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, 2021 , 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 2021 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 sustainable fiber-based paper and packaging solutions. We partner with our customers to provide 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 .
Presentation
EffectiveOctober 1, 2021 , we reorganized our segment reporting to four reportable segments:Corrugated Packaging ,Consumer Packaging , Paper and Distribution. Also, effectiveOctober 1, 2021 , our measure of segment profitability for each reportable segment is Adjusted EBITDA in accordance with ASC 280, "Segment Reporting" because it is the measure used by our CODM to make decisions regarding allocation of resources and to assess segment performance. Certain items are not allocated to our operating segments and, thus, the information that our CODM uses to make operating decisions and assess performance does not reflect such amounts. Adjusted EBITDA is defined as pretax earnings of a reportable segment before depreciation, depletion and amortization, and excludes the following items our CODM does not consider part of our segment performance: gain on sale of certain closed facilities, multiemployer pension withdrawal income, restructuring and other costs, non-allocated expenses, interest expense, net, loss on extinguishment of debt, other income (expense), net, and other adjustments. Management believes excluding these items is useful in the evaluation of operating performance from period to period because they are not representative of our ongoing operations or are items our CODM does not consider part of our reportable segments. We have recast prior periods presented to conform with the new segment structure. These changes did not impact our consolidated financial statements. In connection with the reorganization of our reportable segments, we changed the amount of previously non-allocated expenses. See "Note 6. Segment Information" for additional information. EXECUTIVE SUMMARY Net sales of$5,382.1 million for the second quarter of fiscal 2022 increased$944.3 million , or 21.3%, compared to the second quarter of fiscal 2021. This increase was primarily due to the impact of higher selling price/mix and higher volumes. In the second quarter of fiscal 2021, we lost an estimated$189.1 million of net sales associated with the ransomware incident and winter weather ("the Events"). See the discussion under "Ransomware Incident" below for more information on that event. In the second quarter of fiscal 2022, we recorded pre-tax restructuring and other costs of$363.4 million , or$1.04 per diluted share, primarily associated with our decision to permanently cease operations at ourPanama City, FL mill byJune 6, 2022 . We expect to record future restructuring charges, primarily associated with carrying costs and contract terminations as operations cease. The mill produces containerboard, primarily heavyweight kraft, and fluff pulp, with a combined annual capacity of 645,000 tons of which approximately two-thirds is shipped to external customers. Select grades of containerboard currently produced at the mill are expected to be manufactured at other WestRock facilities. We are committed to improving our return on invested capital as well as maximizing the performance of our assets. ThePanama City mill was expected to require significant capital investment to maintain and improve going forward, and the production of fluff pulp is not a priority in our strategy to focus on higher value markets. By closing this mill, significant capital that would have been required to keep the mill competitive in the future is expected to be deployed to improve other key assets. Net income attributable to common stockholders of$39.9 million for the second quarter of fiscal 2022 decreased$72.6 million , or 64.5%, compared to the second quarter of fiscal 2021. Net income attributable to common 31 -------------------------------------------------------------------------------- stockholders in the prior year period was negatively impacted by$80.1 million pre-tax for lost sales and operational disruption from the Events as well as$19.8 million pre-tax of ransomware recovery costs, primarily professional fees. Consolidated Adjusted EBITDA of$853.9 million for the second quarter of fiscal 2022 increased$213.4 million , or 33.3%, compared to$640.5 million in the second quarter of fiscal 2021. Consolidated Adjusted EBITDA in the prior year period was negatively impacted by$80.1 million pre-tax for lost sales and operational disruption from the Events as the$19.8 million of pre-tax ransomware recovery costs did not impact Consolidated Adjusted EBITDA. Earnings per diluted share were$0.15 and$0.42 in the three months endedMarch 31, 2022 and 2021, respectively. Adjusted Earnings Per Diluted Share were$1.17 and$0.54 in the three months endedMarch 31, 2022 and 2021, respectively. The lost sales and operational disruption from the Events had a negative impact of$80.1 million pre-tax, or$0.23 per share, on both earnings per diluted share and Adjusted Earnings per Diluted Share in the second quarter of fiscal 2021. See the discussion and tables under "Non-GAAP Financial Measures" below with respect to Consolidated Adjusted EBITDA and Adjusted Earnings Per Diluted Share. Net cash provided by operating activities in the six months endedMarch 31, 2022 andMarch 31, 2021 was$642.7 million and$851.6 million , respectively. The decline was primarily due to$345.6 million of greater working capital usage compared to the prior year period. The greater working capital usage in the first half of fiscal 2022 was primarily due to actions taken in the prior year to preserve cash due to the high uncertainty during the COVID pandemic, such as the payment of certain bonuses and 401(k) match in cash that were paid in stock in the prior year period, and the payment of certain deferred payroll taxes that relate to relief offered under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") in the current year period. During the six months endedMarch 31, 2022 , we invested$354.1 million in capital expenditures and returned$442.3 million in capital to stockholders, specifically$310.2 million in stock repurchases and$132.1 million in dividend payments. During the six months endedMarch 31, 2022 , debt increased$179.9 million , primarily as capital expenditures and capital returned to stockholders exceeded net cash provided by operating activities. In the third quarter of fiscal 2022, we expect higher inflation costs sequentially driven by higher energy, freight and labor costs with roughly flat fiber costs sequentially. While we are past the highest mill maintenance outage quarters, we have approximately 54,000 tons of scheduled maintenance downtime across our system in the third quarter of fiscal 2022, roughly half that of the third quarter of fiscal 2021. We expect the continued flow through of previously published price increases, and that those increases will more than offset inflation. As a result of these, and other factors, we expect higher sequential earnings in the third quarter of fiscal 2022.
A detailed review of our performance appears below under "Results of Operations".
COVID Pandemic
The global impact of the COVID pandemic continues to evolve and our first priority has been and continues to be the health and safety of our teammates. We have taken, and continue to take, actions to protect the health and safety of our teammates during COVID and we have incurred and continue to incur costs for safety, cleaning and other items related to COVID. The pandemic has affected our operational and financial performance to varying degrees and the extent of its effect on our operational and financial performance will continue to depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration, scope and severity of the pandemic (including due to new or continuing variants such as Omicron and Delta), the actions taken to contain or mitigate its impact (including the distribution and effectiveness of vaccines and vaccine boosters), and the direct and indirect economic effects of the pandemic and related containment measures and government responses, among others. Our net sales have been negatively impacted by COVID, to varying degrees, primarily in the last half of fiscal 2020, and we have experienced and are currently experiencing higher supply chain costs and labor shortages, in part due to the impacts of COVID. Productivity, primarily in ourCorrugated Packaging segment, has been negatively impacted by COVID-related absenteeism. The Company's assessment of the future magnitude and duration of COVID, as well as other factors, may change and could result in changes in our accounting estimates and assumptions used to prepare our financial statements in conformity with GAAP. In the first quarter of fiscal 2021 we recorded$22.0 million of relief payments to employees. 32 --------------------------------------------------------------------------------
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. 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 of fiscal 2021 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. As previously disclosed, our mill system production was approximately 115,000 tons lower than planned for the quarter endedMarch 31, 2021 as a result of this incident. 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 SG&A excluding intangible amortization and approximately$5 million as a reduction of cost of goods sold. In the first and second quarters of fiscal 2022, we received additional business interruption recoveries of$5 million and$5 million , respectively, related to the ransomware incident, which we recorded as a reduction of Cost of goods sold and presented in net cash provided by operating activities on our condensed consolidated statements of cash flows. While we expect to recover substantially all of the remaining ransomware losses from cyber and business interruption insurance from various carriers in future periods, the recovery process proceeds from carrier to carrier up the coverage layers after the preceding layer is resolved, which lends itself to a lengthy process. Additionally, discussions and/or disputes over the extent of insurance coverage for claims are not uncommon and generally take time to be resolved.
See "Note 1. Description of Business and Summary of Significant Accounting Policies - Ransomware Incident" of the Notes to Consolidated Financial Statements section in the Fiscal 2021 Form 10-K for additional information.
33
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RESULTS OF OPERATIONS
The following table summarizes our consolidated results for the three and six
months ended
Three Months Ended Six Months Ended
March 31, March 31,
2022 2021 2022 2021
Net sales $ 5,382.1 $ 4,437.8 $ 10,334.3 $ 8,839.3
Cost of goods sold 4,378.4 3,688.2 8,534.0 7,336.8
Gross profit 1,003.7 749.6 1,800.3 1,502.5
Selling, general and administrative,
excluding
intangible amortization 493.1 458.4 946.0 876.2
Selling, general and administrative
intangible
amortization 88.1 88.6 176.1 180.5
Loss (gain) on disposal of assets 2.5 0.3 (11.4 ) 2.8
Multiemployer pension withdrawal
income - - (3.3 ) -
Restructuring and other costs 363.4 5.2 365.7 12.9
Operating profit 56.6 197.1 327.2 430.1
Interest expense, net (72.5 ) (83.5 ) (159.2 ) (177.3 )
Loss on extinguishment of debt (8.2 ) - (8.2 ) (1.1 )
Pension and other postretirement
non-service income 39.7 35.0 79.6 69.9
Other income (expense), net 6.3 (13.4 ) 6.5 7.4
Equity in income of unconsolidated
entities 20.6 9.7 39.0 18.7
Income before income taxes 42.5 144.9 284.9 347.7
Income tax expense (1.8 ) (30.5 ) (60.4 ) (80.8 )
Consolidated net income 40.7 114.4 224.5 266.9
Less: Net income attributable to
noncontrolling
interests (0.8 ) (1.9 ) (2.3 ) (2.4 )
Net income attributable to common
stockholders $ 39.9 $ 112.5 $ 222.2 $ 264.5 (In millions, except First Second Six Months Third
Fourth Fiscal
percentages) Quarter Quarter Ended 3/31 Quarter Quarter Year
Fiscal 2021 $ 4,401.5 $ 4,437.8 $ 8,839.3 $ 4,816.3 $ 5,090.5 $ 18,746.1
Fiscal 2022 $ 4,952.2 $ 5,382.1 $ 10,334.3
% Change 12.5 % 21.3 % 16.9 %
Net sales in the second quarter of fiscal 2022 increased $944.3 million compared
to the second quarter of fiscal 2021. This increase was primarily due to the
impact of higher selling price/mix and higher volumes. In the second quarter of
fiscal 2021, we lost an estimated $189.1 million of net sales associated with
the Events.
Net sales in the six months ended March 31, 2022 increased $1,495.0 million
compared to the prior year period. This increase was primarily due to the impact
of higher selling price/mix and higher volumes. In the first six months of
fiscal 2021, we lost an estimated $189.1 million of net sales associated with
the Events, all in the second quarter.
The change in net sales by reportable segment is outlined below for each
reportable segment.
Cost of Goods Sold
(In millions,
except First Second Six Months Third Fourth Fiscal
percentages) Quarter Quarter Ended 3/31 Quarter Quarter Year
Fiscal 2021 $ 3,648.6 $ 3,688.2 $ 7,336.8 $ 3,886.4 $ 4,092.6 $ 15,315.8
(% of Net Sales) 82.9 % 83.1 % 83.0 % 80.7 % 80.4 % 81.7 %
Fiscal 2022$ 4,155.6 $ 4,378.4 $ 8,534.0 (% of Net Sales) 83.9 % 81.4 % 82.6 % 34
-------------------------------------------------------------------------------- The$690.2 million increase in cost of goods sold in the second quarter of fiscal 2022 compared to the prior year quarter was primarily due to increased cost inflation, higher volumes and a reduction in productivity and other operational items, that were partially offset by the prior year period negative impact of the Events. Cost inflation consisted primarily of higher recycled fiber, wage and benefit costs, freight, energy, virgin fiber and chemical costs. The$1,197.2 million increase in cost of goods sold in the six months endedMarch 31, 2022 compared to the prior year period was primarily due increased cost inflation, higher volumes and a reduction in productivity and other operational items, and increased planned downtime including maintenance outages, that were partially offset by the prior year period negative impact of the Events. Cost inflation consisted primarily of higher recycled fiber, energy, wage and benefit costs, freight, virgin fiber and chemical costs. In the first six months of fiscal 2021, we recorded$19.7 million of one-time recognition awards to our teammates who work in manufacturing and operations.
We discuss our operations in greater detail below for each reportable segment, as applicable.
Selling, General and Administrative Excluding Intangible Amortization
(In millions, except First Second Six Months Third
Fourth Fiscal
percentages) Quarter Quarter Ended 3/31 Quarter Quarter Year
Fiscal 2021 $ 417.8 $ 458.4 $ 876.2 $ 450.9 $ 432.2 $ 1,759.3
(% of Net Sales) 9.5 % 10.3 % 9.9 % 9.4 % 8.5 % 9.4 %
Fiscal 2022 $ 452.9 $ 493.1 $ 946.0
(% of Net Sales) 9.1 % 9.2 % 9.2 %
Selling, general and administrative expenses ("SG&A") excluding intangible
amortization increased $34.7 million in the second quarter of fiscal 2022
compared to the prior year quarter. The increase was primarily due to $26.7
million of increased compensation and benefits, that would have been higher had
the prior year period not included a $9.6 million acceleration of stock-based
compensation in connection with the departure of our former Chief Executive
Officer. In addition, we incurred $6.0 million of increased software/computer
expenses. These items were partially offset by $11.3 million of decreased
consulting and professional fees primarily due to higher costs in the second
quarter of fiscal 2021 associated with the ransomware incident.
SG&A excluding intangible amortization increased $69.8 million in the six months
ended March 31, 2022 compared to the prior year period. The increase was
primarily due to $25.6 million of increased compensation and benefits, that
would have been higher had the prior year period not included a $9.6 million
acceleration of stock-based compensation in connection with the departure of our
former Chief Executive Officer. In addition, we incurred $13.2 million of
increased software/computer expenses, $9.9 million of increased bad debt expense
and $8.0 million of increased travel and entertainment costs. The increased
travel and entertainment costs are still well below pre-pandemic levels.
Selling, General and Administrative Intangible Amortization
SG&A intangible amortization was$88.1 million and$88.6 million in the second quarter of fiscal 2022 and 2021, respectively. SG&A intangible amortization was$176.1 million and$180.5 million in the six months endedMarch 31, 2022 and 2021, respectively. The decline was primarily attributable to certain intangibles from prior acquisitions reaching full amortization.
Loss (Gain) on Disposal of Assets
In the three and six months endedMarch 31, 2022 , we recorded a loss on disposal of assets of$2.5 million and a gain on disposal of assets of$11.4 million . The gain was primarily due to the sale of a previously closed facility in the first quarter of fiscal 2022. In the three and six months endedMarch 31, 2021 , we recorded a loss on disposal of assets of$0.3 million and$2.8 , respectively.
Restructuring and Other Costs
We recorded aggregate pre-tax restructuring and other costs of$363.4 million and$5.2 million in the second quarter of fiscal 2022 and 2021, respectively, and$365.7 million and$12.9 million in the six months ended March 35 -------------------------------------------------------------------------------- 31, 2022 and 2021, respectively. The charges in the second quarter of fiscal 2022 were primarily associated with our decision to permanently cease operations at ourPanama City, FL mill byJune 6, 2022 . These amounts are not comparable since the timing and scope of the individual actions associated with a given 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 3. Restructuring and Other Costs" of the Notes to Condensed Consolidated Financial Statements for additional information.
Interest Expense, net
Interest expense, net for the second quarter of fiscal 2022 was$72.5 million compared to$83.5 million for the prior year quarter. The decrease was primarily due to a$14.6 reduction in interest expense associated with the remeasurement of our multiemployer pension liabilities for the change in interest rates in the second quarter of fiscal 2022 compared to a similar$8.1 million reduction in the second quarter of fiscal 2021 and lower debt levels compared to the prior year period were partially offset by higher interest rates on debt in the current year period. Interest expense, net for the six months endedMarch 31, 2022 was$159.2 million compared to$177.3 million for the prior year period. The decrease is primarily due to lower debt levels compared to the prior year period and a net$6.5 million reduction in interest expense associated with the remeasurement of our multiemployer pension liabilities for the change in interest rates and lower debt levels compared to the prior year period were partially offset by higher interest rates on debt in the six months endedMarch 31, 2022 .
Loss on Extinguishment of Debt
Loss on extinguishment of debt for each of the second quarter and six months endedMarch 31, 2022 was$8.2 million related to ourMarch 22, 2022 redemption of$350 million aggregate principal amount of our 4.00% senior notes dueMarch 2023 . Loss on extinguishment of debt for the six months endedMarch 31, 2021 was$1.1 million .
Pension and Other Postretirement Non-Service Income
Pension and other postretirement non-service income for the second quarter of fiscal 2022 was$39.7 million compared to$35.0 million for the second quarter of fiscal 2021. Pension and other postretirement non-service income for the six months endedMarch 31, 2022 was$79.6 million compared to$69.9 million for the six months endedMarch 31, 2021 . These increases were primarily due to the increase in plan asset balances used to determine the expected return on plan assets for fiscal 2022. Customary pension and other postretirement (income) costs are included in our segment results. See "Note 4. Retirement Plans" of the Notes to Condensed Consolidated Financial Statements for more information.
Other income (expense), net
Other income (expense), net for the second quarter of fiscal 2022 was income of$6.3 million compared to expense of$13.4 million in the second quarter of fiscal 2021. The expense in the second quarter of fiscal 2021 was primarily due to a charge of$22.5 million associated with not exercising an option to purchase an additional equity interest inGondi, S.A. de C.V. ("Grupo Gondi"), a joint venture in which we have invested, plus other items, that were partially offset by a$16.5 million gain on sale of theSummerville, SC sawmill. Other income (expense), net for the six months endedMarch 31, 2022 was income of$6.5 million compared to income of$7.4 million for the first half of fiscal 2021. The first half of fiscal 2021 included a$16.5 million gain on sale of theSummerville, SC sawmill and a$14.7 million gain on sale of our Rosenbloom 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, plus other items.
Provision for Income Taxes
We recorded income tax expense of$1.8 million for the three months endedMarch 31, 2022 compared to$30.5 million for the three months endedMarch 31, 2021 . The effective tax rate for the three months endedMarch 31, 2022 was 4.2%, while the effective tax rate for the three months endedMarch 31, 2021 was 21.0%. The lower tax 36 --------------------------------------------------------------------------------
rate in the three months ended
We recorded income tax expense of$60.4 million for the six months endedMarch 31, 2022 compared to$80.8 million for the six months endedMarch 31, 2021 . The effective tax rate for the six months endedMarch 31, 2022 was 21.2%, while the effective tax rate for the six months endedMarch 31, 2021 was 23.2%.
See "Note 5. Income Taxes" of the Notes to Condensed Consolidated Financial Statements for the primary factors impacting our effective tax rates.
Corrugated Packaging Segment
Corrugated Packaging Shipments
Corrugated Packaging shipments are expressed as a tons equivalent in thousands of tons, which includes external and intersegment shipments from our corrugated converting operations, principally for the sale of corrugated containers and other corrugated products. Tons sold from period to period may be impacted by customer conversions to lower basis weight products. In addition, we discloseNorth American Corrugated Packaging shipments in billion square feet ("BSF") and millions of square feet ("MMSF") per shipping day. We have presented theCorrugated Packaging shipments in this manner because we believe investors, potential investors, securities analysts and others find this breakout useful when evaluating our operating performance. Quantities in the table may not sum across due to trailing decimals. First Second Six Months Third Fourth Fiscal Quarter Quarter Ended 3/31 Quarter Quarter Year Fiscal 2021 Corrugated Packaging Shipments - thousands of tons 1,729.4 1,662.7 3,392.1 1,709.6 1,678.7 6,780.4 North American Corrugated Packaging Shipments - BSF 25.3 24.6 50.0 25.3 24.5 99.8 North American Corrugated Packaging Per Shipping Day - MMSF 415.3 391.2 403.0 401.7 383.2 397.6 Fiscal 2022 Corrugated Packaging Shipments - thousands of tons 1,634.5 1,662.1 3,296.6 North American Corrugated Packaging Shipments - BSF 24.5 24.7 49.2 North American Corrugated Packaging Per Shipping Day - MMSF 401.0 385.8 393.2 37
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Corrugated Packaging Segment -
(In millions, except percentages) Adjusted
Net Sales (1) Adjusted EBITDA EBITDA Margin
Fiscal 2021
First Quarter $ 2,019.5 $ 347.6 17.2 %
Second Quarter 2,022.4 321.1 15.9
Six Months Ended March 31, 2021 4,041.9 668.7 16.5
Third Quarter 2,154.7 363.9 16.9
Fourth Quarter 2,203.9 361.4 16.4
Total $ 8,400.5 $ 1,394.0 16.6 %
Fiscal 2022
First Quarter $ 2,220.0 $ 288.9 13.0 %
Second Quarter 2,319.0 328.7 14.2
Six Months Ended March 31, 2022 $ 4,539.0 $ 617.6 13.6 %
(1) Net sales before intersegment eliminations, also referred to as segment sales.
Net sales for theCorrugated Packaging segment increased$296.6 million in the second quarter of fiscal 2022 compared to the prior year quarter. The increase primarily consisted of$274.0 million of higher selling price/mix and$13.0 million of higher volumes. The current period volume comparison was improved by the$39.2 million negative impact in the prior year period from the Events. Net sales for theCorrugated Packaging segment increased$497.1 million in the six months endedMarch 31, 2022 compared to the prior year period. The increase primarily consisted of$550.4 million of higher selling price/mix that was partially offset by$64.7 million of lower volumes. The current period volume comparison was improved by the$39.2 million negative impact in the prior year period from the Events.
Adjusted EBITDA - Corrugated Packaging Segment
Corrugated Packaging segment Adjusted EBITDA in the second quarter of fiscal 2022 increased$7.6 million compared to the prior year quarter primarily due to an estimated$274.8 million margin impact from higher selling price/mix and the$19.9 million negative impact from the Events in the prior year period. These items were partially offset by$199.6 million of increased cost inflation, a$79.8 million reduction in productivity and other operational items, and$4.3 million of lower volumes excluding the negative impact of the Events in the prior year period. Productivity was negatively impacted by heavy planned mill maintenance and COVID related absenteeism, especially in the first two months of the quarter.Corrugated Packaging segment Adjusted EBITDA in the six months endedMarch 31, 2022 decreased$51.1 million compared to the prior year period primarily due to an estimated$429.7 million of increased cost inflation, a$135.9 million reduction in productivity and other operational items,$47.5 million of lower volumes excluding the Events in the prior year period and a$12.9 million increase in planned downtime including maintenance outages. These items were partially offset by a$552.2 million margin impact from higher selling price/mix and the$19.9 million negative impact of the Events in the prior year period. Productivity was negatively impacted by heavy planned mill maintenance and COVID related absenteeism in the first half of fiscal 2022.
Consumer Packaging Segment
Consumer Packaging Shipments
38
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cartons, interior partitions and other consumer products. We have presented the
Consumer Packaging shipments in this manner because we believe investors,
potential investors, securities analysts and others find this breakout useful
when evaluating our operating performance. Quantities in the table may not sum
across due to trailing decimals.
First Second Six Months Third Fourth Fiscal
Quarter Quarter Ended 3/31 Quarter Quarter Year
Fiscal 2021
Consumer Packaging Shipments -
thousands of tons 374.9 379.1 754.0 386.4 389.5 1,529.9
Fiscal 2022 Consumer Packaging Shipments - thousands of tons 374.2 401.3 775.5
Consumer Packaging Segment -
(In millions, except percentages) Adjusted
Net Sales (1) Adjusted EBITDA EBITDA Margin
Fiscal 2021
First Quarter $ 1,062.5 $ 175.3 16.5 %
Second Quarter 1,080.6 164.1 15.2
Six Months Ended March 31, 2021 2,143.1 339.4 15.8
Third Quarter 1,132.2 183.3 16.2
Fourth Quarter 1,158.6 198.1 17.1
Total $ 4,433.9 $ 720.8 16.3 %
Fiscal 2022
First Quarter $ 1,138.7 $ 169.3 14.9 %
Second Quarter 1,250.6 205.8 16.5
Six Months Ended March 31, 2022 $ 2,389.3 $ 375.1 15.7 %
(1) Net sales before intersegment eliminations, also referred to as segment sales.
The$170.0 million increase in net sales for theConsumer Packaging segment in the second quarter of fiscal 2022 compared to the prior year quarter was primarily due to$116.6 million of higher selling price/mix and$96.6 million of higher volumes, including the$12.1 million negative impact from the Events in the prior year period. These increases were partially offset by$38.7 million of unfavorable foreign currency impacts. The$246.2 million increase in net sales for theConsumer Packaging segment in the six months endedMarch 31, 2022 compared to the prior year period was primarily due to$176.2 million of higher selling price/mix and$117.7 million impact of higher volumes, including the$12.1 million negative impact from the Events in the prior year period. These increases were partially offset by$42.4 million of unfavorable foreign currency impacts.
Adjusted EBITDA - Consumer Packaging Segment
Consumer Packaging segment Adjusted EBITDA in the second quarter of fiscal 2022 increased$41.7 million compared to the prior year quarter primarily due to an estimated$111.1 million margin impact from higher selling price/mix,$31.2 million of higher volumes excluding the Events and a$3.6 million negative impact from the Events in the prior year period. These items were partially offset by$93.2 million of increased cost inflation,$7.4 million of unfavorable foreign currency impacts and a$3.7 million reduction in productivity and other operational items. 39 --------------------------------------------------------------------------------Consumer Packaging segment Adjusted EBITDA in the six months endedMarch 31, 2022 increased$35.7 million compared to the prior year period primarily due to an estimated$161.1 million margin impact from higher selling price/mix,$37.1 million of higher volumes excluding the Events,$16.3 million of increased productivity and other operational items, and a$3.6 million negative impact from the Events in the prior year period. These items were partially offset by$169.0 million of increased cost inflation,$7.4 million of unfavorable foreign currency impacts and a$5.8 million increase in planned downtime including maintenance outages. Paper Segment Paper Shipments Paper shipments in thousands of tons includes the sale of containerboard, paperboard, market pulp and specialty papers (including kraft papers and saturating kraft) to external customers. The shipment data table excludes gypsum paperboard liner tons produced by ourSeven Hills Paperboard LLC joint venture inLynchburg, VA since it is not consolidated. We have presented the Paper shipments in this manner because we believe investors, potential investors, securities analysts and others find this breakout useful when evaluating our operating performance. Quantities in the table may not sum across due to trailing decimals. First Second Six Months Third Fourth Fiscal Quarter Quarter Ended 3/31 Quarter Quarter Year Fiscal 2021 Paper Shipments - thousands of tons 1,461.7 1,482.7 2,944.4 1,588.6 1,738.7 6,271.6 Fiscal 2022 Paper Shipments - thousands of tons 1,515.9 1,658.2 3,174.1
Paper Segment -
(In millions, except percentages) Adjusted
Net Sales (1) Adjusted EBITDA EBITDA Margin
Fiscal 2021
First Quarter $ 1,090.9 $ 151.7 13.9 %
Second Quarter 1,130.6 159.6 14.1
Six Months Ended March 31, 2021 2,221.5 311.3 14.0
Third Quarter 1,299.2 265.2 20.4
Fourth Quarter 1,462.3 307.2 21.0
Total $ 4,983.0 $ 883.7 17.7 %
Fiscal 2022
First Quarter $ 1,352.6 $ 232.4 17.2 %
Second Quarter 1,538.1 308.6 20.1
Six Months Ended March 31, 2022 $ 2,890.7 $ 541.0 18.7 %
(1) Net sales before intersegment eliminations, also referred to as segment sales.
The$407.5 million increase in net sales for the Paper segment in the second quarter of fiscal 2022 compared to the prior year quarter was primarily due to$311.2 million of higher selling price/mix and$130.7 million of higher volumes, including the$134.8 million negative impact on volumes in the prior year period from the Events. These increases were partially offset by the absence of$18.9 million of sales from the sawmill we sold in the second quarter fiscal 2021. The$669.2 million increase in net sales for the Paper segment in the six months endedMarch 31, 2022 compared to the prior year period was primarily due to$557.4 million of higher selling price/mix and$171.7 million of higher volumes, including the$134.8 million negative impact on volumes in the prior year period from the Events. 40 --------------------------------------------------------------------------------
These increases were partially offset by the absence of
Adjusted EBITDA - Paper Segment
Paper segment Adjusted EBITDA in the second quarter of fiscal 2022 increased$149.0 million compared to the prior year quarter primarily due to a$311.2 million margin impact from higher selling price/mix, the$63.4 million negative impact from the Events in the prior year period and$3.7 million of higher volumes excluding the Events. These items were partially offset by an estimated$165.5 million of increased cost inflation, a$50.5 million reduction in productivity and other operational items,$8.3 million of unfavorable foreign currency impacts and a$4.9 million increase in planned downtime including maintenance outages. Paper segment Adjusted EBITDA in the six months endedMarch 31, 2022 increased$229.7 million compared to the prior year period primarily due to a$557.4 million margin impact from higher selling price/mix, the$63.4 million negative impact from the Events in the prior year and$9.7 million of higher volumes excluding the Events. These items were partially offset by an estimated$352.8 million of increased cost inflation, a$20.7 million increase in planned downtime including maintenance outages, a$19.7 million reduction in productivity and other operational items, and$7.7 million of unfavorable foreign currency impacts. Distribution Segment Distribution Shipments Distribution shipments are expressed as a tons equivalent in thousands of tons, which includes external and intersegment shipments from our distribution and display assembly operations. We have presented the Distribution shipments in this manner because we believe investors, potential investors, securities analysts and others find this breakout useful when evaluating our operating performance. Quantities in the table may not sum across due to trailing decimals. First Second Six Months Third Fourth Fiscal Quarter Quarter Ended 3/31 Quarter Quarter Year Fiscal 2021 Distribution Shipments - thousands of tons 56.4 53.6 110.0 64.5 53.1 227.6 Fiscal 2022 Distribution Shipments - thousands of tons 48.5 50.8 99.3
Distribution Segment -
(In millions, except percentages) Adjusted EBITDA
Net Sales (1) Adjusted EBITDA Margin
Fiscal 2021
First Quarter $ 303.8 $ 16.4 5.4 %
Second Quarter 280.3 11.0 3.9
Six Months Ended March 31, 2021 584.1 27.4 4.7
Third Quarter 322.3 18.0 5.6
Fourth Quarter 348.4 23.4 6.7
Total $ 1,254.8 $ 68.8 5.5 %
Fiscal 2022
First Quarter $ 324.8 $ 6.5 2.0 %
Second Quarter 362.3 28.0 7.7
Six Months Ended March 31, 2022 $ 687.1 $ 34.5 5.0 %
(1) Net sales before intersegment eliminations, also referred to as segment sales.
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--------------------------------------------------------------------------------The$82.0 million increase in net sales for the Distribution segment in the second quarter of fiscal 2022 compared to the prior year quarter was primarily due to$29.5 million of higher selling price/mix and$48.6 million of higher volumes, primarily related to fulfillment of a large healthcare order. The$103.0 million increase in net sales for the Distribution segment in the six months endedMarch 31, 2022 compared to the prior year period was primarily due to$55.5 million of higher selling price/mix and$43.7 million of higher volumes, primarily related to fulfillment of a large healthcare order in the second quarter of fiscal 2022.
Adjusted EBITDA - Distribution Segment
Distribution segment Adjusted EBITDA in the second quarter of fiscal 2022 increased$17.0 million compared to the prior year quarter primarily due to a$29.5 million margin impact from higher selling price/mix and$23.0 million from higher volumes. These items were partially offset by an estimated$30.6 million of increased cost inflation and a$5.8 million reduction in productivity and other operational items. Distribution segment Adjusted EBITDA in the six months endedMarch 31, 2022 increased$7.1 million compared to the prior year quarter primarily due a$55.5 million margin impact from higher selling price/mix and$21.7 million from higher volumes. These items were partially offset by an estimated$55.8 million of increased cost inflation and a$14.3 million reduction in productivity and other operational items. 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 under our credit facilities, proceeds from the sale of receivables under 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 11. Debt" of the Notes to Condensed Consolidated Financial Statements and "Note 13. Debt" of the Notes to Consolidated Financial Statements section in the Fiscal 2021 Form 10-K 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. Cash and cash equivalents were$360.2 million atMarch 31, 2022 and$290.9 million atSeptember 30, 2021 . Approximately three-fourths of the cash and cash equivalents atMarch 31, 2022 were held outside of theU.S. The proportion of cash and cash equivalents held outside of theU.S. generally varies from period to period. AtMarch 31, 2022 andSeptember 30, 2021 , total debt was$8,374.0 million and$8,194.1 million , respectively,$419.6 million and$168.8 million of which was short-term atMarch 31, 2022 andSeptember 30, 2021 , respectively. Included in our total debt atMarch 31, 2022 was$183.8 million of non-cash acquisition-related step-up. Total debt atMarch 31, 2022 increased$179.9 million compared toSeptember 30, 2021 , primarily as capital expenditures and capital returned to stockholders exceeded net cash provided by operating activities. AtMarch 31, 2022 , we had approximately$3.2 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 onNovember 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
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 atMarch 31, 2022 .
At
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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 a group of
third-party financial institutions and receivables securitization facilities. We
describe these programs below.
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 SCF programs generally meet the requirements to be
accounted for as sales in accordance with guidance under ASC 860, "Transfers and
Servicing" resulting in derecognition of such receivables from our consolidated
balance sheets. Receivables involved with these customer-based SCF 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. See
"Note 10. Fair Value - Accounts Receivable Sales Agreements" for a discussion of
our monetization facilities.
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 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
items Accounts payable and Other current liabilities in our condensed
consolidated balance sheet and the activity is reflected in net cash provided by
operating activities in our condensed 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% to 17% 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 the Receivables Securitization
Facility that allows for borrowing availability based on the eligible underlying
accounts receivable and compliance with certain covenants. See "Note 11. Debt"
for a discussion of our Receivables Securitization Facility and the amount
outstanding under our vendor financing and commercial card programs.
Cash Flow Activity
Six Months Ended
(In millions) March 31,
2022 2021
Net cash provided by operating activities
Net cash provided by operating activities during the six months endedMarch 31, 2022 decreased$208.9 million compared to the six months endedMarch 31, 2021 , primarily due to$345.6 million of higher working capital usage compared to the prior year period. The higher working capital usage in the first half of fiscal 2022 was primarily due to actions taken in the prior year to preserve cash due to the high uncertainty during the COVID pandemic, such 43 --------------------------------------------------------------------------------
as the payment of certain bonuses and 401(k) match in cash that were paid in stock in the prior year period, and the payment of certain deferred payroll taxes that relate to relief offered under the CARES Act in the current year.
Net cash used for investing activities of$306.6 million in the six months endedMarch 31, 2022 consisted primarily of$354.1 million for capital expenditures that was partially offset by$27.7 million of proceeds from corporate owned life insurance and$23.0 million of proceeds from the sale of property, plant and equipment, primarily for the sale of a previously closed facility. Net cash used for investing activities of$195.2 million in the six months endedMarch 31, 2021 consisted primarily of$303.0 million for capital expenditures that were partially offset by$58.5 million of proceeds from the sale of theSummerville, SC sawmill,$28.3 million of proceeds from the sale of investments and$16.7 million of proceeds from corporate owned life insurance. 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 to be approximately$900 million to$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. In the six months endedMarch 31, 2022 , net cash used for financing activities of$287.8 million consisted primarily of a net increase in debt of$148.3 million , share repurchases of$310.2 million and cash dividends paid to stockholders of$132.1 million . In the six months endedMarch 31, 2021 , net cash used for financing activities of$584.6 million consisted primarily of a net decrease in debt of$474.8 million and cash dividends paid to stockholders of$105.8 million . OnApril 29, 2022 , our board of directors declared a quarterly dividend of$0.25 per share. InFebruary 2022 andNovember 2021 , we paid quarterly dividends of$0.25 per share, respectively, representing a$1.00 per share annualized dividend or an increase of 25% since ourFebruary 2021 dividend. InFebruary 2021 andNovember 2020 , we paid quarterly dividends of$0.20 per share. 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 . The shares of Common Stock may be repurchased 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. Pursuant to the program, in the six months endedMarch 31, 2022 , we repurchased approximately 7.2 million shares of our Common Stock for an aggregate cost of$332.1 million . The amount reflected as purchased in the condensed consolidated statements of cash flows varies due to the timing of share settlement. In the six months endedMarch 31, 2021 , we repurchased no shares of Common Stock. As ofMarch 31, 2022 , we had approximately 9.4 million shares of Common Stock available for repurchase under the program. OnMay 4, 2022 , our board of directors authorized a new repurchase program of up to 25.0 million shares of our Common Stock, plus any unutilized shares left from theJuly 2015 authorization. The 25.0 million shares represents an additional authorization of approximately 10% of our outstanding Common Stock. 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 at the end of the previous fiscal year. These items are primarily for foreign and state net operating losses and credits that generally will be utilized between fiscal 2022 and 2040. 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 and our cash tax rate in fiscal 2023 will be driven slightly higher than our income tax rate. Our pension plans in theU.S. are overfunded and we have a$0.7 billion pension asset on our condensed consolidated balance sheet as ofMarch 31, 2022 . We made contributions of$10.3 million to our pension and supplemental retirement plans during the six months endedMarch 31, 2022 . Based on current facts and 44 -------------------------------------------------------------------------------- assumptions, we expect to contribute approximately$22 million to ourU.S. and non-U.S. pension plans in fiscal 2022. 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 Protection Act of 2006 (the "Pension Act") and other regulations. Our estimates are based on current factors, such as discount rates and expected return on plan assets. It is possible that our assumptions may change, actual market performance may vary or we may decide to contribute different amounts. 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, 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. AtMarch 31, 2022 andSeptember 30, 2021 , we had recorded withdrawal liabilities of$232.2 million and$247.1 million , respectively, including liabilities associated with PIUMPF's accumulated funding deficiency demands. The decrease in withdrawal liabilities at the second quarter of fiscal 2022 as compared to the end of fiscal 2021 was primarily due to an increase in interest rates. See "Note 4. Retirement Plans - MEPPs" of the Notes to Condensed Consolidated Financial Statements for more information regarding these liabilities. See also Item 1A. "Risk Factors - We May Incur Withdrawal Liability and/or Increased Funding Requirements in Connection with MEPPs" in our Fiscal 2021 Form 10-K. 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.
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 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
45
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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 ".
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 unaudited Condensed 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.
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