WESTROCK COMPANY OVERVIEW
We are a multinational provider of sustainable fiber-based paper and packaging solutions. We partner with our customers to provide differentiated paper and packaging solutions that help them win in the marketplace. Our team members support customers around the world from our operating and business locations inNorth America ,South America ,Europe ,Asia andAustralia .
Organization
OnNovember 2, 2018 , we completed the KapStone Acquisition. As a result, among other things, the Company became the ultimate parent ofWRKCo , KapStone and their respective subsidiaries, and the Company changed its name to "WestRock Company " andWRKCo changed its name to "WRKCo Inc. ". See "Note 3. Acquisitions and Investments" of the Notes to Consolidated Financial Statements for additional information.
Presentation
We report our financial results of operations in the following three reportable segments:Corrugated Packaging , which consists of our containerboard mills, corrugated packaging and distribution operations, as well as our merchandising displays and recycling procurement operations;Consumer Packaging , which consists of our consumer mills, food and beverage and partition operations; and Land and Development, which previously sold real estate, primarily in theCharleston, SC region. We have not included a discussion of the Land and Development segment below as its net sales and segment income are not significant due to the completion of the monetization of the real estate holdings. See "Note 7. Segment Information" of the Notes to Consolidated Financial Statements for the Land and Development disclosures. With the completion of the monetization, this segment no longer exists. A detailed discussion of the fiscal 2020 year-over-year changes can be found below and a detailed discussion of fiscal 2019 year-over-year changes can be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 . Acquisitions From time to time, we have completed acquisitions that have expanded our product and geographic scope, allowed us to increase our integration levels and impacted our comparative financials. We expect to continue to evaluate similar potential acquisitions in the future, although the size of individual acquisitions may vary. Below we summarize certain of these acquisitions. OnNovember 2, 2018 , we completed the KapStone Acquisition. KapStone is a leading North American producer and distributor of containerboard, corrugated products and specialty papers, including liner and medium containerboard, kraft papers and saturating kraft. KapStone also ownsVictory Packaging , a packaging solutions distribution company with facilities in theU.S. ,Canada andMexico . We have included the financial results of KapStone in ourCorrugated Packaging segment since the date of the acquisition. See "Note 3. Acquisitions and Investments" of the Notes to Consolidated Financial Statements for additional information. See also Item 1A. "Risk Factors - We May Be Unsuccessful in Making and Integrating Mergers, Acquisitions and Investments, and Completing Divestitures". 36 --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
Year Ended September 30 ,(In millions) 2020 2019 Net sales$ 17,578.8 $ 18,289.0 Segment income$ 1,362.8 $ 1,790.2 In fiscal 2020, we continued to pursue our strategy of offering differentiated and sustainable paper and packaging solutions that help our customers win. As a result of our broad portfolio, 160 customers bought at least$1 million from both ourCorrugated Packaging andConsumer Packaging segments in fiscal 2020. Net sales of$17,578.8 million for fiscal 2020 decreased$710.2 million , or 3.9%, compared to fiscal 2019. The decrease was primarily due to lower selling price/mix and lower volumes excluding acquisitions, including the impact of COVID-19, as well as unfavorable foreign currency impacts across our segments. Segment income decreased$427.4 million in fiscal 2020 compared to fiscal 2019, primarily due to lowerCorrugated Packaging andConsumer Packaging segment income. A detailed review of our performance appears below under "Results of Operations". We generated$2,070.7 million of net cash provided by operating activities in fiscal 2020, compared to$2,310.2 million in fiscal 2019. The decrease was primarily due to lower earnings largely due to lower selling price/mix, lower volumes excluding acquisitions, including COVID-19, as well as other factors. Given the uncertainties associated with the severity and duration of COVID-19 as discussed below, inMay 2020 we implemented the WestRock Pandemic Action Plan. See "COVID-19 RESPONSE - WestRock Pandemic Action Plan" for more information. We invested$978.1 million in capital expenditures in fiscal 2020 while returning$344.5 million in dividends to our stockholders. We believe our strong balance sheet and cash flow provide us the flexibility to continue to invest to sustain and improve our operating performance. See "Liquidity and Capital Resources" for more information. Loss per diluted share was$2.67 in fiscal 2020 compared to earnings per diluted share of$3.33 in fiscal 2019. Adjusted Earnings Per Diluted Share were$2.75 and$3.98 in fiscal 2020 and 2019, respectively. The loss per diluted share in fiscal 2020 was driven by a pre-tax non-cash goodwill impairment of$1,333.2 million in ourConsumer Packaging reporting unit.
A detailed review of our fiscal 2020 and 2019 performance appears below under "Results of Operations".
Expectations for Fiscal 2021 and the First Quarter of Fiscal 2021
We expect to generate strong cash flows and reduce our debt meaningfully in fiscal 2021. We expect capital investments to be$800 to$900 million , which is higher than the estimates that we incorporated into the WestRock Pandemic Action Plan due to specific growth projects that we subsequently identified. We expect to complete the Tres Barras mill upgrade in the first half of 2021 and to add more than$125 million in EBITDA in fiscal 2021 from capturing synergies related to the KapStone Acquisition, the new paper machine at ourFlorence, SC mill, our box plant in Porto Feliz,Brazil and the reconfiguration at ourNorth Charleston, SC mill. We expect that our financial results in fiscal 2021 will continue to be impacted by COVID-19. See "COVID-19 Response - End Market Segment Demand Trends" and "COVID-19 Response - Health and Safety of our Teammates" for additional information. In the first quarter of fiscal 2021, we expect a sequential decline in net sales and earnings from the fourth quarter reflecting the normal seasonal sequential volume declines in many of our businesses. We expect higher North American Corrugated box shipments to be offset by three fewer shipping days during the first quarter of fiscal 2021. While volume should remain strong inBrazil , we will execute a significant outage to support ourTres Barras mill upgrade and estimate 27,000 tons of maintenance downtime. We also expect higher energy and transportation costs entering the winter season along with increased health insurance costs prior to the annual reset of employee deductibles. In addition, our short-term incentive payouts for fiscal 2020 were below target as 37 -------------------------------------------------------------------------------- part of our pandemic action plan and we will begin accruing short-term incentive payouts for fiscal 2021 at a target level that is higher than the payout level for fiscal 2020. COVID-19 RESPONSE WestRock Pandemic Action Plan In fiscal 2020, we executed our differentiated strategy with financial strength and substantial liquidity, and we adapted quickly to changing market conditions as a result of the COVID-19 pandemic. Given the uncertainties associated with the severity and duration of the pandemic, inMay 2020 we announced, and began implementing, the WestRock Pandemic Action Plan. We have modified the WestRock Pandemic Action Plan as the impact of COVID-19 has continued and we may further modify it in the future by, for example, changing our capital expenditure assumptions, future estimates or the duration of the planned items. We expect that the actions that we have undertaken and will continue to undertake pursuant to the plan will provide an additional$1 billion in cash through the end of fiscal 2021 that we will be able to use to reduce our outstanding indebtedness. Pursuant to the WestRock Pandemic Action Plan, we committed ourselves to:
• Continuing to protect the safety and well-being of our teammates, which we
continue to do,
• Continuing to match our supply with our customers' demand, which we continue
to do,
• Decreasing the salaries of our senior executive team by up to 25% from
2020 through
board of directors by 25% for the third and fourth calendar quarters of 2020,
in addition to reducing discretionary expenses,
• Using Common Stock to pay our annual incentive for fiscal 2020 for nearly all
participants, and setting the payout level at 50% of the target opportunity
subject to a safety modifier that could increase the target by up to 5% or
decrease it by up to 10%,
• Using Common Stock to make Company funded 401(k) contributions (i.e. our
employee match of up to 5%) beginning
o We subsequently determined to fund the Company's annual 401(k) contribution
of 2.5% using Common Stock
o We subsequently determined to use Common Stock to make Company funded 401(k)
contributions through September 30, 2021
• Reducing fiscal 2020 capital investments by approximately $150 million to
approximately
fiscal 2021 capital investments to a range of
(which we have subsequently revised to
• Postponing an estimated
end of calendar year 2020, pursuant to relief offered under the Coronavirus
Aid, Relief and Economic Security ("CARES") Act, and
• Resetting our quarterly dividend to
In fiscal 2020, we achieved more than$350 million of the$1 billion goal set forth in the WestRock Pandemic Action Plan. We expect that our actions under the WestRock Pandemic Action Plan will continue to position us both to sustain our business in a range of economic and market conditions and for long-term success.
Health and Safety of our Teammates
Our first priority is 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-19, including:
• Implementing social distancing practices,
• Cleaning and disinfecting workstations and common surfaces frequently and
arranging for deep cleaning and sanitizing of our sites, as needed,
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• Requiring the use of face coverings to enter our facilities,
• Enforcing quarantine guidelines for team members affected by or potentially
exposed to COVID-19, and
• Supporting flexible and alternative work arrangements, including a
work-from-home strategy for team members whose jobs can be performed remotely.
We have also implemented health questionnaires and temperature screenings in compliance with applicable law and launched an onlineCoronavirus Resource Center to keep our teammates up to date on Company and health authority information, including information from theWorld Health Organization and theU.S. Centers for Disease Control and Prevention . During fiscal 2020, we provided one-time COVID-19 recognition awards to our teammateswho work in manufacturing and operations and recognized expense of$31.6 million for those awards. During fiscal 2020, we also incurred an additional expense of$32.4 million for cleaning, safety supplies and equipment, screening resources and other items. We expect to continue to incur expenses for these items as needed in the future. Business Continuity Our business is an essential part of the global supply chain. Our paper and packaging products enable our customers to package essential food, beverage, health products, cleaning products and other goods. We are continuing to operate and meet or exceed our customers' needs in this rapidly evolving demand environment. We formed a business continuity team comprised of senior leaders throughout our organization that develops and implements business continuity plans to ensure that our operations are well positioned to continue producing and delivering products to customers without disruption. The business continuity team meets regularly to identify and address issues as they arise and focuses on taking actions that address current circumstances associated with COVID-19 while positioning us for future growth.
Financial Flexibility and Liquidity
We expect the resetting of our dividend from
InJune 2020 ,WRKCo issued$600.0 million aggregate principal amount of its 3.00% Senior Notes due 2033. AtSeptember 30, 2020 , we had approximately$3.6 billion of availability under long-term committed credit facilities and cash and cash equivalents. We have limited debt maturities prior toMarch 2022 . We believe that we have substantial liquidity to navigate the current dynamic environment, and remain focused on maintaining our investment grade rating and managing our working capital and taking appropriate actions to ensure our access to necessary liquidity. The CARES Act allows employers to postpone paying their share of employment taxes incurred through the end of calendar year 2020. We expect to postpone an estimated$120 million of such payments over the three quarters endedDecember 31, 2020 and will be required to pay 50% of these amounts inDecember 2021 and the remaining 50% inDecember 2022 .
End Market Segment Demand Trends
End market demand trends continue to be impacted by COVID-19. Since the onset of COVID-19, we have experienced strong sequential demand from the e-commerce, food, and healthcare end markets. As we exited the fourth quarter of fiscal 2020, corrugated container volumes increased, andOctober 2020 shipments continued to rise as compared to the prior year. However, we have also experienced lower sales in other market segments, including specialty solid bleached sulphate ("SBS"), especially for commercial print, tobacco, plate and cup stock markets. Although we are not certain whether these trends will continue into future reporting periods and, if so, for how long and to what degree, we believe the decline in specialty SBS, in particular for certain end markets, is more systemic. Our view of related growth and earnings opportunities has been diminished in the foreseeable future. As 39 -------------------------------------------------------------------------------- a result of the expected lower volumes and cash flows, in the fourth quarter of fiscal 2020 we recorded a non-cash goodwill impairment charge of$1.3 billion pre-tax in ourConsumer Packaging reporting unit. InOctober 2020 , we announced the shut-down of one of our SBS paper machines at ourEvadale, TX mill, which will result in the removal of 200,000 tons of capacity. We believe that our diverse portfolio of sustainable fiber-based paper and packaging solutions positions us well to adapt and meet our customers' changing needs across a broad cross-section of the economy. In particular, for customers and markets that have had increased demand, the scale of our operations has enabled us to partner with our customers to support these needs. RESULTS OF OPERATIONS The following table summarizes our consolidated results for the two years endedSeptember 30, 2020 : Year Ended September 30, (In millions) 2020 2019 Net sales$ 17,578.8 $ 18,289.0 Cost of goods sold 14,381.6 14,540.0 Gross profit 3,197.2 3,749.0 Selling, general and administrative, excluding intangible amortization 1,624.4
1,715.2
Selling, general and administrative intangible amortization 400.5
400.2
Gain on disposal of assets (16.3 ) (41.2 ) Multiemployer pension withdrawal income (1.1 ) (6.3 ) Land and Development impairments -
13.0
Restructuring and other costs 112.7 173.7 Goodwill impairment 1,333.2 - Operating (loss) profit (256.2 ) 1,494.4 Interest expense, net (393.5 ) (431.3 ) Loss on extinguishment of debt (1.5 ) (5.1 ) Pension and other postretirement non-service income 103.3
74.2
Other income, net 9.5
2.4
Equity in income of unconsolidated entities 15.8
10.1
(Loss) income before income taxes (522.6 )
1,144.7
Income tax expense (163.5 ) (276.8 ) Consolidated net (loss) income (686.1 )
867.9
Less: Net income attributable to noncontrolling interests (4.8 )
(5.0 )
Net (loss) income attributable to common stockholders
Net sales in fiscal 2020 decreased$710.2 million , or 3.9%, compared to fiscal 2019. The decrease was primarily due to lower selling price/mix and lower volumes excluding acquisitions, including the impact of COVID-19, as well as unfavorable foreign currency impacts across our segments. These decreases were partially offset by higher containerboard volumes and the impact of the KapStone Acquisition as the prior year included only eleven months of KapStone ownership (the transaction closed onNovember 2, 2018 ). The change in net sales by segment is outlined below in "Results of Operations - Corrugated Packaging Segment" and "Results of Operations - Consumer Packaging Segment".
Cost of Goods Sold
Cost of goods sold decreased to$14,381.6 million in fiscal 2020 compared to$14,540.0 million in fiscal 2019. Cost of goods sold as a percentage of net sales was 81.8% in fiscal 2020 compared to 79.5% in fiscal 2019. The decrease in cost of goods sold in fiscal 2020 compared to fiscal 2019 was primarily due to a decrease in net sales, 40
-------------------------------------------------------------------------------- productivity improvements, net cost deflation and lower depreciation, which were partially offset by increased cost of goods sold associated with the impact of acquisitions (primarily an additional month of KapStone ownership in fiscal 2020), one-time COVID-19 recognition awards to our teammateswho work in manufacturing and operations and other manufacturing cost increases, including increased costs resulting from theNorth Charleston, SC mill reconfiguration andFlorence, SC mill strategic capital project, as well as increased costs for safety, cleaning and other items related to COVID-19. In fiscal 2020 and 2019, we incurred approximately$4.5 million and$113.9 million , respectively, of direct costs and property damage associated with Hurricane Michael, and received Hurricane Michael-related insurance proceeds of$32.3 million and$180.0 million , respectively, which were recorded as a reduction of cost of goods sold in ourCorrugated Packaging segment. The insurance proceeds were for$20.6 million and$124.7 million of direct costs and property damage for fiscal 2020 and 2019, respectively, and for$11.7 million and$55.3 million for business interruption recoveries, respectively. See "Hurricane Michael" below for additional information. In fiscal 2020 and 2019, we recorded a reduction of cost of goods sold of$32.1 million and$11.4 million , respectively, in connection with an indirect tax claim inBrazil , primarily in theCorrugated Packaging segment. See "Note 18. Commitments and Contingencies - Indirect Tax Claim" of the Notes to Consolidated Financial Statements for additional information. In fiscal 2019, we recorded a$24.7 million acquisition inventory step-up charge in ourCorrugated Packaging segment related to the KapStone Acquisition. We discuss these items in greater detail below in "Results of Operations - Corrugated Packaging Segment" and "Results of Operations - Consumer Packaging Segment".
Selling, General and Administrative Excluding Intangible Amortization
Selling, general, and administrative expenses ("SG&A") excluding intangible
amortization decreased $90.8 million to $1,624.4 million in fiscal 2020 compared
to fiscal 2019 in part, due to a $31.3 million reduction in bonus compensation
expense primarily associated with the Pandemic Action Plan, a $38.3 million
reduction in travel and entertainment, and other reductions associated with the
implementation of shelter-in-place orders that were initiated in response to
COVID-19. Decreases for fiscal 2020 were partially offset by an additional month
of KapStone ownership in fiscal 2020, as well as a $9.9 million increase in bad
debt expense compared to the prior year. SG&A excluding intangible amortization
as a percentage of net sales declined in fiscal 2020 to 9.2% from 9.4% in fiscal
2019.
Selling, General and Administrative Intangible Amortization
SG&A intangible amortization was
Gain on Disposal of Assets
The gain on disposal of assets in fiscal 2020 was$16.3 million and the gain on disposal of assets in fiscal 2019 was$41.2 million . The gain on disposal of assets in fiscal 2019 was primarily due to the$48.5 million gain on sale of our formerAtlanta beverage facility recorded in the first quarter of fiscal 2019.
Land and Development Impairments
In fiscal 2019, we recorded
Restructuring and Other Costs
We recorded aggregate pre-tax restructuring and other costs of$112.7 million and$173.7 million for fiscal 2020 and 2019, respectively. These amounts are not comparable since the timing and scope of the individual actions associated with each restructuring, acquisition, integration or divestiture vary. We generally expect the integration of a closed facility's assets and production with other facilities to enable the receiving facilities to better leverage their fixed costs while eliminating fixed costs from the closed facility. See "Note 4. Restructuring and Other Costs" of the Notes to Consolidated Financial Statements for additional information, including a description of the type of costs incurred. We have restructured portions of our operations from time to time and it is likely that we will engage in additional restructuring opportunities in the future. See also Item 1A. "Risk Factors - We May Incur Additional Restructuring Costs and May Not Realize Expected Benefits from Restructuring". 41 --------------------------------------------------------------------------------
Goodwill Impairment
In fiscal 2020, we recorded a pre-tax non-cash goodwill impairment of$1,333.2 million in ourConsumer Packaging reporting unit. The impairment is described below in "Critical Accounting Policies and Significant Accounting Estimates -Goodwill " of the Notes to Consolidated Financial Statements.
Interest Expense, net
Interest expense, net was$393.5 million and$431.3 million for fiscal 2020 and 2019, respectively. Interest expense, net in fiscal 2020 decreased primarily due to$20.5 million of interest income recorded in connection with an indirect tax claim inBrazil compared to$0.8 million in fiscal 2019, lower levels of debt and lower interest rates in the current year period. These increases were partially offset by an additional month of interest expense associated with the KapStone Acquisition in the current year compared to the prior year. See "Note 18. Commitments and Contingencies - Indirect Tax Claim" of the Notes to Consolidated Financial Statements for additional information. See Item 1A. "Risk Factors - The Level of Our Indebtedness Could Adversely Affect Our Financial Condition and Impair Our Ability to Operate Our Business".
Pension and Other Postretirement Non-Service Income
Pension and other postretirement non-service income was$103.3 million and$74.2 million in fiscal 2020 and 2019, respectively. The increases were primarily due to the increase in plan asset balances used to determine the expected return on plan assets for fiscal 2020. Customary pension and other postretirement (income) costs are included in segment income. See "Note 5. Retirement Plans" of the Notes to Consolidated Financial Statements for more information.
Other Income, net
Other income, net was
Provision for Income Taxes We recorded income tax expense of$163.5 million for fiscal 2020 at an effective tax rate of (31.3)%, due to the loss before income tax in fiscal 2020, compared to an income tax expense of$276.8 million at an effective tax rate of 24.2% in fiscal 2019. Excluding the effect of the goodwill impairment, which was largely not tax deductible, our effective tax rate was 22.5%. See "Note 6. Income Taxes" of the Notes to Consolidated Financial Statements for additional information, including a table reconciling the statutory federal tax rate to our effective tax rate. Hurricane Michael InOctober 2018 , our containerboard and pulp mill located inPanama City, FL sustained extensive damage from Hurricane Michael. We shut down the mill's operations in advance of the hurricane's landfall. Repair work was completed on the two paper machines and related infrastructure duringJune 2019 . In fiscal 2019, we received$180.0 million of insurance proceeds. In the first quarter of fiscal 2020, we settled our property damage and business interruption insurance claim for$212.3 million (net of our$15 million deductible), and received the remaining$32.3 million of insurance proceeds. The insurance proceeds received in fiscal 2020 consisted of$11.7 million of business interruption recoveries and$20.6 million for direct costs and property damage. In fiscal 2019, we received insurance proceeds of$180.0 million . The insurance proceeds for fiscal 2019 consisted of$55.3 million of business interruption recoveries and$124.7 million for direct costs and property damage.
Corrugated Packaging Segment
Corrugated Packaging Shipments
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groups: North American and Brazil / India because we believe investors,
potential investors, securities analysts and others find this breakout useful
when evaluating our operating performance. We have included the impact of the
KapStone Acquisition beginning in the first quarter of fiscal 2019. In the
second quarter of fiscal 2020, we adjusted the second quarter and full year
fiscal 2019 amounts in the table below by an immaterial amount to adjust the
acquired KapStone operations. The table below reflects shipments in thousands of
tons, BSF and millions of square feet ("MMSF") per shipping day. The number of
shipping days vary by geographic location.
North American Corrugated Packaging Shipments
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
Fiscal 2019
North American Corrugated Packaging
Shipments - thousands of tons 2,346.7 2,510.2 2,644.2 2,616.4 10,117.5
North American Corrugated Containers
Shipments - BSF 22.5 23.4 24.3 24.1 94.3
North American Corrugated Containers Per
Shipping Day - MMSF 369.4 372.2
384.7 382.7 377.3
Fiscal 2020North American Corrugated Packaging Shipments - thousands of tons 2,591.2 2,618.8 2,504.4 2,504.4 10,218.8 North American Corrugated Containers Shipments - BSF 23.9 23.8 23.2 24.9 95.8
North American Corrugated Containers Per
Shipping Day - MMSF 385.9 371.2 369.3 388.0 378.6
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
Fiscal 2019
Brazil / India Corrugated Packaging
Shipments
- thousands of tons 185.6 176.5 171.0 194.6 727.7
Brazil / India Corrugated
Containers Shipments
- BSF 1.6 1.5 1.6 1.7 6.4
Brazil / India Corrugated
Containers Per Shipping
Day - MMSF 20.7 20.6 21.0 21.8 21.0
Fiscal 2020
Brazil / India Corrugated Packaging
Shipments
- thousands of tons 168.1 182.5 176.4 185.1 712.1
Brazil / India Corrugated
Containers Shipments
- BSF 1.7 1.6 1.6 1.9 6.8
Brazil / India Corrugated
Containers Per
Shipping Day - MMSF 22.9 21.3 21.0 24.3 22.4
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Corrugated Packaging Segment -
Segment Return
(In millions, except percentages) Net Sales (1) Income on Sales Fiscal 2019 First Quarter$ 2,733.8 $ 246.8 9.0 % Second Quarter 2,990.7 310.3 10.4 Third Quarter 3,072.8 392.7 12.8 Fourth Quarter 3,019.4 449.8 14.9 Total$ 11,816.7 $ 1,399.6 11.8 % Fiscal 2020 First Quarter$ 2,909.5 $ 283.4 9.7 % Second Quarter 2,882.5 244.5 8.5 Third Quarter 2,728.8 227.9 8.4 Fourth Quarter 2,898.4 281.9 9.7 Total$ 11,419.2 $ 1,037.7 9.1 %
(1)
Net sales before intersegment elimination for theCorrugated Packaging segment decreased$397.5 million in fiscal 2020 compared to fiscal 2019 primarily reflecting$447.1 million from lower selling price/mix on sales,$150.3 million of lower volumes excluding acquisitions, including the impact of COVID-19, as well as$93.2 million related to unfavorable impacts of foreign currency. These items were partially offset by$278.3 million of net sales from the acquired KapStone operations forOctober 2019 as fiscal 2020 included an additional month of KapStone ownership.
Segment Income - Corrugated Packaging Segment
Segment income attributable to theCorrugated Packaging segment in fiscal 2020 decreased$361.9 million compared to fiscal 2019, primarily due to the margin impact of lower selling price/mix of$466.4 million ,$55.3 million of lower volumes excluding acquisitions, including the impact of COVID-19,$22.7 million of unfavorable foreign currency impacts, and other manufacturing cost increases, including estimated increased costs of$43.4 million associated with theNorth Charleston, SC mill reconfiguration andFlorence, SC mill strategic capital project, one-time COVID-19 recognition awards to our teammateswho work in manufacturing and operations and increased costs for safety, cleaning and other items related to COVID-19. Since we started tracking and reporting the impact of COVID-19 in the third quarter of fiscal 2020, we have made one-time COVID-19 recognition awards to our manufacturing and operations teammates and incurred increased costs for safety, cleaning and other items related to COVID-19 of approximately$33.5 million . These decreases were partially offset by the net favorable impact of Hurricane Michael in fiscal 2020 compared to fiscal 2019. The net recovery of Hurricane Michael direct costs and property damage was a favorable$5.3 million compared to the prior year net expense incurred, and the impact of business interruption recoveries in the current year period compared to lost production and sales net of recoveries in the prior year were an estimated favorable$25.1 million . In addition, we realized an estimated$115.8 million of productivity improvements, an estimated$30.5 million decreased impact of economic downtime,$18.4 million for an indirect tax claim inBrazil and an estimated$11.8 million of net cost deflation, each as compared to the prior year. See "Note 18. Commitments and Contingencies - Indirect Tax Claim" of the Notes to Consolidated Financial Statements for additional information. Net cost deflation consisted primarily of lower energy, virgin fiber, freight and chemical costs that were partially offset by higher recovered fiber, and wage and other costs compared to the prior year. The prior year included an acquisition inventory step-up charge of$24.7 million . 44 --------------------------------------------------------------------------------
Consumer Packaging Segment Consumer Packaging ShipmentsConsumer Packaging shipments are expressed as a tons equivalent, which includes external and intersegment tons shipped from ourConsumer Packaging mills plusConsumer Packaging converting shipments converted from BSF to tons. The shipment data table excludes gypsum paperboard liner tons produced bySeven Hills since it is not consolidated. First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter Year Fiscal 2019 Consumer Packaging Shipments - thousands of tons 969.6 985.5
980.1 974.0 3,909.2
Fiscal 2020 Consumer Packaging Shipments - thousands of tons 922.4 987.7 984.5 976.8 3,871.4
Consumer Packaging Segment -
Segment Return
(In millions, except percentages) Net Sales (1) Income on Sales Fiscal 2019 First Quarter$ 1,618.8 $ 76.9 4.8 % Second Quarter 1,668.3 85.2 5.1 Third Quarter 1,650.1 91.0 5.5 Fourth Quarter 1,668.8 135.0 8.1 Total$ 6,606.0 $ 388.1 5.9 % Fiscal 2020 First Quarter$ 1,536.9 $ 46.2 3.0 % Second Quarter 1,616.3 90.8 5.6 Third Quarter 1,552.6 95.3 6.1 Fourth Quarter 1,627.2 91.4 5.6 Total$ 6,333.0 $ 323.7 5.1 %
(1)
Net sales before intersegment eliminations for theConsumer Packaging segment decreased$273.0 million in fiscal 2020 compared to the prior year primarily due to$145.3 million of lower volumes, including the impact of COVID-19,$100.5 million of lower selling price/mix on sales and$30.2 million of unfavorable foreign currency impacts.
Segment Income - Consumer Packaging Segment
Segment income attributable to theConsumer Packaging segment in fiscal 2020 decreased$64.4 million compared to the prior year. Segment income in the period was reduced by an estimated$69.5 million of margin impact from lower selling price/mix, an estimated$53.4 million of economic downtime,$51.5 million of lower volumes, including the impact of COVID-19,$10.3 million of unfavorable foreign currency impacts, and other items. These items were partially offset by$69.0 million of productivity improvements, an estimated$40.1 million of net cost deflation and$22.6 million of lower depreciation and amortization, each as compared to the prior year. Net cost deflation consisted primarily of lower virgin fiber, chemical, energy, and freight costs, which were partially offset wage and other costs. Recovered fiber costs were essentially flat. Since we started tracking and reporting the 45 -------------------------------------------------------------------------------- impact of COVID-19 in the third quarter of fiscal 2020, we have made one-time COVID-19 recognition awards to our manufacturing and operations teammates and incurred increased costs for safety, cleaning and other items related to COVID-19 of approximately$25.1 million . 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 our A/R Sales Agreement (as hereinafter defined), 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 additional information. 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$251.1 million atSeptember 30, 2020 and$151.6 million atSeptember 30, 2019 . Approximately one-half of the cash and cash equivalents atSeptember 30, 2020 were held outside of theU.S. AtSeptember 30, 2020 , total debt was$9,430.6 million ,$222.9 million of which was current. AtSeptember 30, 2019 , total debt was$10,063.4 million ,$561.1 million of which was current. Included in our total debt atSeptember 30, 2020 was$208.9 million of non-cash acquisition related step-up. Total debt declined compared to the prior year primarily due to net cash provided by operating activities exceeding aggregate capital expenditures and dividends by$748.1 million , which was partially offset by a$99.5 million increase in our cash and cash equivalents balance. This includes the achievement of more than$350 million of the$1 billion goal set forth in the WestRock Pandemic Action Plan. In addition, debt was also increased by$100.3 million related to ourOctober 1, 2019 adoption of the leasing guidance codified inFinancial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") 842 "Leases" ("ASC 842") that recharacterized$100.3 million from short-term and long-term liabilities for two chip mills to a finance lease obligation. InJune 2020 ,WRKCo issued$600.0 million aggregate principal amount of its 3.00% Senior Notes due 2033 (the "June 2033 Notes"). We may redeem theJune 2033 Notes, in whole or in part, at any time at specified redemption prices, plus accrued and unpaid interest, if any. The proceeds from the issuance of theJune 2033 Notes were primarily used to repay the$100.0 million principal amount ofWestRock MWV, LLC's ("MWV") 9.75% notes dueJune 2020 and reduce outstanding indebtedness under our Receivables Securitization Facility and Revolving Credit Facility (each as hereinafter defined). See "Note 13. Debt" of the Notes to Consolidated Financial Statements for additional information. AtSeptember 30, 2020 , we had approximately$3.6 billion of availability under long-term committed credit facilities and cash and cash equivalents. Our primary availability is under our revolving credit facilities and Receivables Securitization Facility, the majority of which matures onNovember 21, 2024 . This liquidity may be used to provide for ongoing working capital needs and for other general corporate purposes, including acquisitions, dividends and stock repurchases. We have limited debt maturities prior toMarch 2022 . Certain restrictive covenants govern our maximum availability under the credit facilities. We test and report our compliance with these covenants as required by these facilities and were in compliance with all of these covenants atSeptember 30, 2020 .
At
We use a variety of working capital management strategies including supply chain
financing ("SCF") programs, vendor financing and commercial card programs, a
monetization facility where we sell short-term receivables to a group of
third-party financial institutions and a receivables securitization facility. We
describe these programs below and, in the Notes to Consolidated Financial
Statements.
We engage in certain customer-based SCF programs to accelerate the receipt of
payment for outstanding accounts receivables from certain customers. Certain
costs of these programs are borne by the customer or us. Receivables transferred
under these customer-based supply chain finance programs generally meet the
requirements to be accounted for as sales in accordance with guidance under ASC
860 "Transfers and Servicing"
46
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resulting in derecognition of such receivables from our consolidated balance
sheets. Receivables involved with these customer-based supply chain finance
programs constitute approximately 2% of our annual net sales. In addition, we
have a monetization facility which sells to a third-party financial institution
all of the short-term receivables generated from certain customer trade
accounts. For a discussion of our monetization facility see "Note 12. Fair Value
- A/R Sales Agreement".
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
item accounts payable and accrued expenses in our consolidated balance sheet and
the activity is reflected in net cash provided by operating activities in our
consolidated statements of cash flows. Based on correspondence with the
financial institutions that are involved with our two primary SCF programs,
while the amount suppliers elect to sell to the financial institutions varies
from period to period, the amount generally averages approximately 15% of our
accounts payable balance.
We also participate in certain vendor financing and commercial card programs to
support our travel and entertainment expenses and smaller vendor purchases.
Amounts outstanding under these programs are classified as debt primarily
because we receive the benefit of extended payment terms and a rebate from the
financial institution that we would not have otherwise received without the
financial institutions' involvement. We also have a receivables securitization
facility (as defined herein) that allows for borrowing availability based on the
eligible underlying accounts receivable and compliance with certain covenants.
For a discussion of our receivables securitization facility and the amount
outstanding under our vendor financing and commercial card programs see "Note
13. Debt" of the Notes to Consolidated Financial Statements for additional
information.
Cash Flow Activity
Year Ended September 30,
(In millions) 2020 2019
Net cash provided by operating activities $ 2,070.7 $ 2,310.2
Net cash used for investing activities$ (921.5 ) $ (4,579.6 ) Net cash (used for) provided by financing activities$ (1,021.1 ) $
1,780.2
Net cash provided by operating activities during fiscal 2020 decreased$239.5 million from fiscal 2019 primarily due to lower consolidated net income and a$117.7 million net increase in the use of working capital compared to the prior year. Net cash used for investing activities of$921.5 million in fiscal 2020 consisted primarily of$978.1 million for capital expenditures that was partially offset by$35.0 million of proceeds from the sale of property, plant and equipment and$16.9 million of proceeds from corporate owned life insurance benefits. Net cash used for investing activities of$4,579.6 million in fiscal 2019 consisted primarily of$3,374.2 million for cash paid for the purchase of businesses, net of cash acquired (excluding the assumption of debt), primarily related to the KapStone Acquisition, and$1,369.1 million for capital expenditures that were partially offset by$119.1 million of proceeds from the sale of property, plant and equipment, primarily related to the sale of ourAtlanta beverage facility,$33.2 million of 47 --------------------------------------------------------------------------------
proceeds from corporate owned life insurance benefits and
Under the WestRock Pandemic Action Plan, which we announced inMay 2020 in response to the COVID-19 pandemic, we expected to reduce our fiscal 2020 capital expenditures by approximately$150 million to approximately$950 million . Fiscal 2020 capital expenditures aggregated$978.1 million in fiscal 2020, including work on our strategic projects at ourFlorence, SC andTres Barras ,Brazil mills. We also had to navigate the impact of shelter-in-place and other similar restrictions and the availability of contract and technical resources as a result of COVID-19. We started up the paper machine at ourFlorence, SC mill inOctober 2020 and expect to increase capacity during fiscal 2021. The Tres Barras mill upgrade project should be completed in the first half of 2021. With the expected completion of certain of our strategic projects, we had expected to transition to our long-range capital expenditure run-rate of approximately$900 million to$1.0 billion a year in fiscal 2021. We expect to invest$800 million to$900 million in fiscal 2021, which is higher than the estimates that we incorporated into the WestRock Pandemic Action Plan due to specific growth projects that we subsequently identified. At these capital investment levels, we are confident that we will continue to invest in the appropriate safety, environmental and maintenance projects, and complete our strategic mill projects while also making investments to support productivity and growth in our business. However, it is possible that our capital expenditure assumptions may change, project completion dates may change, or we may decide to invest a different amount depending upon opportunities we identify, or changes in market conditions, or to comply with environmental or other regulatory changes.
In fiscal 2020, net cash used for financing activities of
We estimate that we will invest approximately$27 million for capital expenditures during fiscal 2021 in connection with matters relating to environmental compliance. We were obligated to purchase approximately$310 million of fixed assets atSeptember 30, 2020 for various capital projects. See Item 1A. "Risk Factors - Our Capital Expenditures May Not Achieve the Desired Outcomes or May Be Achieved at a Higher Cost than Anticipated". AtSeptember 30, 2020 theU.S. federal, state and foreign net operating losses and otherU.S. federal and state tax credits available to us aggregated approximately$78 million in future potential reductions ofU.S. federal, state and foreign cash taxes. Based on our current projections, we expect to utilize nearly all of the remainingU.S. federal net operating losses and otherU.S. federal credits during the current fiscal year. Foreign and state net operating losses and credits will be used over a longer period of time. Our cash tax rate is highly dependent on our taxable income, utilization of net operating losses and credits, changes in tax laws or tax rates, capital expenditures or 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 cash tax rate to be slightly higher than our income tax rate in fiscal 2021, 2022 and 2023 primarily due to the absence of certain nonrecurring tax credits, the reduction in capital investments, as well as reversal of prior years' accelerated tax depreciation causing taxable income to be higher. During fiscal 2020 and 2019, we made contributions of$22.5 million and$25.1 million , respectively, to ourU.S. and non-U.S. pension plans. Based on current facts and assumptions, we expect to contribute approximately$23 million to ourU.S. and non-U.S. pension plans in fiscal 2021. We have made contributions and expect to continue to make contributions in the coming years to our pension plans in order to ensure that our funding levels remain adequate in light of projected liabilities and to meet the requirements of the Pension Act and other regulations. The net overfunded status of ourU.S. and non-U.S. pension plans atSeptember 30, 2020 was$51.7 million . Based on current assumptions, including future interest rates, we estimate that minimum pension contributions to ourU.S. and non-U.S. pension plans will be approximately$22 million to$23 million annually in fiscal 2022 through 2025. See "Note 5. Retirement Plans" of the Notes to Consolidated Financial Statements. In the normal course of business, we evaluate our potential exposure to MEPPs, including with respect to potential withdrawal liabilities. In fiscal 2018, we submitted formal notification to withdraw from two plans and recorded an aggregate estimated withdrawal liability of$184.2 million , nearly all of which was for PIUMPF. InSeptember 2019 , we received a demand from PIUMPF asserting that we owe$170.3 million on an undiscounted basis (approximately$0.7 million per month for the next 20 years) with respect to our withdrawal liability. The initial 48
-------------------------------------------------------------------------------- demand did not address any assertion of liability for PIUMPF's accumulated funding deficiency. InOctober 2019 , we received two additional demand letters from PIUMPF related to a subsidiary of ours asserting that we owe$2.3 million on an undiscounted basis to be paid over 20 years with respect to the subsidiary's withdrawal liability and$2.0 million for its accumulated funding deficiency. We received an updated demand letter decreasing the accumulated funding deficiency demand from$2.0 million to$1.3 million inApril 2020 . InFebruary 2020 , we received a demand letter from PIUMPF asserting that we owe$51.2 million for our pro-rata share of PIUMPF's accumulated funding deficiency, including interest. We are evaluating each of these demands and we expect to challenge the accumulated funding deficiency demands. We began making monthly payments for these withdrawal liabilities in fiscal 2020, excluding the accumulated funding deficiency demands. See "Note 5. Retirement Plans - Multiemployer Plans" of the Notes to Consolidated Financial Statements for additional information. See also Item 1A. "Risk Factors - We May Incur Withdrawal Liability and/or Increased Funding Requirements in Connection with MEPPs". OnMay 5, 2020 , our board of directors declared a quarterly dividend of$0.20 per share for an annual rate of$0.80 per share, which was lower than our previous quarterly dividend paid in fiscal 2020. We believe that this reduction in our dividend was prudent given the uncertain market conditions driven by COVID-19 and allowed us to allocate additional cash to pay down our outstanding debt. As the situation with COVID-19 continues to evolve, we will re-evaluate the level of our dividend. InAugust 2020 ,May 2020 ,February 2020 andNovember 2019 we paid a quarterly dividend of$0.20 ,$0.20 ,$0.465 and$0.465 per share, respectively for a total of$1.33 per share. During fiscal 2019, we paid an annual dividend of$1.82 per share. During fiscal 2018, we paid an annual dividend of$1.72 per share. InJuly 2015 , our board of directors authorized a repurchase program of up to 40.0 million shares of our Common Stock, representing approximately 15% of our outstanding Common Stock as ofJuly 1, 2015 . Shares of our Common Stock may be purchased from time to time in open market or privately negotiated transactions. The timing, manner, price and amount of repurchases will be determined by management at its discretion based on factors, including the market price of our Common Stock, general economic and market conditions and applicable legal requirements. The repurchase program may be commenced, suspended or discontinued at any time. In fiscal 2020, we repurchased no shares of our Common Stock. In fiscal 2019, we repurchased approximately 2.1 million shares of our Common Stock for an aggregate cost of$88.6 million . As ofSeptember 30, 2020 , we had approximately 19.1 million shares of Common Stock available for repurchase under the program. We anticipate that we will be able to fund our capital expenditures, interest payments, dividends and stock repurchases, pension payments, working capital needs, note repurchases, restructuring activities, repayments of current portion of long-term debt and other corporate actions for the foreseeable future from cash generated from operations, borrowings under our credit facilities, proceeds from our A/R Sales Agreement, proceeds from the issuance of debt or equity securities or other additional long-term debt financing, including new or amended facilities. In addition, we continually review our capital structure and conditions in the private and public debt markets in order to optimize our mix of indebtedness. In connection with these reviews, we may seek to refinance existing indebtedness to extend maturities, reduce borrowing costs or otherwise improve the terms and composition of our indebtedness.
Contractual Obligations
We summarize our enforceable and legally binding contractual obligations atSeptember 30, 2020 , and the effect these obligations are expected to have on our liquidity and cash flow in future periods in the following table. Certain amounts in this table are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties and other factors, including estimated minimum pension plan contributions and estimated benefit payments related to postretirement obligations, supplemental retirement plans and deferred compensation plans. Because these estimates and assumptions are subjective, the enforceable and legally binding obligations we actually pay in future periods may vary from those presented in the table. 49 --------------------------------------------------------------------------------
Payments Due by Period
Fiscal 2023 Fiscal 2024
(In millions) Total Fiscal 2021 and 2022 and 2025 Thereafter
Long-Term Debt, including current
portion,
excluding finance lease
obligations (1) $ 9,007.9 $ 214.2 $ 1,077.8 $ 1,986.8 $ 5,729.1
Lease obligations (2) 1,138.0 205.0 299.0 181.3 452.7
Purchase obligations and other (3)
(4) (5) 1,669.2 989.4 207.1 133.0 339.7
Total $ 11,815.1 $ 1,408.6 $ 1,583.9 $ 2,301.1 $ 6,521.5 (1) Includes only principal payments owed on our debt assuming that all of our
long-term debt will be held to maturity, excluding scheduled payments. We
have excluded
financing costs and unamortized bond discounts from the table to arrive at
actual debt obligations. See "Note 13. Debt" of the Notes to Consolidated
Financial Statements for information on the interest rates that apply to our
various debt instruments.
(2) See "Note 15. Leases" of the Notes to Consolidated Financial Statements for
additional information.
(3) Purchase obligations include agreements to purchase goods or services that
are enforceable and legally binding and that specify all significant terms,
including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provision; and the approximate timing of the transaction.
Purchase obligations exclude agreements that are cancelable without penalty.
(4) We have included future estimated minimum pension plan contributions, MEPP
withdrawal payments with definite payout terms and estimated benefit payments
related to postretirement obligations, supplemental retirement plans and
deferred compensation plans. Our estimates are based on factors, such as
discount rates and expected returns on plan assets. Future contributions are
subject to changes in our underfunded status based on factors such as
investment performance, discount rates, returns on plan assets and changes in
legislation. It is possible that our assumptions may change, actual market
performance may vary or we may decide to contribute different amounts. We
have excluded
deficiency, due to lack of definite payout terms for certain of the
obligations. See "Note 5. Retirement Plans - Multiemployer Plans" of the
Notes to Consolidated Financial Statements for additional information.
(5) We have not included the following items in the table:
• An item labeled "other long-term liabilities" reflected on our consolidated
balance sheet because these liabilities do not have a definite pay-out
scheme.
•
with liabilities, primarily for uncertain tax positions due to the
uncertainty as to the amount and timing of payment, if any.
In addition to the enforceable and legally binding obligations presented in the table above, we have other obligations for goods and services and raw materials entered into in the normal course of business. These contracts, however, are subject to change based on our business decisions.
Expenditures for Environmental Compliance
See Item 1. "Business - Governmental Regulation - Environmental" and "Business - Governmental Regulation - Climate Change" for a discussion of our expenditures for environmental compliance.
NON-GAAP FINANCIAL MEASURES
We report our financial results in accordance with generally accepted accounting
principles in the U.S. ("GAAP"). However, management believes certain non-GAAP
financial measures provide investors and other users with additional meaningful
information that should be considered when assessing our ongoing performance.
Management also uses these non-GAAP financial measures in making financial,
operating and planning decisions, and in evaluating our performance. Non-GAAP
financial measures should be viewed in addition to, and not as an alternative
for, our GAAP results. The non-GAAP financial measures we present may differ
from similarly captioned measures presented by other companies.
We use the non-GAAP financial measures "Adjusted Net Income" and "Adjusted Earnings Per Diluted Share".
50
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Management believes these measures provide our board of directors, investors,
potential investors, securities analysts and others with useful information to
evaluate our performance because they exclude restructuring and other costs and
other specific items that management believes are not indicative of the ongoing
operating results of the business. We and our board of directors use this
information to evaluate our performance relative to other periods. We believe
that the most directly comparable GAAP measures to Adjusted Net Income and
Adjusted Earnings Per Diluted Share are Net (loss) income attributable to common
stockholders and (Loss) earnings per diluted share, respectively.
Set forth below is a reconciliation of the non-GAAP financial measure Adjusted Earnings Per Diluted Share to Loss (earnings) per diluted share, the most directly comparable GAAP measure (in dollars per share) for the periods indicated.
Years Ended September 30,
2020 2019
(Loss) earnings per diluted share$ (2.67 ) $ 3.33 Goodwill impairment 5.07 - Restructuring and other items 0.33
0.56
reconfiguration costs 0.13 - COVID-19 manufacturing and operations bonus 0.09 - Losses at closed plants, transition and start-up costs 0.07
0.05
Accelerated depreciation on major capital projects and
certain plant closures 0.05
0.12
Interest accretion and other 0.05 (0.02 ) Loss on extinguishment of debt -
0.02
Multiemployer pension withdrawal expense (income) - (0.01 ) Brazil indirect tax claim (0.14 ) (0.02 ) Litigation recovery (0.07 ) - Adjustment related to Tax Cuts and Jobs Act (0.06 )
0.02
Direct recoveries from Hurricane Michael, net of
related proceeds (0.05 ) (0.03 ) Gain on sale of certain closed facilities (0.05 )
(0.15 ) Land and Development impairment and operating results (1)
- 0.03
Inventory stepped-up in purchase accounting, net of LIFO
- 0.07
Other 0.02
0.01
Adjustment to reflect adjusted earnings on a fully diluted basis
(0.02 ) -
Adjusted Earnings Per Diluted Share $ 2.75 $ 3.98 (1)Includes a
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The GAAP results in the tables below for Pre-Tax, Tax and Net of Tax are
equivalent to the line items "(Loss) income before income taxes", "Income tax
(expense) benefit" and "Consolidated net (loss) income", respectively, as
reported on the statements of operations. Set forth below are reconciliations of
Adjusted Net Income to the most directly comparable GAAP measure, Net (loss)
income attributable to common stockholders (represented in the table below as
the GAAP Results for Consolidated net (loss) income (i.e. Net of Tax) less net
income attributable to Noncontrolling interests), for the periods indicated (in
millions):
Year ended September 30, 2020 Year ended September 30, 2019
Pre-Tax Tax Net of Tax Pre-Tax Tax Net of Tax
GAAP Results $ (522.6 ) $ (163.5 ) $ (686.1 ) $ 1,144.7 $ (276.8 ) $ 867.9
Goodwill impairment 1,333.2 (18.9 ) 1,314.3 - - -
Restructuring and other items 112.7 (28.2 ) 84.5 173.7 (28.1 ) 145.6
North Charleston and Florence
transition
and reconfiguration costs 43.4 (10.6 ) 32.8 - - -
COVID-19 manufacturing and
operations
bonus 31.6 (7.7 ) 23.9 - - -
Losses at closed plants,
transition and
start-up costs 21.9 (5.4 ) 16.5 19.7 (5.6 ) 14.1
Accelerated depreciation on
major capital
projects and certain plant
closures 17.3 (4.2 ) 13.1 42.1 (10.5 ) 31.6
Interest accretion and other 15.0 (3.7 ) 11.3 (5.5 ) 1.3 (4.2 )
Loss on extinguishment of
debt 1.5 (0.4 ) 1.1 5.1 (1.3 ) 3.8
Multiemployer pension
withdrawal
expense (income) 0.9 (0.2 ) 0.7 (4.6 ) 1.2 (3.4 )
Brazil indirect tax claim (51.9 ) 16.0 (35.9 ) (7.3 ) 2.1 (5.2 )
Litigation recovery (23.9 ) 5.9 (18.0 ) - - -
Adjustment related to Tax
Cuts and
Jobs Act - (16.4 ) (16.4 ) - 4.1 4.1
Direct recoveries from
Hurricane Michael,
net of related proceeds (16.1 ) 4.0 (12.1 ) (10.8 ) 2.6 (8.2 )
Gain on sale of certain
closed facilities (15.6 ) 3.8 (11.8 ) (52.6 ) 12.9 (39.7 )
Land and Development
impairment and
operating results (1) (1.3 ) 0.3 (1.0 ) 10.5 (2.6 ) 7.9
Inventory stepped-up in
purchase
accounting, net of LIFO - - - 24.7 (6.0 ) 18.7
Other 6.0 (1.5 ) 4.5 3.9 (1.0 ) 2.9
Adjusted Results $ 952.1 $ (230.7 ) $ 721.4 $ 1,343.6 $ (307.7 ) $ 1,035.9
Noncontrolling interests (4.8 ) (5.0 )
Adjusted Net Income $ 716.6 $ 1,030.9 (1) Includes a
We discuss certain of these charges in more detail in "Note 4. Restructuring and Other Costs" and "Note 18. Commitments and Contingencies - Indirect Tax Claim".
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING ESTIMATES
We have prepared our accompanying consolidated financial statements in conformity with GAAP, which requires management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. Certain significant accounting policies are described in "Note 1. Description of Business and Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements.
These critical accounting policies are both important to the portrayal of our
financial condition and results of operations and require some of management's
most subjective and complex judgments. The accounting for these
52
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matters involves the making of estimates based on current facts, circumstances
and assumptions that, in management's judgment, could change in a manner that
would materially affect management's future estimates with respect to such
matters and, accordingly, could cause our future reported financial condition
and results of operations to differ materially from those that we are currently
reporting based on management's current estimates.
We review the carrying value of our goodwill annually at the beginning of the fourth quarter of each fiscal year, or more often if events or changes in circumstances indicate that the carrying amount may exceed fair value as set forth in ASC 350, "Intangibles -Goodwill and Other." We test goodwill for impairment at the reporting unit level, which is an operating segment or one level below an operating segment, referred to as a component. ASC 350 allows an optional qualitative assessment, prior to a quantitative assessment test, to determine whether it is more likely than not that the fair value of a reporting unit exceeds its carrying amount. We generally do not attempt a qualitative assessment and move directly to the quantitative test. As part of the quantitative test, we utilize the present value of expected cash flows or, as appropriate, a combination of the present value of expected cash flows and the guideline public company method to determine the estimated fair value of our reporting units. This present value model requires management to estimate future cash flows, the timing of these cash flows, and a discount rate (based on a weighted average cost of capital), which represents the time value of money and the inherent risk and uncertainty of the future cash flows. The assumptions we use to estimate future cash flows are consistent with the assumptions that the reporting units use for internal planning purposes, which we believe would be generally consistent with that of a market participant. If we determine that the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If we determine that the carrying amount of the reporting unit exceeds its estimated fair value, we measure goodwill impairment charge based on the excess of a reporting unit's carrying amount over its fair value as required under ASU 2017-04, "Simplifying the Test for Goodwill Impairment", which we early adopted starting with our fiscal 2020 annual goodwill impairment test onJuly 1, 2020 . We describe our accounting policy for goodwill further in "Note 1. Description of Business and Summary of Significant Accounting Policies -Goodwill and Long-Lived Assets" of the Notes to Consolidated Financial Statements. We began seeing the impact of COVID-19 in a limited manner at the end of the second quarter of fiscal 2020. The impact on our operations increased in the third quarter of fiscal 2020. During these interim periods, we evaluated the current economic environment, including our then current assessment of the long-term impact of COVID-19 on our forecasts, and we concluded there were no indicators of impairment of our long-lived assets, including goodwill that required a quantitative test to be performed. During the fourth quarter of fiscal 2020, we completed our annual goodwill impairment testing. We considered factors such as, but not limited to, our expectations for the short-term and long-term impacts of COVID-19, macroeconomic conditions, industry and market considerations, and financial performance, including planned revenue, earnings and capital investments of each reporting unit. The discount rate used for each reporting unit ranged from 8.0% to 14.0%. We used perpetual growth rates in the reporting units ranging from 0.5% to 1.0%. All reporting units that have goodwill were noted to have a fair value that exceeded their carrying values, except theConsumer Packaging reporting unit. As a result, we recorded a pre-tax non-cash impairment of$1,333.2 million or$1,314.3 million after-tax. Each of our other reporting units had fair values that exceeded their respective carrying values by more than 10% each. If we had concluded that it was appropriate to increase the discount rate we used by 100 basis points to estimate the fair value of each reporting unit, the fair value of each of our reporting units, excludingConsumer Packaging , would have continued to exceed its carrying value. The impairment was driven by the expected lower volumes and cash flows related to certain external SBS end markets, including commercial print, tobacco and plate and cup stock markets. We have experienced significant declines in demand for these products and are not showing significant recovery. We believe these declines are more systemic and our view of related growth and earnings opportunities has been diminished for the foreseeable future. Worldwide SBS operating rates are down, and the market has taken increased levels of economic downtime. InOctober 2020 , we announced the shut-down of one of our SBS paper machines at ourEvadale, TX mill, which will result in the removal of 200,000 tons of capacity. AtSeptember 30, 2020 , following the impairment, the North American Corrugated,Consumer Packaging , Brazil Corrugated andVictory Packaging reporting units had$3,533.0 million ,$2,288.7 million ,$99.4 million and$41.1 million of goodwill, respectively. Our long-lived assets, including intangible assets remain recoverable. Subsequent to our annual test, we monitored industry 53 -------------------------------------------------------------------------------- economic trends until the end of our fiscal year and determined no additional testing for goodwill impairment was warranted. We have not made any material changes to our impairment loss assessment methodology during the past three fiscal years. Currently, we do not believe there is a reasonable likelihood that there will be a material change in future assumptions or estimates we use to calculate impairment losses. However, we cannot predict certain market factors with certainty, including the impact of COVID-19, and have certain risks inherent to our operations as described in Item 1A. "Risk Factors". If actual results are not consistent with our assumptions and estimates, particularly for ourConsumer Packaging reporting unit for which the fair value approximates its carrying value after the impairment recognition, we may be exposed to additional impairment losses that could be material. See Item 1A. "Risk Factors - We Have a Significant Amount ofGoodwill and Other Intangible Assets and a Write-Down Would Adversely Impact Our Operating Results and Shareholders' Equity". Accounting for Income Taxes Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits, reflect management's best assessment of estimated current and future taxes to be paid. Significant judgments and estimates are required in determining the consolidated income tax expense. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, recent financial operations and their associated valuation allowances, if any. We use significant judgment in (i) determining whether a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination and (ii) measuring the tax benefit as the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. We do not record any benefit for the tax positions where we do not meet the "more likely than not" initial recognition threshold. Income tax positions must meet a "more likely than not" recognition threshold at the effective date to be recognized. We generally recognize interest and penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of operations. Resolution of the uncertain tax positions could have a material adverse effect on our cash flows or materially benefit our results of operations in future periods depending upon their ultimate resolution. A 1% change in our effective tax rate would increase or decrease tax expense by approximately$5.2 million for fiscal 2020. A 1% change in our effective tax rate used to compute deferred tax liabilities and assets, as recorded on theSeptember 30, 2020 consolidated balance sheet, would increase or decrease tax expense by approximately$123 million for fiscal 2020.
Pension
The funded status of our qualified and non-qualifiedU.S. and non-U.S. pension plans increased$137.5 million in fiscal 2020. OurU.S. qualified and non-qualified pension plans were over funded by$105.2 million as ofSeptember 30, 2020 . Our non-U.S. pension plans were under funded by$53.5 million as ofSeptember 30, 2020 . OurU.S. pension plan benefit obligations were negatively impacted in fiscal 2020 primarily by a 34-basis point decrease in the discount rate compared to the prior measurement date. The non-U.S. pension plan obligations were negatively impacted in fiscal 2020 by a 26-basis point decrease in the discount rate compared to the prior measurement date. A 25-basis point change in the discount rate, compensation level and expected long-term rate of return on plan assets, factoring in our corridor (as defined herein) as appropriate, would have had the following effect on fiscal 2020 pension expense (amounts in the table in parentheses reflect additional income, in millions): Pension Plans 25 Basis 25 Basis Point Point Increase Decrease Discount rate$ (14.7 ) $ 13.2 Compensation level$ 0.2 $
(0.2 )
Expected long-term rate of return on plan assets
New Accounting Standards
See "Note 1. Description of Business and Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective expected dates of adoption and expected effects on our results of operations and financial condition.
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