WESTROCK COMPANY The following discussion should be read in conjunction with the condensed consolidated financial statements and Notes thereto included herein and our audited Consolidated Financial Statements and Notes thereto for the fiscal year endedSeptember 30, 2020 , 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 2020 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 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 the following two reportable segments:Corrugated Packaging , which consists of our containerboard mills, corrugated packaging and distribution operations, as well as our merchandising displays and recycling procurement operations; andConsumer Packaging , which consists of our consumer mills and food and beverage and partition operations. Prior to the completion of our monetization program in fiscal 2020, we had a third reportable segment, Land and Development, which previously sold real estate, primarily in theCharleston, SC region. Certain income and expenses are not allocated to our segments and, thus, the information that management uses to make operating decisions and assess performance does not reflect such amounts. See "Note 1. Basis of Presentation and Significant Accounting Policies - Basis of Presentation" for more information. EXECUTIVE SUMMARY Net sales of$4,437.8 million for the second quarter of fiscal 2021 decreased$9.5 million , or 0.2%, compared to the second quarter of fiscal 2020. This decrease was primarily due to the aggregate lost sales associated with the ransomware incident and winter weather ("the Events") of an estimated$189.1 million that were partially offset by the impact of higher selling price/mix and higher volumes excluding the Events. See the discussion under "Ransomware Incident" below for more information. Earnings per diluted share were$0.42 and$0.57 in the three months endedMarch 31, 2021 and 2020, respectively. Adjusted Earnings Per Diluted Share were$0.54 and$0.67 in the three months endedMarch 31, 2021 and 2020, respectively. The lost sales and operational disruption from the Events had a negative impact of$80.1 million pre-tax, or$0.23 per share, on both earnings per diluted share and Adjusted Earnings Per Diluted Share. See the discussion and tables under "Non-GAAP Financial Measures" below. Net cash provided by operating activities in the six months endedMarch 31, 2021 and 2020 was$851.6 million and$598.8 million , respectively, primarily due to$334.8 million of favorable working capital compared to the prior year period, including the payment of certain fiscal 2020 bonuses and the Company's 401(k) match and annual company contribution (i.e. up to 5% and 2.5%, respectively) in the form of stock, rather than cash, and deferral of certain payroll taxes in connection with the WestRock Pandemic Action Plan that were partially offset by an increase in accounts receivable associated with delayed billing related to the ransomware incident during the second quarter of fiscal 2021. We expect the level of accounts receivable to normalize in the third quarter of fiscal 2021. During the six months endedMarch 31, 2021 , we paid down$488.0 million of debt.
A detailed review of our performance appears below under "Results of Operations".
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--------------------------------------------------------------------------------Ransomware Incident As previously disclosed, onJanuary 23, 2021 we detected a ransomware incident impacting certain of our systems. Promptly upon our detection of this incident, we initiated response and containment protocols and our security teams, supplemented by leading cyber defense firms, worked to remediate this incident. These actions included taking preventative measures, including shutting down certain systems out of an abundance of caution, as well as taking steps to supplement existing security monitoring, scanning and protective measures. We notified law enforcement and contacted our customers to apprise them of the situation. We undertook extensive efforts to identify, contain and recover from this incident quickly and securely. Our teams worked to maintain our business operations and minimize the impact on our customers and teammates. All systems are back in service. All of our mills and converting locations began producing and shipping paper and packaging at pre-ransomware levels inMarch 2021 or earlier. Our mill system production was approximately 115,000 tons lower than planned for the quarter endedMarch 31, 2021 as a result of this incident. While shipments from some of our facilities initially lagged behind production levels, this gap closed as systems were restored during the second quarter of fiscal 2021. In locations where technology issues were identified, we used alternative methods, in many cases manual methods, to process and ship orders. We systematically brought our information systems back online in a controlled, phased approach. We estimate segment income impact of the lost sales and operational disruption of this incident on our operations in the second quarter of fiscal 2021 to be approximately$50 million , as well as approximately$20 million of ransomware recovery costs, primarily professional fees. We estimate that the total insurance claim will be approximately$75 million . We expect to recover substantially all of the ransomware losses from cyber and business interruption insurance in future periods. Disputes over the extent of insurance coverage for claims are not uncommon, and there will be a time lag between the initial incurrence of costs and the receipt of any insurance proceeds. While the impact of lost sales and operational disruption is behind us, we expect to incur some additional recovery costs in the second half of fiscal 2021, albeit at a diminished rate. We are making information technology investments that we had planned to make in future periods in order to further strengthen our information security infrastructure. We engaged a leading cybersecurity defense firm that completed a forensics investigation of the ransomware incident and we are taking appropriate actions in response to the findings. For example, in the short-term, we reset all credentials Company-wide and strengthened security tooling across our servers and workstations. In the long-term, we are continuing to advance the maturity and effectiveness of our information security resiliency strategy and capabilities. Our technology team has accelerated its roadmap to further strengthen the resiliency of our information security infrastructure across the Company that aims to enable us to detect, respond and recover more quickly from security and technical incidents. More specifically, we plan to take actions to improve our security monitoring capabilities and enhance the information security within our mills and plants.
Expectations for the Third Quarter of Fiscal 2021 and Fiscal 2021
We expect to benefit from strong demand for our products during the fiscal third quarter. Our earnings for the fiscal third quarter should increase sequentially as we return to normal business operations and benefit from continued strength in packaging demand and the implementation of previously published price increases. These items are expected to be partially offset by modest sequential inflation across recycled fiber, chemical and transportation costs. In ourCorrugated Packaging segment, the third fiscal quarter is our peak mill outage quarter and we expect to take approximately 112,000 tons of scheduled maintenance downtime across our North American containerboard mills. In ourConsumer Packaging segment, we had approximately 20,000 tons of paperboard shipments that were deferred from the second fiscal quarter to the third fiscal quarter due to the disruptions that we experienced during the second fiscal quarter. For fiscal 2021, we expect to benefit from the continued flow through of previously published price increases and growth in packaging across our primary end markets, as well as the benefit from completing certain of our strategic capital projects. For example, we expect ourFlorence, SC mill to reach full production levels by the end of the fourth quarter of fiscal 2021 and improved margins from our business inBrazil that were negatively impacted in the first half of fiscal 2021 by maintenance and capital outages at the Tres Barras mill. In addition, our short-term incentive payouts for fiscal 2020 were below target and we will continue accruing short-term incentive payouts for fiscal 2021 at a level that is higher than the payout level for fiscal 2020. Given our outlook for earnings 32
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and anticipated strong cash flows, we expect to continue to reduce our debt.
COVID-19 RESPONSE
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. 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. In May 2020 , we formed a business continuity team comprised
of senior leaders throughout our organization that continues to meet regularly
to develop and implement business continuity plans to ensure that our operations
are well positioned to continue producing and delivering products to customers
without disruption.
During the three and six months ended March 31, 2021 , we recorded $7.1 million
and $40.8 million of expense related to COVID-19, including $22.0 million of
relief payments to employees in the first quarter of fiscal 2021. The balance
was for increased costs for safety, cleaning and other items related to
COVID-19. We began tracking the impact of costs for safety, cleaning and other
items related to COVID-19 in the third quarter of fiscal 2020. We expect to
continue to incur additional costs related to safety, cleaning and other items
related to COVID-19 as needed in the foreseeable future.
We continue to execute our differentiated strategy with financial strength and
substantial liquidity, and we continue to adapt to changing market conditions as
a result of COVID-19. At March 31, 2021 , 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 to March 2022 . We continue to
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.
WestRock Pandemic Action Plan
Given the uncertainties associated with the severity and duration of the
pandemic, in May 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, increasing our dividend, 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 approximately $1 billion in cash through
the end of calendar 2021 that we will be able to use to reduce our outstanding
indebtedness. Pursuant to the WestRock Pandemic Action Plan, as modified, we are
committed to: (i) continue to protect the safety and well-being of our
teammates, (ii) continue to match our supply with our customers' demand, (iii)
reduce discretionary expenses, (iv) use Common Stock to make Company funded
401(k) match and annual contribution (i.e. up to 5% and 2.5%, respectively)
beginning July 1, 2020 through September 30, 2021 , (v) target reducing fiscal
2021 capital investments to a range of $800 million to $900 million (up from an
initial range of $600 to $800 million ), and (vi) resetting our quarterly
dividend to $0.20 per share for an annual rate of $0.80 per share, which we did
in May 2020 . On May 4, 2021 , our board of directors declared a quarterly
dividend of $0.24 per share, an increase of $0.04 per share, or 20%,
representing a $0.96 per share annualized dividend.
In addition, we followed through on previously disclosed commitments under the
WestRock Pandemic Action Plan, as modified, including that we (i) decreased the
salaries of our senior executive team by up to 25% from May 1, 2020 through
December 31, 2020 and decreased the retainer for members of our board of
directors by 25% for the third and fourth calendar quarters of 2020, (ii) used
Common Stock to pay our annual incentive for fiscal 2020 for nearly all
participants and set the payout level at 50% of the target opportunity subject
to a safety modifier, as well as for Company funded 401(k) match and our annual
contribution as noted above, and (iii) postponed $116.5 million of employment
taxes incurred through the end of calendar year 2020, pursuant to relief offered
under the Coronavirus Aid, Relief and Economic Security ("CARES") Act. We also
reduced fiscal 2020 capital investments to $978.1 million after targeting to
reduce them by approximately $150 million to approximately $950 million .
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In fiscal 2020, we achieved more than $350 million of the approximately $1
billion goal set forth in the WestRock Pandemic Action Plan, as modified. As of
March 31, 2021 , we had achieved more than $750 million of the approximately $1
billion goal. 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.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - COVID-19 RESPONSE - WestRock Pandemic Action Plan" in
our Fiscal 2020 Form 10-K for additional information.
RESULTS OF OPERATIONS
The following table summarizes our consolidated results for the three and six
months ended
Three Months Ended Six Months Ended
March 31, March 31,
2021 2020 2021 2020
Net sales $ 4,437.8 $ 4,447.3 $ 8,839.3 $ 8,871.0
Cost of goods sold 3,688.2 3,642.5 7,336.8 7,257.2
Gross profit 749.6 804.8 1,502.5 1,613.8
Selling, general and administrative,
excluding
intangible amortization 458.4 418.6 876.2 844.3
Selling, general and administrative
intangible
amortization 88.6 100.1 180.5 201.9
Loss (gain) on disposal of assets 0.3 (5.6 ) 2.8 (6.9 )
Multiemployer pension withdrawal
expense - 0.9 - 0.9
Restructuring and other costs 5.2 16.4 12.9 46.5
Operating profit 197.1 274.4 430.1 527.1
Interest expense, net (83.5 ) (97.3 ) (177.3 ) (190.8 )
Loss on extinguishment of debt - (0.5 ) (1.1 ) (0.5 )
Pension and other postretirement
non-service income 35.0 26.1 69.9 52.8
Other (expense) income, net (13.4 ) (0.9 ) 7.4 (4.6 )
Equity in income of unconsolidated
entities 9.7 4.9 18.7 8.7
Income before income taxes 144.9 206.7 347.7 392.7
Income tax expense (30.5 ) (57.8 ) (80.8 ) (104.3 )
Consolidated net income 114.4 148.9 266.9 288.4
Less: Net income attributable to
noncontrolling
interests (1.9 ) (0.8 ) (2.4 ) (1.8 )
Net income attributable to common
stockholders $ 112.5 $ 148.1 $ 264.5 $ 286.6
(In millions, except percentages) First Second Six Months Third Fourth Fiscal
Quarter Quarter Ended 3/31 Quarter Quarter Year
Fiscal 2020 $ 4,423.7 $ 4,447.3 $ 8,871.0 $ 4,236.3 $ 4,471.5 $ 17,578.8
Fiscal 2021 $ 4,401.5 $ 4,437.8 $ 8,839.3
% Change (0.5 )% (0.2 )% (0.4 )%
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-------------------------------------------------------------------------------- Net sales in the second quarter of fiscal 2021 decreased$9.5 million compared to the second quarter of fiscal 2020. This decrease was primarily due to the estimated$189.1 million of aggregate lost sales associated with the Events that were partially offset by the impact of higher selling price/mix, and higher volumes excluding the Events. Net sales in the six months endedMarch 31, 2021 decreased$31.7 million compared to the six months endedMarch 31, 2020 . We experienced higher selling price/mix, and higher volumes in the period excluding the Events that decreased net sales by$189.1 million . Additionally, we experienced aggregate unfavorable foreign currency impacts across our segments. The decrease was also due to the absence of$18.9 million of Land and Development net sales due to the completion of the monetization program in fiscal 2020. 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
(In millions, except percentages) First Second Six Months
Third Fourth Fiscal
Quarter Quarter Ended 3/31 Quarter Quarter Year
Fiscal 2020 $ 3,614.7 $ 3,642.5 $ 7,257.2 $ 3,466.3 $ 3,658.1 $ 14,381.6 (% of Net Sales) 81.7 % 81.9 % 81.8 % 81.8 % 81.8 % 81.8 % Fiscal 2021$ 3,648.6 $ 3,688.2 $ 7,336.8 (% of Net Sales) 82.9 % 83.1 % 83.0 % The$45.7 million increase in cost of goods sold in the second quarter of fiscal 2021 compared to the prior year quarter was primarily due to higher cost inflation and other items, including operational disruption associated with the Events. In the second quarter of fiscal 2021, we recorded costs of goods sold of$7.0 million related to costs for safety, cleaning and other items related to COVID-19. These items were partially offset by productivity improvements and other items. We expect to continue to incur additional costs related to safety, cleaning and other items related to COVID-19 as needed in the foreseeable future. The$79.6 million increase in cost of goods sold in the six months endedMarch 31, 2021 compared to the prior year period was primarily due to higher cost inflation and other items, including operational disruption associated with the Events and COVID-19 related costs. These items were partially offset by productivity improvements and other items. In the first half of fiscal 2021, we recorded costs of goods sold of$36.5 million related to COVID-19 primarily for relief payments to employees and increased costs for safety, cleaning and other items related to COVID-19. In the six months endedMarch 31, 2020 , we received Hurricane Michael-related insurance proceeds of$32.3 million and recorded a reduction of cost of goods sold of$23.5 million in connection with an indirect tax claim inBrazil , primarily in theCorrugated Packaging segment. The insurance proceeds were for$20.6 million of direct costs and property damage for the six months endedMarch 31, 2020 and for$11.7 million for business interruption recoveries.
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
(In millions, except percentages) First Second Six Months
Third Fourth Fiscal
Quarter Quarter Ended 3/31 Quarter Quarter Year
Fiscal 2020 $ 425.7 $ 418.6 $ 844.3 $ 390.1 $ 390.0 $ 1,624.4
(% of Net Sales) 9.6 % 9.4 % 9.5 % 9.2 % 8.7 % 9.2 %
Fiscal 2021 $ 417.8 $ 458.4 $ 876.2
(% of Net Sales) 9.5 % 10.3 % 9.9 %
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Selling, general, and administrative expenses ("SG&A") excluding intangible
amortization increased $39.8 million in the second quarter of fiscal 2021
compared to the prior year quarter. The increase was primarily due to a $33.9
million increase in bonus and stock-based compensation expense as a result of
fiscal 2021 payments projected to be higher than fiscal 2020 payments due to the
actions we took in fiscal 2020 in connection with the WestRock Pandemic Action
Plan discussed above, and included a $9.6 million acceleration of stock-based
compensation in connection with the departure of our former Chief Executive
Officer in the current quarter. In addition, we incurred increased aggregate
costs for consulting, professional and legal fees of $17.7 million compared to
the prior year quarter, primarily associated with the ransomware incident. These
increases were partially offset by a $11.6 million reduction in travel and
entertainment associated with prolonged shelter-in-place orders in response to
the ongoing effects of COVID-19, as well as a $4.5 million decrease in bad debt
expense compared to the prior year period.
SG&A excluding intangible amortization increased $31.9 million in the six months
ended March 31, 2021 compared to the six months ended March 31, 2020 . The
increase was primarily due to a $62.5 million increase in bonus and stock-based
compensation expense as a result of fiscal 2021 payments projected to be higher
than fiscal 2020 payments, and included a $9.6 million acceleration of
stock-based compensation in connection with the departure of our former Chief
Executive Officer. In addition, we incurred increased aggregate costs for
consulting, professional and legal fees of $14.1 million compared to the prior
year quarter, primarily associated with the ransomware incident. These increases
were partially offset by a $26.2 million reduction in travel and entertainment
associated with prolonged shelter-in-place orders in response to the ongoing
effects of COVID-19, as well as a $9.6 million decrease in bad debt expense
compared to the prior year period.
The favorable SG&A impact of shelter-in-place orders as a result of COVID-19 and
increased levels of bonus and stock-based compensation expense as compared to
fiscal 2020 will likely continue to some degree in the near term.
Selling, General and Administrative Intangible Amortization
SG&A intangible amortization was$88.6 million and$100.1 million in the second quarter of fiscal 2021 and 2020, respectively. SG&A intangible amortization was$180.5 million and$201.9 million in the six months endedMarch 31, 2021 andMarch 31, 2020 , respectively. The declines were primarily attributable to certain intangibles from prior acquisitions reaching full amortization.
Loss (Gain) on Disposal of Assets
In the three and six months endedMarch 31, 2021 , we recorded a loss on disposal of assets of$0.3 and$2.8 million . In the three and six months endedMarch 31, 2020 , we recorded a gain on disposal of assets of$5.6 million and$6.9 million , respectively.
Restructuring and Other Costs
We recorded aggregate pre-tax restructuring and other costs of$5.2 million and$16.4 million in the second quarter of fiscal 2021 and 2020, respectively, and$12.9 million and$46.5 million in the six months endedMarch 31, 2021 andMarch 31, 2020 , respectively. These amounts are not comparable since the timing and scope of the individual actions associated with a given restructuring, acquisition, integration or divestiture vary. We generally expect the integration of a closed facility's assets and production with other facilities to enable the receiving facilities to better leverage their fixed costs while eliminating fixed costs from the closed facility. See "Note 3. Restructuring and Other Costs" of the Notes to Condensed Consolidated Financial Statements for additional information. Interest Expense, net Interest expense, net for the second quarter of fiscal 2021 was$83.5 million compared to$97.3 million for the prior year quarter. The decrease was primarily due to lower levels of debt compared to the prior year period, as well as a$8.1 million reduction in interest expense associated with the remeasurement of our multiemployer pension liabilities for the change in interest rates in the second quarter of fiscal 2021. Interest expense, net for the six months endedMarch 31, 2021 was$177.3 million compared to$190.8 million for the prior year period. The decrease is primarily due to lower levels of debt in fiscal 2021 compared to the prior 36 -------------------------------------------------------------------------------- year period. Additionally, the current year period included the$8.1 million reduction in interest expense associated with the remeasurement of our multiemployer pension liabilities and the prior year included$11.6 million of interest income recorded in connection with an indirect tax claim inBrazil in the first half of fiscal 2020.
See "Note 13. Commitments and Contingencies - Indirect Tax Claim" of the Notes to Condensed Consolidated Financial Statements for additional information.
Pension and Other Postretirement Non-Service Income
Pension and other postretirement non-service income for the second quarter of fiscal 2021 was$35.0 million compared to$26.1 million for the second quarter of fiscal 2020. Pension and other postretirement non-service income for the six months endedMarch 31, 2021 was$69.9 million compared to$52.8 million for the six months endedMarch 31, 2020 . The increase was primarily due to the increase in plan asset balances used to determine the expected return on plan assets for fiscal 2021. Customary pension and other postretirement (income) costs are included in segment income. See "Note 4. Retirement Plans" of the Notes to Condensed Consolidated Financial Statements for more information.
Other (expense) income, net
Other (expense) income, net for the second quarter of fiscal 2021 was expense of$13.4 million compared to expense of$0.9 million in the second quarter of fiscal 2020. The expense in the second quarter of fiscal 2021 was primarily due to a charge of$22.5 million associated with not exercising an option to purchase an additional equity interest in Grupo Gondi, plus other items, that were partially offset by a$16.5 million gain on sale of theSummerville, SC sawmill. Other (expense) income, net for the six months endedMarch 31, 2021 was income of$7.4 million compared to expense of$4.6 million for the first half of fiscal 2020. The first half of fiscal 2021 included a$16.5 million gain on sale of theSummerville, SC sawmill and a$14.7 million gain on sale of a legacy cost method investment which were partially offset by a$22.5 million charge associated with not exercising an option to purchase an additional equity interest in Grupo Gondi, plus other items.
Provision for Income Taxes
We recorded income tax expense of$30.5 million for the three months endedMarch 31, 2021 compared to$57.8 million for the three months endedMarch 31, 2020 . The effective tax rate for the three months endedMarch 31, 2021 was 21.0%, while the effective tax rate for the three months endedMarch 31, 2020 was 28.0%. We recorded income tax expense of$80.8 million for the six months endedMarch 31, 2021 compared to$104.3 million for the six months endedMarch 31, 2020 . The effective tax rate for the six months endedMarch 31, 2021 was 23.2%, while the effective tax rate for the six months endedMarch 31, 2020 was 26.6%.
See "Note 5. Income Taxes" of the Notes to Condensed Consolidated Financial Statements for the primary factors impacting our effective tax rates.
Corrugated Packaging Segment
Corrugated Packaging Shipments
Corrugated Packaging shipments are expressed as a tons equivalent, which includes external and intersegment tons shipped from ourCorrugated Packaging mills plusCorrugated Packaging container shipments converted from billion square feet ("BSF") to tons. We have presented theCorrugated Packaging shipments in two groups: North American andBrazil /India because we believe investors, potential investors, securities analysts and others find this breakout useful when evaluating our operating performance. The table below reflects shipments in thousands of tons, BSF and millions of square feet ("MMSF") per shipping day. The number of shipping days vary by geographic location. 37
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North American Corrugated Packaging Shipments
First Second Six Months Third Fourth Fiscal
Quarter Quarter Ended 3/31 Quarter Quarter Year
Fiscal 2020
North American Corrugated
PackagingShipments - thousands of tons 2,591.2 2,618.8 5,210.0
2,504.4 2,504.4 10,218.8
North American Corrugated
Containers
Shipments - BSF 23.9 23.8 47.7 23.2 24.9 95.8
North American Corrugated
Containers Per
Shipping Day - MMSF 385.9 371.2 378.4 369.3 388.0 378.6
Fiscal 2021
North American Corrugated
Packaging
Shipments - thousands of tons 2,519.3 2,485.2 5,004.5
North American Corrugated
Containers
Shipment - BSF 25.4 24.7 50.1
North American Corrugated
Containers Per
Shipping Day - MMSF 416.7 391.5 403.9
First Second Six Months Third Fourth Fiscal
Quarter Quarter Ended 3/31 Quarter Quarter Year
Fiscal 2020
Brazil / India Corrugated
Packaging
Shipments - thousands of tons 168.1 182.5 350.6 176.4 185.1 712.1
Brazil / India Corrugated
Containers
Shipments - BSF 1.7 1.6 3.3 1.6 1.9 6.8
Brazil / India Corrugated
Containers Per
Shipping Day - MMSF 22.9 21.3 22.1 21.0 24.3 22.4
Fiscal 2021
Brazil / India Corrugated
Packaging
Shipments - thousands of tons 156.8 183.9 340.7
Brazil / India Corrugated
Containers
Shipments - BSF 1.8 1.9 3.7
Brazil / India Corrugated
Containers Per
Shipping Day - MMSF 23.5 24.5 24.0
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Corrugated Packaging Segment -
(In millions, except percentages) Segment Return
Net Sales (1) Income on Sales
Fiscal 2020
First Quarter $ 2,909.5 $ 283.4 9.7 %
Second Quarter 2,882.5 244.5 8.5
Six Months Ended March 31, 2020 5,792.0 527.9 9.1
Third Quarter 2,728.8 227.9 8.4
Fourth Quarter 2,898.4 281.9 9.7
Total $ 11,419.2 $ 1,037.7 9.1 %
Fiscal 2021
First Quarter $ 2,864.5 $ 215.0 7.5 %
Second Quarter 2,913.4 205.3 7.0
Six Months Ended
(1) Net sales before intersegment eliminations.
Net sales of theCorrugated Packaging segment increased$30.9 million in the second quarter of fiscal 2021 compared to the prior year quarter. The increase primarily consisted of$60.3 million of higher selling price/mix on sales that was partially offset by$22.3 million of unfavorable foreign currency impacts and$18.7 million of lower volumes. Excluding the estimated impact of$77.0 million and$39.9 million of lower volumes due to the ransomware incident and winter weather, respectively, volumes would have increased$98.2 million . Record second quarter North American per day box shipments during the quarter increased 5.5% compared to the prior year period. Net sales of theCorrugated Packaging segment decreased$14.1 million in the six months endedMarch 31, 2021 compared to the prior year period. The decrease primarily consisted of$54.6 million of higher selling price/mix on sales that was more than offset by$49.1 million of unfavorable foreign currency impacts and$31.5 million of lower volumes. Excluding the estimated impact of$77.0 million and$39.9 million of lower volumes due to the ransomware incident and winter weather, respectively, volumes would have increased$85.4 million . Record North American per day box shipments during the six month period increased 6.7% compared to the prior year period.
Segment Income - Corrugated Packaging Segment
Segment income attributable to theCorrugated Packaging segment in the second quarter of fiscal 2021 decreased$39.2 million primarily due to an estimated$94.7 million of net cost inflation,$40.5 million estimated impact of the ransomware incident,$15.9 million estimated impact of winter weather and safety, cleaning and other items related to COVID-19 aggregating$4.0 million . These items were partially offset by$71.1 million of margin impact from higher selling price/mix,$18.7 million of higher volumes, which excludes the impact of the Events,$9.7 million of lower depreciation and amortization and$16.4 million of other items, including lower costs compared to the prior year quarter related to theNorth Charleston, South Carolina mill reconfiguration project and theFlorence, South Carolina paper machine project that decreased operating results in the second quarter of fiscal 2020. Net cost inflation consisted primarily of higher recovered fiber, energy, chemical, freight and wage and other costs that were partially offset by lower virgin fiber compared to the prior year quarter. Segment income attributable to theCorrugated Packaging segment in the six months endedMarch 31, 2021 decreased$107.6 million compared to the prior year period, primarily due to an estimated$158.1 million of net cost inflation,$40.5 million estimated impact of the ransomware incident,$15.9 million estimated impact of winter weather,$21.4 million related to COVID-19 primarily for relief payments to employees and increased costs for 39 -------------------------------------------------------------------------------- safety, cleaning and other items related to COVID-19 and$28.3 million of Hurricane Michael insurance recoveries net of direct costs in the prior year period as well as$20.9 million of decreased indirect tax claims inBrazil . These items were partially offset by$65.4 million of margin impact from higher selling price/mix,$14.0 million of higher volumes, which excludes the impact of the Events in the second quarter of fiscal 2021,$21.7 million of lower depreciation and amortization, primarily due to accelerated depreciation incurred in the prior year period associated with theFlorence, SC paper machine project and theNorth Charleston, SC reconfiguration project,$18.4 million of estimated productivity savings net of the Tres Barras planned maintenance outage in the first quarter of fiscal 2021 and other favorable items aggregating$58.0 million . These other favorable items included lower costs compared to the prior year period for theNorth Charleston, SC mill reconfiguration project and theFlorence, SC paper machine project, the decreased negative impact of maintenance downtime and other items. Net cost inflation consisted primarily of higher recovered fiber, energy, freight, chemical and wage and other costs that were partially offset by lower virgin fiber compared to the prior year quarter. 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 Paperboard LLC our joint venture inLynchburg, VA since it is not consolidated. First Second Six Months Third Fourth Fiscal Quarter Quarter Ended 3/31 Quarter Quarter Year Fiscal 2020 Consumer Packaging Shipments - thousands of tons 922.4 987.7 1,910.1 984.5 976.8 3,871.4 Fiscal 2021 Consumer Packaging Shipments - thousands of tons 940.4 913.0 1,853.4
Consumer Packaging Segment -
(In millions, except percentages) Segment Return
Net Sales (1) Income on Sales
Fiscal 2020
First Quarter $ 1,536.9 $ 46.2 3.0 %
Second Quarter 1,616.3 90.8 5.6
Six Months Ended March 31, 2020 3,153.2 137.0 4.3
Third Quarter 1,552.6 95.3 6.1
Fourth Quarter 1,627.2 91.4 5.6
Total $ 6,333.0 $ 323.7 5.1 %
Fiscal 2021
First Quarter $ 1,595.1 $ 92.5 5.8 %
Second Quarter 1,589.9 81.2 5.1
Six Months Ended
(1) Net sales before intersegment eliminations.
40
--------------------------------------------------------------------------------The$26.4 million decrease in net sales for theConsumer Packaging segment for the second quarter of fiscal 2021 compared to the prior year quarter was primarily due to$64.5 million of lower volumes that were partially offset by$25.1 million of favorable foreign currency impacts and$13.0 million of higher selling price/mix on sales. Excluding the estimated impact of$40.5 million and$31.7 million of lower volumes due to the ransomware incident and winter weather, respectively, volumes would have increased$7.7 million . The$31.8 million increase in net sales for theConsumer Packaging segment for the six months endedMarch 31, 2021 compared to the prior year period was primarily due to$34.1 million of higher selling price/mix on sales and$34.9 million of favorable foreign currency impacts which were partially offset by$37.4 million of lower volumes. Excluding the estimated impact of$40.5 million and$31.7 million due to the ransomware incident and winter weather, respectively, volumes would have increased$34.8 million .
Segment Income - Consumer Packaging Segment
Segment income attributable to theConsumer Packaging segment in the second quarter of fiscal 2021 decreased$9.6 million compared to the prior year quarter primarily due to an estimated$17.5 million of net cost inflation,$14.1 million estimated impact of winter weather,$12.4 million estimated impact of the ransomware incident and safety, cleaning and other items related to COVID-19 aggregating$3.0 million . These items were partially offset by$17.8 million of margin impact from higher selling price/mix, an estimated$13.7 million of productivity improvements,$3.1 million of lower depreciation and amortization and$2.0 million of higher volumes, which excludes the impact of the Events. Net cost inflation consisted primarily of higher wage and other costs and higher recovered fiber, chemical, energy and freight costs, which were partially offset by lower virgin fiber costs. Segment income attributable to theConsumer Packaging segment for the six months endedMarch 31, 2021 increased$36.7 million compared to the prior year period primarily due to an estimated$57.3 million of productivity improvements,$35.9 million of margin impact from higher selling price/mix,$8.1 million of higher volumes, which excludes the impact of the Events,$7.4 million of lower depreciation and amortization and$14.5 million of other items. These items were partially offset by an estimated$31.6 million of net cost inflation,$14.1 million estimated impact of winter weather,$12.4 million estimated impact of the ransomware incident, COVID-19 relief payments and other safety, cleaning and other items related to COVID-19 aggregating$17.6 million and an estimated$10.8 million of economic downtime. Net cost inflation consisted primarily of higher wage and other costs and higher recovered fiber, energy, freight and chemical costs, which were partially offset by lower virgin fiber costs. LIQUIDITY AND CAPITAL RESOURCES We fund our working capital requirements, capital expenditures, mergers, acquisitions and investments, restructuring activities, dividends and stock repurchases from net cash provided by operating activities, borrowings under our credit facilities, proceeds from the sale of receivables under our accounts receivable sales agreements, proceeds from the sale of property, plant and equipment removed from service and proceeds received in connection with the issuance of debt and equity securities. See "Note 11. Debt" of the Notes to Condensed Consolidated Financial Statements and "Note 13. Debt" of the Notes to Consolidated Financial Statements section in the Fiscal 2020 Form 10-K for more information regarding our debt. Funding for our domestic operations in the foreseeable future is expected to come from sources of liquidity within our domestic operations, including cash and cash equivalents, and available borrowings under our credit facilities. As such, our foreign cash and cash equivalents are not expected to be a key source of liquidity to our domestic operations. 41
-------------------------------------------------------------------------------- Cash and cash equivalents were$334.0 million atMarch 31, 2021 and$251.1 million atSeptember 30, 2020 . Approximately four-fifths of the cash and cash equivalents atMarch 31, 2021 was held outside of theU.S. The proportion of cash and cash equivalents held outside of theU.S. generally varies from period to period. AtMarch 31, 2021 andSeptember 30, 2020 , total debt was$8,942.6 million and$9,430.6 million , respectively,$549.5 million and$222.9 million of which was short-term atMarch 31, 2021 andSeptember 30, 2020 , respectively. Included in our total debt atMarch 31, 2021 was$200.7 million of non-cash acquisition-related step-up. Total debt atMarch 31, 2021 decreased$488.0 million compared toSeptember 30, 2020 . Total debt was primarily impacted by net cash provided by operating activities exceeding aggregate capital expenditures and dividends, despite an increase in accounts receivable during the second quarter of fiscal 2021 associated with delayed billing due to the ransomware incident. We expect the level of accounts receivable to normalize in the third quarter of fiscal 2021. AtMarch 31, 2021 , we had approximately$3.6 billion of availability under our long-term committed credit facilities and cash and cash equivalents. Our primary availability is under our revolving credit facilities and Receivables Securitization Facility, the majority of which matures onNovember 21, 2024 . This liquidity may be used to provide for ongoing working capital needs and for other general corporate purposes, including acquisitions, dividends and stock repurchases. We have limited debt maturities prior toMarch 2022 . Certain restrictive covenants govern our maximum availability under our credit facilities. We test and report our compliance with these covenants as required by these facilities and were in compliance with these covenants atMarch 31, 2021 .
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.
We engage in certain customer-based SCF programs to accelerate the receipt of
payment for outstanding accounts receivable from certain customers. Certain
costs of these programs are borne by the customer or us. Receivables transferred
under these customer-based supply chain financing programs generally meet the
requirements to be accounted for as sales in accordance with guidance under ASC
860, "Transfers and Servicing" resulting in derecognition of such receivables
from our consolidated balance sheets. Receivables involved with these
customer-based supply chain finance programs constitute less than 3% of our
annual net sales. In addition, we have monetization facilities that sell to
third-party financial institutions all of the short-term receivables generated
from certain customer trade accounts. See "Note 10. Fair Value - Accounts
Receivable Sales Agreements" for a discussion of our monetization facilities.
Our working capital management strategy includes working with our suppliers to
revisit terms and conditions, including the extension of payment terms. Our
current payment terms with the majority of our suppliers generally range from
payable upon receipt to 120 days and vary for items such as the availability of
cash discounts. We do not believe our payment terms will be shortened
significantly in the near future, and we do not expect our net cash provided by
operating activities to be significantly impacted by additional extensions of
payment terms. Certain financial institutions offer voluntary SCF programs that
enable our suppliers, at their sole discretion, to sell their receivables from
us to the financial institutions on a non-recourse basis at a rate that
leverages our credit rating and thus might be more beneficial to our suppliers.
We and our suppliers agree on commercial terms for the goods and services we
procure, including prices, quantities and payment terms, regardless of whether
the supplier elects to participate in SCF programs. The suppliers sell us goods
or services and issue the associated invoices to us based on the agreed-upon
contractual terms. The due dates of the invoices are not extended due to the
supplier's participation in SCF programs. Our suppliers, at their sole
discretion if they choose to participate in a SCF program, determine which
invoices, if any, they want to sell to the financial institutions. No guarantees
are provided by us under SCF programs and we have no economic interest in a
supplier's decision to participate in the SCF program. Therefore, amounts due to
our suppliers that elect to participate in SCF programs are included in the line
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.
42
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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.
See "Note 11. Debt" for additional information for a discussion of our
receivables securitization facility and the amount outstanding under our vendor
financing and commercial card programs.
Cash Flow Activity
Six Months Ended
(In millions) March 31,
2021 2020
Net cash provided by operating activities $ 851.6 $ 598.8
Net cash used for investing activities$ (195.2 ) $
(589.3 )
Net cash (used for) provided by financing activities
Net cash provided by operating activities during the six months endedMarch 31, 2021 increased$252.8 million compared to the six months endedMarch 31, 2020 , primarily due to$334.8 million of favorable working capital compared to the prior year period, including the payment of certain fiscal 2020 bonuses and the Company's 401(k) match and annual company contribution (i.e. up to 5% and 2.5%, respectively) in the form of stock, rather than cash, and deferral of certain payroll taxes in connection with the WestRock Pandemic Action Plan that were partially offset by an increase in accounts receivable during the second quarter of fiscal 2021 associated with delayed billing related to the ransomware incident. We expect the level of accounts receivable to normalize in the third quarter of fiscal 2021. Net cash used for investing activities of$195.2 million in the six months endedMarch 31, 2021 consisted primarily of$303.0 million for capital expenditures that were partially offset by$58.5 million of proceeds from the sale of theSummerville, SC sawmill and$28.3 million of proceeds from the sale of investments. Net cash used for investing activities of$589.3 million in the six months endedMarch 31, 2020 consisted primarily of$616.2 million for capital expenditures that were partially offset by$21.3 million of proceeds from the sale of property, plant and equipment. We started up a new paper machine at ourFlorence, SC mill inOctober 2020 and expect to ramp up to full production by the end of fiscal 2021. The Tres Barras mill upgrade project should be completed in the spring of 2021 and we expect to begin ramping up production in the second half of the fiscal year. We expect fiscal 2021 capital investments to be$800 million to$900 million , which is higher than the estimates that we incorporated into the WestRock Pandemic Action Plan due to investments that we subsequently identified in specific growth projects. 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 the six months endedMarch 31, 2021 , net cash used for financing activities of$584.6 million consisted primarily of a net decrease in debt of$474.8 million and cash dividends paid to stockholders of$105.8 million . In the six months endedMarch 31, 2020 , net cash provided by financing activities of$507.1 million consisted primarily of a net increase in debt of$733.0 million and cash dividends paid to stockholders of$240.7 million . OnMay 4, 2021 , our board of directors declared a quarterly dividend of$0.24 per share, an increase of$0.04 per share, or 20%, representing a$0.96 per share annualized dividend. InFebruary 2021 andNovember 2020 , we paid a quarterly dividend of$0.20 per share, respectively, compared to$0.465 per share inFebruary 2020 andNovember 2019 , respectively. We believe that reducing our dividend inMay 2020 was prudent given the uncertain market conditions at the time driven by COVID-19 and that the reduction has allowed us to allocate 43
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additional cash to pay down our outstanding debt. Our short-term goal is to reduce debt and leverage and return capital to stockholders through a competitive annual dividend.
AtMarch 31, 2021 , 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 similar to our income tax rate in fiscal 2021 and slightly higher in fiscal 2022 primarily due to the absence of certain nonrecurring tax credits and the reduction in capital investments, including the timing of depreciation on our qualifying capital investments as allowed under the Tax Cuts and Jobs Act. Our pension plans in theU.S. are overfunded and we have a pension asset of approximately$0.4 billion on our condensed consolidated balance sheet as ofMarch 31, 2021 . We made contributions of$10.8 million to our pension and supplemental retirement plans during the six months endedMarch 31, 2021 . Based on current facts and assumptions, we expect to contribute approximately$21 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 Protection Act of 2006 (the "Pension Act") and other regulations. Our estimates are based on current factors, such as discount rates and expected return on plan assets. It is possible that our assumptions may change, actual market performance may vary or we may decide to contribute different amounts. In the normal course of business, we evaluate our potential exposure to MEPPs, including with respect to potential withdrawal liabilities. During fiscal 2018, we submitted formal notification to withdraw from PIUMPF and Central States, and recorded estimated withdrawal liabilities for each. Subsequently, in fiscal 2019 and 2020, we received demand letters from PIUMPF, including a demand for withdrawal liabilities and for our proportionate share of PIUMPF's accumulated funding deficiency, and we refined our liability, the impact of which was not significant. We have challenged the PIUMPF accumulated funding deficiency demands. We began making monthly payments (approximately$0.7 million per month for 20 years) for the PIUMPF withdrawal liabilities in fiscal 2020, excluding the accumulated funding deficiency demands. It is reasonably possible that we may incur withdrawal liabilities with respect to certain other MEPPs in connection with such withdrawals. Our estimate of any such withdrawal liability, both individually and in the aggregate, is not material for the remaining plans in which we participate. AtMarch 31, 2021 andSeptember 30, 2020 , we had withdrawal liabilities recorded of$243.2 million and$252.0 million , respectively, including liabilities associated with PIUMPF. See "Note 5. Retirement Plans - Multiemployer Plans" of the Notes to Consolidated Financial Statements section in the Fiscal 2020 Form 10-K for more information regarding these liabilities. See also Item 1A. "Risk Factors - We May Incur Withdrawal Liability and/or Increased Funding Requirements in Connection with MEPPs" in our Fiscal 2020 Form 10-K. We anticipate that we will be able to fund our capital expenditures, interest payments, dividends and stock repurchases, pension payments, working capital needs, note repurchases, restructuring activities, repayments of current portion of long-term debt and other corporate actions for the foreseeable future from cash generated from operations, borrowings under our credit facilities, proceeds from our accounts receivable sales agreements, proceeds from the issuance of debt or equity securities or other additional long-term debt financing, including new or amended facilities. In addition, we continually review our capital structure and conditions in the private and public debt markets in order to optimize our mix of indebtedness. In connection with these reviews, we may seek to refinance existing indebtedness to extend maturities, reduce borrowing costs or otherwise improve the terms and composition of our indebtedness.
Guarantor Summarized Financial Information
44
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Aggregate Principal Stated
Amount Coupon
(in millions) Rate Maturity Date Referred to as:
$ 500 3.000 % September 2024 the 2024 Notes
$ 600 3.750 % March 2025 the 2025 Notes
$ 750 4.650 % March 2026 the 2026 Notes
$ 500 3.375 % September 2027 the 2027 Notes
$ 600 4.000 % March 2028 the 2028 Notes
$ 500 3.900 % June 2028 the June 2028 Notes
$ 750 4.900 % March 2029 the 2029 Notes
$ 500 4.200 % June 2032 the 2032 Notes
$ 600 3.000 % June 2033 the June 2033 Notes
Upon issuance, the Notes maturing in 2024, 2025, 2027 and March 2028 were fully
and unconditionally guaranteed by the Guarantor Subsidiaries. On November 2,
2018 , in connection with the consummation of the KapStone Acquisition, Whiskey
Holdco, Inc. became the direct parent of the Issuer, changed its name to
WestRock Company ("Parent") and fully and unconditionally guaranteed these
Notes. The remaining Notes were issued by the Issuer subsequent to the
consummation of the KapStone Acquisition and were fully and unconditionally
guaranteed at the time of issuance by Parent and the Guarantor Subsidiaries.
Accordingly, each series of the Notes is fully and unconditionally guaranteed on
a joint and several basis by Parent and the Guarantor Subsidiaries (together,
the "Guarantors"). Collectively, the Issuer and the Guarantors are the "Obligor
Group ".
Each series of Notes and the related guarantees constitute unsecured
unsubordinated obligations of the applicable obligor. Each series of Notes and
the related guarantees ranks equally in right of payment with all of the
applicable obligor's existing and future unsecured and unsubordinated debt;
ranks senior in right of payment to all of the applicable obligor's existing and
future subordinated debt; is effectively junior to the applicable obligor's
existing and future secured debt to the extent of the value of the assets
securing such debt; and is structurally subordinated to all of the existing and
future liabilities of each subsidiary of the applicable obligor (that is not
itself an obligor) that does not guarantee such Notes.
The indentures governing each series of Notes contain covenants that, among
other things, limit our ability and the ability of our subsidiaries to grant
liens on our assets and enter into sale and leaseback transactions. In addition,
the indentures limit, as applicable, the ability of the Issuer and Guarantors to
merge, consolidate or sell, convey, transfer or lease our or their properties
and assets substantially as an entirety. The covenants contained in the
indentures do not restrict the Company's ability to pay dividends or
distributions to stockholders.
The guarantee obligations of the Guarantors under the Notes are also subject to
certain limitations and terms similar to those applicable to other guarantees of
similar instruments, including that (i) the guarantees are subject to fraudulent
transfer and conveyance laws and (ii) the obligations of each Guarantor under
its guarantee of each series of Notes will be limited to the maximum amount as
will result in the obligations of such Guarantor under its guarantee of such
Notes not to be deemed to constitute a fraudulent conveyance or fraudulent
transfer under federal or state law.
Under each indenture governing one or more series of the Notes, a Guarantor
Subsidiary will be automatically and unconditionally released from its guarantee
upon consummation of any transaction permitted under the applicable indenture
resulting in such Guarantor Subsidiary ceasing to be an obligor (either as
issuer or guarantor). Under the indentures, the guarantee of Parent will be
automatically released and will terminate upon the merger of Parent with or into
the Issuer or another guarantor, the consolidation of Parent with the Issuer or
another guarantor or the transfer of all or substantially all of the assets of
Parent to the Issuer or a guarantor. In addition, if the Issuer exercises its
defeasance or covenant defeasance option with respect to the Notes of a series
in accordance with the terms of the applicable indenture, each guarantor will be
automatically and unconditionally released from its guarantee of the Notes of
such series and all its obligations under the applicable indenture.
45--------------------------------------------------------------------------------
The Issuer and each Guarantor is a holding company that conducts substantially all of its business through subsidiaries. Accordingly, repayment of the Issuer's indebtedness, including the Notes, is dependent on the generation of cash flow by the Issuer's and each Guarantor's subsidiaries, as applicable, and their ability to make such cash available to the Issuer and the Guarantors, as applicable, by dividend, debt repayment or otherwise. The Issuer's and the Guarantors' subsidiaries may not be able to, or be permitted to, make distributions to enable them to make payments in respect of their obligations, including with respect to the Notes in the case of the Issuer and the guarantees in the case of the Guarantors. Each of the Issuer's and the Guarantors' subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit the Issuer's and the Guarantors' ability to obtain cash from their subsidiaries. In the event that the Issuer and the Guarantors do not receive distributions from their subsidiaries, the Issuer and the Guarantors may be unable to make required principal and interest payments on their obligations, including with respect to the Notes and the guarantees. Pursuant to amended Rule 3-10 of Regulation S-X, the summarized financial information below is presented for theObligor Group on a combined basis after the elimination of intercompany balances and transactions among theObligor Group and equity in earnings from and investments in the non-Guarantor Subsidiaries. The summarized financial information below should be read in conjunction with the Company's unaudited condensed consolidated financial statements contained herein, as the summarized financial information may not necessarily be indicative of results of operations or financial position had the subsidiaries operated as independent entities.
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