultimate resolution. A 1% change in our effective tax rate would increase or decrease tax expense by approximately$10.9 million for fiscal 2021. A 1% change in our effective tax rate used to compute deferred tax liabilities and assets, as recorded on theSeptember 30, 2021 consolidated balance sheet, would increase or decrease tax expense by approximately$124 million for fiscal 2021.
Pension
The funded status of our qualified and non-qualifiedU.S. and non-U.S. pension plans increased$353.4 million in fiscal 2021. OurU.S. qualified and non-qualified pension plans were over funded by$387.9 million as ofSeptember 30, 2021 . Our non-U.S. pension plans were over funded by$17.2 million as ofSeptember 30, 2021 . OurU.S. pension plan benefit obligations were negatively impacted in fiscal 2021 primarily by a 1-basis point decrease in the discount rate compared to the prior measurement date. The non-U.S. pension plan obligations were positively impacted in fiscal 2021 by a 47-basis point increase in the discount rate compared to the prior measurement date. The determination of pension obligations and pension expense requires various assumptions that can significantly affect liability and expense amounts, such as the expected long-term rate of return on plan assets, discount rates, projected future compensation increases and mortality rates for each of our plans. These assumptions are determined annually in conjunction with our actuary. The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions that, in management's judgment, could change in a manner that would materially affect management's future estimates with respect to such matters and, accordingly, could cause our future reported financial condition and results of operations to differ materially from those that we are currently reporting based on management's current estimates. 55 -------------------------------------------------------------------------------- A 25-basis point change in the discount rate, compensation level, expected long-term rate of return on plan assets and interest crediting rate, factoring in our corridor (as defined herein) as appropriate, would have had the following effect on fiscal 2021 pension expense (amounts in the table in parentheses reflect additional income, in millions): Pension Plans 25 Basis 25 Basis Point Point Increase Decrease Discount rate$ (14.5 ) $ 15.2 Compensation level$ 0.3 $ (0.3 ) Expected long-term rate of return on plan assets$ (16.7 ) $ 16.7 Interest crediting rate$ 0.4 $ (0.4 ) New Accounting Standards
See "Note 1. Description of Business and Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective expected dates of adoption and expected effects on our results of operations and financial condition.
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