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 , Global 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 pre-tax 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, mineral rights impairment, restructuring and other costs, non-allocated expenses, interest expense, net, loss on extinguishment of debt, other (expense) income, 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$5,519.7 million for the third quarter of fiscal 2022 increased$703.4 million , or 14.6%, compared to the third quarter of fiscal 2021. This increase was primarily due to the impact of higher selling price/mix that was partially offset by the unfavorable impact of foreign currency. Net income attributable to common stockholders of$377.9 million for the third quarter of fiscal 2022 increased$127.8 million , or 51.1%, compared to the third quarter of fiscal 2021. The impact of higher selling price/mix was partially offset by increased cost inflation, higher operating costs and lower volumes. Consolidated Adjusted EBITDA of$1,005.5 million for the third quarter of fiscal 2022 increased$194.5 million , or 24.0%, compared to$811.0 million in the third quarter of fiscal 2021. Net income in the quarter was also impacted by a$26.0 million pre-tax non-cash mineral rights impairment that was largely offset by$18.7 million of insurance recoveries related to the fiscal 2021 ransomware incident and winter weather event (the "Events"). The insurance recoveries were primarily for business interruption costs and were recorded as a reduction of Cost of goods sold. Earnings per diluted share were$1.47 and$0.93 in the three months endedJune 30, 2022 and 2021, respectively. Adjusted Earnings Per Diluted Share were$1.54 and$1.00 in the three months endedJune 30, 2022 and 2021, respectively. 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 nine months endedJune 30, 2022 andJune 30, 2021 was$1,480.1 million and$1,602.4 million , respectively. The decline was primarily due to$379.9 million of greater 33 -------------------------------------------------------------------------------- working capital usage compared to the prior year period. The greater working capital usage 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 during the prior year period of certain bonuses and 401(k) match in stock rather than in cash, 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 nine months endedJune 30, 2022 , we invested$569.5 million in capital expenditures and returned$795.9 million in capital to stockholders, specifically$600.0 million in stock repurchases and$195.9 million in dividend payments. During the nine months endedJune 30, 2022 , debt decreased$171.2 million due to repayments primarily using net cash provided by operating activities that exceeded aggregate capital expenditures and capital returned to stockholders in the form of dividends and share repurchases. In the fourth quarter of fiscal 2022, we have approximately 45,000 tons of scheduled maintenance downtime compared to 12,000 in the prior year period. We expect the continued flow through of previously published price increases, and that those increases will more than offset inflation. We expect higher inflation costs sequentially, driven by higher natural gas costs and slightly higher recycled fiber costs, partially offset by lower virgin fiber costs. We also expect increased logistics costs. As a result of these, and other factors, we expect higher earnings compared to the prior year period.
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), 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, particularly in the second quarter of fiscal 2022. While the negative impact in the third quarter diminished, we may experience COVID-related absenteeism in future periods, to varying degrees, depending upon the impact of new or continuing variants. 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.
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 34 -------------------------------------------------------------------------------- million as a reduction of SG&A excluding intangible amortization and approximately$5 million as a reduction of cost of goods sold. In the three and nine months endedJune 30, 2022 , we received additional business interruption recoveries of$10 million and$20 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.
RESULTS OF OPERATIONS
The following table summarizes our consolidated results for the three and nine
months ended
Three Months Ended Nine Months Ended
June 30, June 30,
2022 2021 2022 2021
Net sales $ 5,519.7 $ 4,816.3 $ 15,854.0 $ 13,655.6
Cost of goods sold 4,360.3 3,886.4 12,894.3 11,223.2
Gross profit 1,159.4 929.9 2,959.7 2,432.4
Selling, general and administrative,
excluding
intangible amortization 504.3 450.9 1,450.3 1,327.1
Selling, general and administrative
intangible
amortization 87.5 88.8 263.6 269.3
(Gain) loss on disposal of assets (0.2 ) 1.0 (11.6 ) 3.8
Multiemployer pension withdrawal
income - - (3.3 ) -
Mineral rights impairment 26.0 - 26.0 -
Restructuring and other costs 0.6 6.9 366.3 19.8
Operating profit 541.2 382.3 868.4 812.4
Interest expense, net (78.5 ) (102.5 ) (237.7 ) (279.8 )
Loss on extinguishment of debt - - (8.2 ) (1.1 )
Pension and other postretirement
non-service
income 38.7 31.5 118.3 101.4
Other (expense) income, net (7.2 ) 6.4 (0.7 ) 13.8
Equity in income of unconsolidated
entities 18.3 10.7 57.3 29.4
Income before income taxes 512.5 328.4 797.4 676.1
Income tax expense (132.7 ) (77.4 ) (193.1 ) (158.2 )
Consolidated net income 379.8 251.0 604.3 517.9
Less: Net income attributable to
noncontrolling
interests (1.9 ) (0.9 ) (4.2 ) (3.3 )
Net income attributable to common
stockholders $ 377.9 $ 250.1 $ 600.1 $ 514.6 (In millions, except First Second Third Nine Months
Fourth Fiscal
percentages) Quarter Quarter Quarter Ended 6/30 Quarter Year
Fiscal 2021 $ 4,401.5 $ 4,437.8 $ 4,816.3 $ 13,655.6 $ 5,090.5 $ 18,746.1
Fiscal 2022 $ 4,952.2 $ 5,382.1 $ 5,519.7 $ 15,854.0
% Change 12.5 % 21.3 % 14.6 % 16.1 %
35-------------------------------------------------------------------------------- Net sales in the third quarter of fiscal 2022 increased$703.4 million compared to the third quarter of fiscal 2021. This increase was primarily due to the impact of higher selling price/mix that was partially offset by the unfavorable impact of foreign currency. Net sales in the nine months endedJune 30, 2022 increased$2,198.4 million compared to the prior year period. This increase was primarily due to the impact of higher selling price/mix and higher volumes which were partially offset by the unfavorable impact of foreign currency. In the first nine months of fiscal 2021, we lost an estimated$189.1 million of net sales associated with the Events, all in the second quarter. The change in net sales by reportable segment is outlined below for each reportable segment. Cost of Goods Sold (In millions, First Second Third Nine Months Fourth Fiscal except percentages) Quarter Quarter Quarter Ended 6/30 Quarter Year Fiscal 2021$ 3,648.6 $ 3,688.2 $ 3,886.4 $ 11,223.2 $ 4,092.6 $ 15,315.8 (% of Net Sales) 82.9 % 83.1 % 80.7 % 82.2
% 80.4 % 81.7 %
Fiscal 2022
81.3 %
The $473.9 million increase in cost of goods sold in the third quarter of fiscal
2022 compared to the prior year quarter was primarily due to increased cost
inflation and higher operating costs. Cost inflation consisted primarily of
higher energy, freight, wage and benefit costs, recycled fiber, virgin fiber and
chemical costs.
The $1,671.1 million increase in cost of goods sold in the nine months ended
June 30, 2022 compared to the prior year period was primarily due increased cost
inflation, higher operating costs and increased planned downtime including
maintenance outages, which were partially offset by the prior year period
negative impact of the Events and related recoveries in fiscal 2022. Cost
inflation consisted primarily of higher recycled fiber, energy, wage and benefit
costs, freight, virgin fiber and chemical costs. In the first nine months of
fiscal 2021, we recorded $19.7 million of one-time recognition awards to our
teammates who work in manufacturing and operations.
In the third quarter of fiscal 2022, we entered into various natural gas
commodity derivatives that were designated as cash flow hedges for accounting
purposes and are scheduled to be settled over the next twelve months. See "Note
14. Equity and Other Comprehensive Income (Loss)" of the Notes to Condensed
Consolidated Financial Statements for additional information about the natural
gas commodity derivatives.
We discuss our operations in greater detail below for each reportable segment, as applicable.
Selling, General and Administrative Excluding Intangible Amortization
(In millions, except First Second Third Nine Months Fourth Fiscal percentages) Quarter Quarter Quarter Ended 6/30 Quarter Year Fiscal 2021$ 417.8 $ 458.4 $ 450.9 $ 1,327.1 $ 432.2 $ 1,759.3 (% of Net Sales) 9.5 % 10.3 % 9.4 % 9.7 % 8.5 % 9.4 % Fiscal 2022$ 452.9 $ 493.1 $ 504.3 $ 1,450.3 (% of Net Sales) 9.1 % 9.2 % 9.1 % 9.1 %
Selling, general and administrative expenses ("SG&A") excluding intangible
amortization increased
SG&A excluding intangible amortization increased$123.2 million in the nine months endedJune 30, 2022 compared to the prior year period. The increase was primarily due to$51.1 million of increased compensation and benefits, which 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 36 --------------------------------------------------------------------------------
Selling, General and Administrative Intangible Amortization
SG&A intangible amortization was$87.5 million and$88.8 million in the third quarter of fiscal 2022 and 2021, respectively. SG&A intangible amortization was$263.6 million and$269.3 million in the nine months endedJune 30, 2022 and 2021, respectively. The expense primarily represents the amortization of customer relationship intangibles acquired in business combinations.
(Gain) Loss on Disposal of Assets
In the three and nine months endedJune 30, 2022 , we recorded a gain on disposal of assets of$0.2 million and a gain on disposal of assets of$11.6 million , respectively. The gain was primarily due to the sale of a previously closed facility in the first quarter of fiscal 2022. In the three and nine months endedJune 30, 2021 , we recorded a loss on disposal of assets of$1.0 million and$3.8 million , respectively. Mineral Rights Impairment In the three and nine months endedJune 30, 2022 , we recorded a$26.0 million pre-tax non-cash impairment of certain mineral rights driven by a lack of new leasing or development activity on the related properties for an extended period of time. With the impairment, we have no remaining mineral rights atJune 30, 2022 .
Restructuring and Other Costs
We recorded aggregate pre-tax restructuring and other costs of$0.6 million and$6.9 million in the third quarter of fiscal 2022 and 2021, respectively, and$366.3 million and$19.8 million in the nine months endedJune 30, 2022 and 2021, respectively. The charges in the nine months endedJune 30, 2022 were primarily driven by our second quarter decision to permanently cease operations at ourPanama City, FL mill. 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 third quarter of fiscal 2022 was$78.5 million compared to$102.5 million for the prior year quarter. The decrease was primarily due a$12.7 million reduction in interest expense associated with the remeasurement of our multiemployer pension liabilities for the change in interest rates in the third quarter of fiscal 2022 compared to a similar$7.7 million increase in the third quarter of fiscal 2021. In addition, interest expense, net declined due to lower debt levels compared to the prior year period that was partially offset by higher interest rates on debt in the current year period. Interest expense, net for the nine months endedJune 30, 2022 was$237.7 million compared to$279.8 million for the prior year period. The decrease was primarily due to a net$26.9 million reduction in interest expense associated with the remeasurement of our multiemployer pension liabilities for the change in interest rates between the two nine month periods. In addition, interest expense, net declined due to lower debt levels compared to the prior year period that was partially offset by higher interest rates on debt in the nine months endedJune 30, 2022 .
Loss on Extinguishment of Debt
Loss on extinguishment of debt for the nine months ended
37
--------------------------------------------------------------------------------Pension and Other Postretirement Non-Service Income
Pension and other postretirement non-service income for the third quarter of fiscal 2022 was$38.7 million compared to$31.5 million for the third quarter of fiscal 2021. Pension and other postretirement non-service income for the nine months endedJune 30, 2022 was$118.3 million compared to$101.4 million for the nine months endedJune 30, 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 (Expense) Income, net
Other (expense) income, net for the third quarter of fiscal 2022 was expense of$7.2 million compared to income of$6.4 million in the third quarter of fiscal 2021. The variance was primarily driven by impact of foreign currency on the respective periods. Other (expense) income, net for the nine months endedJune 30, 2022 was expense of$0.7 million compared to income of$13.8 million for the nine months endedJune 30, 2021 . The nine months endedJune 30, 2021 primarily included a$16.5 million gain on sale of theSummerville, SC sawmill and a$16.0 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.
On
Provision for Income Taxes
We recorded income tax expense of$132.7 million for the three months endedJune 30, 2022 compared to$77.4 million for the three months endedJune 30, 2021 . The effective tax rate for the three months endedJune 30, 2022 was 25.9%, while the effective tax rate for the three months endedJune 30, 2021 was 23.6%. We recorded income tax expense of$193.1 million for the nine months endedJune 30, 2022 compared to$158.2 million for the nine months endedJune 30, 2021 . The effective tax rate for the nine months endedJune 30, 2022 was 24.2%, while the effective tax rate for the nine months endedJune 30, 2021 was 23.4%.
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 38 -------------------------------------------------------------------------------- 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 Third Nine Months Fourth Fiscal Quarter Quarter Quarter Ended 6/30 Quarter Year Fiscal 2021 Corrugated Packaging Shipments - thousands of tons 1,729.4 1,662.7 1,709.6 5,101.7 1,678.7 6,780.4 North American Corrugated Packaging Shipments - BSF 25.3 24.6 25.3 75.3 24.5 99.8 North American Corrugated Packaging Per Shipping Day - MMSF 415.3 391.2 401.7 402.6 383.2 397.6 Fiscal 2022 Corrugated Packaging Shipments - thousands of tons 1,634.5 1,662.1 1,648.7 4,945.3 North American Corrugated Packaging Shipments - BSF 24.5 24.7 24.5 73.7 North American Corrugated Packaging Per Shipping Day - MMSF 401.0 385.8 389.3 391.9
Corrugated Packaging Segment -
(In millions, except percentages) Adjusted Adjusted EBITDA
Net Sales (1) EBITDA Margin
Fiscal 2021
First Quarter $ 2,019.5 $ 347.6 17.2 %
Second Quarter 2,022.4 321.1 15.9
Third Quarter 2,154.7 363.9 16.9
Nine Months Ended June 30, 2021 6,196.6 1,032.6 16.7
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
Third Quarter 2,382.5 385.2 16.2
Nine Months Ended June 30, 2022 $ 6,921.5 $ 1,002.8 14.5 %
(1)Net sales before intersegment eliminations, also referred to as segment sales.
Net sales for theCorrugated Packaging segment increased$227.8 million in the third quarter of fiscal 2022 compared to the prior year quarter. The increase primarily consisted of$300.1 million of higher selling price/mix partially offset by$84.1 million of lower volumes. Net sales for theCorrugated Packaging segment increased$724.9 million in the nine months endedJune 30, 2022 compared to the prior year period. The increase primarily consisted of$850.5 million of higher selling price/mix that was partially offset by$148.8 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. 39 --------------------------------------------------------------------------------
Adjusted EBITDA - Corrugated Packaging Segment
Corrugated Packaging segment Adjusted EBITDA in the third quarter of fiscal 2022 increased$21.3 million compared to the prior year quarter primarily due to an estimated$300.3 million margin impact from higher selling price/mix that was largely offset by an estimated$218.1 million of increased cost inflation,$34.8 million of lower volumes and$33.2 million higher operating costs. Productivity was negatively impacted by higher supply chain costs and labor shortages, in part due to the impacts of COVID.Corrugated Packaging segment Adjusted EBITDA in the nine months endedJune 30, 2022 decreased$29.8 million compared to the prior year period primarily due to an estimated$647.8 million of increased cost inflation,$169.1 million higher operating costs,$82.3 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 largely offset by a$852.5 million margin impact from higher selling price/mix and the$27.4 million favorable impact on the current period of the Events due to recoveries in the current year period compared to the expense from the Events in the prior year period. Productivity was negatively impacted by higher supply chain costs and labor shortages, in part due to the impacts of COVID, as well as heavy planned mill maintenance in the first half of fiscal 2022 and COVID related absenteeism primarily in the second quarter of fiscal 2022.
Consumer Packaging Segment
Consumer Packaging Shipments
Consumer Packaging shipments are expressed as a tons equivalent in thousands of tons, which includes external and intersegment shipments from our consumer converting operations, principally for the sale of folding cartons, interior partitions and other consumer products. We have presented theConsumer 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 Third Nine Months Fourth Fiscal Quarter Quarter Quarter Ended 6/30 Quarter Year Fiscal 2021 Consumer Packaging Shipments - thousands of tons 374.9 379.1 386.4
1,140.4 389.5 1,529.9
Fiscal 2022
Consumer Packaging Shipments -
thousands of tons 374.2 401.3 399.3 1,174.8
40--------------------------------------------------------------------------------
Consumer Packaging Segment -
(In millions, except percentages) Adjusted EBITDA
Net Sales (1) Adjusted EBITDA Margin
Fiscal 2021
First Quarter $ 1,062.5 $ 175.3 16.5 %
Second Quarter 1,080.6 164.1 15.2
Third Quarter 1,132.2 183.3 16.2
Nine Months Ended June 30, 2021 3,275.3 522.7 16.0
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
Third Quarter 1,270.2 234.9 18.5
Nine Months Ended June 30, 2022 $ 3,659.5 $ 610.0 16.7 %
(1)Net sales before intersegment eliminations, also referred to as segment sales.
The$138.0 million increase in net sales for theConsumer Packaging segment in the third quarter of fiscal 2022 compared to the prior year quarter was primarily due to$122.4 million of higher selling price/mix and$58.3 million of higher volumes. These increases were partially offset by$44.0 million of unfavorable foreign currency impacts. The$384.2 million increase in net sales for theConsumer Packaging segment in the nine months endedJune 30, 2022 compared to the prior year period was primarily due to$298.6 million of higher selling price/mix and$176.0 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$86.4 million of unfavorable foreign currency impacts.
Adjusted EBITDA - Consumer Packaging Segment
Consumer Packaging segment Adjusted EBITDA in the third quarter of fiscal 2022 increased$51.6 million compared to the prior year quarter primarily due to an estimated$122.0 million margin impact from higher selling price/mix and$8.6 million of higher volumes. These items were partially offset by an estimated$76.9 million of increased cost inflation and$7.5 million of unfavorable foreign currency impacts.Consumer Packaging segment Adjusted EBITDA in the nine months endedJune 30, 2022 increased$87.3 million compared to the prior year period primarily due to an estimated$283.1 million margin impact from higher selling price/mix,$45.7 million of higher volumes excluding the Events,$18.6 million of increased productivity and other operational items, and a$6.8 million favorable impact from the Events due to recoveries in the current year period compared to the expense from the Events in the prior year period. These items were partially offset by an estimated$245.9 million of increased cost inflation,$14.9 million of unfavorable foreign currency impacts and a$5.8 million increase in planned downtime including maintenance outages.
Global Paper Segment
Global Paper Shipments
Global 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 Global Paper shipments in this manner because we believe 41 --------------------------------------------------------------------------------
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 Third Nine Months Fourth Fiscal
Quarter Quarter Quarter Ended 6/30 Quarter Year
Fiscal 2021
Global Paper Shipments - thousands
of tons 1,461.7 1,482.7 1,588.6 4,533.0 1,738.7 6,271.6
Fiscal 2022 Global Paper Shipments - thousands of tons 1,515.9 1,658.2 1,632.7 4,806.8
Global Paper Segment -
(In millions, except percentages) Adjusted EBITDA
Net Sales (1) Adjusted EBITDA Margin
Fiscal 2021
First Quarter $ 1,090.9 $ 151.7 13.9 %
Second Quarter 1,130.6 159.6 14.1
Third Quarter 1,299.2 265.2 20.4
Nine Months Ended June 30, 2021 3,520.7 576.5 16.4
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
Third Quarter 1,610.3 399.0 24.8
Nine Months Ended June 30, 2022 $ 4,501.0 $ 940.0 20.9 %
(1)Net sales before intersegment eliminations, also referred to as segment sales.
The$311.1 million increase in net sales for the Global Paper segment in the third quarter of fiscal 2022 compared to the prior year quarter was primarily due to$297.0 million of higher selling price/mix and$38.7 million of higher volumes. The$980.3 million increase in net sales for the Global Paper segment in the nine months endedJune 30, 2022 compared to the prior year period was primarily due to$854.4 million of higher selling price/mix and$210.4 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$33.7 million of sales from the sawmill we sold in the second quarter fiscal 2021.
Adjusted EBITDA - Global Paper Segment
Global Paper segment Adjusted EBITDA in the third quarter of fiscal 2022 increased$133.8 million compared to the prior year quarter primarily due to a$297.0 million margin impact from higher selling price/mix,$14.4 million of higher volumes,$9.1 million of favorable foreign currency impacts and a$5.9 million decrease in planned downtime including maintenance outages. These items were partially offset by an estimated$162.9 million of increased cost inflation and$37.0 million higher operating costs. Global Paper segment Adjusted EBITDA in the nine months endedJune 30, 2022 increased$363.5 million compared to the prior year period primarily due to a$854.4 million margin impact from higher selling price/mix, a$70.6 million favorable impact from the Events due to recoveries in the current year period compared to the expense 42 -------------------------------------------------------------------------------- from the Events in the prior year period and$24.1 million of higher volumes excluding the Events. These items were partially offset by an estimated$515.7 million of increased cost inflation,$56.7 million higher operating costs and a$14.8 million increase in planned downtime including maintenance outages.
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.
Nine
First Second Third Months Fourth Fiscal
Quarter Quarter Quarter Ended 6/30 Quarter Year
Fiscal 2021
Distribution Shipments -
thousands of tons 56.4 53.6 64.5 174.5 53.1 227.6
Fiscal 2022
Distribution Shipments -
thousands of tons 48.5 50.8 59.8 159.1
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
Third Quarter 322.3 18.0 5.6
Nine Months Ended June 30, 2021 906.4 45.4 5.0
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
Third Quarter 357.7 19.2 5.4
Nine Months Ended June 30, 2022 $ 1,044.8 $ 53.7 5.1 %
(1)Net sales before intersegment eliminations, also referred to as segment sales.
The
The$138.4 million increase in net sales for the Distribution segment in the nine months endedJune 30, 2022 compared to the prior year period was primarily due to$96.3 million of higher selling price/mix and$38.0 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 third quarter of fiscal 2022
increased
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increase in productivity and other operational items. These items were largely
offset by an estimated
Distribution segment Adjusted EBITDA in the nine months endedJune 30, 2022 increased$8.3 million compared to the prior year quarter primarily due a$96.3 million margin impact from higher selling price/mix and$19.6 million from higher volumes. These items were largely offset by an estimated$103.0 million of increased cost inflation and$4.9 million higher operating 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 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$305.4 million atJune 30, 2022 and$290.9 million atSeptember 30, 2021 . Approximately two-thirds of the cash and cash equivalents atJune 30, 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. AtJune 30, 2022 andSeptember 30, 2021 , total debt was$8,022.9 million and$8,194.1 million , respectively,$387.8 million and$168.8 million of which was short-term atJune 30, 2022 andSeptember 30, 2021 , respectively. Included in our total debt atJune 30, 2022 was$179.6 million of non-cash acquisition-related step-up. During the nine months endedJune 30, 2022 , debt decreased$171.2 million due to repayments primarily using net cash provided by operating activities that exceeded aggregate capital expenditures and capital returned to stockholders in the form of dividends and share repurchases. AtJune 30, 2022 , we had approximately$3.5 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. 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 atJune 30, 2022 .
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 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.
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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 sheets 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 16% to 18% 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
Nine Months Ended
(In millions) June 30,
2022 2021
Net cash provided by operating activities
Net cash provided by operating activities during the nine months endedJune 30, 2022 decreased$122.3 million compared to the nine months endedJune 30, 2021 , primarily due to$379.9 million of greater working capital usage compared to the prior year period. The greater working capital usage in the nine months endedJune 30, 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 during the prior year period of certain bonuses and 401(k) match in stock rather than in cash, 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$514.2 million in the nine months endedJune 30, 2022 consisted primarily of$569.5 million for capital expenditures that was partially offset by$29.8 million of proceeds from corporate owned life insurance and$25.6 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$385.5 million in the nine months endedJune 30, 2021 consisted primarily of$505.4 million for capital expenditures that were partially offset by$58.5 million of proceeds from the sale of theSummerville, SC sawmill,$29.5 million of proceeds from the sale of investments and$26.6 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 our
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continue to invest in safety, environmental and maintenance projects while also
making investments to support productivity and growth in our business. Based on
investments made as of the nine months ended June 30, 2022 and supply chain and
other delays, we now expect to invest approximately $900 million in fiscal 2022.
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 nine months ended June 30, 2022 , net cash used for financing activities
of $965.8 million consisted primarily of share repurchases of $600.0 million ,
cash dividends paid to stockholders of $195.9 million and a net decrease in debt
of $195.3 million . In the nine months ended June 30, 2021 , net cash used for
financing activities of $941.3 million consisted primarily of a net decrease in
debt of $777.1 million and cash dividends paid to stockholders of $169.8
million .
On July 29, 2022 , our board of directors declared a quarterly dividend of $0.25
per share. In May 2022 , February 2022 and November 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 our February 2021 dividend. In
May 2021 , February 2021 and November 2020 , we paid quarterly dividends of $0.24 ,
$0.20 and $0.20 per share, respectively.
In July 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 of July 1, 2015 . On May 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 the July 2015
authorization. The 25.0 million shares represents an additional authorization of
approximately 10% of our outstanding Common Stock. 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 programs, in the nine
months ended June 30, 2022 , we repurchased approximately 12.6 million shares of
our Common Stock for an aggregate cost of $597.5 million . The amount reflected
as purchased in the condensed consolidated statements of cash flows varies due
to the timing of share settlement. In the nine months ended June 30, 2021 , we
repurchased no shares of Common Stock. As of June 30, 2022 , we had approximately
29.0 million shares of Common Stock available for repurchase under the program.
The U.S. federal, state and foreign net operating losses and other U.S. federal
and state tax credits available to us aggregated approximately $59 million in
future potential reductions of U.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 the U.S. are overfunded and we have a $0.8 billion pension
asset on our condensed consolidated balance sheet as of June 30, 2022 . We made
contributions of $15.1 million to our pension and supplemental retirement plans
during the nine months ended June 30, 2022 . Based on current facts and
assumptions, we expect to contribute approximately $17 million to our U.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
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. Going forward, we expect to pay approximately $12 million a year in
withdrawal liabilities, excluding accumulated funding deficiency demands and any
settlement payments. With respect to certain other MEPPs, in the event we
withdraw from one or more of the MEPPs in the
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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.
At June 30, 2022 and September 30, 2021 , we had recorded withdrawal liabilities
of $219.6 million and $247.1 million , respectively, including liabilities
associated with PIUMPF's accumulated funding deficiency demands. The decrease in
withdrawal liabilities in 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 Coupon
(in millions) 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 WestRock RKT, LLC ("RKT") and WestRock MWV,
LLC ("MWV", and together with RKT, the "Guarantor Subsidiaries"). On November 2,
2018 , pursuant to the Agreement and Plan of Merger, dated as of January 28,
2018 , among WRKCo , KapStone Paper and Packaging Corporation ("KapStone"),
WestRock Company (formerly known as Whiskey Holdco, Inc. ), Whiskey Merger Sub,
Inc. and Kola Merger Sub, Inc. , the Company acquired all of the outstanding
shares of KapStone through a transaction in which: (i) Whiskey Merger Sub, Inc.
merged with and into WRKCo , with WRKCo surviving the merger as a wholly owned
subsidiary of the Company and (ii) Kola Merger Sub, Inc. merged with and into
KapStone, with KapStone surviving the merger as a wholly owned subsidiary of the
Company (together, the "KapStone Acquisition"). On November 2, 2018 , in
connection with 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
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Guarantor Subsidiaries (together, the "Guarantors"). Collectively, the Issuer
and the Guarantors are the "
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 are holding companies that conducts substantially all of their 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 theObligor Group on a combined basis after the elimination of intercompany balances and transactions among theObligor 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. 48
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