WESTROCK COMPANY The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included herein and our audited consolidated financial statements and notes thereto for the fiscal year endedSeptember 30, 2022 , 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 2022 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 differentiated, sustainable paper and packaging solutions that help them win in the marketplace. Our team members support customers around the world from our operating and business locations inNorth America ,South America ,Europe ,Asia andAustralia .
Presentation
We report our financial results of operations in four reportable segments:Corrugated Packaging ,Consumer Packaging , Global Paper and Distribution. Our measure of segment profitability for each reportable segment is Adjusted EBITDA because it is the measure used by our CODM to make decisions regarding allocation of resources and to assess segment performance. OnDecember 1, 2022 , we completed our previously announced acquisition of the remaining 67.7% interest in Grupo Gondi for$969.8 million in cash and the assumption of debt. We have accounted for this acquisition as a business combination resulting in consolidation of Grupo Gondi. In connection with the transaction, we recognized a$46.8 million non-cash, pre-tax loss that was partially offset by a write-off of$22.2 million of deferred taxes. The loss represents the write-off of historical foreign currency translation adjustments recorded in Accumulated other comprehensive loss, as well as the difference between the fair value of the consideration paid and the carrying value of our prior ownership interest. See "Note 3. Acquisitions" for additional information.
Due to the timing of the Grupo Gondi Acquisition, it was not practicable to
allocate the results of Grupo Gondi to our operating segments for the first
quarter of fiscal 2023. As a result, we included the results for
OnDecember 1, 2022 , we sold ourEaton, IN , andAurora, IL , uncoated recycled paperboard mills and recorded a pre-tax gain on sale of$11.1 million recorded in Other income, net in our consolidated statements of income. See "Note 1. Basis of Presentation and Significant Accounting Policies" for additional information.
Business Systems Transformation
In the fourth quarter of fiscal 2022, we launched a multi-year phased business systems transformation project that is expected to cost approximately$0.5 to$0.6 billion . The investment will replace much of our existing disparate systems and transition them to a standardized enterprise resource planning ("ERP") system on a cloud-based platform, as well as a suite of other complementing technologies, across approximately 90% of our footprint based on net sales. Approximately 85% of the project spend is expected to be related to the implementation of the ERP, including process definition, standardization and simplification, with the remaining costs primarily related to the implementation of complementing technologies. The new systems are intended to transform areas such as manufacturing, supply chain, procurement, quote to cash, financials and analytics, and position us to better leverage automation and process efficiency and enable productivity enhancements. An implementation of this scale is a major financial undertaking and will require substantial time and attention of management and key employees. Project completion dates and anticipated costs may also change. As the systems are phased in, they will become a significant component of our internal control over financial reporting. See also Item 1A. "Risk Factors - We May Not Be Able To Successfully Implement 34 --------------------------------------------------------------------------------
Our Strategic Transformation Initiatives, Including Our New Business Systems Transformation" in our Fiscal 2022 Form 10-K.
Due to the nature, scope and magnitude of this investment, management believes
these incremental transformation costs are above the normal, recurring level of
spend for information technology to support operations. These strategic
investments are not expected to recur in the foreseeable future, and are not
considered representative of our underlying operating performance. As such,
management believes presenting these costs as an adjustment in the non-GAAP
results provides additional information to investors about trends in our
operations and is useful for period-over-period comparisons. This presentation
also allows investors to view our underlying operating results in the same
manner as they are viewed by management.
The expenses expected to be adjusted from Net income attributable to common
stockholders ("Net Income") are expensed as incurred during the implementation
of software applications and other enabling technologies, and do not include
deferred or capitalized costs, depreciation and/or amortization, and costs to
support or maintain these software applications or systems once they are in
productive use. During the investment period, the normal level of spend
associated with non-transformative programs is expected to be maintained and
these expenses will not be adjusted in our non-GAAP measures. The items adjusted
from Net Income will also be adjusted in our presentation of Consolidated
Adjusted EBITDA.
We expect approximately half of the estimated $0.5 to $0.6 billion investment
will represent incremental operating costs to be adjusted in our Consolidated
Adjusted EBITDA and Adjusted Earnings Per Diluted Share non-GAAP measures over
the course of the project, with substantially all such costs being recorded
within Selling, general and administrative excluding intangible amortization in
the consolidated statements of income. These non-GAAP adjustments would not
include any cash operating costs that are expected to continue to recur after
the business systems transformation project is completed.
In fiscal 2023, we expect the aggregate investment in our business systems
transformation to be approximately $170 million . We expect approximately $80
million to be expensed when incurred, of which approximately 90% would be
adjusted from Net Income for our non-GAAP financial measures. Approximately $90
million is expected to be deferred or capitalized and amortized over future
periods as the project is deployed.
EXECUTIVE SUMMARY
Net sales of $4,923.1 million for the first quarter of fiscal 2023 decreased
$29.1 million , or 0.6%, compared to the first quarter of fiscal 2022. This
decrease was primarily due to lower volumes and unfavorable foreign exchange
rates, which were partially offset by higher selling price/mix and increased
sales due to the Grupo Gondi Acquisition.
Net income attributable to common stockholders of $45.3 million for the first
quarter of fiscal 2023 decreased $137.0 million , or 75.2%, compared to the first
quarter of fiscal 2022. Increased net cost inflation, lower volumes, economic
downtime, the Mahrt mill work stoppage, increased non-cash pension costs,
increased restructuring and other costs, business systems transformation costs
and a non-cash loss related to the Grupo Gondi Acquisition were partially offset
by the margin impact from higher price mix and a gain on sale of two uncoated
recycled paperboard ("URB") mills. In addition, Consolidated Adjusted EBITDA of
$652.1 million for the first quarter of fiscal 2023 decreased $28.2 million , or
4.1%, compared to $680.3 million in the first quarter of fiscal 2022.
Earnings per diluted share were $0.18 and $0.68 in the three months ended
December 31, 2022 and 2021, respectively. Adjusted Earnings Per Diluted Share
were $0.55 and $0.65 in the three months ended December 31, 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 three months ended December 31,
2022 and December 31, 2021 was $265.9 million and $252.8 million , respectively.
The increase was primarily due to $68.4 million of reduced working capital usage
compared to the prior year period, partially offset by lower earnings. During
the three months ended December 31, 2022 , we invested $282.2 million in capital
expenditures and returned $70.0 million in capital to stockholders in dividend
payments. During the three months ended December 31, 2022 , debt increased
$1,675.6 million , primarily due to the Grupo Gondi Acquisition. See "Note 3.
Acquisitions" for additional information.
35
--------------------------------------------------------------------------------Expectations for the Second Quarter of Fiscal 2023
In the second quarter of fiscal 2023, we expect a sequential increase in net sales and net income from the first quarter of fiscal 2023, reflecting the normal seasonal sequential volume increases in many of our businesses as well as the inclusion of a full quarter of Grupo Gondi results. The second quarter of fiscal 2023 has four additionalFibre Box Association shipping days sequentially. However, we expect continued macroeconomic uncertainty to impact our results of operations. In addition, our Global Paper and Distribution segments face difficult year-over-year comparisons due to strong quarterly performance in the second quarter of fiscal 2022. We also expect scheduled mill maintenance outages, resulting in approximately 132,000 tons of maintenance downtime. We expect unfavorable non-cash pension expense of approximately$40 million driven by higher interest rates and market volatility. We further expect sequential natural gas deflation of approximately 20%, and stable recycled fiber, virgin fiber, chemicals and freight costs. We expect the continued flow through of previously published price increases in our Consumer segment and to continue balancing our supply with our customers' demand.
A detailed review of our performance appears below under "Results of Operations".
COVID-19 Pandemic
The global impact of COVID has affected our operational and financial performance to varying degrees. The extent of the effects of future public health crises, including a resurgence of COVID, or related containment measures and government responses are highly uncertain and cannot be predicted.
Ransomware Incident
As previously disclosed, onJanuary 23, 2021 we detected a ransomware incident impacting certain of our systems. Promptly upon our detection of this incident, we initiated response and containment protocols and our security teams, supplemented by leading cyber defense firms, worked to remediate this incident. These actions included taking preventative measures, such as shutting down certain systems out of an abundance of caution, as well as taking steps to supplement existing security monitoring, scanning and protective measures. In our Form 10-Q for the second quarter of fiscal 2021, we announced that all systems were back in service. In the first quarter of fiscal 2022, we received a$5 million business interruption recovery 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 consolidated statements of cash flows.
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 2022 Form 10-K for additional information,
including other recoveries (fiscal 2021
36
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table summarizes our consolidated results for the three months
ended
Three Months Ended
December 31,
2022 2021
Net sales $ 4,923.1 $ 4,952.2
Cost of goods sold 4,157.9 4,155.6
Gross profit 765.2 796.6Selling, general and administrative excluding
intangible amortization 479.1
452.9
Selling, general and administrative intangible
amortization 86.6
88.0
Gain on disposal of assets (1.7 ) (13.9 ) Multiemployer pension withdrawal income - (3.3 ) Restructuring and other costs 33.0 2.3 Operating profit 168.2 270.6 Interest expense, net (97.3 ) (86.7 ) Pension and other postretirement non-service (cost) income (5.0 )
39.9
Other income, net 25.2
0.2
Equity in (loss) income of unconsolidated entities (36.0 ) 18.4 Income before income taxes 55.1 242.4 Income tax expense (8.3 ) (58.6 ) Consolidated net income 46.8 183.8
Less: Net income attributable to noncontrolling
interests (1.5 )
(1.5 )
Net income attributable to common stockholders
(In millions, except First Second Third Fourth Fiscal percentages) Quarter Quarter Quarter Quarter Year Fiscal 2022$ 4,952.2 $ 5,382.1 $ 5,519.7 $ 5,402.5 $ 21,256.5 Fiscal 2023$ 4,923.1 % Change (0.6 )% Net sales in the first quarter of fiscal 2023 decreased$29.1 million compared to the first quarter of fiscal 2022. This decrease was primarily due to lower volumes and unfavorable foreign exchange rates which were partially offset by higher selling price/mix and increased sales due to the Grupo Gondi Acquisition. The change in net sales by reportable segment is outlined below for each reportable segment. Cost of Goods Sold (In millions, except First Second Third Fourth Fiscal percentages) Quarter Quarter Quarter Quarter Year Fiscal 2022$ 4,155.6 $ 4,378.4 $ 4,360.3 $ 4,341.5 $ 17,235.8 (% of Net Sales) 83.9 % 81.4 % 79.0 %
80.4 % 81.1 %
Fiscal 2023$ 4,157.9 (% of Net Sales) 84.5 % The$2.3 million increase in cost of goods sold in the first quarter of fiscal 2023 compared to the prior year quarter was primarily due to increased net cost inflation and higher operating costs. Net cost inflation consisted primarily of higher wage and benefit costs, freight, energy, chemicals and virgin fiber costs which were partially offset by lower recycled fiber costs. 37 --------------------------------------------------------------------------------
We discuss our operations in greater detail below for each reportable segment, as applicable.
Selling, General and Administrative Excluding Intangible Amortization
(In millions, except percentages) First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
Fiscal 2022 $ 452.9 $ 493.1 $ 504.3 $ 482.3 $ 1,932.6
(% of Net Sales) 9.1 % 9.2 % 9.1 % 8.9 % 9.1 %
Fiscal 2023 $ 479.1
(% of Net Sales) 9.7 %
Selling, general and administrative expenses ("SG&A") excluding intangible
amortization increased
Selling, General and Administrative Intangible Amortization
SG&A intangible amortization was
Gain on Disposal of Assets
In the three months endedDecember 31, 2022 , we recorded a gain on disposal of assets of$1.7 million . In the three months endedDecember 31, 2021 , we recorded a gain on disposal of assets of$13.9 million that was primarily due to the sale of a previously closed facility.
Restructuring and Other Costs
We recorded aggregate pre-tax restructuring and other costs of
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 5. Restructuring and Other Costs" of the Notes to Consolidated Financial Statements for additional information.
Interest Expense, net
Interest expense, net for the first quarter of fiscal 2023 was$97.3 million compared to$86.7 million for the prior year quarter. Interest expense, net increased in the current year period primarily due to higher interest rates on debt in the current year period and increased debt associated with the Grupo Gondi Acquisition.
Pension and Other Postretirement Non-Service Costs (Income)
Pension and other postretirement non-service costs for the first quarter of fiscal 2023 were$5.0 million compared to income of$39.9 million for the first quarter of fiscal 2022. The costs in the first quarter of fiscal 2023 were primarily due to higher interest rates driving the decrease in plan asset balances used to determine the expected return on plan assets for fiscal 2023 compared to greater plan assets used to determine the expected return in the prior year. Customary pension and other postretirement costs (income) are included in our segment results. See "Note 6. Retirement Plans" of the Notes to Consolidated Financial Statements for more information.
Other Income, net
Other income, net for the first quarter of fiscal 2023 was$25.2 million compared to$0.2 million in the first quarter of fiscal 2022. The results in the first quarter of fiscal 2023 included a$19.7 million gain on foreign currency exchange contract derivatives entered into in anticipation of the Grupo Gondi Acquisition and an$11.1 million gain 38 -------------------------------------------------------------------------------- on the sale of ourEaton, IN , andAurora, IL , uncoated recycled paperboard mills. Additionally, Other income, net included a favorable$7.1 million impact of foreign currency and$8.7 million of increased expense in connection with the sale of receivables, each as compared to the first quarter of fiscal 2022.
Equity in (Loss) Income of Unconsolidated Entities
Equity in (loss) income of unconsolidated entities for the first quarter of fiscal 2023 was a loss of$36.0 million compared to income of$18.4 million for the first quarter of fiscal 2022. The loss in the first quarter of fiscal 2023 was driven by a$46.8 million non-cash, pre-tax loss to recognize the write-off of historical foreign currency translation adjustments recorded in Accumulated other comprehensive loss, as well as the difference between the fair value of the consideration paid for the Grupo Gondi Acquisition and the carrying value of our prior ownership interest. See "Note 3. Acquisitions" for additional information.
Provision for Income Taxes
We recorded income tax expense of$8.3 million for the three months endedDecember 31, 2022 compared to$58.6 million for the three months endedDecember 31, 2021 . The effective tax rate for the three months endedDecember 31, 2022 was 15.1%, while the effective tax rate for the three months endedDecember 31, 2021 was 24.2%.
See "Note 7. Income Taxes" of the Notes to 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 Third Fourth Fiscal Quarter Quarter Quarter Quarter Year Fiscal 2022 Corrugated Packaging Shipments - thousands of tons (1) 1,621.0 1,646.3 1,635.8 1,567.9 6,471.1North American Corrugated Packaging Shipments - BSF 24.5 24.7 24.5 23.4 97.1 North American Corrugated Packaging Per Shipping Day - MMSF 401.0 385.8
389.3 365.5 385.2
Fiscal 2023 Corrugated Packaging Shipments - thousands of tons 1,474.9
Shipments - BSF 22.4
North American Corrugated Packaging Per
Shipping Day - MMSF 373.2
(1)
Fiscal 2022 Corrugated Packaging Shipments have been revised by an immaterial amount.
39
--------------------------------------------------------------------------------
Corrugated Packaging Segment -
(In millions, except percentages) Adjusted Adjusted EBITDA
Net Sales (1) EBITDA Margin
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
Fourth Quarter 2,386.1 383.9 16.1
Total $ 9,307.6 $ 1,386.7 14.9 %
Fiscal 2023
First Quarter $ 2,235.2 $ 309.2 13.8 %
(1)Net sales before intersegment eliminations, also referred to as segment sales.
Net sales before intersegment eliminations for theCorrugated Packaging segment increased$15.2 million in the first quarter of fiscal 2023 compared to the prior year quarter. The increase primarily consisted of$204.0 million of higher selling price/mix largely offset by$189.0 million of lower volumes.
Adjusted EBITDA - Corrugated Packaging Segment
Corrugated Packaging segment Adjusted EBITDA in the first quarter of fiscal 2023 increased$20.3 million compared to the prior year quarter primarily due to an estimated$206.0 million margin impact from higher selling price/mix that was largely offset by an estimated$79.0 million of increased net cost inflation,$57.8 million of lower volumes and$39.2 million higher operating costs including an estimated$56.5 million impact of economic downtime.
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 Fourth Fiscal Quarter Quarter Quarter Quarter Year Fiscal 2022 Consumer Packaging Shipments - thousands of tons 374.2 401.3 399.3
391.4 1,566.2
Fiscal 2023
Consumer Packaging Shipments -
thousands of tons 360.2
40--------------------------------------------------------------------------------
Consumer Packaging Segment -
(In millions, except percentages) Adjusted EBITDA
Net Sales (1) Adjusted EBITDA Margin
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
Fourth Quarter 1,305.7 219.2 16.8
Total $ 4,965.2 $ 829.2 16.7 %
Fiscal 2023
First Quarter $ 1,215.0 $ 183.3 15.1 %
(1)Net sales before intersegment eliminations, also referred to as segment sales.
The$76.3 million increase in net sales before intersegment eliminations for theConsumer Packaging segment in the first quarter of fiscal 2023 compared to the prior year quarter was primarily due to$132.3 million of higher selling price/mix that was partially offset by$52.4 million of unfavorable foreign exchange rates.
Adjusted EBITDA - Consumer Packaging Segment
Consumer Packaging segment Adjusted EBITDA in the first quarter of fiscal 2023 increased$14.0 million compared to the prior year quarter primarily due to an estimated$132.3 million margin impact from higher selling price/mix that was partially offset by an estimated$54.0 million of increased net cost inflation,$34.4 million of higher operating costs,$12.1 million of unfavorable foreign exchange rates and$9.2 million of higher non-cash pension costs.
Global Paper Segment
Global Paper Shipments
Global Paper shipments in thousands of tons include 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 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 Fourth Fiscal Quarter Quarter Quarter Quarter Year Fiscal 2022 Global Paper Shipments - thousands of tons 1,515.9 1,658.2 1,632.7
1,377.4 6,184.3
Fiscal 2023
Global Paper Shipments - thousands
of tons 1,091.9
41--------------------------------------------------------------------------------
Global Paper Segment -
(In millions, except percentages) Adjusted Adjusted EBITDA
Net Sales (1) EBITDA Margin
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
Fourth Quarter 1,429.2 306.4 21.4
Total $ 5,930.2 $ 1,246.4 21.0 %
Fiscal 2023
First Quarter $ 1,123.6 $ 157.3 14.0 %
(1)Net sales before intersegment eliminations, also referred to as segment sales.
The$229.0 million decrease in net sales before intersegment eliminations for the Global Paper segment in the first quarter of fiscal 2023 compared to the prior year quarter was primarily due to$328.6 million of lower volumes, including an estimated$20.3 million related to weather, which was partially offset by$99.8 million of higher selling price/mix. Containerboard volumes were impacted by inventory destocking and shifting consumer spending in the first quarter of fiscal 2023.
Adjusted EBITDA - Global Paper Segment
Global Paper segment Adjusted EBITDA in the first quarter of fiscal 2023 decreased$75.1 million compared to the prior year quarter primarily due to$113.7 million of lower volumes, including$11.5 million due to weather, an estimated$47.9 million of increased net cost inflation,$17.1 million of higher non-cash pension costs,$1.6 million higher operating costs including an estimated$41.1 million impact of economic downtime that was largely offset by lower maintenance downtime and other items, an estimated$4.0 million loss related to weather excluding volume and$3.6 million of unfavorable foreign exchange rates. These items were partially offset by$114.7 million of margin impact from higher selling price/mix.
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 Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
Fiscal 2022
Distribution Shipments - thousands of tons 48.5 50.8 59.8 46.8 205.9
Fiscal 2023
Distribution Shipments - thousands of tons 34.1
42
--------------------------------------------------------------------------------
Distribution Segment -
(In millions, except percentages) Adjusted EBITDA
Net Sales (1) Adjusted EBITDA Margin
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
Fourth Quarter 374.1 26.0 7.0
Total $ 1,418.9 $ 79.7 5.6 %
Fiscal 2023
First Quarter $ 321.5 $ 10.8 3.4 %
(1)Net sales before intersegment eliminations, also referred to as segment sales.
The$3.3 million decrease in net sales before intersegment eliminations for the Distribution segment in the first quarter of fiscal 2023 compared to the prior year quarter was primarily due to$24.7 million of lower volumes partially offset by$19.9 million of higher selling price/mix.
Adjusted EBITDA - Distribution Segment
Distribution segment Adjusted EBITDA in the first quarter of fiscal 2023 increased$4.3 million compared to the prior year quarter primarily due to a$19.9 million margin impact from higher selling price/mix that was partially offset by an estimated$13.2 million of increased cost inflation and$3.6 million of lower volumes.
Other Unallocated
Due to the timing of the Grupo Gondi Acquisition, it was not practicable to allocate the Grupo Gondi results to our operating segments for the first quarter of fiscal 2023. As a result, we included the results for the month ofDecember 2022 in "Other unallocated". We expect to allocate the results into our operating segments in the second quarter of fiscal 2023.
Net sales before intersegment eliminations for the operations from the Grupo
Gondi Acquisition in the first quarter of fiscal 2023 were
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 13. Debt" of the Notes to
Consolidated Financial Statements for more information regarding our debt.
Funding for our domestic operations in the foreseeable future is expected to
come from sources of liquidity within our domestic operations, including cash
and cash equivalents, and available borrowings under our credit facilities. As
such, our foreign cash and cash equivalents are not expected to be a key source
of liquidity to our domestic operations.
Cash and cash equivalents were $415.2 million at December 31, 2022 and $260.2
million at September 30, 2022 . Approximately two-thirds of the cash and cash
equivalents at December 31, 2022 were held outside of the U.S. The proportion of
cash and cash equivalents held outside of the U.S. generally varies from period
to period. At December 31, 2022 and September 30, 2022 , total debt was $9,462.8
million and $7,787.2 million , respectively, $497.0 million and $212.2 million of
which was short-term at December 31, 2022 and September 30, 2022 , respectively.
Included in our total debt at December 31, 2022 was $170.6 million of non-cash
acquisition-related
43
--------------------------------------------------------------------------------
step-up. During the three months ended
AtDecember 31, 2022 , we had approximately$3.3 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.
Our credit facilities contain certain restrictive covenants, including a
covenant to satisfy a debt to capitalization ratio. We test and report our
compliance with all of these covenants as required by these facilities and were
in compliance with all of these covenants at
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 a receivables securitization facility. 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 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 12. 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 consolidated balance
sheets and the activity is reflected in net cash provided by operating
activities in our consolidated statements of cash flows. Based on correspondence
with the financial institutions that are involved with our two primary SCF
programs, while the amount suppliers elect to sell to the financial institutions
varies from period to period, the amount generally averages approximately 17% to
19% 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 13. Debt"
for a discussion of our Receivables Securitization Facility and the amount
outstanding under our vendor financing and commercial card programs.
44
--------------------------------------------------------------------------------
Cash Flow Activity
Three Months Ended
(In millions) December 31,
2022 2021
Net cash provided by operating activities $ 265.9 $ 252.8
Net cash used for investing activities$ (1,080.2 ) $
(154.8 )
Net cash provided by (used for) financing activities
Net cash provided by operating activities during the three months endedDecember 31, 2022 increased$13.1 million compared to the three months endedDecember 31, 2021 , primarily due to a$68.4 million net decrease in the use of working capital compared to the prior year period that was partially offset by lower earnings. Net cash used for investing activities of$1,080.2 million in the three months endedDecember 31, 2022 consisted primarily of$853.5 million of cash paid for the purchase of businesses, net of cash acquired and$282.2 million for capital expenditures that were partially offset by$25.9 million of proceeds from the sale of two URB mills,$23.2 million of proceeds from currency forward contracts and$4.5 million of proceeds from the sale of property, plant and equipment. Net cash used for investing activities of$154.8 million in the three months endedDecember 31, 2021 consisted primarily of$173.1 million for capital expenditures that was partially offset by$22.4 million of proceeds from the sale of property, plant and equipment, primarily for the sale of a previously closed facility. Going into fiscal 2023, we expected capital expenditures of approximately$1.0 to$1.1 billion . We now expect capital expenditures in fiscal 2023 to be approximately$1.0 billion . At this level of capital investment, we expect that we will continue to invest in safety, environmental and maintenance projects while also making investments to support productivity and growth in our business. However, 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 changes in environmental laws and regulations. In the three months endedDecember 31, 2022 , net cash provided by financing activities of$982.9 million consisted primarily of a net increase in debt of$1,050.9 million which was partially offset by cash dividends paid to stockholders of$70.0 million . In the three months endedDecember 31, 2021 , net cash used for financing activities of$104.3 million consisted primarily of share repurchases of$100.1 million and cash dividends paid to stockholders of$66.3 million , which were partially offset by a net increase in debt of$48.1 million . OnJanuary 27, 2023 , our board of directors declared a quarterly dividend of$0.275 per share. InNovember 2022 , we paid a quarterly dividend of$0.275 per share, representing a$1.10 per share annualized dividend or an increase of 10% from the prior year. InNovember 2021 , we paid a quarterly dividend of$0.25 per share. InJuly 2015 , our board of directors authorized a repurchase program of up to 40.0 million shares of our outstanding Common Stock, representing approximately 15% of our outstanding Common Stock as ofJuly 1, 2015 . OnMay 4, 2022 , our board of directors authorized a new repurchase program of up to 25.0 million shares of our Common Stock, representing approximately 10% of our outstanding Common Stock, plus any unutilized shares left from theJuly 2015 authorization. Shares of our Common Stock may be purchased from time to time in open market or privately negotiated transactions. The timing, manner, price and amount of repurchases will be determined by management at its discretion based on factors, including the market price of our Common Stock, general economic and market conditions and applicable legal requirements. The repurchase program may be commenced, suspended or discontinued at any time. Pursuant to the programs, in the three months endedDecember 31, 2022 , we had no share repurchases. In the three months endedDecember 31, 2021 , we repurchased approximately 2.1 million shares of our Common Stock for an aggregate cost of$97.5 million . The amount reflected as purchased in the consolidated statements of cash flows varies due to the timing of share settlement. As ofDecember 31, 2022 , we had approximately 29.0 million shares of Common Stock available for repurchase under the program. TheU.S. federal, state and foreign net operating losses and otherU.S. federal and state tax credits available to us aggregated approximately$51 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 2023 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, 45 -------------------------------------------------------------------------------- forecasted taxable income, levels of capital expenditures and other items, we expect our fiscal 2023 cash tax rate will be slightly lower than our income tax rate and our cash tax rate in fiscal 2024 will be driven slightly higher than our income tax rate primarily due to the timing of depreciation on our qualifying capital investments as allowed under the Tax Cuts and Jobs Act. Our pension plans in theU.S. are overfunded and we have a$453.7 million pension asset on our consolidated balance sheet as ofDecember 31, 2022 . We made contributions of$7.6 million to our qualified and supplemental defined benefit pension plans during the three months endedDecember 31, 2022 . Based on current facts and assumptions, we expect to contribute approximately$23 million to our qualified and supplemental defined benefit pension plans in fiscal 2023. 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 certain MEPPs, including PIUMPF, 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. In fiscal 2023, we expect to pay approximately$12 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. AtDecember 31, 2022 andSeptember 30, 2022 , we had recorded withdrawal liabilities of$212.4 million and$214.7 million , respectively, including liabilities associated with PIUMPF's accumulated funding deficiency demands. See "Note 6. Retirement Plans - MEPPs" of the Notes to 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 Multiemployer Pension Plans" in our Fiscal 2022 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. 46 --------------------------------------------------------------------------------
Guarantor Summarized Financial Information
WRKCo, Inc. (the "Issuer"), a wholly owned subsidiary ofWestRock Company ("Parent"), has issued the following debt securities pursuant to offerings registered under the Securities Act of 1933, as amended (collectively for purposes of this subsection, the "Notes") (in millions, except percentages): Aggregate Principal Amount Stated Coupon Rate Maturity Date $ 500 3.000 % September 2024 $ 600 3.750 % March 2025 $ 750 4.650 % March 2026 $ 500 3.375 % September 2027 $ 600 4.000 % March 2028 $ 500 3.900 % June 2028 $ 750 4.900 % March 2029 $ 500 4.200 % June 2032 $ 600 3.000 % June 2033 Upon issuance, the Notes maturing in 2024, 2025, 2027 andMarch 2028 were fully and unconditionally guaranteed by two other wholly owned subsidiaries ofWestRock Company : RKT and MWV, together, (the "Guarantor Subsidiaries").WestRock Company has also fully and unconditionally guaranteed these Notes. The remaining Notes were issued by the Issuer subsequent to the consummation of the acquisition ofKapStone Paper and Packaging Corporation inNovember 2018 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 ".
For additional information regarding the notes, related indentures and other information, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Guarantor Summarized Financial Information" in our Fiscal 2022 Form 10-K.
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 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 (in millions).
© Edgar Online, source
