UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2019
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-38736
WESTROCK COMPANY
(Exact Name of Registrant as Specified in Its Charter)
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Delaware |
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37-1880617 |
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(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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1000 Abernathy Road NE, Atlanta, Georgia |
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30328 |
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(Address of Principal Executive Offices) |
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(Zip Code) |
Registrant’s Telephone Number, Including Area Code: (770) 448-2193
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Common Stock, par value $0.01 per share |
WRK |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Act.
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Large accelerated filer ☒ |
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company ☐ |
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Emerging growth company ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the common equity held by non-affiliates of the registrant as of March 31, 2019 (based on the closing price per share as reported on the New York Stock Exchange on such date), was approximately $9,706 million.
As of November 4, 2019, the registrant had 257,894,507 shares of Common Stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 31, 2020 are incorporated by reference in Part III.
WESTROCK COMPANY
INDEX TO FORM 10-K
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Page Reference |
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Item 1. |
3 |
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Item 1A. |
17 |
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Item 1B. |
27 |
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Item 2. |
27 |
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Item 3. |
29 |
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Item 4. |
29 |
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Item 5. |
30 |
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Item 6. |
30 |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
33 |
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Item 7A. |
50 |
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Item 8. |
54 |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
147 |
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Item 9A. |
147 |
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Item 9B. |
148 |
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Item 10. |
149 |
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Item 11. |
150 |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
150 |
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Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
150 |
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Item 14. |
150 |
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Item 15. |
151 |
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Item 16. |
151 |
2
PART I
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Item 1. |
BUSINESS |
Unless the context otherwise requires, “we”, “us”, “our”, “WestRock” and “the Company” refer to the business of WestRock Company, its wholly-owned subsidiaries and its partially-owned consolidated subsidiaries for periods on or after November 2, 2018 and to WRKCo Inc. (formerly known as WestRock Company, “WRKCo”) for periods prior to November 2, 2018.
General
WestRock is a multinational provider of paper and packaging solutions for consumer and corrugated packaging markets. 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 in North America, South America, Europe, Asia and Australia.
WestRock was formed on March 6, 2015 for the purpose of effecting the Combination (as defined below). Pursuant to the second amended and restated business combination agreement, dated April 17, 2015 and amended as of May 5, 2015 by and among WestRock, WestRock RKT Company (formerly known as Rock-Tenn Company, and a wholly-owned subsidiary of WestRock) (“RockTenn”), WestRock MWV, LLC (formerly known as MeadWestvaco Corporation, and a wholly-owned subsidiary of WestRock) (“MWV”), Rome Merger Sub, Inc. and Milan Merger Sub, LLC (the “Business Combination Agreement”), on July 1, 2015, (i) Rome Merger Sub, Inc. merged with and into RockTenn, with RockTenn surviving the merger as a wholly-owned subsidiary of WestRock, and (ii) Milan Merger Sub, LLC merged with and into MWV, with MWV surviving the merger as a wholly owned subsidiary of WestRock (the “Combination”). Prior to the Combination, WestRock did not conduct any activities other than those incidental to its formation and the matters contemplated by the Business Combination Agreement. On July 1, 2015, pursuant to the Business Combination Agreement, RockTenn and MWV completed a strategic combination of their respective businesses and RockTenn and MWV each became wholly-owned subsidiaries of WestRock. RockTenn was the accounting acquirer in the Combination.
On May 15, 2016, WestRock completed the distribution of the outstanding common stock, par value $0.01 per share, of Ingevity Corporation, formerly the Specialty Chemicals business of WestRock to WestRock’s stockholders (the “Separation”). As a result of the Separation, we disposed of our former Specialty Chemicals segment in its entirety and ceased to consolidate its assets, liabilities and results of operations in our consolidated financial statements. Accordingly, we presented the financial position and results of operations of our former Specialty Chemicals segment as discontinued operations.
On April 6, 2017, we completed the sale (the “HH&B Sale”) of our Home, Health and Beauty business, a former division of our Consumer Packaging segment (“HH&B”). We used the proceeds from the HH&B Sale in connection with the MPS Acquisition (as defined below). We recorded a pre-tax gain on sale of HH&B of $192.8 million in fiscal 2017. See “Note 1. Description of Business and Summary of Significant Accounting Policies — Description of Business” of the Notes to Consolidated Financial Statements for additional information.
On June 6, 2017, we completed the acquisition (the “MPS Acquisition”) of Multi Packaging Solutions International Limited, a Bermuda exempted company (“MPS”). MPS is reported in our Consumer Packaging segment. See “Note 3. Acquisitions and Investment” of the Notes to Consolidated Financial Statements for additional information.
On November 2, 2018, pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of January 28, 2018, among WRKCo, KapStone Paper and Packaging Corporation (“KapStone”), WestRock Company (formerly known as Whiskey Holdco, Inc.), Whiskey Merger Sub, Inc. and Kola Merger Sub, Inc., the Company acquired all of the outstanding shares of KapStone through a transaction in which: (i) Whiskey Merger Sub, Inc. merged with and into WRKCo, with WRKCo surviving the merger as a wholly owned subsidiary of the Company and (ii) Kola Merger Sub, Inc. merged with and into KapStone, with KapStone surviving the merger as a wholly owned subsidiary of the Company (together, the “KapStone Acquisition”). As a result, among other things, the Company became the ultimate parent of WRKCo, KapStone and their respective subsidiaries, and the Company changed its name to “WestRock Company” and WRKCo changed its name to “WRKCo Inc.”. WRKCo was the accounting acquirer in the transaction; therefore, the historical consolidated financial statements of WRKCo for periods prior to the KapStone Acquisition are also considered to be the historical financial statements of the
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Company. The Company is the successor issuer to both WRKCo and KapStone pursuant to Rule 12g-3(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). See “Note 3. Acquisitions and Investment” of the Notes to Consolidated Financial Statements for more information.
Effective in the first quarter of fiscal 2019, we aligned our financial results for all periods presented to move our merchandising displays operations from our Consumer Packaging segment to our Corrugated Packaging segment and to allocate certain previously non-allocated costs and certain pension and other postretirement non-service income (expense) to our reportable segments. Separately, in the first quarter of fiscal 2019, we began conducting our recycling operations primarily as a procurement function. Since then, recycling net sales have not been recorded and the margin from these operations has reduced cost of goods sold. Following the realignment, 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 sells real estate, primarily in the Charleston, SC region. Prior to the HH&B Sale, our Consumer Packaging segment included HH&B.
Products
Corrugated Packaging Segment
We are one of the largest integrated producers of linerboard and corrugating medium (“containerboard”), corrugated products and specialty papers (including kraft papers and saturating kraft) in North America measured by tons produced, one of the largest producers of high-graphics preprinted linerboard measured by net sales in North America and one of the largest manufacturers of temporary promotional point-of-purchase displays in North America measured by net sales. We have integrated corrugated operations in North America, Brazil and India. We believe we are one of the largest paper recyclers in North America and our recycling operations provide substantially all of the recycled fiber to our mills, as well as to third parties. Our Brazil operations own and operate forestlands that provide virgin fiber to our Brazilian mill.
We operate an integrated corrugated packaging system that manufactures primarily containerboard, corrugated sheets, corrugated packaging and preprinted linerboard for sale to consumer and industrial products manufacturers and corrugated box manufacturers. We produce a full range of high-quality corrugated containers designed to protect, ship, store, promote and display products made to our customers’ merchandising and distribution specifications. We convert corrugated sheets into corrugated products ranging from one-color protective cartons to graphically brilliant point-of-purchase packaging. Our corrugated container plants serve local customers and regional and large national accounts. Corrugated packaging is used to provide protective packaging for shipment and distribution of food, paper, health and beauty, and other household, consumer, commercial and industrial products. Corrugated packaging may also be graphically enhanced for retail sale, particularly in club store locations. We provide customers with innovative packaging solutions to promote and sell their products. We provide structural and graphic design, engineering services and custom, proprietary and standard automated packaging machines, offering customers turn-key installation, automation, line integration and packaging solutions. We have a machinery solution that creates pouches that replace single-use plastics, including bubble mailers. We also distribute corrugated packaging materials and other specialty packaging products, which include stretch film, void fill, carton sealing tape and other specialty tapes through our network of warehouses and distribution facilities. To make corrugated sheet stock, we feed linerboard and corrugating medium into a corrugator that flutes the medium to specified sizes, glues the linerboard and fluted medium together, and slits and cuts the resulting corrugated paperboard into sheets to customer specifications. Our containerboard mills and corrugated container operations are integrated with the majority of our containerboard production used internally by our corrugated container operations. The balance is either used in trade swaps with other manufacturers or sold domestically and internationally.
We design, manufacture and, in certain cases, pack temporary displays for sale to consumer products companies and retailers. These displays are used as marketing tools to support new product introductions and specific product promotions in mass merchandising stores, supermarkets, convenience stores, home improvement stores and other retail locations. We also design, manufacture and, in some cases, pre-assemble permanent displays for these customers. We make temporary displays primarily from corrugated paperboard. Unlike temporary displays, permanent displays are restocked with our customers’ product; therefore, they are constructed primarily from metal, plastic, wood and other durable materials. We provide contract packing services, such as multi-product promotional packing and product manipulation, such as multipacks and onpacks. We manufacture and distribute
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point of sale material utilizing litho, screen and digital printing technologies. We manufacture lithographic laminated packaging for sale to our customers that require packaging with high quality graphics and strength characteristics.
Our recycling operations primarily procure recovered paper (also known as recycled fiber) from our converting facilities and from third parties, such as factories, warehouses, commercial printers, office complexes, grocery and retail stores, document storage facilities, paper converters and other wastepaper collectors. We handle a wide variety of grades of recovered paper, including old corrugated containers, office paper, box clippings, newspaper and print shop scraps. We operate recycling facilities that collect, sort, grade and bale recovered paper and, after sorting and baling, we transfer it to our mills for processing or sell it principally to manufacturers of paperboard or containerboard in the United States (“U.S.”), as well as manufacturers of tissue, newsprint, roofing products and insulation, and to export markets. We operate a nationwide fiber marketing and brokerage system that serves large regional and national accounts, as well as our recycled containerboard and paperboard mills, and sells scrap materials from our converting businesses and mills. Many of our recycling facilities are located close to our recycled containerboard and paperboard mills, which helps promote the availability of supply with reduced shipping costs. In the first quarter of fiscal 2019, we began conducting our recycling operations primarily as a procurement function, shifting its focus to the procurement of low cost, high quality fiber for our mill system. As a result, we no longer record recycling net sales and the margin from these operations has reduced cost of goods sold.
Sales of corrugated packaging products to external customers accounted for 64.2%, 59.0% and 60.6% of our net sales in fiscal 2019, 2018 and 2017, respectively. See “Note 7. Segment Information” of the Notes to Consolidated Financial Statements, as well as Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for additional information.
Consumer Packaging Segment
We operate integrated virgin and recycled fiber paperboard mills and consumer packaging converting operations, which convert items such as folding and beverage cartons, interior partitions, inserts and labels. Our integrated system of virgin and recycled mills produces paperboard for our converting operations and third parties. We internally consume or sell to manufacturers of folding cartons and other paperboard products our coated natural kraft, bleached paperboard and coated recycled paperboard, and internally consume or sell to manufacturers of solid fiber interior packaging, tubes and cores, book covers and other paperboard products our specialty recycled paperboard. The mill owned by our Seven Hills Paperboard LLC (“Seven Hills”) joint venture in Lynchburg, VA manufactures gypsum paperboard liner for sale to our joint venture partner.
We are one of the largest manufacturers of folding and beverage cartons in North America. We believe we are the largest manufacturer of solid fiber partitions in North America measured by net sales. Our folding and beverage cartons are used to package items such as food, paper, beverages, dairy products, tobacco, confectionery, health and beauty and other household consumer, commercial and industrial products, primarily for retail sale. Our folding and beverage cartons are also used by our customers to attract consumer attention at the point-of-sale. We manufacture express mail packages for the overnight courier industry, provide inserts and labels, as well as rigid packaging and other printed packaging products, such as transaction cards (e.g., credit, debit, etc.), brochures, product literature, marketing materials (such as booklets, folders, inserts, cover sheets and slipcases) and grower tags and plant stakes for the horticultural market. For the global healthcare market, we manufacture secondary packages designed to enhance patient adherence for prescription drugs, as well as paperboard packaging for over-the-counter and prescription drugs. Our customers generally use our inserts and labels to provide customer product information either inside a secondary package (e.g., a folding carton) or affixed to the outside of a primary package (e.g., a bottle). Folding cartons typically protect customers’ products during shipment and distribution, and employ graphics to promote them at retail. We manufacture folding and beverage cartons from recycled and virgin paperboard, laminated paperboard and various substrates with specialty characteristics, such as grease masking and microwaveability. We print, coat, die-cut and glue the cartons to customer specifications and ship finished cartons to customers for assembling, filling and sealing. We employ a broad range of offset, flexographic, gravure, backside printing, coating and finishing technologies, as well as iridescent, holographic, textured and dimensional effects to provide differentiated packaging products, and support our customers with new package development, innovation and design services and package testing services. We manufacture and sell our solid fiber and corrugated partitions and die-cut paperboard components principally to glass container manufacturers and producers of beer, food, wine, spirits, cosmetics and pharmaceuticals, and to the automotive industry.
Sales of consumer packaging products to external customers accounted for 35.7%, 40.1% and 37.8% of our net sales in fiscal 2019, 2018 and 2017, respectively. See “Note 7. Segment Information” of the Notes to Consolidated
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Financial Statements, as well as Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for additional information.
Land and Development Segment
We seek to maximize the value of the various real estate holdings we own that are concentrated in the Charleston, SC region. We expect to complete the monetization of these holdings during fiscal 2020. Sales in our Land and Development segment to external customers accounted for 0.1%, 0.9% and 1.6% of our net sales in fiscal 2019, 2018 and 2017, respectively. See “Note 7. Segment Information” and “Note 9. Assets Held For Sale” of the Notes to Consolidated Financial Statements, as well as Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for additional information.
Raw Materials
The primary raw materials used by our mill operations are recycled fiber at our recycled containerboard and paperboard mills and virgin fiber from hardwoods and softwoods at our virgin containerboard and paperboard mills. Certain of our virgin containerboard is manufactured with some recycled fiber content. Recycled fiber prices and virgin fiber prices can fluctuate significantly. While virgin fiber prices have generally been more stable than recycled fiber prices, they also fluctuate, particularly due to significant changes in weather, such as during prolonged periods of heavy rain or drought, or during housing construction slowdowns or accelerations.
Containerboard and paperboard are the primary raw materials used by our converting operations. Our converting operations use many different grades of containerboard and paperboard. We supply substantially all of our converting operations' needs for containerboard and paperboard from our own mills and through the use of trade swaps with other manufacturers. These arrangements allow us to optimize our mill system and reduce freight costs. Because there are other suppliers that produce the necessary grades of containerboard and paperboard used in our converting operations, we believe we would be able to source significant replacement quantities from other suppliers in the event that we incur production disruptions for recycled or virgin containerboard and paperboard. See Item 1A. “Risk Factors — We May Face Increased Costs For, or Inadequate Availability of, Raw Materials, Energy and Transportation”.
Energy
Energy is one of the most significant costs of our mill operations. The cost of natural gas, coal, oil, electricity and wood by-products (biomass) at times has fluctuated significantly. In our recycled paperboard mills, we use primarily natural gas and electricity, supplemented with coal and fuel oil to generate steam used in the paper making process and, at a few mills, to generate electricity used on site. In our virgin fiber mills, we use natural gas, biomass and coal to generate steam used in the pulping and paper making processes and to generate some or all of the electricity used on site. We primarily use electricity and natural gas to operate our converting facilities. We generally purchase these products from suppliers at market or tariff rates. See Item 1. “Business — Governmental Regulation — Environmental and Other Matters” for additional information. See also Item 1A. “Risk Factors — We May Face Increased Costs For, or Inadequate Availability of, Raw Materials, Energy and Transportation”. See also Item 7A. “Quantitative and Qualitative Disclosures About Market Risk — “Energy” and “Derivative Instruments / Forward Contracts”.
Transportation
Inbound and outbound freight is a significant expenditure for us. Factors that influence our freight expense are distance between our shipping and delivery locations, distance from our facilities to our customers and suppliers, mode of transportation (rail, truck, intermodal and ocean) and freight rates, which are influenced by supply and demand and fuel costs. We experienced continued higher freight costs in fiscal 2019. The principal markets for our products are in North America, South America, Europe, Asia and Australia. See Item 1A. “Risk Factors — We May Face Increased Costs For, or Inadequate Availability of, Raw Materials, Energy and Transportation”.
Sales and Marketing
None of our top ten external customers individually accounted for more than 10% of our consolidated net sales in fiscal 2019. We generally manufacture our products pursuant to customers’ orders. We believe that we have good relationships with our customers. See Item 1A. “Risk Factors — We Depend on Certain Large Customers”.
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As a result of our vertical integration, our mills’ sales volumes may be directly impacted by changes in demand for our packaging products. During fiscal 2019, approximately two-thirds of our coated natural kraft tons shipped, approximately three-fifths of our coated recycled paperboard tons shipped and approximately one-fifth of our bleached paperboard tons shipped were delivered to our converting operations, primarily to manufacture folding and beverage cartons, and approximately three-fourths of our containerboard tons shipped, including trade swaps and buy/sell transactions, were delivered to our converting operations to manufacture corrugated products. Under the terms of our Seven Hills joint venture arrangement, our joint venture partner is required to purchase all of the qualifying gypsum paperboard liner produced by Seven Hills. Excluding the production from Seven Hills and from our Aurora, IL facility, which is converted into book covers and other products, approximately one-third of our specialty recycled paperboard tons shipped in fiscal 2019 were delivered to our converting operations, primarily to manufacture interior partitions. We have the ability to move our internal sourcing among certain of our mills to optimize the efficiency of our operations.
As a result of our broad portfolio of differentiated and sustainable paper and packaging solutions, we serve over 15,000 customers, including over 150 customers that buy at least $1 million from each of our segments. We believe that our ability to leverage our full portfolio of differentiated solutions and capabilities enables us to set ourselves apart from our competitors.
We market our products primarily through our own sales force. We also market a number of our products through independent sales representatives, independent distributors or both. We generally pay our sales personnel a combination of base salary, commissions and annual bonus. We pay our independent sales representatives on a commission basis. Orders from our customers generally do not have significant lead times. We discuss foreign net sales to unaffiliated customers and other non-U.S. operations financial and other segment information in “Note 7. Segment Information” of the Notes to Consolidated Financial Statements.
Competition
We operate in a competitive global marketplace and compete with many large, well established and highly competitive manufacturers and service providers. Our business is affected by a range of macroeconomic conditions, including industry capacity changes, global competition, economic conditions in the U.S. and abroad, as well as fluctuations in currency exchange rates.
The industries we operate in are highly competitive, and no single company dominates any of those industries. Our containerboard and paperboard operations compete with integrated and non-integrated national and regional companies operating primarily in North America, and to a limited extent, manufacturers outside of North America. Our competitors include large and small, vertically integrated companies and numerous smaller non-integrated companies. In the corrugated packaging and folding and beverage carton markets, we compete with a significant number of national, regional and local packaging suppliers in North America and abroad. In the solid fiber interior packaging, promotional point-of-purchase display and converted paperboard products markets, we primarily compete with a smaller number of national, regional and local companies offering highly specialized products.
Because all of our businesses operate in highly competitive industry segments, we regularly discuss sales opportunities for new business or for renewal of existing business with customers. Our packaging products compete with packaging made from other materials, including plastics. The primary competitive factors we face include price, design, product innovation, quality, service and, most recently, sustainability, with varying emphasis on these factors depending on the product line and customer preferences. Our machinery solutions represent one example of how we provide differentiated solutions and create value for our customers. We believe that we compete effectively with respect to each of these factors and we obtain feedback on our performance with customer surveys, among other means.
The industries in which we operate have undergone consolidation. Within the packaging products industry, larger customers, with an expanded geographic presence, have tended to seek suppliers that can, because of their broad geographic presence, efficiently and economically supply all or a range of their packaging needs. In addition, our customers continue to demand higher quality products meeting stricter quality control requirements. Demand for sustainable products also impacts our industry. See Item 1. “Business — Sustainability” for additional information.
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See Item 1A. “Risk Factors — We Face Intense Competition” and “Risk Factors — We May Be Adversely Affected by Factors That Are Beyond Our Control, Such as U.S. and Worldwide Economic and Financial Market Conditions, and Social and Political Change”.
Governmental Regulation
Health and Safety Regulations
Our operations are subject to a broad range of foreign, federal, state and local laws and regulations relating to workplace safety and worker health, including the Occupational Safety and Health Act of 1970 (“OSHA”) and similar laws and regulations. OSHA, among other things, establishes asbestos standards for the workplace. Although we do not use asbestos in manufacturing our products, asbestos containing material (“ACM”) is present in some of our facilities. For those facilities where ACM is present and asbestos is subject to regulation, we have established procedures for properly managing ACM, including, but not limited to, employee training and work practices to maintain the ACM in good condition and minimize exposure. We do not believe that future compliance with health and safety laws and regulations will have a material adverse effect on our results of operations, financial condition or cash flows.
Environmental and Other Matters
Environmental compliance requirements are a significant factor affecting our business. We employ manufacturing processes that result in various discharges, emissions and wastes. These processes are subject to numerous federal, state, local and international environmental laws and regulations, as well as the requirements of environmental permits and similar authorizations issued by various governmental authorities.
On January 31, 2013, the U.S. Environmental Protection Agency (the “EPA”) published a set of four interrelated final rules establishing national air emissions standards for hazardous air pollutants from industrial, commercial and institutional boilers and process heaters, commonly known as “Boiler MACT.” Boiler MACT required compliance by January 31, 2016 or by January 31, 2017 for those mills for which we obtained a prior compliance extension. All work required for our boilers to comply with the rule has been completed. On July 29, 2016, the U.S. Court of Appeals for the District of Columbia Circuit issued a ruling on the consolidated cases challenging Boiler MACT. The court vacated key portions of the rule, including emission limits for certain subcategories of solid fuel boilers, and remanded other issues to the EPA for further rulemaking. At this time, we cannot predict with certainty how this decision will impact our existing Boiler MACT strategies or whether we will incur additional costs to comply with any revised Boiler MACT standards.
In addition to Boiler MACT, we are subject to several other federal, state, local and international environmental rules that may impact our business, including the National Ambient Air Quality Standards for nitrogen oxide, sulfur dioxide, fine particulate matter and ozone for facilities in the U.S.
We are involved in various administrative proceedings relating to environmental matters that arise in the normal course of business, and we may become involved in similar matters in the future. Although the ultimate outcome of these proceedings cannot be predicted with certainty and we cannot at this time estimate any reasonably possible losses based on available information, we do not believe that the currently expected outcome of any environmental proceedings and claims that are pending or threatened against us will have a material adverse effect on our results of operations, financial condition or cash flows.
See Item 1A. “Risk Factors — We are Subject to a Wide Variety of Laws, Regulations and Other Requirements That are Subject to Change and May Impose Substantial Compliance Costs”.
CERCLA and Other Remediation Costs
We face potential liability under federal, state, local and international laws as a result of releases, or threatened releases, of hazardous substances into the environment from various sites owned and operated by third parties at which Company-generated wastes have allegedly been deposited. Generators of hazardous substances sent to off-site disposal locations at which environmental problems exist, as well as the owners of those sites and certain other classes of persons, are liable for response costs for the investigation and remediation of such sites under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”) and analogous laws. While joint and several liability is authorized under CERCLA, liability is typically shared with other potentially
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responsible parties (“PRPs”) and costs are commonly allocated according to relative amounts of waste deposited and other factors.
In addition, certain of our current or former locations are being investigated or remediated under various environmental laws, including CERCLA. Based on information known to us and assumptions, we do not believe that the costs of these projects will have a material adverse effect on our results of operations, financial condition or cash flows. However, the discovery of contamination or the imposition of additional obligations, including natural resources damaged at these or other sites in the future could result in additional costs.
On January 26, 2009, Smurfit-Stone Container Corporation (“Smurfit-Stone”), which we acquired in fiscal 2011, and certain of its subsidiaries filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. Smurfit-Stone’s Canadian subsidiaries also filed to reorganize in Canada. We believe that matters relating to previously identified third party PRP sites and certain facilities formerly owned or operated by Smurfit-Stone have been satisfied by claims in the Smurfit-Stone bankruptcy proceedings. However, we may face additional liability for cleanup activity at sites that are not subject to the bankruptcy discharge, but are not currently identified. The final bankruptcy distributions were made in fiscal 2018.
We believe that we can assert claims for indemnification pursuant to existing rights we have under purchase and other agreements in connection with certain remediation sites. In addition, we believe that we have insurance coverage, subject to applicable deductibles/retentions, policy limits and other conditions, for certain environmental matters. However, there can be no assurance that we will be successful with respect to any claim regarding these insurance or indemnification rights or that, if we are successful, any amounts paid pursuant to the insurance or indemnification rights will be sufficient to cover all our costs and expenses. We also cannot predict with certainty whether we will be required to perform remediation projects at other locations, and it is possible that our remediation requirements and costs could increase materially in the future and exceed current reserves. In addition, we cannot currently assess with certainty the impact that future changes in cleanup standards or federal, state or other environmental laws, regulations or enforcement practices will have on our results of operations, financial condition or cash flows.
We estimate that we will invest approximately $15 million for capital expenditures during fiscal 2020 in connection with matters relating to environmental compliance. It is possible that our capital expenditure assumptions and the project completion dates may change, and our projections are subject to change due to items such as the finalization of ongoing engineering projects and the outcomes of pending legal challenges to the Boiler MACT rules.
Climate Change
Certain jurisdictions in which we have manufacturing facilities or other investments have taken actions to address climate change. The EPA has issued the Clean Air Act permitting regulations applicable to certain facilities that emit greenhouse gases (“GHG”). The EPA also has promulgated a rule requiring certain industrial facilities that emit 25,000 metric tons or more of carbon dioxide equivalent per year to file an annual report of their emissions. While we have facilities subject to existing GHG permitting and reporting requirements, the impact of these requirements has not been material to date.
Additionally, the EPA has been working on rulemakings aimed at cutting carbon emissions from power plants. On June 20, 2019, the EPA issued the final Affordable Clean Energy (“ACE”) rule, which establishes emission guidelines for states to use in developing plans to address greenhouse gas emissions from existing coal-fired power plants. The ACE rule replaced a final rule issued by the EPA in 2015 establishing GHG emission guidelines for existing electric utility generating units, which was stayed by the U.S. Supreme Court and has never gone into effect. Although the ACE rule does not apply directly to the power generation facilities at our mills, it has the potential to increase the cost of purchased electricity for our manufacturing operations and change the treatment of certain types of biomass that are currently considered carbon neutral. Due to uncertainties regarding the implementation of the ACE rule, its potential impacts on us cannot be quantified with certainty at this time.
In addition to national efforts to regulate climate change, some U.S. states in which we have manufacturing operations are taking measures to reduce GHG emissions, such as requiring GHG emissions reporting or developing regional cap-and-trade programs. California has enacted a cap-and-trade program that took effect in 2012, and includes enforceable compliance obligations that began in 2013. In 2017, California extended the cap-and-trade program to 2030. We do not have any manufacturing facilities that are subject to the cap-and-trade
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requirements in California; however, we are continuing to monitor the implementation of this program as well as proposed mandatory GHG reduction efforts in other states. The Washington Department of Ecology issued a final rule, known as the Clean Air Rule, in 2016, which applies to facilities that have average annual carbon dioxide equivalent emissions equal to or exceeding 100,000 metric tons/year. Energy intensive and trade exposed facilities, including our Tacoma, WA and Longview, WA mills, and transportation fuel importers are subject to regulation under this program. Various groups filed lawsuits against the Washington Department of Ecology challenging the Clean Air Rule and, in 2018, the Thurston County Superior Court invalidated the Clean Air Rule. The Washington Department of Ecology subsequently filed an appeal with the State Supreme Court. The case was argued before the Supreme Court on March 19, 2019, and an opinion is expected before the end of 2019. Implementation of the Clean Air Rule has been stayed while the appeal is pending. In June 2019, the State of New York passed the Climate Leadership and Community Protection Act (“CLCPA”). This legislation, which becomes effective in January 2020, commits the state to reaching net zero GHG emissions, with interim goals of a 40% reduction in absolute terms from 1990 levels by 2030 and an 85% reduction by 2050. Our Solvay, NY mill could be affected by the implementation of the CLCPA, although we cannot currently quantify any impacts due to uncertainties regarding implementation of the law. The Virginia Department of Environmental Quality has issued regulations that would link the Commonwealth to the Regional Greenhouse Gas Initiative (“RGGI”), which is a nine-state, market-based carbon cap-and-trade program. Although industrial facilities like our paper mills and converting facilities in Virginia would be exempt from the RGGI regulations, electric generating units and utilities subject to the RGGI carbon reduction requirements may incur increased costs that could be passed on to ratepayers like our industrial facilities in Virginia. The State Air Pollution Control Board approved the final RGGI carbon trading regulations in April 2019; however, legislative amendments made to Virginia’s 2019 budget currently block the use of state funds to join RGGI or any climate change compacts, and to prevent using any cap-and-trade revenue without General Assembly approval. In September 2019, Governor Ralph Northam issued Executive Order 43 (“EO 43”), setting goals for Virginia to generate 30 percent of its electricity from carbon-free sources by 2030 and 100 percent by 2050. EO 43 directs various state agencies, including the Department of Environmental Quality, to develop a plan of action to meet these energy goals and address related issues such as energy storage, energy efficiency and environmental justice.
The agreement signed in April 2016 among the U.S. and over 170 other countries, which arose out of negotiations at the United Nation’s Conference of Parties (COP21) climate summit in December 2015 (the “Paris Agreement”), established a framework for reducing global GHG emissions. By signing the Paris Agreement, the U.S. made a non-binding commitment to reduce economy-wide GHG emissions by 26% to 28% below 2005 levels by 2025. Other countries in which we conduct business, including China, European Union member states and India, have set GHG reduction targets. The Paris Agreement became effective in November 2016. Although a party to the agreement may not provide the required one-year notice of withdrawal until three years after the effective date, in 2017, President Trump announced that the U.S. intended to withdraw from the Paris Agreement. At this time, it is not possible to determine how the Paris Agreement, or any potential U.S. commitments in lieu of those under the agreement, may impact U.S. industrial facilities, including our domestic operations.
Several of our international facilities are located in countries that have already adopted GHG emissions trading schemes. For example, Quebec has become a member of the Western Climate Initiative, which is a collaboration among California and certain Canadian provinces that have joined together to create a cap-and-trade program to reduce GHG emissions. In 2009, Quebec adopted a target of reducing GHG emissions by 20% below 1990 levels by 2020 and 37.5% from 1990 levels by 2030. In 2011, Quebec issued a final regulation establishing a regional cap-and-trade program that required reductions in GHG emissions from covered emitters as of January 1, 2013. Our mill in Quebec is subject to these cap-and-trade requirements, although the direct impact of this regulation has not been material to date. Compliance with this program and other similar programs may require future expenditures to meet required GHG emission reduction requirements in future years.
Regulation related to climate change continues to develop in the areas of the world where we conduct business. We have systems in place for tracking the GHG emissions from our energy-intensive facilities, and we carefully monitor developments in climate related laws, regulations and policies to assess the potential impact of such developments on our results of operations, financial condition, cash flows and disclosure obligations.
Sustainability
Sustainability is an integral part of our business strategy and one of our four stated key value drivers for our customers. Paper-based packaging has several attributes that, we believe, makes it well-suited to helping our customers provide sustainable solutions for their customers. For example, it is lightweight, durable, versatile, and in
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many instances, recyclable and made with renewable materials. Given the size and geographic breadth of our manufacturing operations and our history of developing innovative products and solutions, we believe that we are uniquely positioned to help our customers improve their sustainability. Also, we are helping to drive the development of the circular economy by recovering used paper-based packaging through our extensive network of recycling facilities and turning the recovered fiber into new packaging or selling it to others to use to make new products. Examples of our commitment to sustainability include having one of the industry’s largest certified virgin fiber procurement systems and heading an industry-leading foodservice recycling initiative. We have been recognized for our sustainability efforts through, among other things, industry award programs and inclusion in the FTSE 4 Good index.
Patents and Other Intellectual Property
We hold a substantial number of foreign and domestic trademarks, trademark applications, trade names, patents, patent applications and licenses relating to our business, our products and our production processes. Our patent portfolio consists primarily of utility and design patents relating to our products and manufacturing operations. It also includes exclusive rights to substantial proprietary packaging system technology in the U.S. or other licenses obtained from a third party. Our brand name and logo, and certain of our products and services, are protected by domestic and foreign trademark rights. Our patents, trademarks and other intellectual property rights, particularly those relating to our converting operations, are important to our operations as a whole. Our intellectual property has various expiration dates.
Employees
At September 30, 2019, we employed approximately 51,100 people, of which approximately 78% were located in the U.S. and Canada and 22% were located in Europe, South America, Mexico and Asia/Pacific. Of the approximately 51,100 employees, approximately 71% were hourly and 29% were salaried. Approximately 46% of our hourly employees in the U.S. and Canada are covered by collective bargaining agreements (“CBA” or “CBAs”), which typically have four to six year terms. Approximately 17% of those employees covered under CBAs are operating under agreements that expire within one year and approximately 4% of those employees are working under expired contracts.
While we have experienced isolated work stoppages in the past, we have been able to resolve them, and we believe that working relationships with our employees are generally good. While the terms of our CBAs vary, we believe the material terms of the agreements are customary for the industry, the type of facility, the classification of the employees and the geographic location covered.
In October 2014, we entered into a master agreement with the United Steelworkers Union (“USW”) that applied to substantially all of our legacy RockTenn facilities represented by the USW at that time. The agreement has a six year term and covers a number of specific items, including wages, medical coverage and certain other benefit programs, substance abuse testing and successorship. Individual facilities will continue to have local agreements for subjects not covered by the master agreement and those agreements will continue to have staggered terms. Wage increases specified in the master agreement have been negotiated and ratified. The master agreement permits us to apply its terms to USW employees who work at facilities we acquire during the term of the agreement, and, it now covers many former MeadWestvaco, KapStone and other facilities acquired. WestRock and the USW are currently re-negotiating a successor agreement to the original master agreement. The master agreement covers approximately 63 of our U.S. facilities and approximately 8,900 of our employees.
See Item 1A. “Risk Factors — We May Be Adversely Impacted By Work Stoppages and Other Labor Relations Matters”.
International Operations
Our operations outside the U.S. are conducted through subsidiaries located in Canada, Mexico, South America, Europe, Asia and Australia. Sales attributable to non-U.S. operations were 18.2%, 19.9% and 17.6% of our net sales in fiscal 2019, 2018 and 2017, respectively, some of which were transacted in U.S. dollars. See “Note 7. Segment Information” of the Notes to Consolidated Financial Statements for additional information. See also Item 1A. “Risk Factors — We are Exposed to Risks Related to International Sales and Operations”.
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Available Information
Our Internet address is www.westrock.com. Our Internet address is included herein as an inactive textual reference only. The information contained on our website is not incorporated by reference herein and should not be considered part of this report. We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”) and we make available free of charge most of our SEC filings through our Internet website as soon as reasonably practicable after filing with the SEC. You may access these SEC filings via the hyperlink that we provide on our website to a third-party SEC filings website. We also make available on our website our board committee charters, as well as the corporate governance guidelines adopted by our board of directors, our Code of Conduct for employees, our Code of Conduct and Ethics for the Board of Directors and our Code of Ethical Conduct for Chief Executive Officer (“CEO”) and Senior Financial Officers. Any amendments to, or waiver from, any provision of these codes that are required to be disclosed will be posted on our website. We will also provide copies of these documents, without charge, at the written request of any stockholder of record. Requests for copies should be mailed to: WestRock Company, 1000 Abernathy Road NE, Atlanta, Georgia 30328, Attention: Corporate Secretary.
Forward-Looking Information
This report contains statements that relate to future, rather than past, events. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements made in this report often address our expected future business and financial performance and financial conditions, and often contain words such as “may”, “will”, “could”, “would”, “anticipate”, “intend”, “estimate”, “project”, “plan”, “believe”, “expect”, “target” and “potential”, or refer to future time periods. Forward-looking statements are based on currently available information and our current expectations, beliefs, plans or forecasts, and include statements made in this report regarding, among other things:
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our belief that we are one of the largest paper recyclers in North America; |
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our belief that we are the largest manufacturer of solid fiber partitions in North America measured by net sales; |
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our expectation that we will complete the monetization of our Land and Development holdings during fiscal 2020; |
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our belief that we would be able to source significant replacement quantities from other suppliers in the event we incur production disruptions for recycled or virgin containerboard and paperboard; |
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our belief that we have good relationships with our customers; |
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our belief that our ability to leverage our full portfolio of differentiated solutions and capabilities enables us to set ourselves apart from our competitors; |
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our belief that we compete effectively on price, design, product innovation, quality and service; |
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our belief that future compliance with health and safety laws and regulations will not have a material adverse effect on our results of operations, financial condition or cash flows; |
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our belief that the currently expected outcome of any environmental proceedings and claims that are pending or threatened against us will not have a material adverse effect on our results of operations, financial condition or cash flows; |
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our belief that the costs associated with investigations or remediations under various environmental laws and regulations, including CERCLA, will not have a material adverse effect on our results of operations, financial condition or cash flows; |
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our belief that matters relating to previously identified third party PRP sites and certain facilities formerly owned or operated by Smurfit-Stone have been satisfied by claims in the Smurfit-Stone bankruptcy proceedings; |
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our belief that we can assert claims for indemnification pursuant to existing rights we have under purchase and other agreements in connection with certain remediation sites and have insurance coverage, subject to applicable deductibles/retentions, policy limits and other conditions, for certain environmental matters; |
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our expectation that compliance with the Western Climate Initiative and other similar programs may require future expenditures to meet required GHG emission reduction requirements in future years; |
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our belief that we are uniquely positioned to help our customers improve their sustainability; |
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that our businesses are likely to continue experiencing cycles relating to industry capacity and general economic conditions; |
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our belief that working relationships with our employees are generally good; |
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our expectation that the benefits from potential, as well as completed, acquisitions and joint ventures will include synergies, cost savings, growth opportunities or access to new markets (or a combination thereof), and in the case of divestitures, the realization of proceeds from the sale of businesses and assets to purchasers that place higher strategic value on these businesses and assets than we do; |
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our belief that we have made significant progress integrating KapStone’s operations into our management and operating structures; |
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our expectation that the KapStone Acquisition will generate run-rate synergies and performance improvements of more than $200 million by the end of fiscal 2021; |
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our expectation that we will continue to incur significant capital, operating and other expenditures complying with applicable environmental, health and safety laws and regulations; |
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that we may be required to incur additional indebtedness or issue equity securities in order to satisfy our payment or investment obligations in respect of Grupo Gondi; |
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that we may form additional joint ventures; |
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our belief that certain multiemployer pension plans (“MEPP” or “MEPPs”) in which we participate or have participated, including Pace Industry Union-Management Pension Fund (“PIUMPF”), have material unfunded vested benefits; |
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that we expect to challenge the PIUMPF accumulated funding deficiency, and that we expect to begin making monthly payments for the PIUMPF withdrawal liabilities in fiscal 2020; |
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that we are may withdraw from other MEPPs in the future; |
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our belief that our existing production capacity is adequate to serve existing demand for our products and that our plants and equipment are in good condition; |
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our belief that the resolution of lawsuits and claims will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows; |
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that we expect in the future to continue to evaluate potential acquisitions similar to those completed in the past, although the size of individual acquisitions may vary; |
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our belief that our strong balance sheet and cash flow provide us the flexibility to continue to invest to sustain and improve our operating performance; |
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our expectation that we will generate net sales of between $18.0 and $18.5 billion in fiscal 2020, and the factors thereof; |
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our expectation that our earnings in fiscal 2020 to be impacted by pricing declines, as well as cost inflation related to wages, benefits and other non-commodity categories, and that we expect to experience commodity cost deflation, particularly related to recycled fiber; |
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our expectation that slightly more of our earnings will be generated in the second half of the fiscal year than in the first half of the fiscal year due to seasonality, the timing of scheduled mill maintenance outages and our strategic capital projects; |
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our expectation that we will reconfigure our North Charleston, SC mill beginning in the second quarter of fiscal 2020, and that reconfiguration is expected to reduce our linerboard capacity by approximately 288,000 tons and our annual costs by approximately $40 million, including a workforce reduction over a five-month period; |
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that the new paper machine at our Florence, SC mill is scheduled to start up during the spring of 2020, and that we expect to incur maintenance downtime during the first quarter of fiscal 2020 in connection with this project; |
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that the upgrade of our mill located in Tres Barras, Brazil is expected to be completed in the first half of calendar 2021; |
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our general expectation that the integration of a closed facility’s assets and production with other facilities will enable the receiving facilities to better leverage their fixed costs while eliminating fixed costs from the closed facility; |
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our belief that it is likely that we will engage in future restructuring activities; |
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with respect to the impact of Hurricane Michael on our Panama City, FL mill, (a) our expectation that all remaining repair work will be completed during fiscal 2020 and 2021, (b) our anticipation that the total of our property damage and business interruption claim will exceed $200 million and (c) our expectation that we will recover the majority of the additional amount of direct costs and lost production and sales, excluding our $15 million deductible, in future periods through insurance reimbursements; |
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our expectation that funding for our domestic operations in the foreseeable future to come from sources of liquidity within our domestic operations, including cash and cash equivalents, and available borrowings under our credit facilities, and that our foreign cash and cash equivalents are not expected to be a key source of liquidity to our domestic operations; |
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our expectation that capital expenditures in fiscal 2020 will be approximately $1.1 billion, that with the completion of certain of our strategic capital projects in fiscal 2019 and 2020 we expect to transition to our long-range capital expenditure run rate of approximately $900 million to $1.0 billion a year in fiscal 2021 and that we generally expect our base capital expenditures to be roughly half invested in maintenance and half invested in high return generating projects; |
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our estimation that we will invest approximately $15 million for capital expenditures during fiscal 2020 in connection with matters relating to environmental compliance; |
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our expectation that we will utilize the remaining U.S. federal net operating losses primarily over the next two years and that foreign and state net operating losses and credits will be used over a longer period of time; |
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our expectation that, including the estimated impact of book and tax differences, subject to changes in tax laws, our cash tax rate will move closer to our income tax rate in fiscal 2020, 2021 and 2022; |
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our expectation that we will contribute approximately $27 million to our U.S. and non-U.S. pension plans in fiscal 2020; |
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our estimation that minimum pension contributions to our U.S. and non-U.S. pension plans will be in the range of approximately $24 million to $28 million annually in fiscal 2021 through 2024; |
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our expectation that we will 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 (“Pension Act”) and other regulations; |
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our anticipation 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 (as hereinafter defined), proceeds from the issuance of debt or equity securities or other additional long-term debt financing, including new or amended facilities; |
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that we may seek to refinance existing indebtedness, to extend maturities, reduce borrowing costs or otherwise improve the terms and composition of our indebtedness; |
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our beliefs with respect to material changes in future assumptions and estimates related to allowances and impairment; |
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our belief that our estimates for restructuring costs and other costs are reasonable, considering our knowledge of the industries we operate in, previous experience in exiting activities and valuations we may obtain from independent third parties; |
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our belief that our assumptions are appropriate with respect to health insurance costs, workers’ compensation cost and pension and other postretirement benefit obligations; |
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our expectation of the impact of implementation of various accounting standards, including that certain of these standards will not have a material effect on our consolidated financial statements; |
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our belief that the Grupo Gondi (as defined herein) joint venture is helping to grow our presence in the attractive Mexican market; |
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our belief that our restructuring actions have allowed us to more effectively manage our business; |
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our expectation that by investing in a variety of asset classes and utilizing multiple investment management firms, we can create a portfolio for our pension plans that yields adequate returns with reduced volatility; |
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our belief that PIUMPF’s demand related to our withdrawal would include both a payment for withdrawal liability and for our proportionate share of PIUMPF’s accumulated funding deficiency; |
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our expectation that MWV TN (as defined herein) will only repay the liability at maturity from the Timber Note (as defined herein) proceeds; |
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our belief that the liability for environmental matters was adequately reserved at September 30, 2019; |
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our belief that we have substantial insurance coverage, subject to applicable deductibles and policy limits, with respect to asbestos claims; |
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our belief that we have valid defenses to asbestos-related personal injury claims and intend to continue to defend them vigorously, and that should the volume of asbestos-related personal injury litigation grow substantially, it is possible that we could incur significant costs resolving these cases; |
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our expectation that the resolution of pending asbestos litigation and proceedings will not have a material adverse effect on results of operations, financial condition or cash flows and that in any given |
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period or periods, it is possible that asbestos-related proceedings or matters could have a material adverse effect on our results of operations, financial condition or cash flows; |
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our estimation that the exposure with respect to certain guarantees we have made could be approximately $50 million; |
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our belief that our exposure related to guarantees will not have a material impact on our results of operations, financial condition or cash flows; |
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our expectation that we will not issue additional SARs; |
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that we may enter into various hedging transactions, including commodity hedge contracts, interest rate swap agreements and foreign-exchange hedge contracts; |
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our belief that in the event of a distribution in the form of dividends or dispositions of our foreign subsidiaries, we may be subject to incremental U.S. income taxes, subject to an adjustment for foreign tax credits, and withholding taxes or income taxes payable to the foreign jurisdictions; |
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that it is reasonably possible that our unrecognized tax benefits will decrease by up to $8.7 million in the next twelve months due to expiration of various statues of limitations and settlement of issues; |
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our belief that our tax positions are appropriate; |
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the expected impact of market risks, such as interest rate risk, pension plan risk, foreign currency risk, commodity price risks, energy price risk, rates of return, the risk of investments in derivative instruments, and the risk of counterparty nonperformance, and expected factors affecting those risks, including our exposure to foreign currency rate fluctuations; |
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that the net proceeds from issuances of notes under our commercial paper program are expected to continue to be used for general corporate purposes; and |
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our belief that the decision of the Supreme Court of Brazil concluding that certain state value added tax should not be included in the calculation of federal gross receipts taxes reduced our gross receipts tax in Brazil prospectively and retrospectively, and will allow us to recover tax amounts collected by the government. |
Forward-looking statements are based on currently available information and our current assumptions, expectations and projections about future events. You should not rely on our forward-looking statements. Our forward-looking statements are not guarantees of future performance and are subject to future events, risks and uncertainties — many of which are beyond our control, dependent on actions of third parties or currently unknown to us — as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections. Particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include: our ability to achieve benefits from acquisitions (including the KapStone Acquisition) and the timing thereof, including synergies, performance improvements and successful implementation of capital projects (including our strategic capital projects); risks and uncertainties associated with, the KapStone Acquisition; the level of demand for our products; our ability to successfully identify and make performance improvements; anticipated returns on our capital investments; uncertainties related to planned and unplanned mill outages or production disruptions; investment performance, discount rates, return on pension plan assets and expected compensation levels; fluctuations in energy, raw materials, shipping and capital equipment costs; fluctuations in selling prices and volumes; intense competition; the impact of operational restructuring activities; potential liability for outstanding guarantees and indemnities and the potential impact of such liabilities; changes in law, economic and financial conditions, including interest and exchange rate volatility, commodity and equity prices; our ability to maintain our current credit rating and the impact on our funding costs and competitive position if we do not do so; the amount and timing of our cash flows and earnings and other conditions, which may affect our ability to pay our quarterly dividend at the planned level or to repurchase shares at planned levels; our capital allocation plans, as such plans may change including with respect to the timing and size of share repurchases, acquisitions, joint ventures, dispositions and other strategic actions; the impact of announced price increases or decreases and the impact of the gain and loss of customers; compliance with governmental laws and
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regulations, including those related to the environment; the scope, and timing and outcome of any litigation, claims, or other proceedings or dispute resolutions and the impact of any such litigation (including the Brazil Tax Liability), claims or other proceedings or dispute resolutions on our results of operations, financial condition or cash flows; income tax rates, future deferred tax expense and future cash tax payments; future debt repayment; the occurrence of severe weather or a natural disasters, such as hurricanes or other unanticipated problems, such as labor difficulties, equipment failure or unscheduled maintenance and repair, which could result in operational disruptions of varied duration; and other factors that are discussed in Item 1A. “Risk Factors”.
Forward-looking statements speak only as of the date they are made, and we do not undertake to update these statements other than as required by law. You are advised, however, to review any further disclosures we make on related subjects in our periodic filings with the SEC.
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Item 1A. |
RISK FACTORS |
We are subject to certain risks and events that, if one or more occur, could adversely affect our results of operations, cash flows and financial condition, and the trading price of our common stock, par value $0.01 per share (“Common Stock”). In evaluating us, our business and a potential investment in our securities, you should consider the following risk factors and the other information presented in this report, as well as the other reports and registration statements we file from time to time with the SEC. The risks addressed below are not the only ones we face. Additional risks not currently known to us or that we currently believe to be immaterial could also adversely impact our business.
Industry Risks
We May Experience Pricing Variability
Our businesses have experienced, and are likely to continue experiencing, cycles relating to industry capacity and general economic conditions. The length and magnitude of these cycles have varied over time and by product. Prices for our products are driven by many factors, including general economic conditions, demand for our products and competitive conditions in the industries within which we compete, and we have little influence over the timing and extent of price changes, which may be unpredictable and volatile. If supply exceeds demand, prices for our products could decline, and our results of operations, cash flows and financial condition, and the trading price of our Common Stock could be adversely affected. For example, we believe that the trading price of our Common Stock was adversely affected in fiscal 2018 and fiscal 2019 due, in part, to concerns about announcements by certain of our competitors of planned additional capacity in the North American containerboard market, as well as the subsequent implementation of certain of those plans.
Certain published indices (including those published by Pulp and Paper Week (“PPW”)) contribute to the setting of selling prices for some of our products. PPW is a limited survey that may not accurately reflect changes in market conditions for our products. Changes in how PPW is maintained, or other indices are established or maintained, could adversely impact the selling prices for these products.
Our Earnings Are Highly Dependent on Volumes
Because our operations generally have high fixed operating cost components, our earnings are highly dependent on volumes, which tend to fluctuate. These fluctuations make it difficult to predict our financial results with any degree of certainty. Any failure to maintain volumes may adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.
We May Face Increased Costs For, or Inadequate Availability of, Raw Materials, Energy and Transportation
We rely heavily on the use of certain raw materials, energy sources and third-party companies to transport our goods.
The costs of recycled fiber and virgin fiber, the principal externally sourced raw materials for our mills, are subject to pricing variability due to market and industry conditions. Demand for recycled fiber has fluctuated and may increase due to, among other factors, the addition of new recycled paper mill capacity, increasing demand for products packaged in packaging produced from paper manufactured from 100% recycled fiber and the shift by
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manufacturers of virgin paperboard, tissue, newsprint and corrugated packaging to the production of products with some recycled fiber content. In 2018, China implemented a ban on the importation of some categories of recyclable materials (including mixed paper) and set strict contamination levels for other recovered paper imports. The implementation of these policies resulted in lower demand for recycled fiber in the U.S. and lower associated costs for us in fiscal 2018 and fiscal 2019. If China ends or changes these policies, demand for recycled fiber may increase our costs and adversely affect our profitability. The market price of virgin fiber varies based on availability and source of virgin fiber, and the availability of virgin fiber may be impacted by, among other factors, weather conditions. In fiscal 2019, the profitability of our U.S. operations was adversely impacted by wet weather conditions, particularly in the southern portion of the U.S., which adversely impacted the availability of virgin fiber at some of our mills. In addition, costs for key chemicals used in our manufacturing operations fluctuate, which impacts our manufacturing costs. Certain published indices contribute to price setting for some of our raw materials and future changes in how these indices are established or maintained could adversely impact the pricing of these raw materials.
The cost of natural gas, which we use in many of our manufacturing operations, including many of our mills, and other energy costs (including energy generated by burning natural gas, fuel oil, biomass and coal) has at times fluctuated significantly. High energy costs could increase our operating costs and make our products less competitive compared to similar or alternative products offered by competitors.
We distribute our products primarily by truck and rail, although we also distribute some of our products by cargo ship. The reduced availability of trucks, rail cars or cargo ships could adversely impact our ability to distribute our products in a timely manner. High transportation costs could make our products less competitive compared to similar or alternative products offered by competitors.
Because our businesses operate in highly competitive industry segments, we may not be able to recoup past or future increases in the cost of raw materials, energy or transportation through price increases for our products. The failure to obtain raw materials, energy or transportation services at reasonable market prices (or the failure to pass on price increases to our customers) or a reduction in the availability of raw materials, energy or transportation services due to increased demand, significant changes in climate or weather conditions, or other factors could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.
We Face Intense Competition
We compete in industries that are highly competitive. Our competitors include large and small, vertically integrated companies and numerous smaller non-integrated companies. We generally compete with companies operating in North America, although we have operations spanning North America, South America, Europe, Asia and Australia. Factors affecting our ability to compete include the entry of new competitors into the markets we serve, increased competition from overseas producers, our competitors’ pricing strategies, the introduction by our competitors of new technologies and equipment, our ability to anticipate and respond to changing customer preferences and our ability to maintain the cost-efficiency of our facilities. In addition, changes within these industries, including the consolidation of our competitors and our customers, may impact competitive dynamics. For example, in 2018, International Paper Company completed the combination of its North American consumer packaging business with a subsidiary of Graphic Packaging Holding Company, which competes with our Consumer Packaging segment. If our competitors are more successful than we are with respect to any key competitive factor, our results of operations, cash flows and financial condition, and the trading price of our Common Stock, could be adversely affected.
Our products also compete, to some extent, with various other packaging materials, including products made of paper, plastics, wood and various types of metal. Customer shifts away from containerboard and paperboard packaging to packaging made from other materials could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.
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Operating Risks
We May Be Unsuccessful in Making and Integrating Mergers, Acquisitions and Investments, and Completing Divestitures
We have completed a number of mergers, acquisitions, investments and divestitures in recent years, including the Combination, our investment in Gondi, S.A. de C.V. (“Grupo Gondi”), the Separation, the HH&B Sale, the MPS Acquisition and the KapStone Acquisition, and we may acquire, invest in or sell, or enter into joint ventures with additional companies. We may not be able to identify suitable targets or purchasers or successfully complete suitable transactions in the future, and completed transactions may not be successful. These transactions create risks, including, but not limited to, risks associated with:
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disrupting our ongoing business, including distracting management from our existing businesses; |
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integrating acquired businesses and personnel into our business, including integrating information technology systems and operations across different cultures and languages, and addressing the economic, political and regulatory risks associated with specific countries; |
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working with partners or other ownership structures with shared decision-making authority; |
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obtaining and verifying relevant information regarding a business prior to the consummation of the transaction, including the identification and assessment of liabilities, claims or other circumstances that could result in litigation or regulatory risk exposure; |
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obtaining required regulatory approvals and/or financing on favorable terms; |
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retaining key employees, contractual relationships or customers; |
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the potential impairment of assets and goodwill; |
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the additional operating losses and expenses of businesses we acquire or in which we invest; |
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implementing controls, procedures and policies at companies we acquire; and |
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the dilution of interests of holders of our Common Stock through the issuance of equity securities. |
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Mergers, acquisitions and investments may not be successful and may adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock. Among the benefits we expect from potential, as well as completed, acquisitions and joint ventures are synergies, cost savings, growth opportunities or access to new markets (or a combination thereof), and in the case of divestitures, the realization of proceeds from the sale of businesses and assets to purchasers that place higher strategic value on these businesses and assets than we do. For acquisitions, our success in realizing these benefits and the timing of realizing them depend on the successful integration of the acquired businesses and operations with our business and operations. Even if we integrate these businesses and operations successfully, we may not realize the full benefits we expected within the anticipated timeframe, or at all, and the benefits may be offset by unanticipated costs or delays.
We expect the KapStone Acquisition to generate run-rate synergies and performance improvements of more than $200 million by the end of fiscal 2021. The success of the KapStone Acquisition will depend on, among other things, our ability to realize anticipated growth opportunities, cost savings and other synergies. Our success in realizing these benefits, and the timing of realizing these benefits, will depend on us successfully integrating KapStone with our Corrugated Packaging business, which may be more difficult, complex, costly and time consuming than we expect. The integration process and other disruptions resulting from the KapStone Acquisition may disrupt ongoing businesses or cause inconsistencies in standards, controls, procedures and policies that adversely affect our relationships with employees, suppliers, customers and others. If we are not able to successfully integrate KapStone within the anticipated time frame, or at all, the expected cost savings and synergies and other benefits of the KapStone Acquisition may not be realized fully, or at all, or may take longer or cost us more to realize than expected, the combined businesses may not perform as expected, management’s time and energy may be diverted, and our results of operations, cash flows and financial condition, and the trading price of our Common Stock, could be adversely affected.
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Our Acquisition of KapStone Subjects Us to Various Risks and Uncertainties
As a result of the KapStone Acquisition, we are subject to various risks and uncertainties, including the following:
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we may fail to realize anticipated synergies, cost savings, operating efficiencies and other benefits; |
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our incurrence of substantial indebtedness in connection with financing the KapStone Acquisition may have an adverse effect on our liquidity, limit our flexibility in responding to other business opportunities and increase our vulnerability to adverse economic and industry conditions; |
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we may not be able to integrate KapStone without encountering difficulties and diverting management’s focus and resources from ordinary business activities and opportunities; |
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we may face challenges retaining KapStone’s customers and suppliers; and |
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we may encounter unforeseen internal control, regulatory or compliance issues. |
Any one or more of these risks could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.
We May Incur Business Disruptions
The operations at our manufacturing facilities may be interrupted or impaired by various operating risks, including, but not limited to, risks associated with:
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catastrophic events, such as fires, floods, earthquakes, explosions, natural disasters, severe weather, including hurricanes, tornados and droughts, or other similar occurrences; |
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interruptions in the delivery of raw materials or other manufacturing inputs; |
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adverse government regulations; |
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equipment breakdowns or failures; |
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prolonged power failures; |
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unscheduled maintenance outages; |
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information system disruptions or failures due to any number of causes, including cyber-attacks; |
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violations of our permit requirements or revocation of permits; |
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releases of pollutants and hazardous substances to air, soil, surface water or ground water; |
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disruptions in transportation infrastructure, including roads, bridges, railroad tracks and tunnels; |
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shortages of equipment or spare parts; and |
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labor disputes and shortages. |
For example, in 2018, operations at our Florence, South Carolina and Panama City, FL mills were interrupted by hurricanes, resulting in lost mill production and the incurrence of damages, supply chain disruptions and increased input costs (see “Note 7. Segment Information” of the Notes to Consolidated Financial Statements for additional information) and, in 2019, operations at three of our mills located in the southeastern U.S. were temporarily idled in advance of the landfall of a hurricane.
Business disruptions may impair our production capabilities and adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.
We May Fail to Anticipate Trends That Would Enable Us to Offer Products That Respond to Changing Customer Preferences
Our success depends, in part, on our ability to offer differentiated solutions, and we must continually develop and introduce new products and services to keep pace with technological and regulatory developments and changing customer preferences. The services and products that we offer customers may not meet their needs as their business models evolve. Also, our customers may decide to decrease their use of our products, use alternative
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materials for their product packaging or forego the packaging of certain products entirely. Regulatory developments can also significantly alter the market for our products. For example, a move to electronic distribution of disclaimers and other paperless regimes could adversely impact our healthcare inserts and labels businesses.
Consumer preferences for products and packaging formats are constantly changing based on, among other factors, cost, convenience, and health, environmental and social concerns and perceptions. For example, changing consumer dietary habits and preferences have slowed the sales growth for certain of the food and beverage products we package. Also, there is an increasing focus among consumers to ensure that products delivered through e-commerce are packaged efficiently. For instance, Amazon has begun requiring that all items sold through Amazon that are larger than a specified size be designed and certified as ready-to-ship. Our results of operations, cash flows and financial condition, and the trading price of our Common Stock, could be adversely affected if we fail to anticipate trends that would enable us to offer products that respond to changing customer preferences.
Our Capital Expenditures May Not Achieve the Desired Outcomes or May Be Achieved at a Higher Cost than Anticipated
We regularly make capital expenditures and many of our capital projects are complex, costly and/or implemented over an extended period of time. For example, in fiscal 2019, we completed strategic capital projects at our Porto Feliz corrugated box plant in the Brazilian state of Sao Paulo, our Cottonton, Alabama and Covington, Virginia mills, and we continue to invest in strategic projects at our Florence, South Carolina and Tres Barras, Brazil mills. Our capital expenditures for these and other capital projects could be higher than we anticipated, we may experience unanticipated business disruptions and/or we may not achieve the desired benefits from the capital projects, any of which could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock. In addition, disputes between us and contractors who are involved with implementing capital projects could lead to time-consuming and costly litigation.
We are Exposed to Risks Related to International Sales and Operations
We derived 18.2% of our net sales in fiscal 2019 from outside the U.S. through international operations, some of which were transacted in U.S. dollars. In addition, certain of our domestic operations have sales to foreign customers. Our operating results and business prospects could be adversely affected by risks related to the countries outside the U.S. in which we have manufacturing facilities or sell our products. Specifically, Brazil, China, Mexico and India, where we maintain operations directly or through a joint venture, are exposed to varying degrees of economic, political and social instability. We are exposed to risks of operating in those countries, as well as others, including, but not limited to, risks associated with:
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the difficulties with and costs of complying with a wide variety of complex laws, treaties and regulations; |
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unexpected changes in political or regulatory environments; earnings and cash flows that may be subject to tax withholding requirements or the imposition of tariffs, exchange controls or other restrictions; |
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repatriating cash from foreign countries to the U.S.; |
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political, economic and social instability; |
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import and export restrictions and other trade barriers; |
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responding to disruptions in existing trade agreements or increased trade tensions between countries or political and economic unions; |
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maintaining overseas subsidiaries and managing international operations; |
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obtaining regulatory approval for significant transactions; |
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government limitations on foreign ownership or takeovers, nationalizations of business or mandated price controls; |
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fluctuations in foreign currency exchange rates; and |
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transfer pricing. |
Any one or more of these risks could adversely affect our international operations and our results of operations, cash flows and financial condition, and the trading price of our Common Stock.
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We Cannot Operate Our Joint Ventures Solely For Our Benefit, Which Subjects Us to Risks
We have invested in joint ventures and may form additional joint ventures in the future. Our participation in joint ventures is subject to risks, including, but not limited to, risks associated with:
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shared decision-making, which could require us to expend additional resources to resolve impasses or potential disputes; |
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maintaining good relationships with our partners, which could limit our future growth potential; |
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conflict of interest issues if our partners have competing interests; |
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investment or operational goals that conflict with our partners’ goals, including the timing, terms and strategies for investments or future growth opportunities; |
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our partners’ ability to fund their share of required capital contributions or to otherwise fulfill their obligations as partners; and |
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obtaining consents from our partners for any sale or other disposition of our interest in a joint venture or underlying assets of the joint venture. |
We May Produce Faulty or Contaminated Products Due to Failures in Quality Control Measures and Systems
Our failure to produce products that meet safety and quality standards could result in adverse effects on consumer health, litigation exposure, loss of market share and adverse financial impacts, among other potential consequences, and we may incur substantial costs in taking appropriate corrective action (up to and including recalling products from end consumers) and to reimburse customers and/or end consumers for losses that they suffer as a result of these failures. Our actions or omissions with respect to product safety and quality could lead to regulatory investigations, enforcement actions and/or prosecutions, and result in adverse publicity, which may damage our reputation. Any of these results could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.
We provide guarantees or representations in certain of our contracts that our products are produced in accordance with customer specifications. If the product contained in packaging manufactured by us is faulty or contaminated, the manufacturer of the product may allege that the packaging we provided caused the fault or contamination, even if the packaging complies with contractual specifications. If our packaging fails to function properly or to preserve the integrity of its contents, we could face liability from our customers and third parties for bodily injury or other damages. These liabilities could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.
We Depend on Certain Large Customers
Our Corrugated Packaging and Consumer Packaging segments have large customers, the loss of which could adversely affect each segment’s sales and, depending on the significance of the loss, our results of operations, cash flows and financial condition, and the trading price of our Common Stock. In particular, because our businesses operate in highly competitive industry segments, we regularly bid for new business or for the renewal of existing business. The loss of business from our larger customers, or the renewal of business on less favorable terms, may adversely impact our financial results.
We are Subject to Cyber-Security Risks, Including Related to Customer, Employee, Vendor or Other Company Data
We use information technologies to securely manage operations and various business functions. We rely on various technologies, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including reporting on our business and interacting with customers, vendors and employees. In addition, we collect and store data, including proprietary business information, and may have access to confidential or personal information in certain of our businesses that is subject to privacy and security laws, regulations and customer-imposed controls. Our systems are subject to repeated attempts by third parties to access information or to disrupt our systems. Despite our security design and controls, and those of our third-party providers, we may become subject to system damage, disruptions or shutdowns due to any number of causes, including cyber-attacks, breaches, employee error or
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malfeasance, power outages, telecommunication or utility failures, systems failures, service providers, natural disasters or other catastrophic events. These vulnerabilities may remain undetected for an extended period of time. We may face other challenges and risks as we upgrade and standardize our information technology systems as part of our integration of acquired businesses and operations. We maintain contingency plans to prevent or mitigate the impact of these events; however, these events could result in operational disruptions or the misappropriation of sensitive data, and depending on their nature and scope, could lead to the compromise of confidential information, improper use of our systems and networks, manipulation and destruction of data, defective products, production downtimes, operational disruptions and exposure to liability. Such disruptions or misappropriations and the resulting repercussions, including reputational damage and legal claims or proceedings, may adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.
We May Be Adversely Impacted By Work Stoppages and Other Labor Relations Matters
A significant number of our union employees are governed by CBAs. Expired contracts are in the process of renegotiation and others expire within one year. For example, we are negotiating a successor agreement to the original master agreement with the USW, which is scheduled to expire October 2020. We may not be able to successfully negotiate new union contracts without work stoppages or labor difficulties or renegotiate them on favorable terms. We have experienced work stoppages in the past and may experience them in the future. If we are unable to successfully renegotiate the terms of any of these agreements, or if we experience any extended interruption of operations at any of our facilities as a result of strikes or other work stoppages, our results of operations, cash flows and financial condition, and the trading price of our Common Stock, could be adversely affected. In addition, our businesses rely on vendors, suppliers and other third parties that have union employees. Strikes or work stoppages affecting these vendors, suppliers and other third parties could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.
We May Fail to Attract, Motivate, Train and Retain Qualified Personnel, Including Key Personnel
Our success depends on our ability to attract, motivate, train and retain employees with the skills necessary to understand and adapt to the continuously developing needs of our customers. The increasing demand for qualified personnel makes it more difficult for us to attract and retain employees with requisite skill sets, particularly employees with specialized technical and trade experience. Changing demographics and labor work force trends also may result in a loss of knowledge and skills as experienced workers retire. If we fail to attract, motivate, train and retain qualified personnel, or if we experience excessive turnover, we may experience declining sales, manufacturing delays or other inefficiencies, increased recruiting, training and relocation costs and other difficulties, and our results of operations, cash flows and financial condition, and the trading price of our Common Stock may be adversely impacted.
We rely on key executive and management personnel to manage our business efficiently and effectively. The loss of any of our key personnel could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock may be adversely impacted. In particular, our failure to identify candidates with the leadership skills to manage our increasingly complex organization, and our failure to ensure effective transfers of knowledge and smooth transitions involving key executives, could hinder our strategic planning and execution.
Financial Risks
We May Be Adversely Affected by Factors That Are Beyond Our Control, Such as U.S. and Worldwide Economic and Financial Market Conditions, and Social and Political Change
Our businesses may be adversely affected by a number of factors that are beyond our control, including, but not limited to:
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general economic and business conditions; |
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changes in tax laws or tax rates and conditions in the financial services markets, including counterparty risk, insurance carrier risk, rising interest rates, inflation, deflation, fluctuations in the value of local currency versus the U.S. dollar and the impact of a stronger U.S. dollar; |
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financial uncertainties in our major international markets, including uncertainties surrounding the United Kingdom’s withdrawal from the European Union, commonly referred to as “Brexit”; |
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social and political change impacting matters such as sustainability, environmental regulations and trade policies and agreements; or |
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government deficit reduction and other austerity measures in specific countries or regions, or in the various industries in which we operate. |
For example, we may experience lower demand for our products and the products of our customers that utilize our products if economic conditions in the U.S. and globally (including in Europe, Brazil and Mexico) deteriorate and result in higher unemployment rates, lower family income, unfavorable currency exchange rates, lower corporate earnings, lower business investment or lower consumer spending. In addition, changes in trade policy, including renegotiating or potentially terminating, existing bilateral or multilateral agreements, as well as the imposition of tariffs, could impact demand for our products and the costs associated with certain of our capital investments. Macro-economic challenges may also lead to changes in tax laws or tax rates that may have a material impact on our future cash taxes, effective tax rate or deferred tax assets and liabilities. We are not able to predict with certainty economic and financial market conditions, and social and political change, and our results of operations, cash flows and financial condition, and the trading price of our Common Stock, could be adversely affected by adverse market conditions and social and political change.
The Level of Our Indebtedness Could Adversely Affect Our Financial Condition and Impair Our Ability to Operate Our Business
At September 30, 2019, we had $10.1 billion of debt outstanding. The level of our indebtedness could have important consequences, including:
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a portion of our cash flows from operations will be dedicated to payments on indebtedness and will not be available for other purposes, including operations, capital expenditures and future business opportunities, including acquisitions; |
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we may be limited in our ability to obtain additional financing for working capital, capital expenditures, future business opportunities, acquisitions, general corporate and other purposes; |
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our indebtedness that is subject to variable rates of interest exposes us to increased debt service obligations in the event of increased interest rates; |
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we may be limited in our ability to adjust to changing market conditions, which would place us at a competitive disadvantage compared to competitors that have less debt; and |
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our vulnerability to a downturn in general economic conditions or in our business may increase, and we may be unable to carry out important capital spending. |
Certain of our variable rate debt uses the London Interbank Offered Rate (“LIBOR”) as a benchmark for establishing the interest rate. The U.K. Financial Conduct Authority announced in 2017 that it intends to phase out LIBOR by the end of 2021. In addition, other regulators have suggested reforming or replacing other benchmark rates. The discontinuation, reform or replacement of LIBOR or any other benchmark rates may have an unpredictable impact on contractual mechanics in the credit markets or cause disruption to the broader financial markets. Uncertainty as to the nature of such potential discontinuation, reform or replacement may negatively impact the cost of our variable rate debt.
We are subject to agreements that require us to meet and maintain certain financial ratios and covenants and may restrict us from, among other things, disposing of assets and incurring additional indebtedness. These restrictions may limit our flexibility to respond to changing market conditions and competitive pressures.
Credit Rating Downgrades Could Increase Our Borrowing Costs or Otherwise Adversely Affect Us
Some of our outstanding indebtedness has received credit ratings from rating agencies. Our credit ratings could change based on, among other things, our results of operations and financial condition. Credit ratings are subject to ongoing evaluation by credit rating agencies and may be lowered, suspended or withdrawn entirely by a rating agency or placed on a “watch list” for a possible downgrade or assigned a “negative outlook”. Actual or anticipated changes or downgrades in our credit ratings, including any announcement that our ratings are under review for a downgrade or have been assigned a negative outlook, could increase our borrowing costs, which could in turn adversely affect our results of operations, cash flows and financial condition, and the trading price of our
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Common Stock. If a downgrade were to occur or a negative outlook were to be assigned, it could impact our ability to access the capital markets to raise debt and/or increase the associated costs. In addition, while our credit ratings are important to us, we may take actions and otherwise operate our business in a manner that adversely affects our credit ratings.
We sell short-term receivables from certain customer trade accounts on a revolving basis. Any downgrade of the credit rating or deterioration of the financial condition of these customers may make it more costly or difficult for us to engage in these activities, which could adversely affect our cash flows and liquidity.
We Have a Significant Amount of Goodwill and Other Intangible Assets and a Write-Down Would Adversely Impact Our Operating Results and Shareholders’ Equity
At September 30, 2019, the carrying value of our goodwill and intangible assets was $11.3 billion. We review the carrying value of our goodwill for impairment annually, or more frequently when impairment indicators exist. The impairment test requires us to analyze a number of factors and make estimates that require judgment. In fiscal 2019, we identified our Consumer Packaging and Victory Packaging reporting units as having fair values that exceeded their carrying values by less than 10%. Future changes in the cost of capital, expected cash flows, changes in our business strategy and external market conditions, among other factors, could require us to record an impairment charge for goodwill, which could lead to decreased assets and reduced net income. If a significant write down were required, the charge could have a material adverse effect on our operating results and shareholders’ equity, and could impact the trading price of our Common Stock. See “Note 1. Description of Business and Summary of Significant Accounting Policies — Goodwill and Long-Lived Assets” of the Notes to Consolidated Financial Statements for additional information.
Our Pension Plans Will Likely Require Additional Cash Contributions
We expect to continue to make contributions to our pension plans in the coming years in order to ensure that our funding levels remain adequate and meet the requirements of the Pension Act and other regulations. At September 30, 2019, our pensions were underfunded by approximately $0.1 billion. The actual required amounts and timing of future cash contributions will be highly sensitive to changes in the applicable discount rates and returns on plan assets, and could also be impacted by future changes in the laws and regulations applicable to plan funding. Our pension plan assets are primarily made up of fixed income, equity and alternative investments. Fluctuations in the market performance of these assets and changes in interest rates may result in increased or decreased pension plan costs in future periods. Changes in assumptions regarding expected long-term rate of return on plan assets, our discount rate, expected compensation levels or mortality could also increase or decrease pension costs. These changes, along with future turmoil in financial and capital markets, may adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.
We May Incur Additional Restructuring Costs and May Not Realize Expected Benefits from Restructuring
We have previously restructured portions of our operations and likely will engage in future restructuring initiatives. Because we are not able to predict with certainty market conditions, including changes in the supply and demand for our products, the loss of large customers, the selling prices for our products or our manufacturing costs, we may not be able to predict with certainty the appropriate time to undertake restructurings. The cash and non-cash costs associated with these activities vary depending on the type of facility impacted, with the non-cash cost of a mill closure generally being more significant than that of a converting facility due to the higher level of investment. Restructuring activities may divert the attention of management, disrupt our operations and fail to achieve the intended cost and operations benefits.
We May Utilize Our Cash Flow or Incur Additional Indebtedness to Satisfy Certain Payment Obligations Related to, or Otherwise Increase our Investment in, Grupo Gondi
In connection with our investment in the joint venture with Grupo Gondi, we entered into an option agreement pursuant to which we and certain shareholders of Grupo Gondi agreed to future put and call options with respect to the equity interests in the joint venture held by each party. We own 32.3% of the joint venture. Pursuant to the option agreement, our joint venture partners may exercise a right on April 1, 2020 to sell us up to 24% of the equity interest in Grupo Gondi at fair market value and, between October 1, 2020 and April 1, 2021, we may exercise a right to purchase an additional 18.7% equity interest in Grupo Gondi from our joint venture partners at a predetermined purchase price. If we exercise our right to purchase the additional 18.7% equity interest, our partners may elect to
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sell us their remaining interest at fair market value at that time, or a portion thereof in the future in accordance with the terms of the option agreement. In addition, in the event that we do not exercise our right to purchase the additional 18.7% equity interest, our joint venture partners may call our 32.3% equity interest at a predetermined price between October 1, 2021 and April 1, 2022. These arrangements, or other arrangements pursuant to which we increase our ownership in Grupo Gondi, may require us to dedicate a substantial portion of our cash flow to satisfy our payment or investment obligations, which may reduce the amount of funds available for our operations, capital expenditures and corporate development activities. Also, we may be required to incur additional indebtedness or issue equity securities in order to satisfy our payment or investment obligations.
We May Incur Withdrawal Liability and/or Increased Funding Requirements in Connection with MEPPs
We participate in several MEPPs. Our contributions to any particular MEPP may increase based on the declining funded status of a MEPP and legal requirements, such as those of the Pension Act, which require substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. The funded status of a MEPP may be impacted by, among other items, a shrinking contribution base as a result of the insolvency or withdrawal of other companies that currently contribute to these plans, the inability or failure of companies withdrawing from the plan to pay their withdrawal liability, low interest rates, changes in actuarial assumptions and/or lower than expected returns on pension fund assets.
We believe that certain of the MEPPs in which we participate or have participated, including PIUMPF, have material unfunded vested benefits. In fiscal 2018, we submitted formal notification to withdraw from PIUMPF and the Central Sates, Southeast and Southwest Areas Pension Fund (“Central States”), and recorded aggregate withdrawal liabilities of $184.2 million (nearly all of which was for PIUMPF), which includes an estimate of our portion of PIUMPF’s accumulated funding deficiency. We may withdraw from other MEPPs in the future.
In September 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 demand did not address any assertion of liability for PIUMPF’s accumulated funding deficiency. We expect to begin making monthly payments for these withdrawal liabilities in fiscal 2020.
The impact of increased contributions, future funding obligations or future withdrawal liabilities may adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock. See “Note 5. Retirement Plans — Multiemployer Plans” of the Notes to Consolidated Financial Statements for additional information, including a summary of the demand letters we received from PIUMPF.
Legal and Regulatory Risks
We are Subject to a Wide Variety of Laws, Regulations and Other Requirements That are Subject to Change and May Impose Substantial Compliance Costs
We are subject to a wide variety of federal, state, local and foreign laws, regulations and other requirements, including those relating to the environment, product safety, competition, corruption, occupational health and safety, labor and employment, data privacy, tax and health care. These laws, regulations and other requirements may change or be applied or interpreted in ways that will require us to modify our equipment and/or operations, subject us to enforcement risk, expose us to reputational harm or impose on or require us to incur additional costs, including substantial compliance costs, which may adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.
We have incurred, and expect to continue to incur, significant capital, operating and other expenditures complying with applicable environmental, health and safety laws and regulations. Our environmental expenditures include those related to air and water quality, waste disposal and the cleanup of contaminated soil and groundwater, including situations where we have been identified as a PRP. Because environmental, health and safety regulations are constantly evolving, we will continue to incur costs to maintain compliance with those laws and our compliance costs could increase materially. Future compliance with existing and new laws and requirements may disrupt our business operations and require significant expenditures, and our existing reserves for specific matters may not be adequate to cover future costs. In particular, our manufacturing operations consume significant amounts of energy, and we may in the future incur additional or increased capital, operating and other expenditures from changes due to new or increased climate-related and other environmental regulations. We could also incur substantial liabilities,
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including fines or sanctions, enforcement actions, natural resource damages claims, cleanup and closure costs, and third-party claims for property damage and personal injury under environmental and common laws.
The Foreign Corrupt Practices Act of 1977 and local anti-bribery laws, including those in Brazil, China, Mexico, India and the United Kingdom (where we maintain operations directly or through a joint venture), prohibit companies and their intermediaries from making improper payments to government officials for the purpose of influencing official decisions. Our internal control policies and procedures, or those of our vendors, may not adequately protect us from reckless or criminal acts committed or alleged to have been committed by our employees, agents or vendors. Any such violations could lead to civil or criminal monetary and non-monetary penalties and/or could damage our reputation.
We are subject to a number of labor and employment laws and regulations that could significantly increase our operating costs and reduce our operational flexibility. Additionally, changing privacy laws in the United States (including the California Consumer Privacy Act, which will become effective in January 2020), Europe (where the General Data Protection Regulation became effective in 2018) and elsewhere have created new individual privacy rights, imposed increased obligations on companies handling personal data and increased potential exposure to fines and penalties.
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Item 1B. |
UNRESOLVED STAFF COMMENTS |
There are no unresolved SEC staff comments.
|
Item 2. |
PROPERTIES |
We operate locations in North America, including the majority of U.S. states, South America, Europe, Asia and Australia. We lease our principal offices in Atlanta, GA. We believe that our existing production capacity is adequate to serve existing demand for our products and consider our plants and equipment to be in good condition.
Our corporate and operating facilities as of September 30, 2019 are summarized below:
|
|
|
Number of Facilities |
|
|||||||||
|
Segment |
|
Owned |
|
|
Leased |
|
|
Total |
|
|||
|
Corrugated Packaging |
|
|
112 |
|
|
|
61 |
|
|
|
173 |
|
|
Consumer Packaging |
|
|
84 |
|
|
|
55 |
|
|
|
139 |
|
|
Corporate and significant regional offices |
|
|
— |
|
|
|
10 |
|
|
|
10 |
|
|
Total |
|
|
196 |
|
|
|
126 |
|
|
|
322 |
|
The tables that follow show our annual production capacity by mill at September 30, 2019 in thousands of tons, except for the North Charleston, SC mill which reflects our capacity after the previously announced machine closure expected to occur in fiscal 2020. Our mill system production levels and operating rates may vary from year to year due to changes in market and other factors, including the impact of hurricanes and other weather-related events. Our simple average mill system operating rates for the last three years averaged 94%. We own all of our mills.
27
Corrugated Packaging Mills - annual production capacity in thousands of tons
|
Location of Mill |
|
Linerboard |
|
|
Medium |
|
|
White Top Linerboard |
|
|
Kraft Paper/Bag |
|
|
Saturating Kraft / Folding Carton |
|
|
Market Pulp |
|
|
Bleached Paperboard |
|
|
Total Capacity |
|
||||||||
|
Longview, WA |
|
|
510 |
|
|
|
315 |
|
|
|
|
|
|
|
375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,200 |
|
|
Fernandina Beach, FL |
|
|
930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
930 |
|
|
West Point, VA |
|
|
|
|
|
|
185 |
|
|
|
735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
920 |
|
|
Stevenson, AL |
|
|
|
|
|
|
885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
885 |
|
|
Solvay, NY |
|
|
548 |
|
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
820 |
|
|
Hodge, LA |
|
|
800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800 |
|
|
Florence, SC |
|
|
683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
683 |
|
|
Panama City, FL |
|
|
353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292 |
|
|
|
|
|
|
|
645 |
|
|
Dublin, GA |
|
|
137 |
|
|
|
137 |
|
|
|
|
|
|
|
341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
615 |
|
|
North Charleston, SC |
|
|
235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370 |
|
|
|
|
|
|
|
|
|
|
|
605 |
|
|
Seminole, FL |
|
|
402 |
|
|
|
198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600 |
|
|
Tres Barras, Brazil |
|
|
360 |
|
|
|
185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
545 |
|
|
Hopewell, VA |
|
|
527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
527 |
|
|
Roanoke Rapids, NC |
|
|
290 |
|
|
|
|
|
|
|
|
|
|
|
210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
Tacoma, WA |
|
|
90 |
|
|
|
|
|
|
|
275 |
|
|
|
60 |
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
485 |
|
|
La Tuque, QC |
|
|
|
|
|
|
|
|
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131 |
|
|
|
476 |
|
|
Cowpens, SC |
|
|
45 |
|
|
|
185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230 |
|
|
St. Paul, MN |
|
|
|
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 |
|
|
Morai, India |
|
|
155 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180 |
|
|
Total Capacity |
|
|
6,065 |
|
|
|
2,587 |
|
|
|
1,355 |
|
|
|
986 |
|
|
|
370 |
|
|
|
352 |
|
|
|
131 |
|
|
|
11,846 |
|
Our fiber sourcing for our Corrugated Packaging mills is approximately 62% virgin and 38% recycled.
Consumer Packaging Mills - annual production capacity in thousands of tons
|
Location of Mill |
|
Bleached Paperboard |
|
|
Coated Natural Kraft |
|
|
Coated Recycled Paperboard |
|
|
Specialty Recycled Paperboard |
|
|
Market Pulp |
|
|
Total Capacity |
|
||||||
|
Mahrt, AL |
|
|
|
|
|
|
1,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,066 |
|
|
Covington, VA |
|
|
950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
950 |
|
|
Evadale, TX |
|
|
660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
700 |
|
|
Demopolis, AL |
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110 |
|
|
|
470 |
|
|
St. Paul, MN |
|
|
|
|
|
|
|
|
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
170 |
|
|
Battle Creek, MI |
|
|
|
|
|
|
|
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
160 |
|
|
Chattanooga, TN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140 |
|
|
|
|
|
|
|
140 |
|
|
Dallas, TX |
|
|
|
|
|
|
|
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
127 |
|
|
Lynchburg, VA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118 |
|
|
|
|
|
|
|
118 |
|
|
Sheldon Springs, VT (Missisquoi Mill) |
|
|
|
|
|
|
|
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
111 |
|
|
Stroudsburg, PA |
|
|
|
|
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
80 |
|
|
Eaton, IN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
64 |
|
|
Aurora, IL |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
32 |
|
|
Total Capacity |
|
|
1,970 |
|
|
|
1,066 |
|
|
|
648 |
|
|
|
354 |
|
|
|
150 |
|
|
|
4,188 |
|
The production at our Lynchburg, VA mill is gypsum paperboard liner and the paper machine at this mill is owned by our Seven Hills joint venture. Our fiber sourcing for our Consumer Packaging mills is approximately 75% virgin and 25% recycled. Our overall fiber sourcing for mills is approximately 65% virgin and 35% recycled.
28
At September 30, 2019, we owned approximately 135,000 acres of forestlands in Brazil.
|
Item 3. |
LEGAL PROCEEDINGS |
We are a defendant in a number of lawsuits and claims arising out of the conduct of our business. While the ultimate results of such suits or other proceedings against us cannot be predicted with certainty, we believe the resolution of these matters will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
See “Note 18. Commitments and Contingencies” of the Notes to Consolidated Financial Statements for additional information.
|
Item 4. |
MINE SAFETY DISCLOSURES |
Not applicable.
29
PART II: FINANCIAL INFORMATION
|
Item 5. |
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Common Stock
Our Common Stock trades on the New York Stock Exchange (“NYSE”) under the symbol “WRK”. As of November 4, 2019, there were approximately 6,506 stockholders of record of our Common Stock. The number of stockholders of record includes one single stockholder, Cede & Co., for all of the shares of our Common Stock held by our stockholders in individual brokerage accounts maintained at banks, brokers and institutions.
Dividends
In November 2019, our board of directors declared a quarterly dividend of $0.465 per share, representing a 2.2% increase from the prior $0.455 per share quarterly dividend and an annual dividend of $1.86 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. During fiscal 2017, we paid an annual dividend of $1.60 per share.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III, Item 12 of this Form 10-K and “Note 20. Stockholders’ Equity” of the Notes to Consolidated Financial Statements for additional information.
Stock Repurchase Plan
See “Note 20. Stockholders’ Equity” of the Notes to Consolidated Financial Statements for additional information.
|
Item 6. |
SELECTED FINANCIAL DATA |
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and notes thereto and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. WRKCo was the accounting acquirer in the KapStone Acquisition; therefore, the historical consolidated financial statements of WRKCo for periods prior to the transaction (which was completed on November 2, 2018) are also considered to be the historical financial statements of the Company. We derived the consolidated statements of income and consolidated statements of cash flows data for the years ended September 30, 2019, 2018 and 2017 and the consolidated balance sheet data as of September 30, 2019 and 2018 from the Consolidated Financial Statements included herein. We derived the consolidated statements of operations and consolidated statements of cash flows data for the year ended September 30, 2016 and 2015 and the consolidated balance sheet data as of September 30, 2017, 2016 and 2015 from audited financial statements not included in this report.
30
The impact from acquisitions was the primary driver of the changes in the selected financial data in fiscal 2016, 2018 and 2019 as compared to prior years in varying degrees due to the size and timing of the transactions. See “Note 3. Acquisitions and Investment” of the Notes to Consolidated Financial Statements for additional information. The selected financial data has been updated to reflect the Separation. Our results of operations shown below may not be indicative of future results.
|
|
|
Year Ended September 30, |
|
|||||||||||||||||
|
(In millions, except per share amounts) |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||||
|
|
|
|
|
|||||||||||||||||
|
Net sales |
|
$ |
18,289.0 |
|
|
$ |
16,285.1 |
|
|
$ |
14,859.7 |
|
|
$ |
14,171.8 |
|
|
$ |
11,124.8 |
|
|
Multiemployer pension withdrawal (income) expense (1) |
|
$ |
(6.3 |
) |
|
$ |
184.2 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Pension risk transfer expense (2) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
370.7 |
|
|
$ |
— |
|
|
Pension lump sum settlement and retiree medical curtailment, net (3) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
32.6 |
|
|
$ |
— |
|
|
$ |
11.5 |
|
|
Land and Development impairments (4) |
|
$ |
13.0 |
|
|
$ |
31.9 |
|
|
$ |
46.7 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Restructuring and other costs (5) |
|
$ |
173.7 |
|
|
$ |
105.4 |
|
|
$ |
196.7 |
|
|
$ |
366.4 |
|
|
$ |
140.8 |
|
|
Gain on sale of HH&B (6) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
192.8 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Income from continuing operations (7) |
|
$ |
867.9 |
|
|
$ |
1,909.3 |
|
|
$ |
698.6 |
|
|
$ |
154.8 |
|
|
$ |
501.2 |
|
|
(Loss) income from discontinued operations (net of tax) (8) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(544.7 |
) |
|
$ |
10.6 |
|
|
Net income (loss) attributable to common stockholders |
|
$ |
862.9 |
|
|
$ |
1,906.1 |
|
|
$ |
708.2 |
|
|
$ |
(396.3 |
) |
|
$ |
507.1 |
|
|
Diluted earnings per share from continuing operations |
|
$ |
3.33 |
|
|
$ |
7.34 |
|
|
$ |
2.77 |
|
|
$ |
0.59 |
|
|
$ |
2.87 |
|
|
Diluted (loss) earnings per share from discontinued operations |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(2.13 |
) |
|
$ |
0.06 |
|
|
Diluted earnings (loss) per share attributable to common stockholders |
|
$ |
3.33 |
|
|
$ |
7.34 |
|
|
$ |
2.77 |
|
|
$ |
(1.54 |
) |
|
$ |
2.93 |
|
|
Diluted weighted average shares outstanding |
|
|
259.1 |
|
|
|
259.8 |
|
|
|
255.7 |
|
|
|
257.9 |
|
|
|
173.3 |
|
|
Dividends paid per common share |
|
$ |
1.82 |
|
|
$ |
1.72 |
|
|
$ |
1.60 |
|
|
$ |
1.50 |
|
|
$ |
1.20 |
|
|
Book value per common share |
|
$ |
45.27 |
|
|
$ |
45.24 |
|
|
$ |
40.64 |
|
|
$ |
38.75 |
|
|
$ |
45.34 |
|
|
Total assets |
|
$ |
30,156.7 |
|
|
$ |
25,360.5 |
|
|
$ |
25,089.0 |
|
|
$ |
23,038.2 |
|
|
$ |
25,372.4 |
|
|
Current portion of debt |
|
$ |
561.1 |
|
|
$ |
740.7 |
|
|
$ |
608.7 |
|
|
$ |
292.9 |
|
|
$ |
63.7 |
|
|
Long-term debt due after one year |
|
$ |
9,502.3 |
|
|
$ |
5,674.5 |
|
|
$ |
5,946.1 |
|
|
$ |
5,496.3 |
|
|
$ |
5,558.2 |
|
|
Total debt |
|
$ |
10,063.4 |
|
|
$ |
6,415.2 |
|
|
$ |
6,554.8 |
|
|
$ |
5,789.2 |
|
|
$ |
5,621.9 |
|
|
Total stockholders’ equity |
|
$ |
11,669.9 |
|
|
$ |
11,469.4 |
|
|
$ |
10,342.5 |
|
|
$ |
9,728.8 |
|
|
$ |
11,651.8 |
|
|
Net cash provided by operating activities |
|
$ |
2,310.2 |
|
|
$ |
1,931.2 |
|
|
$ |
1,463.8 |
|
|
$ |
1,223.3 |
|
|
$ |
865.7 |
|
|
Capital expenditures |
|
$ |
1,369.1 |
|
|
$ |
999.9 |
|
|
$ |
778.6 |
|
|
$ |
796.7 |
|
|
$ |
585.5 |
|
|
Cash paid (received) for purchase of businesses, net of cash acquired |
|
$ |
3,374.2 |
|
|
$ |
239.9 |
|
|
$ |
1,588.5 |
|
|
$ |
376.4 |
|
|
$ |
(3.7 |
) |
|
Cash received in merger |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
265.7 |
|
|
Purchases of common stock |
|
$ |
88.6 |
|
|
$ |
195.1 |
|
|
$ |
93.0 |
|
|
$ |
335.3 |
|
|
$ |
336.7 |
|
|
Purchases of commons stock - merger related |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
667.8 |
|
|
Cash dividends paid to stockholders |
|
$ |
467.9 |
|
|
$ |
440.9 |
|
|
$ |
403.2 |
|
|
$ |
380.7 |
|
|
$ |
214.5 |
|
|
(1) |
In fiscal 2018, we recorded an estimated withdrawal liability of $180.0 million to withdraw from PIUMPF and $4.2 million to withdraw from Central States. See “Note 5. Retirement Plans — Multiemployer Plans” of the Notes to Consolidated Financial Statements for additional information. |
|
(2) |
In fiscal 2016, we used plan assets to settle $2.5 billion of pension obligations of the WestRock Company Consolidated Pension Plan (the “Plan”) by purchasing group annuity contracts from the Prudential Insurance Company of America, a subsidiary of Prudential Financial, Inc. (“Prudential”). This transaction transferred payment responsibility to Prudential for retirement benefits owed to approximately 35,000 U.S. retirees and their beneficiaries. As a result, we recorded a non-cash charge of $370.7 million pre-tax, which is included in the consolidated statements of income in the line item “Pension and other postretirement non-service income (expense)”. |
31
|
(3) |
In fiscal 2017, lump sum payments to certain beneficiaries of the Plan, together with several one-time severance benefit payments out of the Plan, triggered pension settlement accounting and a remeasurement of the Plan. As a result of settlement accounting, we recognized as a current period expense a pro-rata portion of the unamortized net actuarial loss, after remeasurement, and recorded a $32.6 million non-cash charge to our earnings, which is included in the consolidated statements of income in the line item “Pension and other postretirement non-service income (expense)”. See “Note 5. Retirement Plans” of the Notes to Consolidated Financial Statements for additional information. In fiscal 2015, payments were made to former employees to partially settle obligations of one of our qualified defined benefit pension plans and we recorded a non-cash pre-tax charge of $20.0 million. In addition, changes in retiree medical coverage for certain employees covered by the USW master agreement resulted in the recognition of an $8.5 million pre-tax curtailment gain. These two items netted to an $11.5 million pre-tax charge. |
|
(4) |
In fiscal 2019, we recorded a $13.0 million pre-tax non-cash impairment of certain mineral rights. In fiscal 2018, we recorded a $31.9 million pre-tax non-cash impairment of certain mineral rights and real estate. The $23.6 million impairment of mineral rights in fiscal 2018 was driven by the non-renewal of a lease and associated with declining oil and gas prices, and the other $8.3 million was recorded to write-down the carrying value on real estate projects. Similarly, in fiscal 2017, we recorded a pre-tax non-cash real estate impairment of $46.7 million, or $39.7 million net of $7.0 million of noncontrolling interest. Due to the accelerated monetization strategy in our Land and Development segment, the real estate impairments were recorded to write-down the carrying value on projects where the projected sales proceeds were less than the carrying value. |
|
(5) |
Costs recorded in each period are not comparable since the timing and scope of the individual actions vary. The restructuring and other costs exclude the Specialty Chemicals costs, which are included in discontinued operations in fiscal 2016. See “Note 4. Restructuring and Other Costs” of the Notes to Consolidated Financial Statements for additional information regarding the type of costs incurred. |
|
(6) |
On April 6, 2017, we completed the HH&B Sale. In fiscal 2017, we recorded a pre-tax gain on sale of HH&B of $192.8 million. See “Note 1. Description of Business and Summary of Significant Accounting Policies — Description of Business” of the Notes to Consolidated Financial Statements for additional information. |
|
(7) |
Income from continuing operations was impacted by the HH&B Sale, restructuring and other costs, the Land and Development impairment, multiemployer pension withdrawals, the pension lump sum settlements (including retiree medical curtailment) and pension risk transfer as identified in the table above for the respective years. In addition, income from continuing operations in fiscal 2018 included an income tax benefit of $1,128.8 million related to the Tax Act. See “Note 6. Income Taxes — Impacts of the Tax Act” of the Notes to Consolidated Financial Statements for additional information. Income from continuing operations in fiscal 2019, 2017 and 2015 was reduced by $24.7 million, $26.5 million and $64.7 million, respectively, pre-tax for the expensing of inventory stepped-up in purchase accounting, primarily related to the KapStone Acquisition, the MPS Acquisition and the Combination, respectively. |
|
(8) |
Loss from discontinued operations, net of tax in fiscal 2016 included a $478.3 million pre-tax goodwill impairment charge and $101.1 million pre-tax customer list impairment charge associated with our former Specialty Chemicals operations. Income from discontinued operations, net of tax in fiscal 2015 was reduced by $8.2 million pre-tax for the expensing of inventory stepped-up in purchase accounting. |
32
|
Item 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
We are a multinational provider of paper and packaging solutions for consumer and corrugated packaging markets. 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 in North America, South America, Europe, Asia and Australia.
Organization
WestRock was formed on March 6, 2015 for the purpose of effecting the Combination and, prior to the Combination, did not conduct any activities other than those incidental to its formation and the matters contemplated by the Business Combination Agreement. On July 1, 2015, pursuant to the Business Combination Agreement, RockTenn and MWV completed a strategic combination of their respective businesses and RockTenn and MWV each became wholly-owned subsidiaries of WestRock. RockTenn was the accounting acquirer in the Combination.
On April 6, 2017, we completed the HH&B Sale. We used the proceeds from the HH&B Sale in connection with the MPS Acquisition. We recorded a pre-tax gain on sale of HH&B of $192.8 million in fiscal 2017. See “Note 1. Description of Business and Summary of Significant Accounting Policies — Description of Business” of the Notes to Consolidated Financial Statements for additional information. On June 6, 2017, we completed the MPS Acquisition. MPS is reported in our Consumer Packaging segment. On November 2, 2018, we completed the KapStone Acquisition. As a result, among other things, the Company became the ultimate parent of WRKCo, KapStone and their respective subsidiaries, and the Company changed its name to “WestRock Company” and WRKCo changed its name to “WRKCo Inc.”. See “Note 3. Acquisitions and Investment” of the Notes to Consolidated Financial Statements for additional information.
Presentation
Effective in the first quarter of fiscal 2019, we aligned our financial results for all periods presented to move our merchandising displays operations from our Consumer Packaging segment to our Corrugated Packaging segment and to allocate certain previously non-allocated costs and certain pension and other postretirement non-service income (expense) to our reportable segments. Separately, in the first quarter of fiscal 2019, we began conducting our recycling operations primarily as a procurement function. Since then, recycling net sales have not been recorded and the margin from these operations has reduced cost of goods sold. Following the realignment, 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 sells real estate, primarily in the Charleston, SC region. Prior to the HH&B Sale, our Consumer Packaging segment included HH&B.
A detailed discussion of the fiscal 2019 year-over-year changes can be found below and a detailed discussion of fiscal 2018 year-over-year changes can be found in “Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Exhibit 99.1 of our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 9, 2019 (the “May 9, 2019 Form 8-K”), which was, as disclosed therein, filed to provide revisions to the Company’s consolidated financial statements, and the notes thereto for the three years ended September 30, 2018 and other related disclosures.
Acquisitions and Investments
During fiscal 2019 and 2018, we completed acquisitions that 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.
On November 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 owns Victory Packaging, a packaging solutions
33
distribution company with facilities in the U.S., Canada and Mexico. We have included the financial results of KapStone in our Corrugated Packaging segment since the date of the acquisition.
On September 4, 2018, we completed the acquisition (the “Schlüter Acquisition”) of Schlüter Print Pharma Packaging (“Schlüter”). Schlüter is a leading provider of differentiated paper and packaging solutions and a German-based supplier of a full range of leaflets and booklets. The Schlüter Acquisition allowed us to further enhance our pharmaceutical and automotive platform and expand our geographical footprint in Europe to better serve our customers. We have included the financial results of the acquired operations in our Consumer Packaging segment since the date of the acquisition.
On January 5, 2018, we completed the acquisition (the “Plymouth Packaging Acquisition”) of substantially all of the assets of Plymouth Packaging, Inc. (“Plymouth”). The assets we acquired included Plymouth’s “Box on Demand” systems, which are manufactured by Panotec, an Italian manufacturer of packaging machines. The addition of the Box on Demand systems enhanced our platform, differentiation and innovation. These systems, which are located on customers’ sites under multi-year exclusive agreements, use fanfold corrugated to produce custom, on-demand corrugated packaging that is accurately sized for any product type according to the customer’s specifications. Fanfold corrugated is continuous corrugated board, folded periodically to form an accordion-like stack of corrugated material. As part of the transaction, WestRock acquired Plymouth’s equity interest in Panotec and Plymouth’s exclusive right from Panotec to distribute Panotec’s equipment in the U.S. and Canada. We have fully integrated the approximately 60,000 tons of containerboard used by Plymouth annually. We have included the financial results of Plymouth in our Corrugated Packaging segment since the date of the acquisition.
See “Note 3. Acquisitions and Investment” 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”.
Business
|
|
|
Year Ended September 30, |
|
|||||
|
(In millions) |
|
2019 |
|
|
2018 |
|
||
|
|
|
|
|
|||||
|
Net sales |
|
$ |
18,289.0 |
|
|
$ |
16,285.1 |
|
|
Segment income |
|
$ |
1,790.2 |
|
|
$ |
1,707.6 |
|
In fiscal 2019, we continued to pursue our strategy of offering differentiated paper and packaging solutions that help our customers win. We successfully executed this strategy in fiscal 2019 in a rapidly changing cost and price environment. Net sales of $18,289.0 million for fiscal 2019 increased $2,003.9 million, or 12.3%, compared to fiscal 2018. The increase was primarily due to the KapStone Acquisition and higher selling price/mix in our Corrugated Packaging and Consumer Packaging segments. These increases were partially offset by the absence of recycling net sales in fiscal 2019 as a result of conducting the operations primarily as a procurement function beginning in the first quarter of fiscal 2019, lower volumes, unfavorable foreign currency impacts across our segments compared to the prior year and decreased Land and Development net sales.
Segment income increased $82.6 million in fiscal 2019 compared to fiscal 2018, primarily due to increased Corrugated Packaging segment income that was partially offset by lower Consumer Packaging and Land and Development segment income. The impact of the contribution from the acquired KapStone operations, higher selling price/mix across our segments and productivity improvements was largely offset by lower volumes across our segments, economic downtime, cost inflation, increased maintenance and scheduled strategic outage expense (including projects at our Mahrt, AL and Covington, VA mills) and lower Land and Development segment income due to the wind-down of sales. With respect to segment income, we experienced higher levels of cost inflation in both our Corrugated Packaging and Consumer Packaging segments during fiscal 2019 as compared to fiscal 2018 that were partially offset by recovered fiber deflation. The primary inflationary items were virgin fiber, freight, energy and wage and other costs.
We generated $2,310.2 million of net cash provided by operating activities in fiscal 2019, compared to $1,931.2 million in fiscal 2018. We remained committed to our disciplined capital allocation strategy during fiscal 2019 by investing $1,369.1 million in capital expenditures, deployed $3,374.2 million to strategic acquisitions (excluding the
34
assumption of debt) while returning $467.9 million in dividends and $88.6 million to our stockholders in share repurchases. In the nine months following December 2018, the quarter that included the KapStone Acquisition, we reduced total debt $757.4 million. We believe our strong balance sheet and cash flow provide us the flexibility to continue to invest to sustain and improve our operating performance. In fiscal 2020, we expect capital expenditures to be approximately $1.1 billion. See “Liquidity and Capital Resources” for more information.
A detailed review of our fiscal 2019 and 2018 performance appears below under “Results of Operations (Consolidated)” and “Results of Operations — Segment Data”.
For fiscal 2020, we expect to generate net sales of between $18.0 billion and $18.5 billion. Our expectations reflect the anticipated impact of the flow through of previously published price declines in North America containerboard and kraft paper index pricing, as well as the full year impact of market pricing declines that we have experienced in export containerboard and kraft paper, and market pulp. We expect that these declines will be partially offset by the impact of an additional month of KapStone sales and growth in our corrugated box volumes in North America and Brazil, as well as increased volumes in our Consumer Packaging segment.
We expect our earnings in fiscal 2020 to be impacted by the pricing declines noted above, as well as cost inflation related to wages, benefits and other non-commodity categories. We expect to experience commodity cost deflation, particularly related to recycled fiber. Similar to past years, we expect that slightly more of our earnings will be generated in the second half of the fiscal year than in the first half of the fiscal year due to seasonality, the timing of scheduled mill maintenance outages and our strategic capital projects.
In fiscal 2019, we announced plans to reconfigure our North Charleston, SC mill. The project, which we expect to begin in the second quarter of fiscal 2020, is expected to reduce our linerboard capacity by approximately 288,000 tons and our annual costs by approximately $40 million, including a workforce reduction over a five-month period.
We expect to invest approximately $1.1 billion in capital expenditures in fiscal 2020, including approximately $275 million for our strategic capital projects at our Florence, SC and Tres Barras, Brazil mills. We expect to start up the project at our Florence, SC mill in the spring of 2020 and to incur maintenance downtime during the first quarter of fiscal 2020 in connection with this project.
35
Results of Operations (Consolidated)
The following table summarizes our consolidated results for the two years ended September 30, 2019:
|
|
|
Year Ended September 30, |
|
|||||
|
(In millions) |
|
2019 |
|
|
2018 |
|
||
|
|
|
|
|
|||||
|
Net sales |
|
$ |
18,289.0 |
|
|
$ |
16,285.1 |
|
|
Cost of goods sold |
|
|
14,540.0 |
|
|
|
12,923.1 |
|
|
Selling, general and administrative, excluding intangible amortization |
|
|
1,715.2 |
|
|
|
1,546.6 |
|
|
Selling, general and administrative intangible amortization |
|
|
400.2 |
|
|
|
296.6 |
|
|
(Gain) loss on disposal of assets |
|
|
(41.2 |
) |
|
|
10.1 |
|
|
Multiemployer pension withdrawal (income) expense |
|
|
(6.3 |
) |
|
|
184.2 |
|
|
Land and Development impairments |
|
|
13.0 |
|
|
|
31.9 |
|
|
Restructuring and other costs |
|
|
173.7 |
|
|
|
105.4 |
|
|
Operating profit |
|
|
1,494.4 |
|
|
|
1,187.2 |
|
|
Interest expense, net |
|
|
(431.3 |
) |
|
|
(293.8 |
) |
|
Loss on extinguishment of debt |
|
|
(5.1 |
) |
|
|
(0.1 |
) |
|
Pension and other postretirement non-service income |
|
|
74.2 |
|
|
|
95.3 |
|
|
Other income, net |
|
|
2.4 |
|
|
|
12.7 |
|
|
Equity in income of unconsolidated entities |
|
|
10.1 |
|
|
|
33.5 |
|
|
Income before income taxes |
|
|
1,144.7 |
|
|
|
1,034.8 |
|
|
Income tax (expense) benefit |
|
|
(276.8 |
) |
|
|
874.5 |
|
|
Consolidated net income |
|
|
867.9 |
|
|
|
1,909.3 |
|
|
Less: Net income attributable to noncontrolling interests |
|
|
(5.0 |
) |
|
|
(3.2 |
) |
|
Net income attributable to common stockholders |
|
$ |
862.9 |
|
|
$ |
1,906.1 |
|
Non-GAAP Financial Measures
We report our financial results in accordance with generally accepted accounting principles in the U.S. (“GAAP”). However, we have included financial measures that were not prepared in accordance with GAAP. 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 of other companies.
We use the non-GAAP financial measures “Adjusted Net Income” and “Adjusted Earnings Per Diluted Share”. Management believes these non-GAAP financial measures provide our board of directors, investors, potential investors, securities analysts and others with useful information to evaluate our performance because the measures 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 income attributable to common stockholders and Earnings per diluted share, respectively.
Diluted earnings per share were $3.33 in fiscal 2019 compared to $7.34 in fiscal 2018. Adjusted Earnings Per Diluted Share were $3.98 and $4.09 in fiscal 2019 and 2018, respectively.
Set forth below is a reconciliation of the non-GAAP financial measure Adjusted Earnings Per Diluted Share to Earnings per diluted share, the most directly comparable GAAP measure (in dollars per share) for the periods indicated.
36
|
|
|
Years Ended September 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Earnings per diluted share |
|
$ |
3.33 |
|
|
$ |
7.34 |
|
|
Restructuring and other items |
|
|
0.56 |
|
|
|
0.30 |
|
|
Accelerated depreciation on major capital projects and certain plant closures |
|
|
0.12 |
|
|
|
0.08 |
|
|
Inventory stepped-up in purchase accounting, net of LIFO |
|
|
0.07 |
|
|
|
— |
|
|
Losses at closed plants, transition and start-up costs |
|
|
0.05 |
|
|
|
0.06 |
|
|
Land and Development impairment and operating results (1) |
|
|
0.03 |
|
|
|
0.02 |
|
|
Impact of Tax Act, net of related tax planning |
|
|
0.02 |
|
|
|
(4.22 |
) |
|
Loss on extinguishment of debt |
|
|
0.02 |
|
|
|
— |
|
|
Gain on sale of certain closed facilities |
|
|
(0.15 |
) |
|
|
— |
|
|
Direct expenses from Hurricane Michael, net of related proceeds |
|
|
(0.03 |
) |
|
|
— |
|
|
Interest accretion and other |
|
|
(0.02 |
) |
|
|
— |
|
|
Brazil indirect tax |
|
|
(0.02 |
) |
|
|
— |
|
|
Multiemployer pension withdrawal (income) expense |
|
|
(0.01 |
) |
|
|
0.52 |
|
|
Acquisition bridge and other financing fees |
|
|
— |
|
|
|
0.03 |
|
|
Consumer Packaging segment acquisition reserve adjustments |
|
|
— |
|
|
|
(0.06 |
) |
|
Gain on sale of waste services |
|
|
— |
|
|
|
(0.03 |
) |
|
Other |
|
|
0.01 |
|
|
|
0.05 |
|
|
Adjusted Earnings Per Diluted Share |
|
$ |
3.98 |
|
|
$ |
4.09 |
|
|
(1) |
Includes a $13.0 million and $23.6 million impairment of mineral rights in fiscal 2019 and 2018, respectively. |
The GAAP results in the tables below for Pre-Tax, Tax and Net of Tax are equivalent to the line items “Income before income taxes”, “Income tax (expense) benefit” and “Consolidated net income”, respectively, as reported on the statements of income. Set forth below are reconciliations of Adjusted Net Income to the most directly comparable GAAP measure, Net income attributable to common stockholders (represented in the table below as the GAAP Results for Consolidated net income (i.e. Net of Tax) plus Noncontrolling interests), for the periods indicated (in millions):
|
|
|
Year ended September 30, 2019 |
|
|||||||||
|
|
|
Pre-Tax |
|
|
Tax |
|
|
Net of Tax |
|
|||
|
GAAP Results |
|
$ |
1,144.7 |
|
|
$ |
(276.8 |
) |
|
$ |
867.9 |
|
|
Restructuring and other items |
|
|
173.7 |
|
|
|
(28.1 |
) |
|
|
145.6 |
|
|
Accelerated depreciation on major capital projects and certain plant closures |
|
|
42.1 |
|
|
|
(10.5 |
) |
|
|
31.6 |
|
|
Inventory stepped-up in purchase accounting, net of LIFO |
|
|
24.7 |
|
|
|
(6.0 |
) |
|
|
18.7 |
|
|
Losses at closed plants, transition and start-up costs |
|
|
19.7 |
|
|
|
(5.6 |
) |
|
|
14.1 |
|
|
Land and Development impairment and operating results (1) |
|
|
10.5 |
|
|
|
(2.6 |
) |
|
|
7.9 |
|
|
Impact of Tax Act |
|
|
— |
|
|
|
4.1 |
|
|
|
4.1 |
|
|
Loss on extinguishment of debt |
|
|
5.1 |
|
|
|
(1.3 |
) |
|
|
3.8 |
|
|
Gain on sale of certain closed facilities |
|
|
(52.6 |
) |
|
|
12.9 |
|
|
|
(39.7 |
) |
|
Direct expenses from Hurricane Michael, net of related proceeds |
|
|
(10.8 |
) |
|
|
2.6 |
|
|
|
(8.2 |
) |
|
Interest accretion and other |
|
|
(5.5 |
) |
|
|
1.3 |
|
|
|
(4.2 |
) |
|
Brazil indirect tax |
|
|
(7.3 |
) |
|
|
2.1 |
|
|
|
(5.2 |
) |
|
Multiemployer pension withdrawal (income) expense |
|
|
(4.6 |
) |
|
|
1.2 |
|
|
|
(3.4 |
) |
|
Other |
|
|
3.9 |
|
|
|
(1.0 |
) |
|
|
2.9 |
|
|
Adjusted Results |
|
$ |
1,343.6 |
|
|
$ |
(307.7 |
) |
|
$ |
1,035.9 |
|
|
Noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
(5.0 |
) |
|
Adjusted Net Income |
|
|
|
|
|
|
|
|
|
$ |
1,030.9 |
|
37
|
(1) |
Includes a $13.0 million impairment of mineral rights in fiscal 2019. |
|
|
|
Year ended September 30, 2018 |
|
|||||||||
|
|
|
Pre-Tax |
|
|
Tax |
|
|
Net of Tax |
|
|||
|
GAAP Results |
|
$ |
1,034.8 |
|
|
$ |
874.5 |
|
|
$ |
1,909.3 |
|
|
Restructuring and other items |
|
|
105.4 |
|
|
|
(26.3 |
) |
|
|
79.1 |
|
|
Accelerated depreciation on major capital projects |
|
|
27.0 |
|
|
|
(7.4 |
) |
|
|
19.6 |
|
|
Inventory stepped-up in purchase accounting, net of LIFO |
|
|
1.0 |
|
|
|
(0.3 |
) |
|
|
0.7 |
|
|
Losses at closed plants and transition costs |
|
|
19.4 |
|
|
|
(5.0 |
) |
|
|
14.4 |
|
|
Land and Development impairment and operating results (1) |
|
|
6.9 |
|
|
|
(1.6 |
) |
|
|
5.3 |
|
|
Impact of Tax Act |
|
|
— |
|
|
|
(1,096.9 |
) |
|
|
(1,096.9 |
) |
|
Loss on extinguishment of debt |
|
|
0.1 |
|
|
|
— |
|
|
|
0.1 |
|
|
Multiemployer pension withdrawal expense |
|
|
183.3 |
|
|
|
(47.7 |
) |
|
|
135.6 |
|
|
Acquisition bridge and other financing fees |
|
|
12.0 |
|
|
|
(3.1 |
) |
|
|
8.9 |
|
|
Consumer Packaging segment acquisition reserve adjustments |
|
|
(20.1 |
) |
|
|
5.2 |
|
|
|
(14.9 |
) |
|
Gain on sale of waste services |
|
|
(12.3 |
) |
|
|
4.4 |
|
|
|
(7.9 |
) |
|
Other |
|
|
13.7 |
|
|
|
(1.9 |
) |
|
|
11.8 |
|
|
Adjusted Results |
|
$ |
1,371.2 |
|
|
$ |
(306.1 |
) |
|
$ |
1,065.1 |
|
|
Noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
(3.2 |
) |
|
Adjusted Net Income |
|
|
|
|
|
|
|
|
|
$ |
1,061.9 |
|
|
(1) |
Includes a $23.6 million impairment of mineral rights in fiscal 2018. |
We discuss certain of these charges in more detail in “Note 4. Restructuring and Other Costs”, “Note 5. Retirement Plans”, and “Note 6. Income Taxes”.
Net Sales (Unaffiliated Customers)
Net sales in fiscal 2019 increased $2,003.9 million, or 12.3%, compared to fiscal 2018. The increase was primarily attributable to the KapStone Acquisition and higher selling price/mix in our Corrugated Packaging and Consumer Packaging segments. These increases were partially offset by the absence of recycling net sales in fiscal 2019 as a result of conducting the operations primarily as a procurement function beginning in the first quarter of fiscal 2019, lower volumes and unfavorable foreign currency impacts across our segments compared to the prior year. The change in net sales by segment is outlined below in “Results of Operations — Segment Data”.
Cost of Goods Sold
Cost of goods sold increased to $14,540.0 million in fiscal 2019 compared to $12,923.1 million in fiscal 2018. Cost of goods sold as a percentage of net sales was 79.5% in fiscal 2019 compared to 79.4% in fiscal 2018. The increase in cost of goods sold in fiscal 2019 compared to fiscal 2018 was primarily due to increased net sales associated with the impact of acquisitions (primarily the KapStone Acquisition), higher levels of cost inflation and other items. These factors were partially offset by lower recovered fiber costs and productivity improvements. We discuss these items in greater detail below. In fiscal 2019, we received $180.0 million of insurance proceeds related to Hurricane Michael, primarily associated with our Panama City, FL mill that were recorded as a reduction of cost of goods sold. See “Hurricane Michael” below for additional information. We discuss these items in greater detail below in “Results of Operations — Segment Data”.
Selling, General and Administrative Excluding Intangible Amortization
Selling, general, and administrative expenses (“SG&A”) excluding intangible amortization increased $168.6 million to $1,715.2 million in fiscal 2019 compared to fiscal 2018 primarily due to the KapStone Acquisition. SG&A excluding intangible amortization as a percentage of net sales declined in fiscal 2019 to 9.4% from 9.5% in fiscal 2018.
38
Selling, General and Administrative Intangible Amortization
SG&A intangible amortization was $400.2 million and $296.6 million in fiscal 2019 and 2018, respectively. The increase in fiscal 2019 compared to fiscal 2018 was primarily due to the KapStone Acquisition.
(Gain) Loss on Disposal of Assets
The gain on disposal of assets in fiscal 2019 was $41.2 million and the loss on disposal of assets in fiscal 2018 was $10.1 million. The gain on disposal of assets in fiscal 2019 was primarily due to the $48.5 million gain on sale of our former Atlanta beverage facility recorded in the first quarter of fiscal 2019.
Multiemployer Pension Withdrawal (Income) Expense
In the fiscal 2019, we recorded a $6.3 million reduction to a previously recorded MEPP withdrawal liabilities. In fiscal 2018, we submitted formal notification to withdraw from PIUMPF and Central States and recorded aggregate estimated withdrawal liabilities of $184.2 million, which includes an estimate of our portion of PIUMPF’s accumulated funding deficiency. Since these withdrawal liabilities assume payment over 20 years, the liabilities were discounted at a credit adjusted risk-free rate and, therefore, we will accrete the liability over time with a charge to interest expense. See “Note 5. Retirement Plans — Multiemployer Plans” of the Notes to Consolidated Financial Statements for additional information, including the receipt of demand letters from PIUMPF. See also Item 1A. “Risk Factors — We May Incur Withdrawal Liability and/or Increased Funding Requirements in Connection with MEPPs”.
Land and Development Impairments
In fiscal 2019, we recorded $13.0 million of pre-tax non-cash impairments of certain mineral rights following the termination of a third party leasing relationship. In fiscal 2018, we recorded $31.9 million of pre-tax non-cash impairments of certain mineral rights and real estate. The $23.6 million impairment of mineral rights in fiscal 2018 was driven by the non-renewal of a lease and associated with declining oil and gas prices, and the other $8.3 million was recorded to write-down the carrying value of certain real estate projects where the projected sales proceeds were less than the carrying value. These charges are not reflected in segment income.
Restructuring and Other Costs
We recorded aggregate pre-tax restructuring and other costs of $173.7 million and $105.4 million for fiscal 2019 and 2018, respectively. 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. Costs recorded in each period are not comparable since the timing and scope of the individual actions associated with each restructuring, acquisition, divestiture or integration vary. 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”.
Interest Expense, net
Interest expense, net was $431.3 million and $293.8 million for fiscal 2019 and 2018, respectively. Interest expense, net in fiscal 2019 increased primarily due to debt incurred as a result of the KapStone Acquisition and higher interest rates. Interest expense, net in fiscal 2019 and 2018 was reduced by $27.8 million and $31.0 million, respectively, related to the amortization of the fair value of debt stepped-up in purchase accounting. 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 $74.2 million and $95.3 million in fiscal 2019 and 2018, respectively. Subsequent to the adoption of ASU 2017-07 (as hereinafter defined) we began presenting the non-service components of our pension and other postretirement income (expense) separately from the service
39
cost components and outside the subtotal of operating profit. The decrease in fiscal 2019 was primarily due to the decline in plan asset balances used to determine the expected return on plan assets.
Other Income, net
Other income, net was $2.4 million and $12.7 million in fiscal 2019 and 2018, respectively. Other income, net in fiscal 2018 included a $12.3 million gain on the sale of our solid waste management brokerage services business.
Provision for Income Taxes
We recorded income tax expense of $276.8 million for fiscal 2019 at an effective tax rate of 24.2% compared to an income tax benefit of $874.5 million at an effective tax rate benefit of 84.5% in fiscal 2018, including a $1,128.8 million provisional benefit from the Tax Act.
The effective tax rate for fiscal 2019 was higher than the statutory federal rate primarily due to (i) the inclusion of state taxes, (ii) income derived from certain foreign jurisdictions subject to higher tax rates, (iii) the exclusion of tax benefits related to losses recorded by certain foreign operations, (iv) the limitation of certain transaction costs and (v) the increase of deferred tax liabilities in certain state jurisdictions, partially offset by (vi) the inclusion of tax benefits related to share-based compensation and state tax law changes, (vii) research and development tax credits and (viii) an adjustment of the valuation allowance against net operating losses of foreign subsidiaries.
The effective tax rate benefit for fiscal 2018 was lower than the statutory federal rate primarily due to (i) the provisional amounts related to the enactment of the Tax Act, (ii) favorable tax items, such as the domestic production deduction, tax benefit of share-based compensation and cash tax planning that resulted in reduced deferred tax liabilities (iii) the true up of certain deferred taxes and foreign tax returns, and (iv) a change in valuation allowance, partially offset by (v) the inclusion of state taxes and (vi) the exclusion of tax benefits related to losses recorded by certain foreign operations.
See “Note 6. Income Taxes” of the Notes to Consolidated Financial Statements for additional information, including the impact of the Tax Act.
Hurricane Michael
In October 2018, our containerboard and pulp mill located in Panama 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 during June 2019 on the two paper machines and related infrastructure and these paper machines are now producing at normal production levels. Other repairs at the mill are continuing and all remaining repair work is expected to be completed during fiscal 2020 and 2021. While we are still identifying the full cost associated with the damage from Hurricane Michael, we anticipate the total of our property damage and business interruption claim will exceed $200 million.
In fiscal 2019, we received $180.0 million of insurance proceeds (net of our $15 million deductible) that were recorded as a reduction of cost of goods sold in our Corrugated Packaging segment related primarily to the Panama City mill. The insurance proceeds consisted of $55.3 million for business interruption recoveries and $124.7 million for direct costs and property damage. Our consolidated statements of cash flow in fiscal 2019 included $154.5 million in net cash provided by operating activities and $25.5 million net cash used for investing activities. We expect to recover the majority of the additional amount of direct costs and lost production and sales in future periods through insurance reimbursements.
Results of Operations — Segment Data
Corrugated Packaging Segment
North American Corrugated Packaging Shipments
Corrugated Packaging Shipments are expressed as a tons equivalent, which includes external and intersegment tons shipped from our Corrugated Packaging mills plus Corrugated Packaging container shipments converted from billion square feet (“BSF”) to tons. We have presented the Corrugated Packaging Shipments in two groups: North American and Brazil / India because we believe investors, potential investors, securities analysts and
40
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. The shipment data table excludes merchandising displays since there is not a common unit of measure. The table below reflects shipments in thousands of tons, BSF and millions of square feet (“MMSF”).
|
|
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Fiscal Year |
|
|||||
|
Fiscal 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Corrugated Packaging Shipments - thousands of tons |
|
|
2,045.6 |
|
|
|
2,112.1 |
|
|
|
2,096.4 |
|
|
|
2,163.8 |
|
|
|
8,417.9 |
|
|
North American Corrugated Containers Shipments - BSF |
|
|
19.8 |
|
|
|
19.7 |
|
|
|
20.5 |
|
|
|
20.3 |
|
|
|
80.3 |
|
|
North American Corrugated Containers Per Shipping Day - MMSF |
|
|
325.4 |
|
|
|
311.7 |
|
|
|
320.5 |
|
|
|
321.9 |
|
|
|
319.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Corrugated Packaging Shipments - thousands of tons |
|
|
2,346.7 |
|
|
|
2,520.8 |
|
|
|
2,644.2 |
|
|
|
2,616.4 |
|
|
|
10,128.1 |
|
|
North American Corrugated Containers Shipments - BSF |
|
|
22.5 |
|
|
|
23.6 |
|
|
|
24.3 |
|
|
|
24.1 |
|
|
|
94.5 |
|
|
North American Corrugated Containers Per Shipping Day - MMSF |
|
|
369.4 |
|
|
|
374.8 |
|
|
|
384.7 |
|
|
|
382.7 |
|
|
|
378.0 |
|
Brazil / India Corrugated Packaging Shipments
|
|
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Fiscal Year |
|
|||||
|
Fiscal 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazil / India Corrugated Packaging Shipments - thousands of tons |
|
|
170.5 |
|
|
|
174.6 |
|
|
|
178.6 |
|
|
|
196.7 |
|
|
|
720.4 |
|
|
Brazil / India Corrugated Containers Shipments - BSF |
|
|
1.6 |
|
|
|
1.5 |
|
|
|
1.6 |
|
|
|
1.6 |
|
|
|
6.3 |
|
|
Brazil / India Corrugated Containers Per Shipping Day - MMSF |
|
|
21.7 |
|
|
|
20.6 |
|
|
|
20.2 |
|
|
|
21.0 |
|
|
|
20.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
41
Corrugated Packaging Segment
|
(In millions, except percentages) |
|
Net Sales (1) |
|
|
Segment Income |
|
|
Return on Sales |
|
|||
|
|
|
|
|
|||||||||
|
Fiscal 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
2,319.7 |
|
|
$ |
269.9 |
|
|
|
11.6 |
% |
|
Second Quarter |
|
|
2,391.3 |
|
|
|
262.8 |
|
|
|
11.0 |
|
|
Third Quarter |
|
|
2,444.6 |
|
|
|
321.9 |
|
|
|
13.2 |
|
|
Fourth Quarter |
|
|
2,537.4 |
|
|
|
385.4 |
|
|
|
15.2 |
|
|
Total |
|
$ |
9,693.0 |
|
|
$ |
1,240.0 |
|
|
|
12.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
|
(1) |
Net Sales before intersegment eliminations |
Net Sales (Aggregate) — Corrugated Packaging Segment
Net sales before intersegment elimination for the Corrugated Packaging segment increased $2,123.7 million in the fiscal 2019 compared to fiscal 2018. The increase in net sales was primarily due to $2,851.5 million from acquisitions, notably the KapStone Acquisition, and $203.5 million from higher corrugated selling price/mix as we had higher selling prices for domestic containerboard and corrugated containers that were partially offset by declining export prices. These increases were partially offset by the absence of $461.6 million of recycling net sales in fiscal 2019 as a result of conducting the operations primarily as a procurement function beginning in the first quarter of fiscal 2019, $417.7 million of lower volumes as lower containerboard volumes were partially offset by increased corrugated container shipments and $65.4 million related to the impact of unfavorable foreign currency.
Segment Income — Corrugated Packaging Segment
Segment income attributable to the Corrugated Packaging segment in fiscal 2019 increased $159.6 million compared to fiscal 2018, primarily due to a $231.0 million of contribution from the acquired KapStone operations before an estimated $23.1 million of economic downtime and net of a $24.7 million acquisition inventory step-up charge, an estimated $122.8 million of productivity improvements and $118.8 million of higher corrugated selling price/mix. These increases were partially offset by $126.5 million of lower volumes, unfavorable cost inflation of $90.9 million, an estimated $66.4 million of economic downtime (including KapStone), $12.4 million of unfavorable foreign currency impacts, and other costs. The net impact of cost inflation was unfavorable compared to the prior year as lower recovered fiber costs were more than offset by higher wage and other costs, virgin fiber costs, freight costs, energy costs and chemical costs. In fiscal 2019, Corrugated Packaging segment income included $11.3 million for a receivable established for the recovery of indirect taxes in Brazil. See “Note 18. Commitments and Contingencies — Indirect Tax Claim” of the Notes to Consolidated Financial Statements for additional information. Fiscal 2018 results were negatively affected by an estimated $20.7 million due to the impact of winter weather and $19.0 million of start-up issues following a major maintenance outage at our Panama City, FL and Tacoma, WA mills. Fiscal 2019 results included an estimated $7.7 million and $5.9 million of expense due to the impact of Hurricane Dorian and start-up issues following a major maintenance outage, respectively. The full year impact of Hurricane Michael, net of recoveries on Corrugated Packaging segment income was not significant.
Consumer Packaging Segment
Consumer Packaging Shipments
Consumer Packaging Shipments are expressed as a tons equivalent, which includes external and intersegment tons shipped from our Consumer Packaging mills plus Consumer Packaging converting shipments converted from
42
BSF to tons. The fiscal 2018 shipment numbers below have been revised by an immaterial amount. The shipment data table excludes gypsum paperboard liner tons produced by Seven Hills since it is not consolidated.
|
|
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Fiscal Year |
|
|||||
|
Fiscal 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Packaging Shipments - thousands of tons |
|
|
977.0 |
|
|
|
986.1 |
|
|
|
1,017.9 |
|
|
|
1,024.1 |
|
|
|
4,005.1 |
|
|
Consumer Packaging Converting Shipments - BSF |
|
|
10.6 |
|
|
|
10.6 |
|
|
|
10.9 |
|
|
|
11.1 |
|
|
|
43.2 |
|
|
Consumer Packaging Converting Per Shipping Day - MMSF |
|
|
174.2 |
|
|
|
167.2 |
|
|
|
171.6 |
|
|
|
174.8 |
|
|
|
171.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Packaging Shipments - thousands of tons |
|
|
969.6 |
|
|
|
985.5 |
|
|
|
980.1 |
|
|
|
974.0 |
|
|
|
3,909.2 |
|
|
Consumer Packaging Converting Shipments - BSF |
|
|
10.5 |
|
|
|
11.0 |
|
|
|
11.1 |
|
|
|
11.1 |
|
|
|
43.7 |
|
|
Consumer Packaging Converting Per Shipping Day - MMSF |
|
|
172.7 |
|
|
|
174.3 |
|
|
|
176.0 |
|
|
|
175.9 |
|
|
|
174.7 |
|
Consumer Packaging Segment
|
(In millions, except percentages) |
|
Net Sales (1) |
|
|
Segment Income |
|
|
Return on Sales |
|
|||
|
|
|
|
|
|||||||||
|
Fiscal 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
1,601.3 |
|
|
$ |
94.2 |
|
|
|
5.9 |
% |
|
Second Quarter |
|
|
1,637.3 |
|
|
|
94.6 |
|
|
|
5.8 |
|
|
Third Quarter |
|
|
1,669.6 |
|
|
|
126.1 |
|
|
|
7.6 |
|
|
Fourth Quarter |
|
|
1,709.3 |
|
|
|
130.2 |
|
|
|
7.6 |
|
|
Total |
|
$ |
6,617.5 |
|
|
$ |
445.1 |
|
|
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
|
(1) |
Net Sales before intersegment eliminations |
Net Sales (Aggregate) — Consumer Packaging Segment
Net sales before intersegment eliminations for the Consumer Packaging segment decreased $11.5 million in fiscal 2019 compared to the prior year primarily due to $128.3 million of higher selling price/mix and $32.0 million from acquisitions, which were more than offset by $88.0 million of unfavorable foreign currency impacts and $83.7 million of lower volumes. Lower volumes were primarily driven by a decline in mill volumes that were partially offset by a 3.7% increase in North American food and beverage tons shipped.
Segment Income — Consumer Packaging Segment
Segment income attributable to the Consumer Packaging segment in fiscal 2019 decreased $57.0 million compared to the prior year. Segment income in the period was reduced by an estimated $112.5 million due to the net impact of cost inflation compared to the prior year, an estimated $35.1 million of increased maintenance and scheduled strategic outage expense (including the projects at the Mahrt, AL and Covington, VA mills), $44.5 million due to the impact of lower volumes, $14.5 million of unfavorable foreign currency impacts, $5.6 million of higher
43
depreciation and amortization, and other items. These items were partially offset by an estimated $107.9 million of higher selling price/mix and an estimated $84.9 million of productivity improvements. While the net impact of cost inflation was unfavorable compared to the prior year, recovered fiber costs and chemical costs were lower than the prior year but were more than offset by higher virgin fiber costs, freight costs and wage and other costs. Fiscal 2018 results were negatively affected by an estimated $17.2 million due to the impact of winter weather that was more than offset by $20.1 million of favorable acquisition reserve adjustments.
Land and Development Segment
|
(In millions) |
|
Net Sales (1) |
|
|
Segment Income (Loss) |
|
||
|
|
|
|
|
|||||
|
Fiscal 2018 |
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
11.4 |
|
|
$ |
(0.7 |
) |
|
Second Quarter |
|
|
26.7 |
|
|
|
16.1 |
|
|
Third Quarter |
|
|
64.8 |
|
|
|
9.9 |
|
|
Fourth Quarter |
|
|
39.5 |
|
|
|
(2.8 |
) |
|
Total |
|
$ |
142.4 |
|
|
$ |
22.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019 |
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
13.9 |
|
|
$ |
0.7 |
|
|
Second Quarter |
|
|
0.8 |
|
|
|
0.5 |
|
|
Third Quarter |
|
|
8.6 |
|
|
|
1.6 |
|
|
Fourth Quarter |
|
|
0.1 |
|
|
|
(0.3 |
) |
|
Total |
|
$ |
23.4 |
|
|
$ |
2.5 |
|
|
(1) |
Net sales before intersegment eliminations |
Net Sales (Aggregate) — Land and Development Segment
Net sales for the Land and Development segment in fiscal 2019 and 2018 were $23.4 million and $142.4 million, respectively. The decrease in fiscal 2019 was due to the wind-down of sales. We include the remainder of the real estate holdings in assets held for sale because we have met the held for sale criteria.
Segment Income (Loss) — Land and Development Segment
Segment income attributable to the Land and Development segment was $2.5 million and $22.5 million in fiscal 2019 and 2018, respectively. The pre-tax non-cash impairments of certain mineral rights and real estate discussed above under the caption “Land and Development Impairments” are not included in segment income.
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.
44
At September 30, 2019, we had approximately $2.9 billion of availability under our committed credit facilities, primarily under our revolving credit facility, the majority of which matures on July 1, 2022. This liquidity may be used to provide for ongoing working capital needs and for other general corporate purposes, including acquisitions, dividends and stock repurchases.
Certain restrictive covenants govern our maximum availability under the credit facilities. We test and report our compliance with these covenants as required and we were in compliance with all of these covenants at September 30, 2019. At September 30, 2019, we had $129.8 million of outstanding letters of credit not drawn upon.
Cash and cash equivalents were $151.6 million at September 30, 2019 and $636.8 million at September 30, 2018. We used a significant portion of the cash and cash equivalents on hand at September 30, 2018 in connection with the closing of the KapStone Acquisition. Primarily all of the cash and cash equivalents at September 30, 2019 were held outside of the U.S. At September 30, 2019, total debt was $10,063.4 million, $561.1 million of which was current. At September 30, 2018, total debt was $6,415.2 million, $740.7 million of which was current. The increase in debt was primarily related to the KapStone Acquisition.
Cash Flow Activity
|
|
|
Year Ended September 30, |
|
|||||
|
(In millions) |
|
2019 |
|
|
2018 |
|
||
|
|
|
|
|
|||||
|
Net cash provided by operating activities |
|
$ |
2,310.2 |
|
|
$ |
1,931.2 |
|
|
Net cash used for investing activities |
|
$ |
(4,579.6 |
) |
|
$ |
(815.1 |
) |
|
Net cash provided by (used for) financing activities |
|
$ |
1,780.2 |
|
|
$ |
(755.1 |
) |
Net cash provided by operating activities during fiscal 2019 increased $379.0 million from fiscal 2018 primarily due to higher cash earnings and a $340.3 million net decrease in the use of working capital compared to the prior year. As a result of the retrospective adoption of ASU 2016-15 and ASU 2016-18 (each as hereinafter defined) as discussed in “Note 1. Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements, net cash provided by operating activities for fiscal 2018 was reduced by $489.7 million and cash provided by investing activities increased $483.8 million, primarily for the change in classification of proceeds received for beneficial interests obtained for transferring trade receivables in securitization transactions.
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 our Atlanta beverage facility, $33.2 million of proceeds from corporate owned life insurance benefits and $25.5 million of proceeds from property, plant and equipment insurance proceeds related to the Panama City, FL mill. Net cash used for investing activities of $815.1 million in fiscal 2018 consisted primarily of $999.9 million for capital expenditures, $239.9 million for cash paid for the purchase of businesses, net of cash acquired primarily related to the Plymouth Acquisition and the Schlüter Acquisition, and $108.0 million for an investment in Grupo Gondi. These investments were partially offset by $461.6 million of cash receipts on sold trade receivables as a result of the adoption of ASU 2016-15, $24.0 million of proceeds from the sale of certain affiliates as well as our solid waste management brokerage services business and $23.3 million of proceeds from the sale of property, plant and equipment.
In fiscal 2019, net cash provided by financing activities of $1,780.2 million consisted primarily of a net increase in debt of $2,314.6 million, primarily related to the KapStone Acquisition and partially offset by cash dividends paid to stockholders of $467.9 million and purchases of Common Stock of $88.6 million. In fiscal 2018, net cash used for financing activities of $755.1 million consisted primarily of cash dividends paid to stockholders of $440.9 million and purchases of Common Stock of $195.1 million and net repayments of debt of $120.1 million.
Our capital expenditures aggregated $1,369.1 million in fiscal 2019. We expect fiscal 2020 capital expenditures to be approximately $1.1 billion, including approximately $275 million for our strategic capital projects at our Florence, SC and Tres Barras, Brazil mills. We expect to start up the project at our Florence mill in the spring of 2020 and the Tres Barras project in the first half of calendar 2021. With the completion of certain of our strategic capital projects in fiscal 2019 and 2020, we expect to transition to our long-range capital expenditure run rate of
45
approximately $900 million to $1.0 billion a year in fiscal 2021. We generally expect our base capital expenditures to be roughly half invested in maintenance and half invested in high return generating projects. 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.
We estimate that we will invest approximately $15 million for capital expenditures during fiscal 2020 in connection with matters relating to environmental compliance. We were obligated to purchase approximately $623 million of fixed assets at September 30, 2019 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”.
At September 30, 2019, the U.S. federal, state and foreign net operating losses and state tax credits available to us aggregated approximately $83 million in future potential reductions of U.S. federal, state and foreign cash taxes. Based on our current projections, we expect to utilize the remaining U.S. federal net operating losses over the next two years. Foreign and state net operating losses and credits will be used over a longer period of time. It is possible that our utilization of these net operating losses and credits may change due to changes in taxable income, tax laws or tax rates, capital expenditures or other factors. Including the estimated impact of book and tax differences, subject to changes in tax laws, we expect our cash tax rate to move closer to our income tax rate in fiscal 2020, 2021 and 2022.
During fiscal 2019 and 2018, we made contributions of $25.0 million and $37.7 million, respectively, to our U.S. and non-U.S. pension plans. Based on current facts and assumptions, we expect to contribute approximately $27 million to our U.S. and non-U.S. pension plans in fiscal 2020. 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 underfunded status of our U.S. and non-U.S. pension plans at September 30, 2019 was $85.8 million. Based on current assumptions, including future interest rates, we estimate that minimum pension contributions to our U.S. and non-U.S. pension plans will be in the range of approximately $24 million to $28 million annually in fiscal 2021 through 2024. See “Note 5. Retirement Plans” of the Notes to Consolidated Financial Statements. See also Item 1A. “Risk Factors —Our Pension Plans Will Likely Require Additional Cash Contributions”.
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. In September 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 demand did not address any assertion of liability for PIUMPF’s accumulated funding deficiency. In October 2019, we received two additional demand letters from PIUMPF related to a subsidiary 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 are evaluating each of these demands. We expect to challenge the accumulated funding deficiency. We expect to begin making monthly payments for these withdrawal liabilities in fiscal 2020. 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”.
In November 2019, our board of directors declared a quarterly dividend of $0.465 per share, representing a 2.2% increase from the prior $0.455 per share quarterly dividend and an annual dividend of $1.86 per share. During fiscal 2019 and 2018, we paid an annual dividend of $1.82 per share and $1.72 per share, respectively.
In July 2015, our board of directors authorized a repurchase program of up to 40.0 million shares of our Common Stock, representing approximately 15% of our outstanding Common Stock as of July 1, 2015. 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 2019, we repurchased approximately 2.1 million shares of our Common Stock for an aggregate cost of $88.6 million. In fiscal 2018, we repurchased approximately 3.4 million shares of our Common Stock for an aggregate cost
46
of $195.1 million. As of September 30, 2019, 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 at September 30, 2019, 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.
|
|
|
Payments Due by Period |
|
|||||||||||||||||
|
(In millions) |
|
Total |
|
|
Fiscal 2020 |
|
|
Fiscal 2021 and 2022 |
|
|
Fiscal 2023 and 2024 |
|
|
Thereafter |
|
|||||
|
|
|
|
|
|||||||||||||||||
|
Long-Term Debt, including current portion, excluding capital lease obligations (1) |
|
$ |
9,714.1 |
|
|
$ |
550.8 |
|
|
$ |
939.8 |
|
|
$ |
2,494.3 |
|
|
$ |
5,729.2 |
|
|
Operating lease obligations (2) |
|
|
930.4 |
|
|
|
214.3 |
|
|
|
316.4 |
|
|
|
193.6 |
|
|
|
206.1 |
|
|
Capital lease obligations (3) |
|
|
168.9 |
|
|
|
6.4 |
|
|
|
8.7 |
|
|
|
2.9 |
|
|
|
150.9 |
|
|
Purchase obligations and other (4) (5) (6) |
|
|
2,293.5 |
|
|
|
1,607.0 |
|
|
|
292.5 |
|
|
|
206.7 |
|
|
|
187.3 |
|
|
Total |
|
$ |
13,106.9 |
|
|
$ |
2,378.5 |
|
|
$ |
1,557.4 |
|
|
$ |
2,897.5 |
|
|
$ |
6,273.5 |
|
|
(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 $163.5 million of fair value of debt step-up, deferred 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. Operating Leases” of the Notes to Consolidated Financial Statements for additional information. |
|
(3) |
The fair value step-up of $16.9 million is excluded. See “Note 13. Debt — Capital Lease and Other Indebtedness” of the Notes to Consolidated Financial Statements for additional information. |
|
(4) |
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. |
|
(5) |
We have included in the table future estimated minimum pension plan contributions 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 $237.2 million of multiemployer pension plan withdrawal liabilities recorded as of September 30, 2019, including our estimate of the accumulated funding 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. |
|
(6) |
We have not included the following items in the table: |
47
|
|
• |
An item labeled “other long-term liabilities” reflected on our consolidated balance sheet because these liabilities do not have a definite pay-out scheme. |
|
|
• |
$284.7 million for certain provisions of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 740, “Income Taxes” associated with liabilities 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 Other Matters”, “Business — Governmental Regulation — CERCLA and Other Remediation Costs”, and “Business — Governmental Regulation — Climate Change” for a discussion of our expenditures for environmental compliance.
Critical Accounting Policies and 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. See also Item 7A. “Quantitative and Qualitative Disclosures About Market Risk”.
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 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.
Goodwill
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. We determine recoverability by comparing the estimated fair value of the reporting unit to which the goodwill applies to the carrying value, including goodwill, of that reporting unit. We determine the fair value of each reporting unit using the discounted cash flow method or, as appropriate, a combination of the discounted cash flow method and the guideline public company method. Our discounted cash flow analysis is based on the sum of two components, the present value of our projected cash flows and the present value of a terminal value. The cash flow estimates are derived from our current forecast and our long-term forecasts prepared for each reporting unit considering historical results and anticipated future performance and capital expenditures, and require considerable judgment. The discount rates used to determine the present value of future cash flows are derived from a weighted average cost of capital analysis utilizing a beta derived from peer companies. In addition, we give consideration in the calculation of the weighted average cost of capital for equity risks, including size risk, industry risk and country specific risk, as appropriate, for each of our reporting units. The guideline public company method involves comparing the reporting unit to similar companies whose stock is freely traded on an organized exchange. The fair values determined by the discounted cash flow and guideline public company methods were weighted to arrive at the concluded fair value of the reporting unit. However, in instances where comparisons to our peers was less meaningful, no weight was placed on the guideline public company method to arrive at the concluded fair value of the reporting unit.
Estimating the fair value of the reporting unit involves uncertainties because it requires management to develop numerous assumptions, including assumptions about the future growth and potential volatility in revenues and costs, capital expenditures, industry economic factors and future business strategy. The variability of the factors that management uses to perform the goodwill impairment test depends on a number of conditions, including uncertainty about future events and cash flows, including anticipated changes in revenues and costs and synergies and productivity improvements resulting from the acquisitions, capital expenditures and continuous improvement projects. These factors are interdependent and, therefore, do not change in isolation. Accordingly, our accounting estimates may materially change from period to period due to changing market factors. If we had used other
48
assumptions and estimates or if conditions change in future periods, our operating results could be materially impacted. Any significant adverse changes in key assumptions about these reporting units and their prospects, such as changes in our strategy or products, the loss of key customers, regulatory changes or adverse changes in economic and market conditions may cause a change in the estimated fair values of our reporting units and could result in an impairment charge that could be material to our financial statements.
During the third quarter of fiscal 2019, we tested our goodwill for potential impairment on an interim basis due to changing market conditions, including the impact on the trading price of our Common Stock. All reporting units that have goodwill were noted to have a fair value that exceeded their carrying values as of the interim impairment test date. The discount rate used for each reporting unit ranged from 8.5% to 14.0%. We used perpetual growth rates in the reporting units that have goodwill ranging from 0.0% to 1.0%. Our Consumer Packaging and Victory Packaging reporting units had fair values that exceeded their respective carrying values by less than 10% each, primarily due to the fair value accounting related to the Combination and the MPS Acquisition (for Consumer Packaging) and the KapStone Acquisition (for Victory Packaging). 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 that has goodwill, the fair value of each of our reporting units would have continued to exceed its carrying value, except for the Consumer Packaging reporting unit. The Consumer Packaging and Victory Packaging reporting units had $3,590.6 million and $40.2 million of goodwill, respectively, at September 30, 2019. We reviewed the carrying value of our goodwill at the beginning of the fourth quarter and continually monitored industry 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, if actual results are not consistent with our assumptions and estimates, we may be exposed to impairment losses that could be material.
See Item 1A. “Risk Factors — We Have a Significant Amount of Goodwill 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 income. 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 $11.4 million for fiscal 2019. A 1% change in our effective tax rate used to compute deferred tax liabilities and assets, as recorded on the September 30, 2019 consolidated balance sheet, would increase or decrease tax expense by approximately $121.3 million for fiscal 2019.
Business Combinations
From time to time, we may enter into business combinations. In accordance with ASC 805, “Business Combinations”, we generally recognize the identifiable assets acquired, the liabilities assumed and any noncontrolling interests in an acquiree at their fair values as of the date of acquisition. We measure goodwill as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities including those related to debt, pensions and other postretirement plans, uncertain tax positions, contingent consideration and contingencies. Significant estimates and assumptions include subjective
49
and/or complex judgements regarding items such as discount rates, customer attrition rates, economic lives and other factors, including estimating future cash flows that we expect to generate from the acquired assets.
The acquisition method of accounting also requires us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on our financial condition and results of operations. No changes in fiscal 2019 to our fiscal 2018 provisional fair value estimates of assets and liabilities assumed in acquisitions have been significant. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record future impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be increased or decreased, or the acquired asset could be impaired.
Pension
The funded status of our qualified and non-qualified U.S. and non-U.S. pension plans decreased $233.5 million in fiscal 2019. Our U.S. qualified and non-qualified pension plans and non-U.S. pension plans were under funded by $43.6 million and $42.2 million, respectively, as of September 30, 2019. Our U.S. pension plan benefit obligations were negatively impacted in fiscal 2019 primarily by a 115-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 2019 by a 100-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 appropriate, would have had the following effect on fiscal 2019 pension expense (amounts in the table in parentheses reflect additional income, in millions):
|
|
|
Pension Plans |
|
|||||
|
|
|
25 Basis Point Increase |
|
|
25 Basis Point Decrease |
|
||
|
Discount rate |
|
$ |
(10.2 |
) |
|
$ |
10.4 |
|
|
Compensation level |
|
$ |
0.3 |
|
|
$ |
(0.3 |
) |
|
Expected long-term rate of return on plan assets |
|
$ |
(14.2 |
) |
|
$ |
14.2 |
|
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.
|
Item 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risk from changes in, among other things, interest rates, foreign currencies and commodity prices. We aim to identify and understand these risks and then implement strategies to manage them. When evaluating these strategies, we evaluate the fundamentals of each market, our sensitivity to movements in pricing, and underlying accounting and business implications. To implement these strategies, we may enter into various hedging transactions. The sensitivity analyses we present below do not consider the effect of possible adverse changes in the general economy, nor do they consider additional actions we may take to mitigate our exposure to such changes. We may not be successful in managing these risks.
Containerboard and Paperboard Shipments
We are exposed to market risk related to our sales of containerboard and paperboard. We sell a significant portion of our mill production and converted products pursuant to contracts that provide that prices are either fixed for specified terms or provide for price adjustments based on negotiated terms, including changes in specified index
50
prices. We have the capacity to annually ship approximately 11.8 million tons in our Corrugated Packaging segment and approximately 4.2 million tons in our Consumer Packaging segment. Although our mill system operating rates may vary from year to year due to changes in market and other factors, our simple average mill system operating rates for the last three years averaged 94%. A hypothetical $10 per ton decrease in the price of containerboard and paperboard throughout the year based on our capacity would decrease our sales by approximately $118 million and $42 million in our Corrugated Packaging and Consumer Packaging segments, respectively. See Item 1A. “Risk Factors — Our Earnings Are Highly Dependent on Volumes”.
Energy
Energy is one of the most significant costs of our mill operations. The cost of natural gas, coal, oil, electricity, diesel and wood by-products (biomass) at times have fluctuated significantly. In our recycled paperboard mills, we use primarily natural gas and electricity, supplemented with coal and fuel oil to generate steam used in the paper making process and, at a few mills, to generate electricity used on site. In our virgin fiber mills, we use biomass, natural gas and coal to generate steam used in the pulping and paper making processes and to generate some or all of the electricity used on site. We primarily use electricity and natural gas to operate our converting facilities. We generally purchase these products from suppliers at market or tariff rates. We may from time to time use commodity contracts to hedge energy exposures.
We spent approximately $879 million on all energy sources in fiscal 2019 to operate our facilities. Natural gas and electricity each accounted for approximately a third of our total energy purchases in fiscal 2019. While the amount of energy we consume my vary from year to year due to production levels and other factors, in fiscal 2020 we expect to consume approximately 84 million MMBtu of natural gas. A hypothetical 10% increase in the price of energy throughout the year would increase our cost of energy by approximately $88 million based on fiscal 2019 pricing and consumption.
Recycled Fiber
Recycled fiber is the principal raw material we use in the production of recycled paperboard and a portion of our containerboard. We consume approximately 5.6 million tons of recycled fiber per year. Recycled fiber prices can fluctuate significantly. Our purchases of old corrugated containers and double-lined kraft clippings accounted for our largest recycled fiber costs and approximately 85% to 90% of our recycled fiber purchases. The remaining 10% to 15% of our recycled fiber purchases consisted of a number of other grades of recycled paper. The mix of recycled fiber may vary due to factors such as market demand, availability and pricing. A hypothetical 10% increase in recycled fiber prices in our mills for a fiscal year would increase our costs by approximately $61 million.
Virgin Fiber
Virgin fiber is the principal raw material we use in the production of a portion of our containerboard, bleached paperboard and market pulp. While virgin fiber prices have generally been more stable than recycled fiber prices, they also fluctuate, particularly due to significant changes in weather, such as during prolonged periods of heavy rain or drought, or during housing construction slowdowns or accelerations. A hypothetical 10% increase in virgin fiber prices in our mills for a fiscal year would increase our costs by approximately $151 million.
Freight
Inbound and outbound freight is a significant expenditure for us. Factors that influence our freight expense are items such as distance between our shipping and delivery locations, distance from customers and suppliers, mode of transportation (rail, truck, intermodal and ocean) and freight rates, which are influenced by supply and demand and fuel costs, primarily diesel. We experienced significantly higher freight costs in fiscal 2019, as transportation companies raised prices to address a shortage of drivers and strong demand. A hypothetical 10% increase for a fiscal year would increase our costs by approximately $165 million, of which nearly one-fifth would be the portion related to higher diesel costs based on our estimated 82 million gallons consumed annually. See Item 1A. “Risk Factors — We May Face Increased Costs For, or Inadequate Availability of, Raw Materials, Energy and Transportation”.
51
Interest Rates
We are exposed to changes in interest rates, primarily as a result of our short-term and long-term debt. As discussed below, we may from time to time use interest rate swap agreements to manage the interest rate characteristics of a portion of our outstanding debt. Based on the amounts and mix of our fixed and floating rate debt at September 30, 2019, including the impact of our interest rate swaps, if market interest rates increase an average of 100 basis points, our annual interest expense would increase by approximately $25 million. We determined these amounts by considering the impact of the hypothetical interest rates on our borrowing costs. This analysis does not consider the effects of changes in the level of overall economic activity that could exist in such an environment. See Item 1A. “Risk Factors — The Level of Our Indebtedness Could Adversely Affect Our Financial Condition and Impair Our Ability to Operate Our Business”.
Derivative Instruments / Forward Contracts
We periodically may issue and settle foreign currency denominated debt, exposing us to the effect of changes in spot exchange rates between loan issue and loan repayment dates and changes in spot exchange rates on open balances at each balance sheet date. From time to time, we may use foreign exchange contracts to hedge these exposures with terms of generally one month. Based on our open foreign exchange contracts as of September 30, 2019, the effect of a 1% change in exchange rates would impact other income, net by approximately $4 million. Although these foreign currency sensitive instruments expose us to market risk, fluctuations in the value of these instruments are mitigated by expected offsetting fluctuations in the foreign currency denominated debt exposures. The fluctuation of these instruments may cause future cash settlement of the hedge.
We periodically may also enter into interest rate swaps to manage the interest rate risk associated with a portion of our outstanding debt. Interest rate swaps are either designated for accounting purposes as cash flow hedges of forecasted floating interest payments on variable rate debt or fair value hedges of fixed rate debt, or we may elect not to treat them as accounting hedges. Based on our open interest rate swaps as of September 30, 2019, the effect of a 1% change in interest rates would impact interest expense by approximately $6 million. We may enter into swaps or forward contracts on certain commodities to manage the price risk associated with forecasted purchases or sales of those commodities. Based on our open natural gas contracts as of September 30, 2019, the effect of a 1% change in prices would impact cost of goods sold by less than $1 million.
Pension Plans
Our pension plans are influenced by trends in the financial markets and the regulatory environment, among other factors. Adverse general stock market trends and falling interest rates increase plan costs and liabilities. During fiscal 2019 and 2018, the effect of a 0.25% decrease in the discount rate would have reduced pre-tax income by approximately $10 million and $11 million, respectively, and a 0.25% increase in the discount rate would have increased pre-tax income by $10 million and $11 million, respectively. Similarly, MEPPs in which we participate could experience similar circumstances which could impact our funding requirements and therefore expenses. See “Note 5. Retirement Plans — Multiemployer Plans” of the Notes to Consolidated Financial Statements. See also Item 1A. “Risk Factors —Our Pension Plans Will Likely Require Additional Cash Contributions” and “Risk Factors — We May Incur Withdrawal Liability and/or Increased Funding Requirements in Connection with MEPPs”.
Foreign Currency
We predominately operate in U.S. markets, but derived 18.2% of our net sales in fiscal 2019 from outside the U.S. through international operations, some of which were transacted in U.S. dollars. In addition, certain of our domestic operations have sales to foreign customers. Although we are impacted by the exchange rates of a number of currencies, our largest exposures are generally to the Brazilian Real, British Pound, Canadian dollar, Euro and Mexican Peso. In conducting our foreign operations, we also make inter-company sales and receive royalties and dividends denominated in different currencies. These activities expose us to the effect of changes in foreign currency exchange rates. Flows of foreign currencies into and out of our operations are generally stable and regularly occurring and are recorded at fair market value in our financial statements. Our foreign currency management policy permits us to enter into foreign currency hedges when these flows exceed a threshold, which is a function of these cash flows and forecasted annual operations.
52
At times, certain of our foreign subsidiaries have U.S. dollar-denominated external debt. In these instances, we may hedge the non-functional currency exposure with derivatives. We issue inter-company loans to and receive foreign cash deposits from our foreign subsidiaries in their local currencies, exposing us to the effect of changes in spot exchange rates between loan issue and loan repayment dates and changes in spot exchange rates from deposits. From time to time, we may use foreign-exchange hedge contracts with terms of generally less than one year to hedge these exposures. Although our derivative and other foreign currency sensitive instruments expose us to market risk, fluctuations in the value of these instruments are mitigated by expected offsetting fluctuations in the matched exposures.
During fiscal 2019 and 2018, the effect of a hypothetical 10% change in foreign currencies that we have exposure to versus to the U.S. dollar would have impacted our segment results by approximately $39 million and $36 million, respectively. See “Note 7. Segment Information” of the Notes to Consolidated Financial Statements for additional information.
During fiscal 2019 and 2018, the effect of a hypothetical 1% change in exchange rates would have impacted accumulated other comprehensive income by approximately $31 million and $37 million, respectively. This impact does not consider the effects of a stronger or weaker dollar on our ability to compete for export business or the overall economic activity that could exist in such an environment. Changes in foreign exchange rates could impact the price and the demand for our products. See Item 1A. “Risk Factors — We May Be Adversely Affected by Factors That Are Beyond Our Control, Such as U.S. and Worldwide Economic and Financial Market Conditions, and Social and Political Change”.
53
|
Item 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Index to Financial Statements
|
Description |
|
Page Reference |
|
|
55 |
|
|
|
56 |
|
|
|
57 |
|
|
|
58 |
|
|
|
60 |
|
|
|
62 |
|
|
|
139 |
|
|
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting |
|
143 |
|
Management’s Annual Report on Internal Control Over Financial Reporting |
|
145 |
For supplemental quarterly financial information, please see “Note 23. Financial Results by Quarter (Unaudited)” of the Notes to Consolidated Financial Statements.
54
WESTROCK COMPANY
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
Year Ended September 30, |
|
|||||||||
|
(In millions, except per share data) |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
|
|
|
|
|||||||||
|
Net sales |
|
$ |
18,289.0 |
|
|
$ |
16,285.1 |
|
|
$ |
14,859.7 |
|
|
Cost of goods sold |
|
|
14,540.0 |
|
|
|
12,923.1 |
|
|
|
12,141.5 |
|
|
Selling, general and administrative, excluding intangible amortization |
|
|
1,715.2 |
|
|
|
1,546.6 |
|
|
|
1,457.2 |
|
|
Selling, general and administrative intangible amortization |
|
|
400.2 |
|
|
|
296.6 |
|
|
|
229.6 |
|
|
(Gain) loss on disposal of assets |
|
|
(41.2 |
) |
|
|
10.1 |
|
|
|
4.8 |
|
|
Multiemployer pension withdrawal (income) expense |
|
|
(6.3 |
) |
|
|
184.2 |
|
|
|
— |
|
|
Land and Development impairments |
|
|
13.0 |
|
|
|
31.9 |
|
|
|
46.7 |
|
|
Restructuring and other costs |
|
|
173.7 |
|
|
|
105.4 |
|
|
|
196.7 |
|
|
Operating profit |
|
|
1,494.4 |
|
|
|
1,187.2 |
|
|
|
783.2 |
|
|
Interest expense, net |
|
|
(431.3 |
) |
|
|
(293.8 |
) |
|
|
(222.5 |
) |
|
(Loss) gain on extinguishment of debt |
|
|
(5.1 |
) |
|
|
(0.1 |
) |
|
|
1.8 |
|
|
Pension and other postretirement non-service income |
|
|
74.2 |
|
|
|
95.3 |
|
|
|
51.8 |
|
|
Other income, net |
|
|
2.4 |
|
|
|
12.7 |
|
|
|
11.5 |
|
|
Equity in income of unconsolidated entities |
|
|
10.1 |
|
|
|
33.5 |
|
|
|
39.0 |
|
|
Gain on sale of HH&B |
|
|
— |
|
|
|
— |
|
|
|
192.8 |
|
|
Income before income taxes |
|
|
1,144.7 |
|
|
|
1,034.8 |
|
|
|
857.6 |
|
|
Income tax (expense) benefit |
|
|
(276.8 |
) |
|
|
874.5 |
|
|
|
(159.0 |
) |
|
Consolidated net income |
|
|
867.9 |
|
|
|
1,909.3 |
|
|
|
698.6 |
|
|
Less: Net (income) loss attributable to noncontrolling interests |
|
|
(5.0 |
) |
|
|
(3.2 |
) |
|
|
9.6 |
|
|
Net income attributable to common stockholders |
|
$ |
862.9 |
|
|
$ |
1,906.1 |
|
|
$ |
708.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to common stockholders |
|
$ |
3.36 |
|
|
$ |
7.46 |
|
|
$ |
2.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to common stockholders |
|
$ |
3.33 |
|
|
$ |
7.34 |
|
|
$ |
2.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid per share |
|
$ |
1.82 |
|
|
$ |
1.72 |
|
|
$ |
1.60 |
|
See Accompanying Notes
55
WESTROCK COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
Year Ended September 30, |
|
|||||||||
|
(In millions) |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
|
|
|
|
|||||||||
|
Consolidated net income |
|
$ |
867.9 |
|
|
$ |
1,909.3 |
|
|
$ |
698.6 |
|
|
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation (loss) gain |
|
|
(143.4 |
) |
|
|
(234.4 |
) |
|
|
80.7 |
|
|
Sale of HH&B |
|
|
— |
|
|
|
— |
|
|
|
26.8 |
|
|
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred gain on cash flow hedges |
|
|
1.1 |
|
|
|
— |
|
|
|
— |
|
|
Reclassification adjustment of net (gain) loss on cash flow hedges included in earnings |
|
|
(0.2 |
) |
|
|
0.5 |
|
|
|
(0.5 |
) |
|
Unrealized gain on available for sale security |
|
|
— |
|
|
|
0.8 |
|
|
|
0.7 |
|
|
Reclassification adjustment of gain on available for sale security included in earnings |
|
|
— |
|
|
|
(1.5 |
) |
|
|
— |
|
|
Defined benefit pension and other postretirement benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial (loss) gain arising during period |
|
|
(248.5 |
) |
|
|
(13.1 |
) |
|
|
22.2 |
|
|
Amortization and settlement recognition of net actuarial loss, included in pension and postretirement cost |
|
|
17.2 |
|
|
|
15.0 |
|
|
|
36.0 |
|
|
Prior service (cost) credit arising during period |
|
|
(3.3 |
) |
|
|
(5.5 |
) |
|
|
0.7 |
|
|
Amortization and curtailment recognition of prior service cost (credit), included in pension and postretirement cost |
|
|
1.8 |
|
|
|
0.2 |
|
|
|
(0.2 |
) |
|
Sale of HH&B |
|
|
— |
|
|
|
— |
|
|
|
2.9 |
|
|
Other comprehensive (loss) income, net of tax |
|
|
(375.3 |
) |
|
|
(238.0 |
) |
|
|
169.3 |
|
|
Comprehensive income |
|
|
492.6 |
|
|
|
1,671.3 |
|
|
|
867.9 |
|
|
Less: Comprehensive (income) loss attributable to noncontrolling interests |
|
|
(3.6 |
) |
|
|
(3.2 |
) |
|
|
9.4 |
|
|
Comprehensive income attributable to common stockholders |
|
$ |
489.0 |
|
|
$ |
1,668.1 |
|
|
$ |
877.3 |
|
See Accompanying Notes
56
WESTROCK COMPANY
CONSOLIDATED BALANCE SHEETS
|
|
|
September 30, |
|
|||||
|
(In millions, except per share data) |
|
2019 |
|
|
2018 |
|
||
|
|
|
|
|
|||||
|
ASSETS |
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
151.6 |
|
|
$ |
636.8 |
|
|
Accounts receivable (net of allowances of $53.2 and $49.7) |
|
|
2,193.2 |
|
|
|
2,010.7 |
|
|
Inventories |
|
|
2,107.5 |
|
|
|
1,829.6 |
|
|
Other current assets |
|
|
496.2 |
|
|
|
248.5 |
|
|
Assets held for sale |
|
|
25.8 |
|
|
|
59.5 |
|
|
Total current assets |
|
|
4,974.3 |
|
|
|
4,785.1 |
|
|
Property, plant and equipment, net |
|
|
11,189.5 |
|
|
|
9,082.5 |
|
|
Goodwill |
|
|
7,285.6 |
|
|
|
5,577.6 |
|
|
Intangibles, net |
|
|
4,059.5 |
|
|
|
3,122.0 |
|
|
Restricted assets held by special purpose entities |
|
|
1,274.3 |
|
|
|
1,281.0 |
|
|
Prepaid pension asset |
|
|
224.7 |
|
|
|
420.0 |
|
|
Other assets |
|
|
1,148.8 |
|
|
|
1,092.3 |
|
|
Total Assets |
|
$ |
30,156.7 |
|
|
$ |
25,360.5 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Current portion of debt |
|
$ |
561.1 |
|
|
$ |
740.7 |
|
|
Accounts payable |
|
|
1,831.8 |
|
|
|
1,716.8 |
|
|
Accrued compensation and benefits |
|
|
470.4 |
|
|
|
399.3 |
|
|
Other current liabilities |
|
|
571.8 |
|
|
|
476.5 |
|
|
Total current liabilities |
|
|
3,435.1 |
|
|
|
3,333.3 |
|
|
Long-term debt due after one year |
|
|
9,502.3 |
|
|
|
5,674.5 |
|
|
Pension liabilities, net of current portion |
|
|
294.0 |
|
|
|
261.3 |
|
|
Postretirement benefit liabilities, net of current portion |
|
|
162.1 |
|
|
|
134.8 |
|
|
Non-recourse liabilities held by special purpose entities |
|
|
1,145.2 |
|
|
|
1,153.7 |
|
|
Deferred income taxes |
|
|
2,878.0 |
|
|
|
2,321.5 |
|
|
Other long-term liabilities |
|
|
1,053.9 |
|
|
|
994.8 |
|
|
Commitments and contingencies (Notes 15 and 18) |
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests |
|
|
1.9 |
|
|
|
4.2 |
|
|
Equity: |
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 30.0 million shares authorized; no shares outstanding |
|
|
— |
|
|
|
— |
|
|
Common stock, $0.01 par value; 600.0 million shares authorized; 257.8 million and 253.5 million shares outstanding at September 30, 2019 and September 30, 2018, respectively |
|
|
2.6 |
|
|
|
2.5 |
|
|
Capital in excess of par value |
|
|
10,739.4 |
|
|
|
10,588.9 |
|
|
Retained earnings |
|
|
1,997.1 |
|
|
|
1,573.3 |
|
|
Accumulated other comprehensive loss |
|
|
(1,069.2 |
) |
|
|
(695.3 |
) |
|
Total stockholders’ equity |
|
|
11,669.9 |
|
|
|
11,469.4 |
|
|
Noncontrolling interests |
|
|
14.3 |
|
|
|
13.0 |
|
|
Total equity |
|
|
11,684.2 |
|
|
|
11,482.4 |
|
|
Total Liabilities and Equity |
|
$ |
30,156.7 |
|
|
$ |
25,360.5 |
|
See Accompanying Notes
57
WESTROCK COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
|
|
|
Year Ended September 30, |
|
|||||||||
|
(In millions, except per share data) |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
|
|
|
|
|||||||||
|
Number of Shares of Common Stock Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of fiscal year |
|
|
253.5 |
|
|
|
254.5 |
|
|
|
251.0 |
|
|
Shares issued under restricted stock plan |
|
|
3.2 |
|
|
|
0.7 |
|
|
|
1.1 |
|
|
Issuance of common stock, net of stock received for minimum tax withholdings (1) (2) |
|
|
3.2 |
|
|
|
1.7 |
|
|
|
4.2 |
|
|
Purchases of common stock (3) |
|
|
(2.1 |
) |
|
|
(3.4 |
) |
|
|
(1.8 |
) |
|
Balance at end of fiscal year |
|
|
257.8 |
|
|
|
253.5 |
|
|
|
254.5 |
|
|
Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of fiscal year |
|
$ |
2.5 |
|
|
$ |
2.5 |
|
|
$ |
2.5 |
|
|
Issuance of common stock, net of stock received for minimum tax withholdings (1) |
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
Purchases of common stock (3) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Balance at end of fiscal year |
|
|
2.6 |
|
|
|
2.5 |
|
|
|
2.5 |
|
|
Capital in Excess of Par Value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of fiscal year |
|
|
10,588.9 |
|
|
|
10,624.9 |
|
|
|
10,458.6 |
|
|
Income tax benefit from share-based plans |
|
|
— |
|
|
|
— |
|
|
|
4.3 |
|
|
Compensation expense under share-based plans |
|
|
64.8 |
|
|
|
66.9 |
|
|
|
60.6 |
|
|
Issuance of common stock, net of stock received for minimum tax withholdings (1) |
|
|
101.1 |
|
|
|
38.9 |
|
|
|
181.6 |
|
|
Fair value of share-based awards issued in business combinations |
|
|
70.8 |
|
|
|
— |
|
|
|
1.9 |
|
|
Purchases of common stock (3) |
|
|
(86.2 |
) |
|
|
(141.8 |
) |
|
|
(76.3 |
) |
|
Separation of Specialty Chemicals business |
|
|
— |
|
|
|
— |
|
|
|
(5.8 |
) |
|
Balance at end of fiscal year |
|
|
10,739.4 |
|
|
|
10,588.9 |
|
|
|
10,624.9 |
|
|
Retained Earnings (Deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of fiscal year |
|
|
1,573.3 |
|
|
|
172.4 |
|
|
|
(105.9 |
) |
|
Adoption of revenue from contracts with customers standard |
|
|
43.5 |
|
|
|
— |
|
|
|
— |
|
|
Net income attributable to common stockholders |
|
|
862.9 |
|
|
|
1,906.1 |
|
|
|
708.2 |
|
|
Dividends declared (per share - $1.82, $1.72 and $1.60) (4) |
|
|
(479.8 |
) |
|
|
(445.2 |
) |
|
|
(407.3 |
) |
|
Issuance of common stock, net of stock received for minimum tax withholdings |
|
|
(0.4 |
) |
|
|
(6.7 |
) |
|
|
(5.9 |
) |
|
Purchases of common stock (3) |
|
|
(2.4 |
) |
|
|
(53.3 |
) |
|
|
(16.7 |
) |
|
Balance at end of fiscal year |
|
|
1,997.1 |
|
|
|
1,573.3 |
|
|
|
172.4 |
|
|
Accumulated Other Comprehensive Loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of fiscal year |
|
|
(695.3 |
) |
|
|
(457.3 |
) |
|
|
(626.4 |
) |
|
Other comprehensive (loss) income, net of tax |
|
|
(373.9 |
) |
|
|
(238.0 |
) |
|
|
169.1 |
|
|
Balance at end of fiscal year |
|
|
(1,069.2 |
) |
|
|
(695.3 |
) |
|
|
(457.3 |
) |
|
Total Stockholders’ equity |
|
|
11,669.9 |
|
|
|
11,469.4 |
|
|
|
10,342.5 |
|
|
Noncontrolling Interests: (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of fiscal year |
|
|
13.0 |
|
|
|
43.6 |
|
|
|
101.2 |
|
|
Net income (loss) |
|
|
3.2 |
|
|
|
2.1 |
|
|
|
(12.9 |
) |
|
Contributions |
|
|
0.2 |
|
|
|
0.5 |
|
|
|
— |
|
|
Distributions and adjustments to noncontrolling interests |
|
|
(2.1 |
) |
|
|
(33.2 |
) |
|
|
(44.7 |
) |
|
Balance at end of fiscal year |
|
|
14.3 |
|
|
|
13.0 |
|
|
|
43.6 |
|
|
Total equity |
|
$ |
11,684.2 |
|
|
$ |
11,482.4 |
|
|
$ |
10,386.1 |
|
|
(1) |
Included in the issuance of common stock in fiscal 2019 is the issuance of approximately 1.6 million shares of Common Stock valued at $70.1 million in connection with the KapStone Acquisition. Included in the issuance of common stock in fiscal 2017 is the issuance of approximately 2.4 million shares of Common Stock valued at $136.1 million in connection with the June 9, 2017 acquisition of U.S. Corrugated Holdings, Inc. (the “U.S. Corrugated Acquisition”). |
|
(2) |
In connection with the acquisition of Smurfit-Stone, there were approximately 1.4 million shares of Common Stock reserved, but unissued at the time of the acquisition for the resolution of Smurfit-Stone bankruptcy claims. At September 30, 2017, 0.2 million shares remained reserved and unissued. The remaining shares were issued in fiscal 2018 as the claim’s distribution process was completed. |
58
|
(3) |
In fiscal 2019, we repurchased approximately 2.1 million shares of our Common Stock for an aggregate cost of $88.6 million. In fiscal 2018, we repurchased approximately 3.4 million shares of our Common Stock for an aggregate cost of $195.1 million. In fiscal 2017, we repurchased approximately 1.8 million shares of our Common Stock for an aggregate cost of $93.0 million. |
|
(4) |
Includes cash dividends paid, dividend equivalent units on certain restricted stock awards and dividends declared, but unpaid related to the shares reserved but unissued at the time of the acquisition for the resolution of Smurfit-Stone bankruptcy claims. |
|
(5) |
Excludes amounts related to contingently redeemable noncontrolling interests, which are separately classified outside of permanent equity in the Consolidated Balance Sheets. |
See Accompanying Notes
59
WESTROCK COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
Year Ended September 30, |
|
|||||||||
|
(In millions) |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
|
$ |
867.9 |
|
|
$ |
1,909.3 |
|
|
$ |
698.6 |
|
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
1,511.2 |
|
|
|
1,252.2 |
|
|
|
1,112.1 |
|
|
Cost of real estate sold |
|
|
17.3 |
|
|
|
121.2 |
|
|
|
207.9 |
|
|
Deferred income tax expense (benefit) |
|
|
37.1 |
|
|
|
(1,069.4 |
) |
|
|
(20.4 |
) |
|
Share-based compensation expense |
|
|
64.2 |
|
|
|
66.8 |
|
|
|
58.0 |
|
|
Pension and other postretirement funding (more) than expense (income) |
|
|
(61.3 |
) |
|
|
(96.8 |
) |
|
|
(51.0 |
) |
|
Multiemployer pension withdrawals |
|
|
(6.3 |
) |
|
|
184.2 |
|
|
|
— |
|
|
Gain on sale of HH&B |
|
|
— |
|
|
|
— |
|
|
|
(192.8 |
) |
|
Land and Development impairments |
|
|
13.0 |
|
|
|
31.9 |
|
|
|
46.7 |
|
|
Other impairment adjustments |
|
|
38.3 |
|
|
|
13.5 |
|
|
|
56.8 |
|
|
(Gain) loss on disposal of plant, equipment and other, net |
|
|
(43.0 |
) |
|
|
2.9 |
|
|
|
(8.4 |
) |
|
Other |
|
|
(80.2 |
) |
|
|
(96.3 |
) |
|
|
(87.3 |
) |
|
Change in operating assets and liabilities, net of acquisitions and divestitures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
272.9 |
|
|
|
(580.1 |
) |
|
|
(520.1 |
) |
|
Inventories |
|
|
(110.5 |
) |
|
|
(72.1 |
) |
|
|
(48.2 |
) |
|
Other assets |
|
|
(124.6 |
) |
|
|
(67.7 |
) |
|
|
(44.7 |
) |
|
Accounts payable |
|
|
(39.1 |
) |
|
|
180.3 |
|
|
|
302.2 |
|
|
Income taxes |
|
|
7.2 |
|
|
|
130.6 |
|
|
|
(67.1 |
) |
|
Accrued liabilities and other |
|
|
(53.9 |
) |
|
|
20.7 |
|
|
|
21.5 |
|
|
Net cash provided by operating activities |
|
|
2,310.2 |
|
|
|
1,931.2 |
|
|
|
1,463.8 |
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(1,369.1 |
) |
|
|
(999.9 |
) |
|
|
(778.6 |
) |
|
Cash paid for purchase of businesses, net of cash acquired |
|
|
(3,374.2 |
) |
|
|
(239.9 |
) |
|
|
(1,588.5 |
) |
|
Cash receipts on sold trade receivables |
|
|
— |
|
|
|
461.6 |
|
|
|
411.2 |
|
|
Investment in unconsolidated entities |
|
|
(11.2 |
) |
|
|
(114.3 |
) |
|
|
(2.5 |
) |
|
Proceeds from sale of HH&B |
|
|
— |
|
|
|
— |
|
|
|
1,005.9 |
|
|
Proceeds from sale of property, plant and equipment |
|
|
119.1 |
|
|
|
23.3 |
|
|
|
52.6 |
|
|
Proceeds from property, plant and equipment insurance settlement |
|
|
25.5 |
|
|
|
7.9 |
|
|
|
3.5 |
|
|
Other |
|
|
30.3 |
|
|
|
46.2 |
|
|
|
27.7 |
|
|
Net cash used for investing activities |
|
|
(4,579.6 |
) |
|
|
(815.1 |
) |
|
|
(868.7 |
) |
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of notes |
|
|
2,498.2 |
|
|
|
1,197.3 |
|
|
|
998.4 |
|
|
Additions (repayments) to revolving credit facilities |
|
|
37.2 |
|
|
|
(115.5 |
) |
|
|
421.8 |
|
|
Additions to debt |
|
|
5,061.6 |
|
|
|
855.2 |
|
|
|
742.6 |
|
|
Repayments of debt |
|
|
(5,631.6 |
) |
|
|
(2,032.9 |
) |
|
|
(2,331.9 |
) |
|
Changes in commercial paper, net |
|
|
339.2 |
|
|
|
— |
|
|
|
— |
|
|
Other financing additions (repayments) |
|
|
10.0 |
|
|
|
(24.2 |
) |
|
|
23.9 |
|
|
Issuances of common stock, net of related minimum tax withholdings |
|
|
18.3 |
|
|
|
26.6 |
|
|
|
35.8 |
|
|
Purchases of common stock |
|
|
(88.6 |
) |
|
|
(195.1 |
) |
|
|
(93.0 |
) |
|
Cash dividends paid to stockholders |
|
|
(467.9 |
) |
|
|
(440.9 |
) |
|
|
(403.2 |
) |
|
Cash distributions paid to noncontrolling interests |
|
|
(4.3 |
) |
|
|
(33.3 |
) |
|
|
(47.0 |
) |
|
Other |
|
|
8.1 |
|
|
|
7.7 |
|
|
|
(2.8 |
) |
|
Net cash provided by (used for) financing activities |
|
|
1,780.2 |
|
|
|
(755.1 |
) |
|
|
(655.4 |
) |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
4.0 |
|
|
|
(28.2 |
) |
|
|
(2.1 |
) |
|
(Decrease) increase in cash, cash equivalents and restricted cash |
|
|
(485.2 |
) |
|
|
332.8 |
|
|
|
(62.4 |
) |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
636.8 |
|
|
|
304.0 |
|
|
|
366.4 |
|
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
151.6 |
|
|
$ |
636.8 |
|
|
$ |
304.0 |
|
60
Supplemental disclosure of cash flow information:
|
|
|
Year Ended September 30, |
|
|||||||||
|
(In millions) |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
|
|
|
|
|||||||||
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes, net of refunds |
|
$ |
226.1 |
|
|
$ |
60.5 |
|
|
$ |
227.6 |
|
|
Interest, net of amounts capitalized |
|
$ |
412.5 |
|
|
$ |
284.4 |
|
|
$ |
239.0 |
|
Supplemental schedule of non-cash operating and investing activities:
In fiscal 2017, we contributed a subsidiary to an unconsolidated joint venture and deconsolidated another subsidiary which resulted in the derecognition and recognition of certain non-cash items for the year ended September 30:
|
(In millions) |
|
2017 |
|
|
|
|
|
|
|
|
|
Derecognized: |
|
|
|
|
|
Accounts receivable |
|
$ |
14.6 |
|
|
Inventories |
|
$ |
7.6 |
|
|
Other assets |
|
$ |
12.3 |
|
|
Accounts payable |
|
$ |
(7.9 |
) |
|
Income taxes |
|
$ |
(1.4 |
) |
|
Accrued liabilities and other |
|
$ |
(12.0 |
) |
|
|
|
|
|
|
|
Recognized: |
|
|
|
|
|
Investment in unconsolidated entities |
|
$ |
(16.7 |
) |
Supplemental schedule of non-cash investing and financing activities:
|
|
|
Year Ended September 30, |
|
|||||||||
|
(In millions) |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
|
|
|
|
|||||||||
|
Non-cash investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred purchase price of trade receivables sold |
|
$ |
— |
|
|
$ |
436.7 |
|
|
$ |
422.2 |
|
Liabilities assumed in fiscal 2019 primarily relate to the KapStone Acquisition. Liabilities assumed in fiscal 2018 primarily relate to the Plymouth Packaging Acquisition and the Schlüter Acquisition. Liabilities assumed in fiscal 2017 relate to the MPS Acquisition, the U.S. Corrugated Acquisition, the July 17, 2017 acquisition (the “Island Container Acquisition”) of certain assets and liabilities of Island Container Corp. and Combined Container Industries LLC (“Island”), the acquisition of Hanna Group Pty Ltd (“Hanna Group”) in a stock purchase (the “Hannapak Acquisition”) and the March 13, 2017 acquisition of certain assets and liabilities of Star Pizza Box of Arizona, LLC, Star Pizza Box of Florida, Inc., Star Pizza Box of Ohio, LLC, Star Pizza Box of Texas, LLC and Box Logistics LLC (the “Star Pizza Acquisition” and “Star Pizza”). See “Note 3. Acquisitions and Investment” for additional information.
|
(In millions) |
|
Year Ended September 30, |
|
|||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
|
|
|
|
|||||||||
|
Fair value of assets acquired, including goodwill |
|
$ |
5,948.9 |
|
|
$ |
303.2 |
|
|
$ |
3,342.4 |
|
|
Cash consideration for the purchase of businesses, net of cash acquired |
|
|
(3,369.3 |
) |
|
|
(242.1 |
) |
|
|
(1,592.0 |
) |
|
Stock issued in business combinations |
|
|
(70.1 |
) |
|
|
— |
|
|
|
(136.1 |
) |
|
Fair value of share-based awards issued in business combinations |
|
|
(70.8 |
) |
|
|
— |
|
|
|
(1.9 |
) |
|
Deferred payments and (unpaid) unreceived working capital or escrow |
|
|
16.6 |
|
|
|
(25.0 |
) |
|
|
4.6 |
|
|
Liabilities and noncontrolling interest assumed |
|
$ |
2,455.3 |
|
|
$ |
36.1 |
|
|
$ |
1,617.0 |
|
See Accompanying Notes
61
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Note 1. |
Description of Business and Summary of Significant Accounting Policies |
Description of Business
Unless the context otherwise requires, “we”, “us”, “our”, “WestRock” and “the Company” refer to the business of WestRock Company, its wholly-owned subsidiaries and its partially-owned consolidated subsidiaries for periods on or after November 2, 2018 and to WRKCo Inc. (formerly known as WestRock Company) for periods prior to November 2, 2018.
WestRock is a multinational provider of paper and packaging solutions for consumer and corrugated packaging markets. 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 in North America, South America, Europe, Asia and Australia.
WestRock was formed on March 6, 2015 for the purpose of effecting the Combination and, prior to the Combination, did not conduct any activities other than those incidental to its formation and the matters contemplated by the Business Combination Agreement. On July 1, 2015, pursuant to the Business Combination Agreement, RockTenn and MWV completed a strategic combination of their respective businesses and RockTenn and MWV each became wholly-owned subsidiaries of WestRock. RockTenn was the accounting acquirer in the Combination.
On May 15, 2016, WestRock completed the Separation, pursuant to which we disposed of our former Specialty Chemicals segment in its entirety and ceased to consolidate its assets, liabilities and results of operations in our consolidated financial statements and treated the former Specialty Chemicals segment as discontinued operations.
On January 23, 2017, we announced we had entered into an agreement with certain subsidiaries of Silgan Holdings Inc. (“Silgan”) under which Silgan would purchase HH&B for approximately $1.025 billion in cash plus the assumption of approximately $25 million in foreign pension liabilities. Accordingly, in the second quarter of fiscal 2017, all of the assets and liabilities of HH&B were reported as assets and liabilities held for sale. We discontinued recording depreciation and amortization while the assets were held for sale. On April 6, 2017, we announced that we had completed the HH&B Sale. We used the proceeds from the HH&B Sale in connection with the MPS Acquisition. We recorded a pre-tax gain on sale of HH&B of $192.8 million in fiscal 2017.
On June 6, 2017, we completed the MPS Acquisition. MPS is a global provider of print-based specialty packaging solutions and its differentiated product offering includes premium folding cartons, inserts, labels and rigid packaging. MPS is reported in our Consumer Packaging segment. See “Note 3. Acquisitions and Investment” for additional information.
On November 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 owns Victory Packaging, a packaging solutions distribution company with facilities in the U.S., Canada and Mexico. KapStone is reported in our Corrugated Packaging segment. WRKCo (formerly known as WestRock Company) was the accounting acquirer in the transaction; therefore, the historical consolidated financial statements of WRKCo for periods prior to the KapStone Acquisition are also considered to be the historical financial statements of the Company. See “Note 3. Acquisitions and Investment” for additional information.
Consolidation
The consolidated financial statements include our accounts and the accounts of our partially-owned consolidated subsidiaries. Equity investments in which we exercise significant influence but do not control and are not the primary beneficiary are accounted for using the equity method. Investments in which we are not able to
62
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
exercise significant influence over the investee are accounted for under the cost method. Our equity and cost method investments are not significant either individually or in the aggregate. We have eliminated all significant intercompany accounts and transactions. See “Note 7. Segment Information” for our equity method investments.
Reclassifications
We aligned our financial results for all periods presented to align our reportable segments as discussed in “Note 7. Segment Information”, we have accounted for the retrospective adoption of certain accounting standards as discussed in “Note 1. Description of Business and Summary of Significant Accounting Policies – New Accounting Standards - Recently Adopted”, and we have accounted for changes in our Rule 3-10 of Regulation S-X disclosures as outlined in “Note 14. Selected Condensed Consolidating Financial Statements of Parent, Issuer, Guarantors and Non-Guarantors”.
Use of Estimates
Preparing consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates, and the differences could be material.
The most significant accounting estimates inherent in the preparation of our consolidated financial statements include estimates to evaluate the recoverability of goodwill, intangibles and property, plant and equipment, to determine the useful lives of assets that are amortized or depreciated, and to measure income taxes, self-insured obligations, restructuring activities and allocate the purchase price of an acquired business to the fair value of acquired assets and liabilities. In addition, significant estimates form the basis for our reserves with respect to collectability of accounts receivable, inventory valuations, pension benefits, deferred tax asset valuation allowances and certain benefits provided to current and retired employees. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial techniques. We regularly evaluate these significant factors and make adjustments where facts and circumstances dictate.
Revenue Recognition
We generally recognize revenue on a point-in-time basis when the customer takes title to the goods and assumes the risks and rewards for the goods. Additionally, we manufacture certain customized products that have no alternative use to us (since they are made to specific customer orders), and we believe that for certain customers we have a legally enforceable right to payment for performance completed to date on these products, including a reasonable profit. For products that meet these two criteria, we recognize revenue “over time”. This results in revenue recognition prior to the date of shipment or title transfer for these products and increases the contract asset (unbilled receivables) balance with a corresponding reduction in finished goods inventory on our balance sheet.
We net, against our gross sales, provisions for discounts, returns, allowances, customer rebates and other adjustments. Such adjustments are based on historical experience which is consistent with the most likely method as provided in Financial Accounting Standards Board’s (“FASB”) Accounting Standard Codification (“ASC”) 606 “Revenue from Contracts with Customers” (“ASC 606”).
Shipping and Handling Costs
We classify shipping and handling costs, such as freight to our customers’ destinations, as a component of cost of goods sold. When shipping and handling costs are included in the sales price charged for our products, they are recognized in net sales since we treat shipping and handling as fulfilment activities.
63
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash Equivalents
We consider all highly liquid investments that mature three months or less from the date of purchase to be cash equivalents. The carrying amounts we report in the consolidated balance sheets for cash and cash equivalents approximate fair market values. We place our cash and cash equivalents primarily with large credit worthy banks, which limits the amount of our credit exposure.
Accounts Receivable and Allowances
We derive our accounts receivable from revenue earned from customers located primarily in North America, South America, Europe, Asia and Australia. Given our diverse customer base, we have limited exposure to credit loss from any particular customer or industry segment, and hence we generally do not require collateral. We perform an evaluation of probable credit losses inherent in our accounts receivable at each balance sheet date. Such an evaluation includes consideration of historical loss experience, trends in customer payment frequency, present economic conditions, and judgment about the future financial health of our customers and industry sector. The average of our receivables collection is within 30 to 60 days. We sell certain receivables under our A/R Sales Agreement.
We state accounts receivable at the amount owed by the customer, net of an allowance for estimated uncollectible accounts, returns and allowances, cash discounts and other adjustments. We do not discount accounts receivable because we generally collect accounts receivable over a relatively short time. We account for sales and other taxes that are imposed on and concurrent with individual revenue-producing transactions between a customer and us on a net basis which excludes the taxes from our net sales. We charge off receivables when they are determined to be no longer collectible. In fiscal 2019, 2018 and 2017 our bad debt expense was not significant.
The following table represents a summary of the changes in the reserve for allowance for doubtful accounts, returns and allowances and cash discounts for fiscal 2019, 2018 and 2017 (in millions):
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Balance at beginning of fiscal year |
|
$ |
49.7 |
|
|
$ |
45.8 |
|
|
$ |
36.5 |
|
|
Reduction in sales and charges to costs and expenses |
|
|
259.6 |
|
|
|
202.8 |
|
|
|
215.6 |
|
|
Deductions |
|
|
(256.1 |
) |
|
|
(198.9 |
) |
|
|
(206.3 |
) |
|
Balance at end of fiscal year |
|
$ |
53.2 |
|
|
$ |
49.7 |
|
|
$ |
45.8 |
|
Inventories
We value the majority of our U.S. inventories at the lower of cost or market, with cost determined on the last-in first-out (“LIFO”) basis. We value all other inventories at the lower of cost and net realizable value, with cost determined using methods that approximate cost computed on a first-in first-out inventory valuation method (“FIFO”) basis. These other inventories represent primarily foreign inventories, distribution business inventories, spare parts inventories and certain inventoried supplies and aggregate to approximately 39% and 31% of FIFO cost of all inventory at September 30, 2019 and 2018, respectively.
Prior to the application of the LIFO method, our U.S. operating divisions use a variety of methods to estimate the FIFO cost of their finished goods inventories. Such methods include standard costs, or average costs computed by dividing the actual cost of goods manufactured by the tons produced and multiplying this amount by the tons of inventory on hand. Lastly, certain operations calculate a ratio, on a plant by plant basis, the numerator of which is the cost of goods sold and the denominator is net sales. This ratio is applied to the estimated sales value of the finished goods inventory. Variances and other unusual items are analyzed to determine whether it is appropriate to include those items in the value of inventory. Examples of variances and unusual items that are considered to be current period charges include, but are not limited to, abnormal production levels, freight, handling costs, and wasted materials (spoilage). Cost includes raw materials and supplies, direct labor, indirect labor related to the manufacturing process and depreciation and other factory overheads. Our inventoried spare parts are measured at average cost.
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Property, Plant and Equipment
We state property, plant and equipment at cost less accumulated depreciation. Cost includes major expenditures for improvements and replacements that extend useful lives, increase capacity, increase revenues or reduce costs, while normal maintenance and repairs are expensed as incurred. During fiscal 2019, 2018 and 2017, we capitalized interest of approximately $23.8 million, $8.2 million and $7.0 million, respectively. For financial reporting purposes, we provide depreciation and amortization primarily on a straight-line method generally over the estimated useful lives of the assets as follows:
|
Buildings and building improvements |
|
15-40 years |
|
Machinery and equipment |
|
3-25 years |
|
Transportation equipment |
|
3-8 years |
Generally, our machinery and equipment have estimated useful lives between 3 and 25 years; however, select portions of machinery and equipment primarily at our mills have estimated useful lives up to 44 years. Greater than 90% of the cost of our mill assets have useful lives of 25 years or less. Leasehold improvements are depreciated over the shorter of the asset life or the lease term, generally between 3 and 10 years.
Goodwill and Long-Lived Assets
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. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. However, two or more components of an operating segment are aggregated and deemed a single reporting unit if the components have similar economic characteristics. The amount of goodwill acquired in a business combination that is assigned to one or more reporting units as of the acquisition date is the excess of the purchase price of the acquired businesses (or portion thereof) included in the reporting unit, over the fair value assigned to the individual assets acquired or liabilities assumed. Goodwill is assigned to the reporting unit(s) expected to benefit from the synergies of the combination even though other assets or liabilities of the acquired entity may not be assigned to that reporting unit. We determine recoverability by comparing the estimated fair value of the reporting unit to which the goodwill applies to the carrying value, including goodwill, of that reporting unit. We determine the fair value of each reporting unit using the discounted cash flow method or, as appropriate, a combination of the discounted cash flow method and the guideline public company method.
The goodwill impairment model is a two-step process. ASC 350 allows a qualitative assessment, prior to step one, 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 step one. In step one, 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. Factors that management must estimate when performing this step in the process include, among other items, sales volume, prices, inflation, discount rates, exchange rates, tax rates, anticipated synergies and productivity improvements resulting from acquisitions, capital expenditures and continuous improvement projects. The assumptions we use to estimate future cash flows are consistent with the assumptions that the reporting units use for internal planning purposes, updated to reflect current expectations. The guideline public company method involves comparing the reporting unit to similar companies whose stock is freely traded on an organized exchange. The fair values determined by the discounted cash flow and guideline public company methods were weighted to arrive at the concluded fair value of the reporting unit. However, in instances where comparisons to our peers was less meaningful, no weight was placed on the guideline public company method to arrive at the concluded fair value of the reporting unit. 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 would complete step two of the impairment analysis. Step two involves determining the implied fair value of the reporting unit’s goodwill and comparing it to the
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carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, we recognize an impairment loss in an amount equal to that excess. While Accounting Standard Update (“ASU 2017-04”), “Simplifying the Test for Goodwill Impairment”, amends the guidance in ASC 350, we have not yet adopted the ASU and do not expect these provisions to have a material impact on our consolidated financial statements.
During the third quarter of fiscal 2019, we tested our goodwill for potential impairment on an interim basis due to changing market conditions, including the impact on the trading price of our Common Stock. All reporting units that have goodwill were noted to have a fair value that exceeded their carrying values as of the interim impairment test date. The discount rate used for each reporting unit ranged from 8.5% to 14.0%. We used perpetual growth rates in the reporting units that have goodwill ranging from 0.0% to 1.0%. Our Consumer Packaging and Victory Packaging reporting units had fair values that exceeded their respective carrying values by less than 10% each, primarily due to the fair value accounting related to the Combination and the MPS Acquisition (for Consumer Packaging) and the KapStone Acquisition (for Victory Packaging). 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 that has goodwill, the fair value of each of our reporting units would have continued to exceed its carrying value, except for the Consumer Packaging reporting unit. The Consumer Packaging and Victory Packaging reporting units had $3,590.6 million and $40.2 million of goodwill, respectively, at September 30, 2019. We reviewed the carrying value of our goodwill at the beginning of the fourth quarter and continually monitored industry 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, if actual results are not consistent with our assumptions and estimates, we may be exposed to impairment losses that could be material.
We follow the provisions included in ASC 360, “Property, Plant and Equipment” in determining whether the carrying value of any of our long-lived assets, including amortizing intangibles other than goodwill, is impaired. The ASC 360 test is a three-step test for assets that are “held and used” as that term is defined by ASC 360. We determine whether indicators of impairment are present. We review long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the long-lived asset might not be recoverable. If we determine that indicators of impairment are present, we determine whether the estimated undiscounted cash flows for the potentially impaired assets are less than the carrying value. This requires management to estimate future cash flows through operations over the remaining useful life of the asset and its ultimate disposition. The assumptions we use to estimate future cash flows are consistent with the assumptions we use for internal planning purposes, updated to reflect current expectations. If our estimated undiscounted cash flows do not exceed the carrying value, we estimate the fair value of the asset and record an impairment charge if the carrying value is greater than the fair value of the asset. We estimate fair value using discounted cash flows, observable prices for similar assets, or other valuation techniques. We record assets classified as “held for sale” at the lower of their carrying value or estimated fair value less anticipated costs to sell.
Included in our long-lived assets are certain identifiable intangible assets. These intangible assets are amortized based on the approximate pattern in which the economic benefits are consumed or straight-line if the pattern was not reliably determinable. Estimated useful lives range from 1 to 40 years and have a weighted average life of approximately 15.3 years.
Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance. Future events could cause us to conclude that impairment indicators exist and that assets associated with a particular operation are impaired. Evaluating impairment also requires us to estimate future operating results and cash flows, which also require judgment by management. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
Restructuring and Other Costs
Our restructuring and other costs include primarily items such as restructuring portions of our operations, acquisition costs, integration costs and divestiture costs. We have restructured portions of our operations from time to time, have current restructuring initiatives taking place, and it is likely that we will engage in future restructuring activities. Identifying and calculating the cost to exit these operations requires certain assumptions to be made, the most significant of which are anticipated future liabilities, including severance costs, leases and other contractual
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obligations, and the adjustment of property, plant and equipment to net realizable value. We believe our estimates are reasonable, considering our knowledge of the industries we operate in, previous experience in exiting activities and valuations we may obtain from independent third parties. Although our estimates have been reasonably accurate in the past, significant judgment is required, and these estimates and assumptions may change as additional information becomes available and facts or circumstances change. See “Note 4. Restructuring and Other Costs” for additional information, including a description of the type of costs incurred.
Business Combinations
From time to time, we may enter into business combinations. In accordance with ASC 805, “Business Combinations”, we generally recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values as of the date of acquisition. We measure goodwill as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities including those related to debt, pensions and other postretirement plans, uncertain tax positions, contingent consideration and contingencies. Significant estimates and assumptions include subjective and/or complex judgements regarding items such as discount rates, customer attrition rates, economic lives and other factors, including estimating future cash flows that we expect to generate from the acquired assets.
The acquisition method of accounting also requires us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on our financial condition and results of operations. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record future impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be increased or decreased, or the acquired asset could be impaired.
Fair Value of Financial Instruments and Nonfinancial Assets and Liabilities
We estimate fair values in accordance with ASC 820, “Fair Value Measurement.” We define fair value as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Financial instruments not recognized at fair value on a recurring or nonrecurring basis include cash and cash equivalents, accounts receivables, certain other current assets, short-term debt, accounts payable, certain other current liabilities and long-term debt. With the exception of long-term debt, the carrying amounts of these financial instruments approximate their fair values due to their short maturities. The fair values of our long-term debt are estimated using quoted market prices or are based on the discounted value of future cash flows. We disclose the fair value of long-term debt in “Note 13. Debt” and our pension and postretirement assets and liabilities in “Note 5. Retirement Plans”. We have, or from time to time may have, financial instruments recognized at fair value including supplemental retirement savings plans (“Supplemental Plans”) that are nonqualified deferred compensation plans pursuant to which assets are invested primarily in mutual funds, interest rate derivatives, commodity derivatives or other similar class of assets or liabilities, the fair value of which are not significant. We measure the fair value of our mutual fund investments based on quoted prices in active markets, and our derivative contracts, if any, based on discounted cash flows.
We measure certain nonfinancial assets and nonfinancial liabilities at fair value on a nonrecurring basis. These assets and liabilities include cost and equity method investments when they are deemed to be other-than-temporarily impaired, assets acquired and liabilities assumed in a merger or an acquisition or in a nonmonetary exchange, and property, plant and equipment and goodwill and other intangible assets that are written down to fair value when they are held for sale or determined to be impaired. Given the nature of nonfinancial assets and liabilities, evaluating their fair value from the perspective of a market participant is inherently complex.
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Assumptions and estimates about future values can be affected by a variety of internal and external factors. Changes in these factors may require us to revise our estimates and could result in future impairment charges for goodwill and acquired intangible assets, or retroactively adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with business combinations. These adjustments could have a material impact on our financial condition and results of operations. We discuss fair values in more detail in “Note 12. Fair Value”.
Derivatives
We are exposed to interest rate risk, commodity price risk and foreign currency exchange risk. To manage these risks, from time to time and to varying degrees, we may enter into a variety of financial derivative transactions and certain physical commodity transactions that are determined to be derivatives. Interest rate swaps may be entered into to manage the interest rate risk associated with a portion of our outstanding debt. Interest rate swaps are either designated for accounting purposes as cash flow hedges of forecasted floating interest payments on variable rate debt or fair value hedges of fixed rate debt, or we may elect not to treat them as accounting hedges. Swaps or forward contracts on certain commodities may be entered into to manage the price risk associated with forecasted purchases or sales of those commodities. In addition, certain commodity financial derivative contracts and physical commodity contracts that are determined to be derivatives may not be designated as accounting hedges because either they do not meet the criteria for treatment as accounting hedges under ASC 815, “Derivatives and Hedging”, or we elect not to treat them as accounting hedges under ASC 815. Generally, we elect the normal purchase, normal sale scope exception for physical commodity contracts that are determined to be derivatives. We may also enter into forward contracts to manage our exposure to fluctuations in foreign currency rates with respect to transactions denominated in foreign currencies. These also can either be designated for accounting purposes as cash flow hedges or not so designated.
Outstanding financial derivative instruments expose us to credit loss in the event of nonperformance by the counterparties to the derivative agreements. Our credit exposure related to these financial instruments is represented by the fair value of contracts reported as assets. We manage our exposure to counterparty credit risk through minimum credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk. We may enter into financial derivative contracts that may contain credit-risk-related contingent features which could result in a counterparty requesting immediate payment or demanding immediate and ongoing full overnight collateralization on derivative instruments in net liability positions.
For financial derivative instruments that are designated as a cash flow hedge for accounting purposes, the entire change in fair value of the financial derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction, and in the same period or periods during which the forecasted transaction affects earnings.
We have at times entered into interest rate swap agreements that effectively modified our exposure to interest rate risk by converting a portion of our interest payments on floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. These agreements typically involved the receipt of floating rate amounts in exchange for fixed interest rate payments over the life of the agreements without an exchange of the underlying principal amount.
At September 30, 2019, the notional amounts of interest rate and foreign currency exchange contract derivatives were $600.0 million and $351.0 million, respectively. At September 30, 2019, the notional amount of natural gas commodity derivatives was 8.4 MMBtu. The fair value of these derivative instruments was not significant as of September 30, 2019. At September 30, 2018, there were no interest rate or commodity derivatives outstanding, and the notional amount of foreign currency derivatives was $356.0 million. See “Note 13. Debt” for additional information on the foreign currency derivatives.
Health Insurance
We are self-insured for the majority of our group health insurance costs. However, we seek to limit our health insurance costs by entering into certain stop loss insurance coverage. Due to mergers, acquisitions and other factors, we may have plans that do not include stop loss insurance. We calculate our group health insurance reserve on an undiscounted basis based on estimated reserve rates. We utilize claims lag data provided by our
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claims administrators to compute the required estimated reserve rate. We calculate our average monthly claims paid using the actual monthly payments during the trailing 12-month period. At that time, we also calculate our required reserve using the reserve rates discussed above. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our group health insurance costs.
Workers’ Compensation
We purchase large risk deductible workers’ compensation policies for the majority of our workers’ compensation liabilities that are subject to various deductibles to limit our exposure. We calculate our workers’ compensation reserves on an undiscounted basis based on estimated actuarially calculated development factors. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our workers' compensation costs.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amount and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. All deferred tax assets and liabilities are classified as noncurrent in our consolidated balance sheet in accordance with ASU 2015-17, “Income Taxes: Balance Sheet Classification of Deferred Taxes.”
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, 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. In the event we were to determine that we would be able to realize or not realize our deferred income tax assets in the future in their net recorded amount, we would make an adjustment to the valuation allowance, which would reduce or increase the provision for income taxes, respectively.
Certain provisions of ASC 740, “Income Taxes” provide that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. We use significant judgment in determining (i) 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. 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.
On December 22, 2017, the Tax Act (as hereinafter defined) was signed into law. The Tax Act contained significant changes to corporate taxation, including (i) the reduction of the corporate income tax rate to 21%, (ii) the acceleration of expensing for certain business assets, (iii) the one-time transition tax related to the transition of U.S. international tax from a worldwide tax system to a territorial tax system, (iv) the repeal of the domestic production deduction, (v) additional limitations on the deductibility of interest expense and (vi) expanded limitations on executive compensation. See “Note 6. Income Taxes.”
Pension and Other Postretirement Benefits
We account for pension and other postretirement benefits in accordance with ASC 715, “Compensation – Retirement Benefits”. Accordingly, we recognize the funded status of our pension plans as assets or liabilities in our consolidated balance sheets. The funded status is the difference between our projected benefit obligations and fair value of plan assets. The determination of our obligation and expense for pension and other postretirement benefits
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is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. We describe these assumptions in “Note 5. Retirement Plans”, which include, among others, the discount rate, expected long-term rates of return on plan assets and rates of increase in compensation levels. As provided under ASC 715, we defer actual results that differ from our assumptions, i.e. actuarial gains and losses, and amortize the difference over future periods. Therefore, these differences generally affect our recognized expense and funding requirements in future periods. Actuarial gains and losses occur when actual experience differs from the estimates used to determine the components of net periodic pension cost and when certain assumptions used to determine the fair value of the plan assets or projected benefit obligation are updated, such as but not limited to, changes in the discount rate, plan amendments, differences between actual and expected returns on plan assets, mortality assumptions and plan remeasurement.
The amount of unrecognized actuarial gains and losses recognized in the current year’s operations is based on amortizing the unrecognized gains or losses for each plan that exceed the larger of 10% of the projected benefit obligation or the fair value of plan assets, also known as “the corridor”. The amount of unrecognized gain or loss that exceeds the corridor is amortized over the average future service of the plan participants or the average life expectancy of inactive plan participants for plans where all or almost all of the plan participants are inactive. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension and other postretirement benefit obligations and our future expense.
Share-Based Compensation
We recognize expense for share-based compensation plans based on the estimated fair value of the related awards in accordance with ASC 718, “Compensation – Stock Compensation”. Pursuant to our incentive stock plans, we can grant options and restricted stock, stock appreciation rights (“SAR” or “SARs”) and restricted stock units to employees and our non-employee directors. The grants generally vest over a period of up to three years depending on the nature of the award, except for non-employee director grants, which typically vest over a period of up to one year. The majority of our restricted stock grants to employees generally contain performance or market conditions that must be met in conjunction with a service requirement for the shares to vest, others contain only a service requirement. We charge compensation under the plan to earnings over each increment’s individual vesting period. See “Note 21. Share-Based Compensation” for additional information.
Asset Retirement Obligations
We account for asset retirement obligations in accordance with ASC 410, “Asset Retirement and Environmental Obligations”. A liability and an asset are recorded equal to the present value of the estimated costs associated with the retirement of long-lived assets where a legal or contractual obligation exists and the liability can be reasonably estimated. The liability is accreted over time and the asset is depreciated over the remaining life of the related asset. Upon settlement of the liability, we will recognize a gain or loss for any difference between the settlement amount and the liability recorded. Asset retirement obligations with indeterminate settlement dates are not recorded until such time that a reasonable estimate may be made. Our asset retirement obligations consist primarily of landfill closure and post-closure costs at certain of our mills. At September 30, 2019 and September 30, 2018, we had recorded liabilities of $72.5 million and $72.9 million, respectively. The liabilities are primarily reflected as other long-term liabilities on the consolidated balance sheets.
Repair and Maintenance Costs
We expense routine repair and maintenance costs as we incur them. We defer certain expenses we incur during planned major maintenance activities and recognize the expenses ratably over the shorter of the estimated interval until the next major maintenance activity or the life of the deferred item. This maintenance is generally performed every twelve to twenty-four months and has a significant impact on our results of operations in the period performed primarily due to lost production during the maintenance period. Planned major maintenance costs deferred at September 30, 2019 and 2018 were $124.3 million and $83.4 million, respectively. The assets are recorded as other assets on the consolidated balance sheets. The increase in fiscal 2019 was primarily due to the acquired KapStone mills, as well as the varied timing and scope of outages.
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Foreign Currency
We translate the assets and liabilities of our foreign operations from their functional currency into U.S. dollars at the rate of exchange in effect as of the balance sheet date. We reflect the resulting translation adjustments in equity. We translate the revenues and expenses of our foreign operations at a daily average rate prevailing for each month during the fiscal year. We include gains or losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables, in the consolidated statements of income. We recorded a gain on foreign currency transactions of $18.5 million, $12.2 million and $4.3 in fiscal 2019, 2018 and 2017, respectively.
Environmental Remediation Costs
We accrue for losses associated with our environmental remediation obligations when it is probable that we have incurred a liability and the amount of the loss can be reasonably estimated. We generally recognize accruals for estimated losses from our environmental remediation obligations no later than completion of the remedial feasibility study and adjust such accruals as further information develops or circumstances change. We recognize recoveries of our environmental remediation costs from other parties as assets when we deem their receipt probable. See “Note 18. Commitments and Contingencies.”
New Accounting Standards - Recently Adopted
During fiscal 2019, we filed with the SEC a Current Report on Form 8-K to provide revisions to our consolidated financial statements, and the notes thereto for the three years ended September 30, 2018 and other related disclosures, including the retrospective adoption of certain accounting standards for all periods therein, including, but not limited to, ASU 2017-07 “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, ASU 2016-15 “Classification of Certain Cash Receipts and Cash Payments” (which amends the guidance in ASC 230, “Statement of Cash Flows”) and ASU 2016-18 “Restricted Cash” (which amends the guidance in the ASC 230, “Statement of Cash Flows”). See “Note 1. Description of Business and Summary of Significant Accounting Policies — New Accounting Standards - Recently Adopted” of the Notes to Consolidated Financial Statements section in Exhibit 99.1 of the May 9, 2019 Form 8-K for information on new accounting standards adopted on October 1, 2018 on a retrospective basis for all periods therein.
In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The amendments in this update provide financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in the period of adoption or retrospectively in each period in which the effect of the change in the U.S. federal corporate income tax rate in the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) (or portion thereof) is recorded. This ASU requires financial statement preparers to disclose (i) a description of the accounting policy for releasing income tax effects from accumulated other comprehensive income; (ii) whether they elect to reclassify the stranded income tax effects from the Tax Act; and (iii) information about the other income tax effects that are reclassified. The amendments affect any organization that is required to apply the provisions of ASC 220, “Income Statement – Reporting Comprehensive Income”, and has items of other comprehensive income in which the related tax effects are included as required by GAAP. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We adopted the provisions of this ASU for fiscal 2020 on October 1, 2019 and we estimate that the reclassification of stranded tax effects from accumulated other comprehensive income to retained earnings to be approximately $70 to $75 million.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). The amendments in this ASU better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this ASU also make certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. In October 2018, the FASB issued ASU 2018-16 “Derivatives and Hedging: Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a
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Benchmark Interest Rate for Hedge Accounting” (“ASU 2018-16”), which adds the overnight index rate based on the Secured Overnight Financing Rate to the list of U.S. benchmark interest rates in ASC 815 that are eligible to be hedged. In April 2019, the FASB issued ASU 2019-04 “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU 2019-04”), which addresses targeted issues related to fair value hedges and clarifies certain transition requirements. The provisions of ASU 2017-12, ASU 2018-16 and ASU 2019-04 are concurrently effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and should be applied prospectively. We early adopted the provisions of ASU 2017-12, ASU 2018-16 and ASU 2019-04 in the fourth quarter of fiscal 2019. These provisions did not have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 “Leases”, which is codified in ASC 842 “Leases” (“ASC 842”) and supersedes current lease guidance in ASC 840 “Leases”. These provisions require lessees to put a right-of-use asset and lease liability on their balance sheet for operating and financing leases that have a term of more than one year. Expense will be recognized in the income statement similar to current accounting guidance. For lessors, this ASU modifies the classification criteria and the accounting for sales-type and direct financing leases. Entities will need to disclose qualitative and quantitative information about their leases, including characteristics and amounts recognized in the financial statements. These provisions are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Prior to the FASB issuing ASU 2018-11 “Leases”, entities were required to use a modified retrospective approach upon adoption to recognize and measure leases at the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, which provides entities the option to initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, the comparative periods presented in the financial statements would continue to be in accordance with current GAAP. In December 2018, the FASB issued ASU 2018-20 “Leases: Narrow-scope Improvements for Lessors” to help lessors apply ASC 842. This ASU allows lessors to make an accounting policy election not to evaluate sales taxes and other similar taxes collected from lessees, requires lessors to exclude from variable payments certain lessor costs paid directly by lessee to third parties on the lessor’s behalf and provides clarification on variable payments allocated to lease and non-lease components. In March 2019, the FASB issued ASU 2019-01 “Leases (Topic 842): Codification Improvements”, which (a) provides guidance on lessors’ accounting for acquisition costs that will now generally be included in the measurement of fair value of the underlying asset, (b) clarifies that lessors in scope of ASC 942, “Financial Services—Depository and Lending” (“ASC 942”), have to follow cash flow presentation guidance under ASC 942 for payments received by lessors and (c) provides an exemption to all companies from interim transition disclosure requirements of ASC 250 “Accounting Changes and Error Corrections” (“ASC 250”), in addition to the already exempted annual disclosure requirement of ASC 250. ASU 2019-01 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years; however, companies are permitted to early adopt ASU 2019-01 concurrent with, or any time after the adoption of, ASC 842.
We adopted the provisions of ASC 842 for fiscal 2020 on October 1, 2019, using the modified retrospective approach and as a result will not restate prior periods. We have also elected the package of three practical expedients permitted within the standard pursuant to which we will not reassess initial direct costs, lease classification or whether our contracts contain or are leases. We have also made an accounting policy election to not recognize right-of-use assets and liability for leases with a term of 12 months or less unless the lease includes an option to renew or purchase the underlying asset that are reasonably certain to be exercised. Upon adoption, we estimate to recognize a right-of-use asset of approximately $730 million to $760 million with its corresponding lease liability representing the present value of the remaining minimum rental payments relating to leases currently classified as operating leases. The adoption of ASC 842 does not have a significant impact on the recognition, measurement, or presentation of lease expenses within the consolidated statements of income or the consolidated statements of cash flows. We have also identified and implemented changes to our accounting policies and practices, business processes, systems and designed and implemented specific controls over our evaluation of the impact of the new standard and related guidance on us upon adoption, and on an ongoing basis, including disclosure requirements and the collection of relevant data into the reporting process. While we have substantially completed the process of quantifying the impacts that will result from applying the new standard, our assessment will be finalized during the first quarter of fiscal 2020.
New Accounting Standards - Recently Issued
In October 2018, the FASB issued ASU 2018-18 “Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606”, which provides targeted amendments to ASC 808, “Collaborative
72
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
arrangements” (“ASC 808”) and ASC 606. The amendments in this ASU require transactions between participants in a collaborative arrangement to be accounted for under ASC 606 when the counterparty is a customer. This ASU precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. This ASU also amends ASC 808 to refer to the unit-of-account guidance in ASC 606 and requires it to be used only when assessing whether a transaction is in scope of ASC 606. This ASU is effective for fiscal years ending after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of this ASU.
In October 2018, the FASB issued ASU 2018-17 “Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities.” This ASU changes how entities evaluate decision-making fees under the variable interest entity guidance. To determine whether decision-making fees represent a variable interest, an entity considers indirect interests held through related parties under common control on a proportionate basis, rather than in their entirety, as currently required under GAAP. This ASU is effective for fiscal years ending after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of this ASU.
In August 2018, the FASB issued ASU 2018-15 “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. The provisions may be adopted prospectively or retrospectively. This ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact of this ASU.
In August 2018, the FASB issued ASU 2018-14 “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans”. The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans to remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. These provisions will be applied retrospectively. This ASU is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We are currently evaluating the impact of this ASU.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments – Credit losses: Measurement of Credit Losses on financial Instruments (Topic 326)” (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and will be applied as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period for which the guidance is effective. In April 2019, the FASB issued ASU 2019-04 which addresses issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. In May 2019, the FASB issued ASU 2019-05 “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief” (“ASU 2019-05”), which provides targeted transition relief allowing entities to make an irrevocable one-time election upon adoption of the new credit losses standard to measure financial assets previously measured at amortized cost (except held-to-maturity securities) using the fair value option. The provisions of ASU 2019-04 related to Topic 326 and ASU 2019-05 are effective concurrent with the adoption of ASU 2016-13. We are currently evaluating the impact of these ASUs and do not expect these provisions to have a material impact on our consolidated financial statements.
|
Note 2. |
Revenue Recognition |
We adopted ASC 606 and all related amendments on October 1, 2018 using the modified retrospective method. We recorded the transition adjustment to the opening balance of retained earnings to account for the cumulative effect of adopting ASC 606. Since we used the modified retrospective method, we have not restated comparative information, which continues to be reported under the accounting standard in effect for those periods.
73
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We manufacture certain customized products that have no alternative use to us (since they are made to specific customer orders), and we believe that for certain customers we have a legally enforceable right to payment for performance completed to date on these products, including a reasonable profit. For manufactured products that meet these two criteria, we recognize revenue “over time”. This results in revenue recognition prior to the date of shipment or title transfer for these products and increases the contract asset (unbilled receivables) balance with a corresponding reduction in finished goods inventory on our balance sheet. Due to the recurring nature of our sales of these customized products, the impact of ASC 606 is not expected to have a material impact on our consolidated financial statements in future periods.
The transition adjustment resulted in revenue acceleration of $183.7 million with a corresponding acceleration of cost of $133.4 million. The net increase to the opening balance of retained earnings was $43.5 million (net of tax expense of $6.8 million) as of October 1, 2018 due to the cumulative impact of adopting the new revenue standard. The adoption of ASC 606 had the following impact on our consolidated financial statements:
Consolidated Statements of Income
|
|
|
Year Ended September 30, 2019 |
|
|||||||||
|
(In millions) |
|
As Reported |
|
|
Balances Without Adoption of ASC 606 |
|
|
Impact of Adoption Increase/(Decrease) |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
18,289.0 |
|
|
$ |
18,297.7 |
|
|
$ |
(8.7 |
) |
|
Cost of goods sold |
|
$ |
14,540.0 |
|
|
$ |
14,555.4 |
|
|
$ |
(15.4 |
) |
|
Income tax expense |
|
$ |
(276.8 |
) |
|
$ |
(275.2 |
) |
|
$ |
(1.6 |
) |
|
Consolidated net income |
|
$ |
867.9 |
|
|
$ |
862.8 |
|
|
$ |
5.1 |
|
Consolidated Balance Sheet
|
|
|
September 30, 2019 |
|
|||||||||
|
(In millions) |
|
As Reported |
|
|
Balances Without Adoption of ASC 606 |
|
|
Impact of Adoption Increase/(Decrease) |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
2,107.5 |
|
|
$ |
2,237.3 |
|
|
$ |
(129.8 |
) |
|
Other current assets |
|
$ |
496.2 |
|
|
$ |
308.2 |
|
|
$ |
188.0 |
|
|
Other current liabilities |
|
$ |
571.8 |
|
|
$ |
570.2 |
|
|
$ |
1.6 |
|
|
Retained earnings |
|
$ |
1,997.1 |
|
|
$ |
1,948.5 |
|
|
$ |
48.6 |
|
Consolidated Statement of Cash Flows
|
|
|
Year Ended September 30, 2019 |
|
|||||||||
|
(In millions) |
|
As Reported |
|
|
Balances Without Adoption of ASC 606 |
|
|
Impact of Adoption Increase/(Decrease) |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
|
$ |
867.9 |
|
|
$ |
862.8 |
|
|
$ |
5.1 |
|
|
Other assets |
|
$ |
(124.6 |
) |
|
$ |
(133.3 |
) |
|
$ |
8.7 |
|
|
Inventories |
|
$ |
(110.5 |
) |
|
$ |
(95.1 |
) |
|
$ |
(15.4 |
) |
|
Income taxes |
|
$ |
7.2 |
|
|
$ |
5.6 |
|
|
$ |
1.6 |
|
Disaggregated Revenue
ASC 606 requires that we disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The table below disaggregates our revenue by geographical market and product type (segment).
74
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
Year Ended September 30, 2019 |
|
|||||||||||||||||
|
(In millions) |
|
Corrugated Packaging |
|
|
Consumer Packaging |
|
|
Land and Development |
|
|
Intersegment Sales |
|
|
Total |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Geographical Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
11,314.7 |
|
|
$ |
5,166.6 |
|
|
$ |
23.4 |
|
|
$ |
(155.5 |
) |
|
$ |
16,349.2 |
|
|
South America |
|
|
437.2 |
|
|
|
73.2 |
|
|
|
— |
|
|
|
— |
|
|
|
510.4 |
|
|
Europe |
|
|
1.6 |
|
|
|
1,064.7 |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
1,066.2 |
|
|
Asia Pacific |
|
|
63.2 |
|
|
|
301.5 |
|
|
|
— |
|
|
|
(1.5 |
) |
|
|
363.2 |
|
|
Total (1) |
|
$ |
11,816.7 |
|
|
$ |
6,606.0 |
|
|
$ |
23.4 |
|
|
$ |
(157.1 |
) |
|
$ |
18,289.0 |
|
|
(1) |
Net sales are attributed to geographical markets based on the location of the seller. |
Revenue Contract Balances
Contract assets are rights to consideration in exchange for goods that we have transferred to a customer when that right is conditional on something other than the passage of time. Contract assets are reduced when title and risk of loss passes to the customer. Contract liabilities represent obligations to transfer goods or services to a customer for which we have received consideration. Contract liabilities are reduced once control of the goods is transferred to the customer.
The opening and closing balances of our contract assets and contract liabilities are as follows. Contract assets and contract liabilities are aggregated within Other current assets and Other current liabilities, respectively, on the consolidated balance sheet.
|
(In millions) |
|
Contract Assets (Short-Term) |
|
|
Contract Liabilities (Short-Term) |
|
||
|
|
|
|
|
|
|
|
|
|
|
Beginning balance - October 1, 2018 |
|
$ |
183.7 |
|
|
$ |
7.9 |
|
|
Impact of acquisition |
|
|
13.0 |
|
|
|
— |
|
|
Ending balance - September 30, 2019 |
|
|
188.0 |
|
|
|
7.7 |
|
|
(Decrease) / increase |
|
$ |
(8.7 |
) |
|
$ |
(0.2 |
) |
Performance Obligations and Significant Judgments
We primarily derive revenue from fixed consideration. Certain contracts may also include variable consideration, typically in the form of cash discounts and volume rebates. If a contract with a customer includes variable consideration, we estimate the expected cash discounts and other customer refunds based on historical experience. We concluded this method is consistent with the most likely amount method under ASC 606 and allows us to make the best estimate of the consideration we will be entitled to from customers.
Contracts or purchase orders with customers could include a single type of product or multiple types and grades of products. Regardless, the contract price with the customer is agreed to at the individual product level outlined in the customer contracts or purchase orders. Management has concluded that the prices negotiated with each individual customer are representative of the stand-alone selling price of the product.
Practical Expedients and Exemptions
As permitted by ASC 606, we elected to use certain practical expedients in connection with our implementation of ASC 606. We treat shipping and handling activities as fulfillment activities. We treat costs associated with obtaining new contracts as expenses when incurred if the amortization period of the asset we would recognize is one year or less. We do not record interest income when the difference in timing of control transfer and customer payment is one year or less. The election of these practical expedients results in accounting treatments that we believe are consistent with our historical accounting policies and, therefore, these elections of practical expedients do not have a material impact on comparability of our financial statements.
75
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
Note 3. |
Acquisitions and Investment |
We account for acquisitions in accordance with ASC 805, “Business Combinations”. The estimated fair values of all assets acquired and liabilities assumed in acquisitions are provisional and may be revised as a result of additional information obtained during the measurement period of up to one year from the acquisition date. No changes in fiscal 2019 to our fiscal 2018 provisional fair value estimates of assets and liabilities assumed in acquisitions were significant.
KapStone Acquisition
On November 2, 2018, pursuant to the Merger Agreement, dated as of January 28, 2018, among WRKCo Inc. (formerly known as WestRock Company), KapStone, the Company (formerly known as Whiskey Holdco, Inc.), Whiskey Merger Sub, Inc. and Kola Merger Sub, Inc., the Company acquired all of the outstanding shares of KapStone through a transaction in which: (i) Whiskey Merger Sub, Inc. merged with and into WRKCo, with WRKCo surviving such merger as a wholly owned subsidiary of Company and (ii) Kola Merger Sub, Inc. merged with and into KapStone, with KapStone surviving such merger as a wholly owned subsidiary of the Company. Effective as of the effective time of the KapStone Acquisition (the “Effective Time”), Whiskey Holdco, Inc. changed its name to “WestRock Company” and WRKCo changed its name to “WRKCo Inc.”
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 owns Victory Packaging, a packaging solutions distribution company with facilities in the U.S., Canada and Mexico. We have included the financial results of KapStone in our Corrugated Packaging segment since the date of the acquisition.
Pursuant to the KapStone Acquisition, at the Effective Time, (a) each issued and outstanding share of common stock, par value $0.01 per share, of WRKCo was converted into one share of common stock, par value $0.01 per share, of the Company (“Company common stock”) and (b) each issued and outstanding share of common stock, par value $0.0001 per share, of KapStone (“KapStone common stock”) (other than shares of KapStone common stock owned by (i) KapStone or any of its subsidiaries or (ii) any KapStone stockholder who properly exercised appraisal rights with respect to its shares of KapStone common stock in accordance with Section 262 of the Delaware General Corporation Law) was automatically canceled and converted into the right to receive (1) $35.00 per share in cash, without interest (the “Cash Consideration”), or, at the election of the holder of such share of KapStone common stock, (2) 0.4981 shares of Company common stock (the “Stock Consideration”) and cash in lieu of fractional shares, subject to proration procedures designed to ensure that the Stock Consideration would be received in respect of no more than 25% of the shares of KapStone common stock issued and outstanding immediately prior to the Effective Time (the “Maximum Stock Amount”). Each share of KapStone common stock in respect of which a valid election of Stock Consideration was not made by 5:00 p.m. New York City time on September 5, 2018 was converted into the right to receive the Cash Consideration. KapStone stockholders elected to receive Stock Consideration that was less than the Maximum Stock Amount and no proration was required.
The consideration for the KapStone Acquisition was $4.9 billion including debt assumed, a long-term financing obligation and assumed equity awards. As a result, KapStone stockholders received in the aggregate approximately $3.3 billion in cash and 1.6 million shares of WestRock common stock with a value of $70.1 million, or approximately 0.6% of the issued and outstanding shares of WestRock common stock immediately following the Effective Time. Pursuant to the Merger Agreement, at the Effective Time, the Company assumed any outstanding awards granted under the equity-based incentive plans of WRKCo and KapStone (including the shares underlying such awards), the award agreements evidencing the grants of such awards and, in the case of the WRKCo equity-based incentive plans, the remaining shares available for issuance under the applicable plan, in each case subject to adjustments to such awards in the manner set forth in the Merger Agreement. Included in the consideration was $70.8 million related to outstanding KapStone equity awards that were replaced with WestRock equity awards with identical terms for pre-combination service. The amount related to post-combination service will be expensed over the remaining service period of the awards. See “Note 21. Share-Based Compensation” for additional information on the converted awards.
The following table summarizes the fair values of the assets acquired and liabilities assumed by major class of assets and liabilities as of the acquisition date, as well as adjustments made during fiscal 2019 (referred to as “measurement period adjustments”) (in millions):
76
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
Amounts Recognized as of the Acquisition Date |
|
|
Measurement Period Adjustments (1) |
|
|
Amounts Recognized as of Acquisition Date (as Adjusted) (2) |
|
|||
|
Cash and cash equivalents |
|
$ |
8.6 |
|
|
$ |
— |
|
|
$ |
8.6 |
|
|
Current assets, excluding cash and cash equivalents |
|
|
878.9 |
|
|
|
(18.7 |
) |
|
|
860.2 |
|
|
Property, plant and equipment, net |
|
|
1,910.3 |
|
|
|
11.5 |
|
|
|
1,921.8 |
|
|
Goodwill |
|
|
1,755.0 |
|
|
|
(13.8 |
) |
|
|
1,741.2 |
|
|
Intangible assets |
|
|
1,336.1 |
|
|
|
30.3 |
|
|
|
1,366.4 |
|
|
Other long-term assets |
|
|
27.9 |
|
|
|
(0.1 |
) |
|
|
27.8 |
|
|
Total assets acquired |
|
|
5,916.8 |
|
|
|
9.2 |
|
|
|
5,926.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of debt |
|
|
33.3 |
|
|
|
— |
|
|
|
33.3 |
|
|
Current liabilities |
|
|
337.5 |
|
|
|
7.6 |
|
|
|
345.1 |
|
|
Long-term debt due after one year |
|
|
1,333.4 |
|
|
|
— |
|
|
|
1,333.4 |
|
|
Accrued pension and other long-term benefits |
|
|
9.8 |
|
|
|
2.1 |
|
|
|
11.9 |
|
|
Deferred income taxes |
|
|
609.7 |
|
|
|
(2.9 |
) |
|
|
606.8 |
|
|
Other long-term liabilities |
|
|
118.4 |
|
|
|
2.4 |
|
|
|
120.8 |
|
|
Total liabilities assumed |
|
|
2,442.1 |
|
|
|
9.2 |
|
|
|
2,451.3 |
|
|
Net assets acquired |
|
$ |
3,474.7 |
|
|
$ |
— |
|
|
$ |
3,474.7 |
|
|
(1) |
The measurement period adjustments recorded in fiscal 2019 did not have a significant impact on our consolidated statements of income for the year ended September 30, 2019. |
|
(2) |
The measurement period adjustments were primarily due to refinements to third party appraisals and carrying amounts of certain assets and liabilities, as well as adjustments to certain tax accounts based on, among other things, adjustments to deferred tax liabilities. The net impact of the measurement period adjustments resulted in a net decrease to goodwill. |
We are in the process of analyzing the estimated values of all assets acquired and liabilities assumed including, among other things, finalizing third-party valuations of certain tangible and intangible assets, as well as the fair value of certain contracts and the determination of certain tax balances; therefore, the allocation of the purchase price is preliminary and subject to revision.
The fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced geographic reach of the combined organization, increased vertical integration and other synergistic opportunities) and the assembled work force of KapStone, as well as from establishing deferred tax liabilities for the assets and liabilities acquired. The goodwill and intangible assets resulting from the acquisition will not be amortizable for tax purposes.
The following table summarizes the weighted average life and the fair value of intangible assets recognized in the KapStone Acquisition, excluding goodwill (in millions):
|
|
|
Weighted Avg. Life |
|
|
Amounts Recognized as of the Acquisition Date |
|
||
|
Customer relationships |
|
|
11.7 |
|
|
$ |
1,303.0 |
|
|
Trademarks and tradenames |
|
|
16.9 |
|
|
|
54.2 |
|
|
Favorable contracts |
|
|
6.0 |
|
|
|
9.2 |
|
|
Total |
|
|
11.9 |
|
|
$ |
1,366.4 |
|
None of the intangible assets have significant residual value. The intangible assets are expected to be amortized over estimated useful lives ranging from one to 20 years based on the approximate pattern in which the economic benefits are consumed or straight-line if the pattern was not reliably determinable.
Schlüter Acquisition
On September 4, 2018, we completed the Schlüter Acquisition to further enhance our pharmaceutical and automotive platform and expand our geographical footprint in Europe to better serve our customers. In connection
77
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
with the Schlüter Acquisition, we paid cash of $50.6 million. The purchase consideration included the assumption of $7.5 million of debt. We have included the financial results of the acquired operations in our Consumer Packaging segment since the date of the acquisition.
The allocation of consideration primarily included $9.1 million of customer relationship intangible assets, $23.7 million of goodwill, $26.5 million of property, plant and equipment and $21.1 million of liabilities including deferred taxes and the aforementioned debt. We are amortizing the customer relationship intangibles over 10.5 years based on a straight-line basis because the amortization pattern was not reliably determinable. The fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced reach of the combined organization and other synergies), and the assembled work force, as well as due to establishing deferred tax liabilities for the difference between book and tax basis of the assets and liabilities acquired. The goodwill and intangibles are not amortizable for income tax purposes.
Plymouth Packaging Acquisition
On January 5, 2018, we completed the Plymouth Packaging Acquisition to further enhance our platform and drive differentiation and innovation. Plymouth’s “Box on Demand” systems are located on customers’ sites under multi-year exclusive agreements and use fanfold corrugated to produce custom, on-demand corrugated packaging that is accurately sized for any product type according to the customers’ specifications. We have fully integrated the approximately 60,000 tons of containerboard used by Plymouth annually. The purchase price of $203.9 million, net of cash received of $3.1 million. We have included the financial results of the acquired assets in our Corrugated Packaging segment since the date of the acquisition.
The allocation of consideration primarily included $61.9 million of customer relationship intangible assets, $59.6 million of goodwill, $36.2 million of property, plant and equipment, $26.2 million of other long-term assets consisting of assets leased to customers and equity method investments, and $12.6 million of liabilities. We are amortizing the customer relationship intangibles over 13.0 years based on a straight-line basis because the amortization pattern was not reliably determinable. The fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced reach of the combined organization and other synergies), and the assembled work force, as well as due to establishing deferred tax liabilities for the difference between book and tax basis of the assets and liabilities acquired. The goodwill and intangibles are amortizable for income tax purposes.
Grupo Gondi Investment
On April 1, 2016, we completed the formation of a joint venture with Grupo Gondi in Mexico. We contributed $175.0 million in cash and the stock of an entity that owns three corrugated packaging facilities in Mexico in return for a 25.0% ownership interest in the joint venture together with future put and call rights. The investment was valued at approximately $0.3 billion. The majority equity holders manage the joint venture and we provide technical and commercial resources and supply certain paperboard to the joint venture. We believe the joint venture is helping to grow our presence in the attractive Mexican market. The joint venture operates paper machines, corrugated packaging and high graphic folding carton facilities across various production sites. We have included the financial results of the joint venture in our Corrugated Packaging segment since the date of the formation, and are accounting for the investment under the equity method. On October 20, 2017, we increased our ownership interest in Grupo Gondi from 27.0% to 32.3% through a $108 million capital contribution, which followed the joint venture entity having a stock redemption from a minority partner in April 2017 that increased our ownership interest to approximately 27.0%. The October 2017 capital contribution was used to support the joint venture’s capital expansion plans, which include a containerboard mill and several converting plants. The agreement governing our investment in Grupo Gondi includes future put and call rights with respect to the respective parties’ ownership interest in the joint venture which can be exercised at various points in fiscal 2020 and beyond.
Hannapak Acquisition
On August 1, 2017, we completed the Hannapak Acquisition in a stock purchase. Hanna Group is one of Australia’s leading providers of folding cartons to a variety of markets, including beverage, food, confectionery, and healthcare. The purchase consideration for the Hannapak Acquisition was $60.4 million, net of cash received of $0.6 million. We have included the financial results of the acquired operations since the date of the acquisition in our
78
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Consumer Packaging segment.
The allocation of consideration primarily included $22.2 million of customer relationship intangible assets, $24.0 million of goodwill, $9.8 million of property, plant and equipment and $13.7 million of liabilities including deferred taxes. We are amortizing the customer relationship intangibles over 13 years based on a straight-line basis because the amortization pattern was not reliably determinable. The fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced reach of the combined organization and other synergies), and the assembled work force, as well as due to establishing deferred tax liabilities for the difference between book and tax basis of the assets and liabilities acquired. The goodwill and intangibles are not amortizable for income tax purposes.
Island Container Acquisition
On July 17, 2017, we completed the Island Container Acquisition in an asset purchase. The assets acquired include a corrugator and corrugated converting operations located in Wheatley Heights, New York, and certain related fulfillment assets located in Saddle Brook, New Jersey. The purchase consideration for the Island Container Acquisition was $84.7 million, including a working capital settlement of $1.2 million paid in fiscal 2018. We have included the financial results of the acquired assets since the date of the acquisition in our Corrugated Packaging segment.
The allocation of consideration primarily included $43.0 million of customer relationship intangible assets, $27.2 million of goodwill, $5.4 million of property, plant and equipment and $0.8 million of liabilities. We are amortizing the customer relationship intangibles over 8.5 years based on a straight-line basis because the amortization pattern was not reliably determinable. The fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced reach of the combined organization and other synergies), and the assembled work force. The goodwill and intangibles are amortizable for income tax purposes.
U.S. Corrugated Acquisition
On June 9, 2017, we completed the U.S. Corrugated Acquisition in a stock purchase. We acquired five corrugated converting facilities in Ohio, Pennsylvania and Louisiana that provide a comprehensive suite of products and services to customers in a variety of end markets, including food & beverage, pharmaceuticals and consumer electronics. At the time of the transaction, we expected the acquisition to provide us the opportunity to increase the vertical integration of our Corrugated Packaging segment by approximately 105,000 tons of containerboard annually through the acquired facilities and another 50,000 tons under a long-term supply contract with another company owned by the seller, and we have since completed the integration of these tons.
The purchase consideration was $193.7 million, net of cash received of $1.4 million and a $3.4 million working capital settlement received in fiscal 2018. The consideration included the issuance of 2.4 million shares of Common Stock valued at $136.1 million. We have included the financial results of U.S. Corrugated Holdings, Inc. since the date of the acquisition in our Corrugated Packaging segment.
The allocation of consideration primarily included $77.8 million of customer relationship intangible assets, $110.5 million of goodwill, $30.0 million of property, plant and equipment and $55.5 million of liabilities, including deferred income taxes. We are amortizing the customer relationship intangibles over 7.5 years based on a straight-line basis because the amortization pattern was not reliably determinable. The fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced reach of the combined organization and other synergies), and the assembled work force, as well as due to establishing deferred tax liabilities for the difference between book and tax basis of the assets and liabilities acquired. The goodwill and intangibles are not amortizable for income tax purposes.
MPS Acquisition
On June 6, 2017, we completed the MPS Acquisition in a stock purchase. MPS is a global provider of print-based specialty packaging solutions and its differentiated product offering includes premium folding cartons, inserts, labels and rigid packaging. We acquired the outstanding shares of MPS for $18.00 per share in cash and the assumption of debt.
79
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In connection with the MPS Acquisition, we paid cash of $1,351.1 million, net of cash received of $47.5 million. The purchase consideration included the assumption of $929.1 million of debt and $1.9 million related to MPS equity awards that were replaced with WestRock equity awards with identical terms for the pre-acquisition service. The amount related to post-acquisition service is being expensed over the remaining service period of the awards. See “Note 21. Share-Based Compensation” for additional information on the converted awards. We have included the financial results of MPS since the date of the acquisition in our Consumer Packaging segment.
The allocation of consideration primarily included $1,026.4 million of intangible assets, $900.9 million of goodwill, $469.9 million of property, plant and equipment and $1,561.6 million of liabilities and noncontrolling interests, including debt and deferred income taxes. The fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced reach of the combined organization and other synergies), the assembled work force, as well as due to establishing deferred tax liabilities for the difference between book and tax basis of the assets and liabilities acquired. The goodwill and intangibles are not amortizable for income tax purposes.
The following table summarizes the weighted average life and the allocation to intangible assets recognized in the MPS Acquisition, excluding goodwill (in millions):
|
|
|
Weighted Avg. Life |
|
|
Amounts Recognized as of the Acquisition Date |
|
||
|
Customer relationships |
|
|
14.6 |
|
|
$ |
1,008.7 |
|
|
Trademarks and tradenames |
|
|
3.0 |
|
|
|
15.2 |
|
|
Patents |
|
|
10.0 |
|
|
|
2.5 |
|
|
Total |
|
|
14.4 |
|
|
$ |
1,026.4 |
|
None of the intangibles has significant residual value. We are amortizing the customer relationship intangibles over estimated useful lives ranging from 13 to 16 years based on a straight-line basis because the amortization pattern was not reliably determinable.
Star Pizza Acquisition
On March 13, 2017, we completed the Star Pizza Acquisition. The transaction provided us with a leadership position in the fast growing small-run pizza box market and has increased our vertical integration. The purchase price was $34.6 million, net of a $0.7 million working capital settlement. We have fully integrated the approximately 22,000 tons of containerboard used by Star Pizza annually. We have included the financial results of the acquired assets since the date of the acquisition in our Corrugated Packaging segment.
The purchase price allocation for the acquisition primarily included $24.8 million of customer relationship intangible assets and $2.2 million of goodwill. We are amortizing the customer relationship intangibles over 10 years based on a straight-line basis because the amortization pattern was not reliably determinable. The fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced reach of the combined organization and other synergies), and the assembled work force. The goodwill and intangibles are amortizable for income tax purposes.
|
Note 4. |
Restructuring and Other Costs |
Summary of Restructuring and Other Initiatives
We recorded pre-tax restructuring and other costs of $173.7 million, $105.4 million and $196.7 million for fiscal 2019, 2018 and 2017, respectively. Of these costs, $56.5 million, $27.0 million and $86.6 million were non-cash for fiscal 2019, 2018 and 2017, respectively. These amounts are not comparable since the timing and scope of the individual actions associated with each restructuring, acquisition, divestiture or integration vary. We present our restructuring and other costs in more detail below.
80
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes our Restructuring and other costs for fiscal 2019, 2018 and 2017 (in millions):
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Restructuring |
|
$ |
111.0 |
|
|
$ |
39.5 |
|
|
$ |
113.4 |
|
|
Other |
|
|
62.7 |
|
|
|
65.9 |
|
|
|
83.3 |
|
|
Restructuring and Other Costs |
|
$ |
173.7 |
|
|
$ |
105.4 |
|
|
$ |
196.7 |
|
Restructuring
Our restructuring charges are primarily associated with restructuring portions of our operations (i.e. partial or complete plant closures), employee costs due to merger and acquisition-related workforce reductions and other workforce reductions, including a voluntary retirement program in fiscal 2019. When we close a facility, if necessary, we recognize a write-down to reduce the carrying value of equipment or other property to their estimated fair value less cost to sell, and record charges for severance and other employee-related costs. Any subsequent change in fair value less cost to sell prior to disposition is recognized as identified; however, no gain is recognized in excess of the cumulative loss previously recorded unless the actual selling price exceeds the original carrying value. At the time of each announced closure, we generally expect to record future period costs for equipment relocation, facility carrying costs, costs to terminate a lease or contract before the end of its term and employee-related costs.
Although specific circumstances vary, our strategy has generally been to consolidate our sales and operations into large well-equipped plants that operate at high utilization rates and take advantage of available capacity created by operational excellence initiatives and/or further optimize our system following mergers and acquisitions or a changing business environment. Therefore, we generally transfer a substantial portion of each closed plant’s assets and production to our other plants. We believe these actions have allowed us to more effectively manage our business. In our Land and Development segment, the restructuring charges primarily consisted of severance and other employee costs associated with the accelerated monetization strategy and wind-down of operations and lease costs.
81
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
While restructuring costs are not charged to our segments and, therefore, do not reduce segment income, we highlight the segment to which the charges relate. The following table presents a summary of restructuring charges related to active restructuring initiatives that we incurred during the last three fiscal years, the cumulative recorded amount since we started the initiative, and our estimate of the total we expect to incur (in millions):
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
Cumulative |
|
|
Total Expected |
|
|||||
|
Corrugated Packaging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment costs |
|
$ |
32.1 |
|
|
$ |
2.9 |
|
|
$ |
1.5 |
|
|
$ |
230.1 |
|
|
$ |
230.1 |
|
|
Severance and other employee costs |
|
|
16.9 |
|
|
|
1.9 |
|
|
|
5.8 |
|
|
|
59.3 |
|
|
|
59.4 |
|
|
Equipment and inventory relocation costs |
|
|
4.8 |
|
|
|
3.4 |
|
|
|
2.2 |
|
|
|
12.5 |
|
|
|
14.2 |
|
|
Facility carrying costs |
|
|
3.9 |
|
|
|
3.3 |
|
|
|
5.4 |
|
|
|
32.7 |
|
|
|
33.8 |
|
|
Other costs |
|
|
1.2 |
|
|
|
0.1 |
|
|
|
(1.1 |
) |
|
|
14.5 |
|
|
|
21.2 |
|
|
Restructuring total |
|
$ |
58.9 |
|
|
$ |
11.6 |
|
|
$ |
13.8 |
|
|
$ |
349.1 |
|
|
$ |
358.7 |
|
|
Consumer Packaging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment costs |
|
$ |
0.5 |
|
|
$ |
6.8 |
|
|
$ |
28.2 |
|
|
$ |
40.4 |
|
|
$ |
40.4 |
|
|
Severance and other employee costs |
|
|
6.0 |
|
|
|
6.9 |
|
|
|
23.9 |
|
|
|
39.4 |
|
|
|
39.4 |
|
|
Equipment and inventory relocation costs |
|
|
1.0 |
|
|
|
2.4 |
|
|
|
2.5 |
|
|
|
6.3 |
|
|
|
6.3 |
|
|
Facility carrying costs |
|
|
0.2 |
|
|
|
0.9 |
|
|
|
0.7 |
|
|
|
2.2 |
|
|
|
2.2 |
|
|
Other costs (1) |
|
|
4.3 |
|
|
|
2.0 |
|
|
|
20.1 |
|
|
|
26.4 |
|
|
|
26.4 |
|
|
Restructuring total |
|
$ |
12.0 |
|
|
$ |
19.0 |
|
|
$ |
75.4 |
|
|
$ |
114.7 |
|
|
$ |
114.7 |
|
|
Land and Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment costs |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1.8 |
|
|
$ |
1.8 |
|
|
$ |
1.8 |
|
|
Severance and other employee costs |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
2.8 |
|
|
|
13.8 |
|
|
|
13.8 |
|
|
Other costs |
|
|
— |
|
|
|
3.0 |
|
|
|
— |
|
|
|
3.0 |
|
|
|
3.0 |
|
|
Restructuring total |
|
$ |
0.1 |
|
|
$ |
3.3 |
|
|
$ |
4.6 |
|
|
$ |
18.6 |
|
|
$ |
18.6 |
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment costs |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
0.1 |
|
|
$ |
1.4 |
|
|
$ |
1.4 |
|
|
Severance and other employee costs |
|
|
37.5 |
|
|
|
0.8 |
|
|
|
14.8 |
|
|
|
138.2 |
|
|
|
138.2 |
|
|
Other costs |
|
|
2.5 |
|
|
|
4.8 |
|
|
|
4.7 |
|
|
|
18.1 |
|
|
|
18.1 |
|
|
Restructuring total |
|
$ |
40.0 |
|
|
$ |
5.6 |
|
|
$ |
19.6 |
|
|
$ |
157.7 |
|
|
$ |
157.7 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment costs |
|
$ |
32.6 |
|
|
$ |
9.7 |
|
|
$ |
31.6 |
|
|
$ |
273.7 |
|
|
$ |
273.7 |
|
|
Severance and other employee costs |
|
|
60.5 |
|
|
|
9.9 |
|
|
|
47.3 |
|
|
|
250.7 |
|
|
|
250.8 |
|
|
Equipment and inventory relocation costs |
|
|
5.8 |
|
|
|
5.8 |
|
|
|
4.7 |
|
|
|
18.8 |
|
|
|
20.5 |
|
|
Facility carrying costs |
|
|
4.1 |
|
|
|
4.2 |
|
|
|
6.1 |
|
|
|
34.9 |
|
|
|
36.0 |
|
|
Other costs |
|
|
8.0 |
|
|
|
9.9 |
|
|
|
23.7 |
|
|
|
62.0 |
|
|
|
68.7 |
|
|
Restructuring total |
|
$ |
111.0 |
|
|
$ |
39.5 |
|
|
$ |
113.4 |
|
|
$ |
640.1 |
|
|
$ |
649.7 |
|
|
(1) |
Includes a $17.6 million impairment of a customer relationship intangible in fiscal 2017 related to an exited product line. |
We have defined “Net property, plant and equipment costs” as used in this Note 4 as property, plant and equipment write-downs, subsequent adjustments to fair value for assets classified as held for sale, subsequent (gains) or losses on sales of property, plant and equipment and related parts and supplies on such assets, if any.
Other Costs
Our other costs consist of acquisition, integration and divestiture costs. We incur costs when we acquire or divest businesses. Acquisition costs include costs associated with transactions, whether consummated or not, such as advisory, legal, accounting, valuation and other professional or consulting fees, as well as potential litigation costs associated with those activities. We incur integration costs pre- and post-acquisition that reflect work being performed to facilitate merger and acquisition integration, such as work associated with information systems and other projects including spending to support future acquisitions, and primarily consist of professional services and labor. Divestiture costs consist primarily of similar professional fees. The divestiture costs in fiscal 2017 were
82
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
primarily associated with costs incurred during the HH&B Sale process. We consider acquisition, integration and divestiture costs to be Corporate costs regardless of the segment or segments involved in the transaction.
The following table presents our acquisition, divestiture and integration costs that we incurred during the last three fiscal years (in millions):
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Acquisition costs |
|
$ |
28.2 |
|
|
$ |
38.2 |
|
|
$ |
27.1 |
|
|
Integration costs |
|
|
34.3 |
|
|
|
27.4 |
|
|
|
46.4 |
|
|
Divestiture costs |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
9.8 |
|
|
Other total |
|
$ |
62.7 |
|
|
$ |
65.9 |
|
|
$ |
83.3 |
|
The following table summarizes the changes in the restructuring accrual, which is primarily composed of lease commitments, accrued severance and other employee costs, and a reconciliation of the restructuring accrual charges to the line item “Restructuring and other costs” on our consolidated statements of income for the last three fiscal years (in millions):
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Accrual at beginning of fiscal year |
|
$ |
31.6 |
|
|
$ |
47.4 |
|
|
$ |
44.8 |
|
|
Accruals acquired in acquisition |
|
|
— |
|
|
|
— |
|
|
|
3.5 |
|
|
Additional accruals |
|
|
60.0 |
|
|
|
16.5 |
|
|
|
63.2 |
|
|
Payments |
|
|
(55.9 |
) |
|
|
(29.8 |
) |
|
|
(53.3 |
) |
|
Adjustment to accruals |
|
|
(3.2 |
) |
|
|
(1.0 |
) |
|
|
(10.8 |
) |
|
Foreign currency rate changes |
|
|
(0.2 |
) |
|
|
(1.5 |
) |
|
|
— |
|
|
Accrual at end of fiscal year |
|
$ |
32.3 |
|
|
$ |
31.6 |
|
|
$ |
47.4 |
|
Reconciliation of accruals and charges to restructuring and other costs (in millions):
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Additional accruals and adjustments to accruals (see table above) |
|
$ |
56.8 |
|
|
$ |
15.5 |
|
|
$ |
52.4 |
|
|
Acquisition costs |
|
|
28.2 |
|
|
|
38.2 |
|
|
|
27.1 |
|
|
Integration costs |
|
|
34.3 |
|
|
|
22.0 |
|
|
|
41.2 |
|
|
Divestiture costs |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
9.8 |
|
|
Net property, plant and equipment |
|
|
32.6 |
|
|
|
9.7 |
|
|
|
31.6 |
|
|
Severance and other employee costs |
|
|
6.8 |
|
|
|
1.3 |
|
|
|
3.8 |
|
|
Equipment and inventory relocation costs |
|
|
5.8 |
|
|
|
5.8 |
|
|
|
4.7 |
|
|
Facility carrying costs |
|
|
4.1 |
|
|
|
4.2 |
|
|
|
6.1 |
|
|
Other costs |
|
|
4.9 |
|
|
|
8.4 |
|
|
|
20.0 |
|
|
Total restructuring and other costs, net |
|
$ |
173.7 |
|
|
$ |
105.4 |
|
|
$ |
196.7 |
|
|
Note 5. |
Retirement Plans |
We have defined benefit pension plans and other postretirement benefit plans for certain U.S. and non-U.S. employees. Certain plans were frozen for salaried and non-union hourly employees at various times in the past, although some employees meeting certain criteria are still accruing benefits. In addition, we participate in several MEPPs that provide retirement benefits to certain union employees in accordance with various CBAs. We also have supplemental executive retirement plans and other non-qualified defined benefit pension plans that provide unfunded supplemental retirement benefits to certain of our current and former executives. The supplemental executive retirement plans provide for incremental pension benefits in excess of those offered in the Plan. The other postretirement benefit plans provide certain health care and life insurance benefits for certain salaried and hourly employees who meet specified age and service requirements as defined by the plans.
83
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The benefits under our defined benefit pension plans are based on either compensation or a combination of years of service and negotiated benefit levels, depending upon the plan. We allocate our pension assets to several investment management firms across a variety of investment styles. Our defined benefit Investment Committee meets at least four times a year with our investment advisors to review each management firm’s performance and monitors its compliance with its stated goals, our investment policy and applicable regulatory requirements in the U.S., Canada, and other jurisdictions.
Investment returns vary. We believe that, by investing in a variety of asset classes and utilizing multiple investment management firms, we can create a portfolio that yields adequate returns with reduced volatility. Our qualified U.S. plans employ a liability matching strategy augmented with Treasury futures to generally fully hedge against interest rate risk. After we consulted with our actuary and investment advisors, we adopted the target allocations in the table that follows for our pension plans to produce the desired performance. These target allocations are guidelines, not limitations, and occasionally plan fiduciaries will approve allocations above or below target ranges or modify the allocations.
Target Allocations
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Equity investments |
|
|
15 |
% |
|
|
15 |
% |
|
|
20 |
% |
|
|
22 |
% |
|
Fixed income investments |
|
|
75 |
% |
|
|
75 |
% |
|
|
72 |
% |
|
|
70 |
% |
|
Short-term investments |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
Other investments |
|
|
9 |
% |
|
|
9 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Our asset allocations by asset category at September 30 were as follows:
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Equity investments |
|
|
13 |
% |
|
|
14 |
% |
|
|
22 |
% |
|
|
23 |
% |
|
Fixed income investments |
|
|
70 |
% |
|
|
73 |
% |
|
|
71 |
% |
|
|
69 |
% |
|
Short-term investments |
|
|
9 |
% |
|
|
3 |
% |
|
|
2 |
% |
|
|
2 |
% |
|
Other investments |
|
|
8 |
% |
|
|
10 |
% |
|
|
5 |
% |
|
|
6 |
% |
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
We manage our retirement plans in accordance with the provisions of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations thereunder as well as applicable legislation in Canada and other foreign countries. Our investment policy objectives include maximizing long-term returns at acceptable risk levels, diversifying among asset classes, as applicable, and among investment managers, as well as establishing certain risk parameters within asset classes. We have allocated our investments within the equity and fixed income asset classes to sub-asset classes designed to meet these objectives. In addition, our other investments support multi-strategy objectives.
In developing our weighted average expected rate of return on plan assets, we consulted with our investment advisors and evaluated criteria based on historical returns by asset class and long-term return expectations by asset class. We use a September 30 measurement date. We expect to contribute approximately $27 million to our U.S. and non-U.S. pension plans in fiscal 2020. However, it is possible that our assumptions or legislation may change, actual market performance may vary or we may decide to contribute a different amount. Therefore, the amount we contribute may vary materially. The expense for MEPPs for collective bargaining employees generally equals the contributions for these plans, excluding estimated accruals for withdrawal liabilities.
84
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted average assumptions used to measure the benefit plan obligations at September 30, were:
|
|
|
Pension Plans |
|
|||||||||||||
|
|
|
2019 |
|
|
2018 |
|
||||||||||
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||
|
Discount rate |
|
|
3.35 |
% |
|
|
2.42 |
% |
|
|
4.50 |
% |
|
|
3.42 |
% |
|
Rate of compensation increase |
|
|
3.00 |
% |
|
|
2.65 |
% |
|
|
3.00 |
% |
|
|
2.67 |
% |
At September 30, 2019, the discount rate for the U.S. pension plans was determined based on the yield on a theoretical portfolio of high-grade corporate bonds, and the discount rate for the non-U.S. plans was determined based on a yield curve developed by our actuary. The theoretical portfolio of high-grade corporate bonds used to select the September 30, 2019 discount rate for the U.S. pension plans includes bonds generally rated Aa- or better with at least $100 million outstanding par value and bonds that are non-callable (unless the bonds possess a “make whole” feature). The theoretical portfolio of bonds has cash flows that generally match our expected benefit payments in future years.
Our assumption regarding the future rate of compensation increases is reviewed periodically and is based on both our internal planning projections and recent history of actual compensation increases.
We typically review our expected long-term rate of return on plan assets periodically through an asset allocation study with either our actuary or investment advisor. In fiscal 2020, our expected rate of return used to determine net periodic benefit cost is 6.25% for our U.S. plans and 4.26% for our non-U.S. plans. Our expected rates of return in fiscal 2020 are based on an analysis of our long-term expected rate of return and our current asset allocation.
During the second quarter of fiscal 2017, our year-to-date lump sum payments to certain beneficiaries of the Plan, together with several one-time severance benefit payments out of the Plan, triggered pension settlement accounting and a remeasurement of the Plan as of February 28, 2017. As a result of settlement accounting, we recognized as a current period expense a pro-rata portion of the unamortized net actuarial loss, after remeasurement, and recorded a $28.7 million non-cash charge to our earnings in the second quarter of 2017. The lump sum payments were to certain eligible former employees who were not currently receiving a monthly benefit. Eligible former employees whose present value of future pension benefits exceeded a certain minimum threshold had the option to either voluntarily accept lump sum payments or to not accept the offer and continue to be entitled to their monthly benefit upon retirement. Lump sum and one-time severance benefits payments of $203.7 million were made out of existing assets of the Plan in the first half of fiscal 2017. The discount rate used in the plan remeasurement was 4.49%, an increase from 4.04% for the Plan at September 30, 2016. The expected long-term rate of return on plan assets was unchanged. As a result of the February 28, 2017 remeasurement, the funded status of the Plan increased by $73.2 million as compared to September 30, 2016. The increase in the funded status was primarily due to a reduction in the plan obligations due to the increase in the discount rate. In the second half of fiscal 2017, we made $ 27.1 million in lump sum payments to certain beneficiaries of the Plan, resulting in total fiscal 2017 lump sum payments of $230.8 million and a total fiscal 2017 non-cash charge to our earnings of $32.6 million.
In October 2014, we entered into a master agreement with the USW that applied to substantially all of our legacy RockTenn facilities represented by the USW at that time. The agreement has a six year term and covers a number of specific items, including wages, medical coverage and certain other benefit programs, substance abuse testing and successorship. Individual facilities will continue to have local agreements for subjects not covered by the master agreement and those agreements will continue to have staggered terms, and, it now covers many former MeadWestvaco, KapStone and other facilities acquired. WestRock and the USW are currently re-negotiating a successor agreement to the original master agreement.
85
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table shows the changes in benefit obligation, plan assets and funded status for the years ended September 30 (in millions):
|
|
|
Pension Plans |
|
|||||||||||||
|
|
|
2019 |
|
|
2018 |
|
||||||||||
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||
|
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of fiscal year |
|
$ |
3,783.5 |
|
|
$ |
1,340.2 |
|
|
$ |
3,941.9 |
|
|
$ |
1,502.2 |
|
|
Service cost |
|
|
36.0 |
|
|
|
6.8 |
|
|
|
36.7 |
|
|
|
8.0 |
|
|
Interest cost |
|
|
189.2 |
|
|
|
43.4 |
|
|
|
157.7 |
|
|
|
46.9 |
|
|
Amendments |
|
|
0.4 |
|
|
|
3.1 |
|
|
|
9.3 |
|
|
|
— |
|
|
Actuarial loss (gain) |
|
|
694.4 |
|
|
|
181.0 |
|
|
|
(186.8 |
) |
|
|
(90.3 |
) |
|
Plan participant contributions |
|
|
— |
|
|
|
2.2 |
|
|
|
— |
|
|
|
2.5 |
|
|
Benefits paid |
|
|
(216.8 |
) |
|
|
(78.3 |
) |
|
|
(175.3 |
) |
|
|
(82.8 |
) |
|
Business combinations |
|
|
561.2 |
|
|
|
0.7 |
|
|
|
— |
|
|
|
3.5 |
|
|
Curtailments |
|
|
1.0 |
|
|
|
— |
|
|
|
— |
|
|
|
(0.7 |
) |
|
Settlements |
|
|
— |
|
|
|
(1.7 |
) |
|
|
— |
|
|
|
(5.5 |
) |
|
Foreign currency rate changes |
|
|
— |
|
|
|
(54.3 |
) |
|
|
— |
|
|
|
(43.6 |
) |
|
Benefit obligation at end of fiscal year |
|
$ |
5,048.9 |
|
|
$ |
1,443.1 |
|
|
$ |
3,783.5 |
|
|
$ |
1,340.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of fiscal year |
|
$ |
3,921.2 |
|
|
$ |
1,350.2 |
|
|
$ |
4,107.9 |
|
|
$ |
1,414.7 |
|
|
Actual gain (loss) on plan assets |
|
|
731.7 |
|
|
|
172.9 |
|
|
|
(24.9 |
) |
|
|
39.9 |
|
|
Employer contributions |
|
|
13.0 |
|
|
|
12.1 |
|
|
|
13.5 |
|
|
|
24.2 |
|
|
Plan participant contributions |
|
|
— |
|
|
|
2.2 |
|
|
|
— |
|
|
|
2.5 |
|
|
Benefits paid |
|
|
(216.8 |
) |
|
|
(78.3 |
) |
|
|
(175.3 |
) |
|
|
(82.8 |
) |
|
Business combinations |
|
|
556.2 |
|
|
|
— |
|
|
|
— |
|
|
|
0.7 |
|
|
Settlements |
|
|
— |
|
|
|
(1.7 |
) |
|
|
— |
|
|
|
(5.5 |
) |
|
Foreign currency rate changes |
|
|
— |
|
|
|
(56.5 |
) |
|
|
— |
|
|
|
(43.5 |
) |
|
Fair value of plan assets at end of fiscal year |
|
$ |
5,005.3 |
|
|
$ |
1,400.9 |
|
|
$ |
3,921.2 |
|
|
$ |
1,350.2 |
|
|
Funded status |
|
$ |
(43.6 |
) |
|
$ |
(42.2 |
) |
|
$ |
137.7 |
|
|
$ |
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension asset |
|
$ |
143.3 |
|
|
$ |
81.4 |
|
|
$ |
305.7 |
|
|
$ |
114.3 |
|
|
Other current liabilities |
|
|
(14.6 |
) |
|
|
(1.9 |
) |
|
|
(10.1 |
) |
|
|
(0.9 |
) |
|
Pension liabilities, net of current portion |
|
|
(172.3 |
) |
|
|
(121.7 |
) |
|
|
(157.9 |
) |
|
|
(103.4 |
) |
|
(Under) over funded status at end of fiscal year |
|
$ |
(43.6 |
) |
|
$ |
(42.2 |
) |
|
$ |
137.7 |
|
|
$ |
10.0 |
|
Certain U.S. plans have benefit obligations in excess of plan assets. These plans, which consist primarily of non-qualified plans, have aggregate projected benefit obligations of $220.9 million, aggregate accumulated benefit obligations of $220.1 million, and aggregate fair value of plan assets of $34.0 million at September 30, 2019. Our qualified U.S. plans were in a net overfunded position at September 30, 2019.
The accumulated benefit obligation of U.S. and non-U.S. pension plans was $6,438.9 million and $5,081.3 million at September 30, 2019 and 2018, respectively.
86
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The pre-tax amounts in accumulated other comprehensive loss at September 30 not yet recognized as components of net periodic pension cost, including noncontrolling interest, consist of (in millions):
|
|
|
Pension Plans |
|
|||||||||||||
|
|
|
2019 |
|
|
2018 |
|
||||||||||
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||
|
Net actuarial loss |
|
$ |
854.7 |
|
|
$ |
168.8 |
|
|
$ |
631.2 |
|
|
$ |
105.6 |
|
|
Prior service cost |
|
|
27.6 |
|
|
|
3.4 |
|
|
|
32.3 |
|
|
|
0.3 |
|
|
Total accumulated other comprehensive loss |
|
$ |
882.3 |
|
|
$ |
172.2 |
|
|
$ |
663.5 |
|
|
$ |
105.9 |
|
The pre-tax amounts recognized in other comprehensive loss (income), including noncontrolling interest, are as follows at September 30 (in millions):
|
|
|
Pension Plans |
|
|||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Net actuarial loss (gain) arising during period |
|
$ |
312.0 |
|
|
$ |
38.7 |
|
|
$ |
(48.8 |
) |
|
Amortization and settlement recognition of net actuarial loss |
|
|
(25.3 |
) |
|
|
(20.6 |
) |
|
|
(57.7 |
) |
|
Prior service cost arising during period |
|
|
3.5 |
|
|
|
9.3 |
|
|
|
3.4 |
|
|
Amortization of prior service cost |
|
|
(5.2 |
) |
|
|
(4.7 |
) |
|
|
(4.1 |
) |
|
Net other comprehensive loss (income) recognized |
|
$ |
285.0 |
|
|
$ |
22.7 |
|
|
$ |
(107.2 |
) |
The net periodic pension (income) cost recognized in the consolidated statements of income is comprised of the following for fiscal years ended (in millions):
|
|
|
Pension Plans |
|
|||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Service cost |
|
$ |
42.8 |
|
|
$ |
44.8 |
|
|
$ |
45.1 |
|
|
Interest cost |
|
|
232.6 |
|
|
|
204.6 |
|
|
|
197.8 |
|
|
Expected return on plan assets |
|
|
(340.2 |
) |
|
|
(328.4 |
) |
|
|
(313.1 |
) |
|
Amortization of net actuarial loss |
|
|
24.5 |
|
|
|
21.2 |
|
|
|
25.4 |
|
|
Amortization of prior service cost |
|
|
5.2 |
|
|
|
4.7 |
|
|
|
4.1 |
|
|
Curtailment loss (gain) |
|
|
1.0 |
|
|
|
(0.6 |
) |
|
|
— |
|
|
Settlement (gain) loss |
|
|
(0.2 |
) |
|
|
(0.5 |
) |
|
|
32.7 |
|
|
Special termination benefits |
|
|
— |
|
|
|
— |
|
|
|
12.5 |
|
|
Company defined benefit plan (income) expense |
|
|
(34.3 |
) |
|
|
(54.2 |
) |
|
|
4.5 |
|
|
Multiemployer and other plans |
|
|
1.4 |
|
|
|
1.4 |
|
|
|
4.7 |
|
|
Net pension (income) cost |
|
$ |
(32.9 |
) |
|
$ |
(52.8 |
) |
|
$ |
9.2 |
|
The Multiemployer and other plans line in the table above excludes the estimated withdrawal liabilities recorded in fiscal 2018 and adjustments recorded to such liabilities in fiscal 2019. See “Note 5. Retirement Plans — Multiemployer Plans” for additional information. The fiscal 2017 special termination benefits were recorded to restructuring and other costs in connection with the Combination and are excluded from the calculation of pension and other postretirement funding (more) than expense (income) in our consolidated statements of cash flows.
The Consolidated Statements of Income line item “Pension and other postretirement non-service income” is equal to the non-service elements of our “Company defined benefit plan (income) expense” and our “Net postretirement cost” outlined in this note excluding special termination benefits (recorded in restructuring and other costs in connection with the Combination).
87
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Weighted-average assumptions used in the calculation of benefit plan expense for fiscal years ended:
|
|
|
Pension Plans |
|
|||||||||||||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||||||||||||||
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||||
|
Discount rate |
|
|
4.50 |
% |
|
|
3.42 |
% |
|
|
4.09 |
% |
|
|
3.26 |
% |
|
|
4.30 |
% |
|
|
3.08 |
% |
|
Rate of compensation increase |
|
|
3.00 |
% |
|
|
2.67 |
% |
|
|
3.00 |
% |
|
|
2.65 |
% |
|
|
3.00 |
% |
|
|
3.09 |
% |
|
Expected long-term rate of return on plan assets |
|
|
6.50 |
% |
|
|
4.69 |
% |
|
|
6.50 |
% |
|
|
4.98 |
% |
|
|
6.50 |
% |
|
|
6.03 |
% |
In fiscal 2019, 2018 and 2017, for our U.S. pension and postretirement plans, we considered the mortality tables published by the Society of Actuaries (“SOA”) and evaluated our mortality experience to establish mortality assumptions. Based on our experience and in consultation with our actuaries, in fiscal 2019 we utilized the base Pri-2012 mortality tables from the SOA’s May 2019 exposure draft with specific gender and job classification increases and applied an improvement scale with generational improvements that is generally based on Social Security Administration analysis and assumptions. The increases for fiscal 2019 were 8% for white collar males, 12% for blue collar males, 10% for white collar females, and 6% for blue collar females. Separate tables specific to contingent annuitants as provided in the SOA’s Pri-2012 exposure draft were used for beneficiaries without any specific increases applied. In fiscal 2018 and 2017, we utilized the SOA’s base RP-2014 mortality tables with specific gender and job classification increases. The increases for fiscal 2018 were 10% for white collar males, 14% for blue collar males, 11% for white collar females, and 10% for blue collar females. The increases for fiscal 2017 were 9% for white collar males, 12% for blue collar males, 11% for white collar females, and 9% for blue collar females. In fiscal 2018 and 2017 our Canadian pension and postretirement plans utilized the 2014 Private Sector Canadian Pensioners Mortality Table adjusted to reflect industry and our mortality experience and applied Canadian Pensioner’s Mortality Improvement Scale B with generational improvements. For fiscal 2019, the adjustments applied to the mortality rates under the 2014 Private Sector Canadian Pensioners Mortality Table were modified to reflect a wider set of factors pertaining to our population, in addition to industry and collar designation, such as pension amount and lifestyle factors.
The estimated losses that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in fiscal 2020 are as follows (in millions):
|
|
|
Pension Plans |
|
|||||
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||
|
Actuarial loss |
|
$ |
38.5 |
|
|
$ |
8.9 |
|
|
Prior service cost |
|
|
5.2 |
|
|
|
0.3 |
|
|
Total |
|
$ |
43.7 |
|
|
$ |
9.2 |
|
Our projected estimated benefit payments (unaudited), which reflect expected future service, as appropriate, are as follows (in millions):
|
|
|
Pension Plans |
|
|||||
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||
|
Fiscal 2020 |
|
$ |
253.1 |
|
|
$ |
75.9 |
|
|
Fiscal 2021 |
|
$ |
262.3 |
|
|
$ |
74.5 |
|
|
Fiscal 2022 |
|
$ |
266.5 |
|
|
$ |
74.6 |
|
|
Fiscal 2023 |
|
$ |
273.3 |
|
|
$ |
74.8 |
|
|
Fiscal 2024 |
|
$ |
268.8 |
|
|
$ |
74.3 |
|
|
Fiscal Years 2025 – 2029 |
|
$ |
1,405.3 |
|
|
$ |
369.0 |
|
88
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes our pension plan assets measured at fair value on a recurring basis (at least annually) as of September 30, 2019 (in millions):
|
|
|
Total |
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|||
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. equities (1) |
|
$ |
184.2 |
|
|
$ |
183.5 |
|
|
$ |
0.7 |
|
|
Non-U.S. equities (1) |
|
|
6.5 |
|
|
|
6.5 |
|
|
|
— |
|
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities (2) |
|
|
598.2 |
|
|
|
— |
|
|
|
598.2 |
|
|
Non-U.S. government securities (3) |
|
|
125.6 |
|
|
|
0.2 |
|
|
|
125.4 |
|
|
U.S. corporate bonds (3) |
|
|
2,156.0 |
|
|
|
137.6 |
|
|
|
2,018.4 |
|
|
Non-U.S. corporate bonds (3) |
|
|
432.9 |
|
|
|
5.7 |
|
|
|
427.2 |
|
|
Other fixed income (4) |
|
|
379.3 |
|
|
|
10.8 |
|
|
|
368.5 |
|
|
Short-term investments (5) |
|
|
468.7 |
|
|
|
468.7 |
|
|
|
— |
|
|
Benefit plan assets measured in the fair value hierarchy |
|
$ |
4,351.4 |
|
|
$ |
813.0 |
|
|
$ |
3,538.4 |
|
|
Assets measured at NAV (6) |
|
|
2,054.8 |
|
|
|
|
|
|
|
|
|
|
Total benefit plan assets |
|
$ |
6,406.2 |
|
|
|
|
|
|
|
|
|
The following table summarizes our pension plan assets measured at fair value on a recurring basis (at least annually) as of September 30, 2018 (in millions):
|
|
|
Total |
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|||
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. equities (1) |
|
$ |
165.5 |
|
|
$ |
165.5 |
|
|
$ |
— |
|
|
Non-U.S. equities (1) |
|
|
8.2 |
|
|
|
8.2 |
|
|
|
— |
|
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities (2) |
|
|
435.8 |
|
|
|
— |
|
|
|
435.8 |
|
|
Non-U.S. government securities (3) |
|
|
127.5 |
|
|
|
— |
|
|
|
127.5 |
|
|
U.S. corporate bonds (3) |
|
|
1,493.6 |
|
|
|
108.4 |
|
|
|
1,385.2 |
|
|
Non-U.S. corporate bonds (3) |
|
|
380.8 |
|
|
|
49.3 |
|
|
|
331.5 |
|
|
Other fixed income (4) |
|
|
319.4 |
|
|
|
— |
|
|
|
319.4 |
|
|
Short-term investments (5) |
|
|
149.0 |
|
|
|
149.0 |
|
|
|
— |
|
|
Benefit plan assets measured in the fair value hierarchy |
|
$ |
3,079.8 |
|
|
$ |
480.4 |
|
|
$ |
2,599.4 |
|
|
Assets measured at NAV (6) |
|
|
2,191.6 |
|
|
|
|
|
|
|
|
|
|
Total benefit plan assets |
|
$ |
5,271.4 |
|
|
|
|
|
|
|
|
|
|
(1) |
Equity securities are comprised of the following investment types: (i) common stock, (ii) preferred stock and (iii) equity exchange traded funds. Level 1 investments in common and preferred stocks and exchange traded funds are valued using quoted market prices multiplied by the number of shares owned. |
|
(2) |
U.S. government securities include treasury and agency debt. These investments are valued using broker quotes in an active market. |
89
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
(3) |
The level 1 non-U.S. government securities investment is an exchange cleared swap valued using quoted market prices. The level 1 U.S. corporate bonds category is primarily comprised of U.S. dollar denominated investment grade securities and valued using quoted market prices. Level 2 investments are valued utilizing a market approach that includes various valuation techniques and sources such as value generation models, broker quotes in active and non-active markets, benchmark yields and securities, reported trades, issuer spreads, and/or other applicable reference data. |
|
(4) |
Other fixed income is comprised of municipal and asset-backed securities. Investments are valued utilizing a market approach that includes various valuation techniques and sources, such as broker quotes in active and non-active markets, benchmark yields and securities, reported trades, issuer spreads and/or other applicable reference data. |
|
(5) |
Short-term investments are valued at $1.00/unit, which approximates fair value. Amounts are generally invested in interest-bearing accounts. |
|
(6) |
Investments that are measured at net asset value (“NAV”) (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. |
The following table summarizes assets measured at fair value based on NAV per share as a practical expedient as of September 30, 2019 and 2018 (in millions):
|
|
|
Fair value |
|
|
Redemption Frequency |
|
Redemption Notice Period |
|
Unfunded Commitments |
|
||
|
September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge funds (1) |
|
$ |
42.9 |
|
|
Monthly |
|
Up to 30 days |
|
$ |
— |
|
|
Commingled funds, private equity, private real estate investments, and equity related investments (2) |
|
|
1,188.6 |
|
|
Monthly |
|
Up to 60 days |
|
|
113.1 |
|
|
Fixed income and fixed income related instruments (3) |
|
|
823.3 |
|
|
Monthly |
|
Up to 10 days |
|
|
— |
|
|
|
|
$ |
2,054.8 |
|
|
|
|
|
|
$ |
113.1 |
|
|
September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge funds (1) |
|
$ |
47.9 |
|
|
Monthly |
|
Up to 30 days |
|
$ |
— |
|
|
Commingled funds, private equity, private real estate investments, and equity related investments (2) |
|
|
1,092.9 |
|
|
Monthly |
|
Up to 60 days |
|
|
75.3 |
|
|
Fixed income and fixed income related instruments (3) |
|
|
1,050.8 |
|
|
Monthly |
|
Up to 10 days |
|
|
— |
|
|
|
|
$ |
2,191.6 |
|
|
|
|
|
|
$ |
75.3 |
|
|
(1) |
Hedge fund investments are primarily made through shares of limited partnerships or similar structures. Hedge funds are typically valued monthly by third-party administrators that have been appointed by the funds’ general partners. Hedge funds have been valued using NAV as a practical expedient. |
|
(2) |
Commingled fund investments are valued at the NAV per share multiplied by the number of shares held. The determination of NAV for the commingled funds includes market pricing of the underlying assets as well as broker quotes and other valuation techniques. Commingled funds have been valued using NAV as a practical expedient. |
|
(3) |
Fixed income and fixed income related instruments consist of commingled debt funds, which are valued at their NAV per share multiplied by the number of shares held. The determination of NAV for the commingled funds includes market pricing of the underlying assets as well as broker quotes and other valuation techniques. Commingled debt funds have been valued using NAV as a practical expedient. |
We maintain holdings in certain private equity partnerships and private real estate investments for which a liquid secondary market does not exist. The private equity partnerships are commingled investments. Valuation techniques, such as discounted cash flow and market based comparable analyses, are used to determine fair value of the private equity investments. Unobservable inputs used for the discounted cash flow technique include projected future cash flows and the discount rate used to calculate present value. Unobservable inputs used for the market-based comparisons technique include earnings before interest, taxes, depreciation and amortization multiples in other comparable third-party transactions, price to earnings ratios, liquidity, current operating results, as well as input from general partners and other pertinent information. Private equity investments have been valued using NAV as a practical expedient.
90
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Private real estate investments are commingled investments. Valuation techniques, such as discounted cash flow and market based comparable analyses, are used to determine fair value of the private equity investments. Unobservable inputs used for the discounted cash flow technique include projected future cash flows and the discount rate used to calculate present value. Unobservable inputs used for the market-based comparison technique include a combination of third party appraisals, replacement cost, and comparable market prices. Private real estate investments have been valued using NAV as a practical expedient.
Equity-related investments are hedged equity investments in a commingled fund that consist primarily of equity indexed investments which are hedged by options and also hold collateral in the form of short term treasury securities. Equity related investments have been valued using NAV as a practical expedient.
Postretirement Plans
The postretirement benefit plans provide certain health care and life insurance benefits for certain salaried and hourly employees who meet specified age and service requirements as defined by the plans.
The weighted average assumptions used to measure the benefit plan obligations at September 30 were:
|
|
|
Postretirement plans |
|
|||||||||||||
|
|
|
2019 |
|
|
2018 |
|
||||||||||
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||
|
Discount rate |
|
|
3.34 |
% |
|
|
5.64 |
% |
|
|
4.50 |
% |
|
|
6.61 |
% |
The following table shows the changes in benefit obligation, plan assets and funded status for the fiscal years ended September 30 (in millions):
|
|
|
Postretirement Plans |
|
|||||||||||||
|
|
|
2019 |
|
|
2018 |
|
||||||||||
|
Change in projected benefit obligation: |
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||
|
Benefit obligation at beginning of fiscal year |
|
$ |
91.0 |
|
|
$ |
55.5 |
|
|
$ |
98.1 |
|
|
$ |
68.1 |
|
|
Service cost |
|
|
0.7 |
|
|
|
0.5 |
|
|
|
0.7 |
|
|
|
0.8 |
|
|
Interest cost |
|
|
4.1 |
|
|
|
3.6 |
|
|
|
3.9 |
|
|
|
4.0 |
|
|
Amendments |
|
|
0.4 |
|
|
|
— |
|
|
|
(1.4 |
) |
|
|
— |
|
|
Actuarial loss (gain) |
|
|
1.6 |
|
|
|
22.2 |
|
|
|
(2.5 |
) |
|
|
(5.2 |
) |
|
Benefits paid |
|
|
(6.6 |
) |
|
|
(2.9 |
) |
|
|
(7.8 |
) |
|
|
(2.6 |
) |
|
Business combinations |
|
|
7.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Curtailments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2.1 |
) |
|
Foreign currency rate changes |
|
|
— |
|
|
|
(3.2 |
) |
|
|
— |
|
|
|
(7.5 |
) |
|
Benefit obligation at end of fiscal year |
|
$ |
98.3 |
|
|
$ |
75.7 |
|
|
$ |
91.0 |
|
|
$ |
55.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of fiscal year |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Employer contributions |
|
|
6.6 |
|
|
|
2.9 |
|
|
|
7.8 |
|
|
|
2.6 |
|
|
Plan participant contributions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Benefits paid |
|
|
(6.6 |
) |
|
|
(2.9 |
) |
|
|
(7.8 |
) |
|
|
(2.6 |
) |
|
Fair value of plan assets at end of fiscal year |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Funded Status |
|
$ |
(98.3 |
) |
|
$ |
(75.7 |
) |
|
$ |
(91.0 |
) |
|
$ |
(55.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities |
|
$ |
(8.9 |
) |
|
$ |
(3.0 |
) |
|
$ |
(8.8 |
) |
|
$ |
(2.9 |
) |
|
Postretirement benefit liabilities, net of current portion |
|
|
(89.4 |
) |
|
|
(72.7 |
) |
|
|
(82.2 |
) |
|
|
(52.6 |
) |
|
Under funded status at end of fiscal year |
|
$ |
(98.3 |
) |
|
$ |
(75.7 |
) |
|
$ |
(91.0 |
) |
|
$ |
(55.5 |
) |
91
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The pre-tax amounts in accumulated other comprehensive loss at September 30 not yet recognized as components of net periodic postretirement cost, including noncontrolling interest, consist of (in millions):
|
|
|
Postretirement Plans |
|
|||||||||||||
|
|
|
2019 |
|
|
2018 |
|
||||||||||
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||
|
Net actuarial (gain) loss |
|
$ |
(8.0 |
) |
|
$ |
18.8 |
|
|
$ |
(11.2 |
) |
|
$ |
(3.8 |
) |
|
Prior service credit |
|
|
(8.3 |
) |
|
|
(0.9 |
) |
|
|
(11.3 |
) |
|
|
(1.0 |
) |
|
Total accumulated other comprehensive (income) loss |
|
$ |
(16.3 |
) |
|
$ |
17.9 |
|
|
$ |
(22.5 |
) |
|
$ |
(4.8 |
) |
The pre-tax amounts recognized in other comprehensive loss (income), including noncontrolling interest, are as follows at September 30 (in millions):
|
|
|
Postretirement Plans |
|
|||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Net actuarial loss (gain) arising during period |
|
$ |
23.9 |
|
|
$ |
(9.7 |
) |
|
$ |
14.7 |
|
|
Amortization and settlement recognition of net actuarial gain (loss) |
|
|
2.0 |
|
|
|
(0.3 |
) |
|
|
1.3 |
|
|
Prior service cost (credit) arising during period |
|
|
0.4 |
|
|
|
(1.5 |
) |
|
|
(4.4 |
) |
|
Amortization or curtailment recognition of prior service credit |
|
|
2.8 |
|
|
|
4.4 |
|
|
|
4.5 |
|
|
Net other comprehensive loss (income) recognized |
|
$ |
29.1 |
|
|
$ |
(7.1 |
) |
|
$ |
16.1 |
|
The net periodic postretirement cost recognized in the consolidated statements of income is comprised of the following for fiscal years ended (in millions):
|
|
|
Postretirement Plans |
|
|||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Service cost |
|
$ |
1.2 |
|
|
$ |
1.5 |
|
|
$ |
0.9 |
|
|
Interest cost |
|
|
7.7 |
|
|
|
7.9 |
|
|
|
7.4 |
|
|
Amortization of net actuarial (gain) loss |
|
|
(2.0 |
) |
|
|
0.3 |
|
|
|
(1.3 |
) |
|
Amortization of prior service credit |
|
|
(2.8 |
) |
|
|
(4.4 |
) |
|
|
(4.5 |
) |
|
Curtailment gain |
|
|
— |
|
|
|
(0.1 |
) |
|
|
(0.3 |
) |
|
Net postretirement cost |
|
$ |
4.1 |
|
|
$ |
5.2 |
|
|
$ |
2.2 |
|
The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation (“APBO”) are as follows at September 30, 2019:
|
U.S. Plans |
|
|
|
|
|
Health care cost trend rate assumed for next year |
|
|
5.87 |
% |
|
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |
|
|
4.42 |
% |
|
Year the rate reaches the ultimate trend rate |
|
2037 |
|
|
|
|
|
|
|
|
|
Non-U.S. Plans |
|
|
|
|
|
Health care cost trend rate assumed for next year |
|
|
5.91 |
% |
|
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |
|
|
5.91 |
% |
|
Year the rate reaches the ultimate trend rate |
|
2019 |
|
|
As of September 30, 2019, the effect of a 1% change in the assumed health care cost trend rate would increase the APBO by approximately $12 million or decrease the APBO by approximately $10 million, and would increase the
92
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
annual net periodic postretirement benefit cost for fiscal 2019 by $1 million or decrease the annual net periodic postretirement benefit cost for fiscal 2019 by approximately $1 million.
Weighted-average assumptions used in the calculation of benefit plan expense for fiscal years ended:
|
|
|
Postretirement Plans |
|
|||||||||||||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||||||||||||||
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||||
|
Discount rate |
|
|
4.50 |
% |
|
|
6.61 |
% |
|
|
4.09 |
% |
|
|
6.51 |
% |
|
|
4.04 |
% |
|
|
6.64 |
% |
|
Rate of compensation increase |
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
7.37 |
% |
|
N/A |
|
|
|
3.14 |
% |
||||
The estimated gains that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in fiscal 2020 are as follows (in millions):
|
|
|
Postretirement Plans |
|
|||||
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||
|
Actuarial gain |
|
$ |
(1.4 |
) |
|
$ |
(0.7 |
) |
|
Prior service credit |
|
|
(2.6 |
) |
|
|
0.2 |
|
|
Total |
|
$ |
(4.0 |
) |
|
$ |
(0.5 |
) |
Our projected estimated benefit payments (unaudited), which reflect expected future service, as appropriate, are as follows (in millions):
|
|
|
Postretirement Plans |
|
|||||
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||
|
Fiscal 2020 |
|
$ |
9.4 |
|
|
$ |
2.9 |
|
|
Fiscal 2021 |
|
$ |
8.2 |
|
|
$ |
3.0 |
|
|
Fiscal 2022 |
|
$ |
7.8 |
|
|
$ |
3.1 |
|
|
Fiscal 2023 |
|
$ |
7.4 |
|
|
$ |
3.2 |
|
|
Fiscal 2024 |
|
$ |
7.0 |
|
|
$ |
3.3 |
|
|
Fiscal Years 2025 – 2029 |
|
$ |
30.8 |
|
|
$ |
17.8 |
|
Multiemployer Plans
We participate in several MEPPs that provide retirement benefits to certain union employees in accordance with various CBAs. The risks of participating in MEPPs are different from the risks of participating in single-employer pension plans. These risks include:
|
|
• |
assets contributed to a MEPP by one employer are used to provide benefits to employees of all participating employers, |
|
|
• |
if a participating employer withdraws from a MEPP, the unfunded obligations of the MEPP allocable to such withdrawing employer may be borne by the remaining participating employers, and |
|
|
• |
if we withdraw from a MEPP, we may be required to pay that plan an amount based on our allocable share of the unfunded vested benefits of the plan, referred to as a withdrawal liability, as well as a share of the MEPP’s accumulated funding deficiency. |
Our contributions to a particular MEPP are established by the applicable CBAs; however, our required contributions may increase based on the funded status of a MEPP and legal requirements, such as those set forth in the Pension Act, which requires substantially underfunded MEPPs to implement a FIP or a RP to improve their funded status. Factors that could impact the funded status of a MEPP include, without limitation, investment performance, changes in participant demographics, decline in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions. We believe that certain of the MEPPs in which we participate or have participated, including the PIUMPF, have material unfunded vested benefits. The Pension Act established three categories, or “zones”, for the funded status of plans. Among other factors, plans in the green zone are at least 80% funded and are designated as healthy, plans in the yellow zone are greater than 65% but less than 80% funded and are designated as endangered and plans in the red zone are generally less than
93
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
65% funded and are designated as critical or critical and declining. Each plan’s actuary must certify the plan status annually. Several of the MEPPs in which we participate or have participated, including PIUMPF, have been certified in the red zone for critical and declining.
A FIP or RP requires a particular MEPP to adopt measures to correct its underfunded status. These measures may include, but are not limited to, an increase in our contribution rate from that provided in the applicable CBA, a reallocation of the contributions already being made by participating employers for various benefits to individuals participating in the MEPP, and/or a reduction in the benefits to be paid to future and/or current retirees. In addition, the Pension Act requires that a 5% surcharge be levied on employer contributions for the first year commencing shortly after the date the employer receives notice that the MEPP is certified in the red zone and a 10% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP. On January 1, 2016, the surcharge we paid for PIUMPF increased from 10% to 15%.
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 recorded an estimated withdrawal liability of $180.0 million. The estimated withdrawal liability assumes payment over 20 years, discounted at a credit adjusted risk-free rate of 3.83%, and that PIUMPF’s demand related to the withdrawal would include both a payment for withdrawal liability and for our proportionate share of PIUMPF’s accumulated funding deficiency. The estimated withdrawal liability noted above excludes the potential impact of a future mass withdrawal of other employers from PIUMPF, which is not considered probable or reasonably estimable at this time. Due to the absence of specific information regarding matters such as PIUMPF’s current financial situation, our estimate is subject to revision. In fiscal 2019, we revised our estimate of the withdrawal liability, the impact of which was not significant.
In addition, in fiscal 2018, we submitted formal notification to withdraw from Central States and recorded an estimated withdrawal liability of $4.2 million on a discounted basis. 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.
In September 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 demand did not address any assertion of liability for PIUMPF’s accumulated funding deficiency. In October 2019, we received two additional demand letters from PIUMPF related to a subsidiary 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 are evaluating each of these demands. We expect to challenge the accumulated funding deficiency. We expect to begin making monthly payments for these withdrawal liabilities in fiscal 2020.
At September 30, 2019 and September 30, 2018, we had withdrawal liabilities recorded of $237.2 million and $247.8 million, respectively. The impact of future withdrawal liabilities, future funding obligations or increased contributions may be material to our results of operations, cash flows and financial condition and the trading price of our Common Stock.
Approximately 46% of our employees are covered by CBAs in the U.S. and Canada, of which approximately 17% are covered by CBAs that expire within one year and another 4% are covered by CBAs that have expired.
94
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table lists our participation in our multiemployer and other plans that are individually significant for the years ended September 30 (in millions):
|
Pension Fund |
|
EIN / Pension Plan Number |
|
Pension Act Zone Status |
|
FIP / RP Status Pending / Implemented |
|
Contributions (1) |
|
|
Surcharge imposed? |
|
Expiration CBA |
|||||||||||
|
|
|
|
|
2019 |
|
2018 |
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
|
|
|
|||
|
U.S. Multiemployer plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pace Industry Union-Management Pension Fund (2) |
|
11-6166763 / 001 |
|
Red |
|
Red |
|
Implemented |
|
$ |
— |
|
|
$ |
0.9 |
|
|
$ |
3.5 |
|
|
Yes |
|
9/30/20 to 6/25/23 |
|
Other Funds (3) |
|
|
|
|
|
|
|
|
|
|
1.4 |
|
|
|
0.5 |
|
|
|
1.6 |
|
|
|
|
|
|
Total Contributions: |
|
|
|
|
|
|
|
|
|
$ |
1.4 |
|
|
$ |
1.4 |
|
|
$ |
5.1 |
|
|
|
|
|
|
(1) |
Contributions represent the amounts contributed to the plan during the fiscal year. |
|
(2) |
In fiscal 2019 and 2018, our contributions did not exceed 5% of total plan contributions due to our withdrawal from PIUMPF. In fiscal 2017, we did exceed 5% of total plan contributions. |
|
(3) |
One additional MEPP in which we participate have been certified as critical and declining. |
Defined Contribution Plans
We have 401(k) and other defined contribution plans that cover certain of our U.S., Canadian and other non-U.S. salaried union and nonunion hourly employees, generally subject to an initial waiting period. The 401(k) and other defined contribution plans permit participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code, or the taxing authority in the jurisdiction in which they operate. Due primarily to acquisitions, CBAs and other non-U.S. defined contribution programs, we have plans with varied terms. At September 30, 2019, our contributions may be up to 7.5% for U.S. salaried and non-union hourly employees, consisting of a match of up to 5% and an automatic employer contribution of 2.5%. Certain other employees who receive accruals under a defined benefit pension plan, certain employees covered by CBAs and non-U.S. defined contribution programs receive generally up to a 3.0% to 4.0% contribution to their 401(k) plan or defined contribution plan. During fiscal 2019, 2018 and 2017, we recorded expense of $150.9 million, $113.7 million and $104.1 million, respectively, related to matching contributions to the 401(k) plans and other defined contribution plans, including the automatic employer contribution.
Supplemental Retirement Plans
We have Supplemental Plans that are nonqualified deferred compensation plans. We intend to provide participants with an opportunity to supplement their retirement income through deferral of current compensation. Amounts deferred and payable under the Supplemental Plans are our unsecured obligations and rank equally with our other unsecured and unsubordinated indebtedness outstanding. Participants’ accounts are credited with investment gains and losses under the Supplemental Plans in accordance with the participant’s investment election or elections (or default election or elections) as in effect from time to time. At September 30, 2019, the Supplemental Plans had assets totaling $173.0 million that are recorded at market value, and liabilities of $181.9 million. The investment alternatives available under the Supplemental Plans are generally similar to investment alternatives available under 401(k) plans. The amount of expense we recorded for the current fiscal year and the preceding two fiscal years was not significant.
|
Note 6. |
Income Taxes |
The components of income before income taxes are as follows (in millions):
|
|
|
Year Ended September 30, |
|
|||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
United States |
|
$ |
891.6 |
|
|
$ |
736.7 |
|
|
$ |
481.9 |
|
|
Foreign |
|
|
253.1 |
|
|
|
298.1 |
|
|
|
375.7 |
|
|
Income before income taxes |
|
$ |
1,144.7 |
|
|
$ |
1,034.8 |
|
|
$ |
857.6 |
|
95
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Impacts of the Tax Act
On December 22, 2017, the U.S. enacted comprehensive tax legislation, commonly referred to as the Tax Act, which made broad and complex changes to the tax code. In conjunction with guidance set forth under SAB 118 pertaining to the Tax Act, we recorded provisional amounts both for the impact of remeasurement on its U.S. net deferred tax liabilities to the new U.S. statutory rate of 21% and for the mandatory transition tax on unrepatriated foreign earnings during fiscal 2018. During the first quarter of fiscal 2019, we completed the accounting for the income tax effect related to the Tax Act and made the following adjustments to the provisional amounts: (i) a $0.4 million tax expense from the true up and revaluation of deferred tax assets and liabilities to reflect the new tax rate and (ii) an additional $3.7 million tax expense, as a result of the refinement to the transition tax provisional liability. We have reclassified the transition tax liability for financial statement purposes to a reserve for uncertain tax position due to uncertainty in the realizability of certain foreign earnings and profits deficits.
For fiscal 2019, we are subject to several provisions of the Tax Act, including computations under Global Intangible Low Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Base Erosion and Anti-Abuse Tax (“BEAT”), and IRC Section 163(j) interest limitation (“Interest Limitation”) rules. We recorded the immaterial tax impact of GILTI, FDII and Interest Limitation computations in our effective tax rate for fiscal 2019. For the BEAT computation, we have not recorded any amount in our effective tax rate for fiscal 2019 because we estimate that this provision of the Tax Act will not impact tax expense for the fiscal year.
As part of the enacted Tax Act, GILTI provisions were introduced that would impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. In January 2018, the FASB issued a question-and-answer document, stating that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as period costs are both acceptable methods subject to an accounting policy election. The GILTI provisions did not take effect for WestRock until fiscal 2019, and the Company has elected to treat any potential GILTI inclusions as a period cost during the year incurred.
Income tax expense (benefit) consists of the following components (in millions):
|
|
|
Year Ended September 30, |
|
|||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Current income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
134.7 |
|
|
$ |
83.0 |
|
|
$ |
80.8 |
|
|
State |
|
|
34.9 |
|
|
|
26.8 |
|
|
|
3.3 |
|
|
Foreign |
|
|
69.5 |
|
|
|
86.6 |
|
|
|
95.3 |
|
|
Total current expense |
|
|
239.1 |
|
|
|
196.4 |
|
|
|
179.4 |
|
|
Deferred income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
44.1 |
|
|
|
(1,108.6 |
) |
|
|
15.2 |
|
|
State |
|
|
6.1 |
|
|
|
53.2 |
|
|
|
(22.8 |
) |
|
Foreign |
|
|
(12.5 |
) |
|
|
(15.5 |
) |
|
|
(12.8 |
) |
|
Total deferred expense (benefit) |
|
|
37.7 |
|
|
|
(1,070.9 |
) |
|
|
(20.4 |
) |
|
Total income tax expense (benefit) |
|
$ |
276.8 |
|
|
$ |
(874.5 |
) |
|
$ |
159.0 |
|
96
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The differences between the statutory federal income tax rate and our effective income tax rate are as follows:
|
|
|
Year Ended September 30, |
|
|||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Statutory federal tax rate |
|
|
21.0 |
% |
|
|
24.5 |
% |
|
|
35.0 |
% |
|
Foreign rate differential |
|
|
1.3 |
|
|
|
0.6 |
|
|
|
(4.9 |
) |
|
Adjustment and resolution of federal, state and foreign tax uncertainties |
|
|
1.2 |
|
|
|
0.9 |
|
|
|
(0.3 |
) |
|
State taxes, net of federal benefit |
|
|
2.5 |
|
|
|
4.3 |
|
|
|
3.3 |
|
|
Tax Act (1) |
|
|
— |
|
|
|
(109.1 |
) |
|
|
— |
|
|
Excess tax benefit related to stock compensation |
|
|
(0.3 |
) |
|
|
(0.8 |
) |
|
|
— |
|
|
Research and development and other tax credits, net of valuation allowances and reserves |
|
|
(0.7 |
) |
|
|
(0.5 |
) |
|
|
(0.8 |
) |
|
Income attributable to noncontrolling interest |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
0.4 |
|
|
Domestic manufacturer’s deduction |
|
|
— |
|
|
|
(1.8 |
) |
|
|
(2.0 |
) |
|
Sale of HH&B |
|
|
— |
|
|
|
— |
|
|
|
(5.0 |
) |
|
U.S. legal entity restructuring |
|
|
— |
|
|
|
— |
|
|
|
(3.3 |
) |
|
Change in valuation allowance |
|
|
0.2 |
|
|
|
(1.8 |
) |
|
|
(3.3 |
) |
|
Nondeductible transaction costs |
|
|
1.0 |
|
|
|
— |
|
|
|
1.0 |
|
|
Nontaxable increased cash surrender value |
|
|
(0.6 |
) |
|
|
(0.8 |
) |
|
|
(1.5 |
) |
|
Withholding taxes |
|
|
0.6 |
|
|
|
0.5 |
|
|
|
0.4 |
|
|
Brazilian net worth deduction |
|
|
(0.9 |
) |
|
|
(0.9 |
) |
|
|
(0.8 |
) |
|
Other, net |
|
|
(1.0 |
) |
|
|
0.5 |
|
|
|
0.3 |
|
|
Effective tax rate |
|
|
24.2 |
% |
|
|
(84.5 |
)% |
|
|
18.5 |
% |
|
(1) |
For the year ended September 30, 2018, the primary components are a $1,215.9 million benefit from the remeasurement of our net U.S. deferred tax liability and a one-time transition tax liability of $95.4 million or $87.1 million net of the release of a previously recorded outside basis difference. |
The tax effects of temporary differences that give rise to deferred income tax assets and liabilities consist of the following (in millions):
|
|
|
September 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
|
Accruals and allowances |
|
$ |
10.7 |
|
|
$ |
22.1 |
|
|
Employee related accruals and allowances |
|
|
221.2 |
|
|
|
213.2 |
|
|
Pension |
|
|
0.7 |
|
|
|
— |
|
|
State net operating loss carryforwards |
|
|
57.6 |
|
|
|
78.4 |
|
|
State credit carryforwards, net of federal benefit |
|
|
69.5 |
|
|
|
64.8 |
|
|
U.S. and foreign tax credit carryforwards |
|
|
0.7 |
|
|
|
14.7 |
|
|
Federal and foreign net operating loss carryforwards |
|
|
173.5 |
|
|
|
188.7 |
|
|
Restricted stock and options |
|
|
39.3 |
|
|
|
46.7 |
|
|
Other |
|
|
52.1 |
|
|
|
45.3 |
|
|
Total |
|
|
625.3 |
|
|
|
673.9 |
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
1,840.5 |
|
|
|
1,509.7 |
|
|
Deductible intangibles and goodwill |
|
|
914.7 |
|
|
|
698.1 |
|
|
Inventory reserves |
|
|
188.3 |
|
|
|
168.6 |
|
|
Deferred gain |
|
|
275.2 |
|
|
|
258.8 |
|
|
Pension obligations |
|
|
— |
|
|
|
60.1 |
|
|
Basis difference in joint ventures |
|
|
33.1 |
|
|
|
35.5 |
|
|
Total |
|
|
3,251.8 |
|
|
|
2,730.8 |
|
|
Valuation allowances |
|
|
218.0 |
|
|
|
229.4 |
|
|
Net deferred income tax liability |
|
$ |
2,844.5 |
|
|
$ |
2,286.3 |
|
97
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred taxes are recorded as follows in the consolidated balance sheet (in millions):
|
|
|
September 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Long-term deferred tax asset (1) |
|
$ |
33.5 |
|
|
$ |
35.2 |
|
|
Long-term deferred tax liability |
|
|
2,878.0 |
|
|
|
2,321.5 |
|
|
Net deferred income tax liability |
|
$ |
2,844.5 |
|
|
$ |
2,286.3 |
|
|
(1) |
The long-term deferred tax asset is presented in Other assets on the consolidated balance sheets. |
At September 30, 2019 and September 30, 2018, we had gross U.S. federal net operating losses of approximately $4.0 million and $13.3 million, respectively. These loss carryforwards generally expire between fiscal 2031 and 2038.
At September 30, 2019 we had no alternative minimum tax credits outstanding. Under current tax law, the alternative minimum tax credit carryforwards became refundable tax credits which we fully utilized. At September 30, 2018, we had alternative minimum tax credits of $14.7 million. We had no research and development tax credits and general business credit carryforwards at September 30, 2019.
At September 30, 2019 and September 30, 2018, we had gross state and local net operating losses, of approximately $1,638 million and $1,676 million, respectively. These loss carryforwards generally expire between fiscal 2021 and 2039. The tax effected values of these net operating losses are $57.6 million and $78.4 million at September 30, 2019 and 2018, respectively, exclusive of valuation allowances of $10.2 million and $7.8 million at September 30, 2019 and 2018, respectively.
At September 30, 2019 and September 30, 2018, gross net operating losses for foreign reporting purposes of approximately $663.2 million and $698.4 million, respectively, were available for carryforward. A majority of these loss carryforwards generally expire between fiscal 2021 and 2039, while a portion have an indefinite carryforward. The tax effected values of these net operating losses are $172.5 million and $185.8 million at September 30, 2019 and 2018, respectively, exclusive of valuation allowances of $144.1 million and $161.5 million at September 30, 2019 and 2018, respectively.
At September 30, 2019 and 2018, we had state tax credit carryforwards of $69.5 million and $64.8 million, respectively. These state tax credit carryforwards generally expire within 5 to 10 years; however, certain state credits can be carried forward indefinitely. Valuation allowances of $56.8 million and $56.1 million at September 30, 2019 and 2018, respectively, have been provided on these assets. These valuation allowances have been recorded due to uncertainty regarding our ability to generate sufficient taxable income in the appropriate taxing jurisdiction.
The following table represents a summary of the valuation allowances against deferred tax assets for fiscal 2019, 2018 and 2017 (in millions):
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Balance at beginning of fiscal year |
|
$ |
229.4 |
|
|
$ |
219.1 |
|
|
$ |
177.2 |
|
|
Increases |
|
|
25.4 |
|
|
|
50.8 |
|
|
|
54.3 |
|
|
Allowances related to purchase accounting (1) |
|
|
0.8 |
|
|
|
0.1 |
|
|
|
12.4 |
|
|
Reductions |
|
|
(37.6 |
) |
|
|
(40.6 |
) |
|
|
(24.8 |
) |
|
Balance at end of fiscal year |
|
$ |
218.0 |
|
|
$ |
229.4 |
|
|
$ |
219.1 |
|
|
(1) |
Amounts in fiscal 2019 relate to the KapStone Acquisition. Amounts in fiscal 2018 and 2017 relate to the MPS Acquisition. |
Consistent with prior years, we consider a portion of our earnings from certain foreign subsidiaries as subject to repatriation and we provide for taxes accordingly. However, we consider the unremitted earnings and all other outside basis differences from all other foreign subsidiaries to be indefinitely reinvested. Accordingly, we have not provided for any taxes that would be due.
98
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of September 30, 2019, we estimate our outside basis difference in foreign subsidiaries that are considered indefinitely reinvested to be approximately $1.6 billion. The components of the outside basis difference are comprised of purchase accounting adjustments, undistributed earnings, and equity components. Except for the portion of our earnings from certain foreign subsidiaries where we provided for taxes, we have not provided for any taxes that would be due upon the reversal of the outside basis differences. However, in the event of a distribution in the form of dividends or dispositions of the subsidiaries, we may be subject to incremental U.S. income taxes, subject to an adjustment for foreign tax credits, and withholding taxes or income taxes payable to the foreign jurisdictions. As of September 30, 2019, the determination of the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the Transition Tax and additional outside basis differences is not practicable.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in millions):
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Balance at beginning of fiscal year |
|
$ |
127.1 |
|
|
$ |
148.9 |
|
|
$ |
166.8 |
|
|
Additions related to purchase accounting (1) |
|
|
1.0 |
|
|
|
3.4 |
|
|
|
7.7 |
|
|
Additions for tax positions taken in current year (2) |
|
|
103.8 |
|
|
|
3.1 |
|
|
|
5.0 |
|
|
Additions for tax positions taken in prior fiscal years |
|
|
1.8 |
|
|
|
18.0 |
|
|
|
15.2 |
|
|
Reductions for tax positions taken in prior fiscal years |
|
|
(0.5 |
) |
|
|
(5.3 |
) |
|
|
(25.6 |
) |
|
Reductions due to settlement (3) |
|
|
(4.0 |
) |
|
|
(29.4 |
) |
|
|
(14.1 |
) |
|
(Reductions) additions for currency translation adjustments |
|
|
(1.7 |
) |
|
|
(9.6 |
) |
|
|
2.0 |
|
|
Reductions as a result of a lapse of the applicable statute of limitations |
|
|
(3.2 |
) |
|
|
(2.0 |
) |
|
|
(8.1 |
) |
|
Balance at end of fiscal year |
|
$ |
224.3 |
|
|
$ |
127.1 |
|
|
$ |
148.9 |
|
|
(1) |
Amounts in fiscal 2019 relate to the KapStone Acquisition. Amounts in fiscal 2018 and 2017 relate to the MPS Acquisition. |
|
|
|
(2) |
Additions for tax positions taken in current fiscal year includes primarily positions taken related to foreign subsidiaries. |
|
(3) |
Amounts in fiscal 2019 relate to the settlements of state and foreign audit examinations. Amounts in fiscal 2018 relate to the settlement of state audit examinations and federal and state amended returns filed related to affirmative adjustments for which there was a reserve. Amounts in fiscal 2017 relate to the settlement of federal and state audit examinations with taxing authorities. |
As of September 30, 2019 and 2018, the total amount of unrecognized tax benefits was approximately $224.3 million and $127.1 million, respectively, exclusive of interest and penalties. Of these balances, as of September 30, 2019 and 2018, if we were to prevail on all unrecognized tax benefits recorded, approximately $207.5 million and $108.7 million, respectively, would benefit the effective tax rate. We regularly evaluate, assess and adjust the related liabilities in light of changing facts and circumstances, which could cause the effective tax rate to fluctuate from period to period. 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. See “Note 18. Commitments and Contingencies — Brazil Tax Liability”
We recognize estimated interest and penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of income. As of September 30, 2019, we had liabilities of $80.0 million related to estimated interest and penalties for unrecognized tax benefits. As of September 30, 2018, we had liabilities of $70.4 million, related to estimated interest and penalties for unrecognized tax benefits. Our results of operations for the fiscal year ended September 30, 2019, 2018 and 2017 include expense of $9.7 million, $5.8 million and $7.4 million, respectively, net of indirect benefits, related to estimated interest and penalties with respect to the liability for unrecognized tax benefits. As of September 30, 2019, it is reasonably possible that our unrecognized tax benefits will decrease by up to $8.7 million in the next twelve months due to expiration of various statues of limitations and settlement of issues.
We file federal, state and local income tax returns in the U.S. and various foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal and state and local income tax examinations by tax authorities for years prior to fiscal 2016 and fiscal 2009, respectively. We are no longer subject to non-U.S. income tax examinations by tax authorities for years prior to fiscal 2012, except for Brazil for which we are not subject to tax
99
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
examinations for years prior to 2006. While we believe our tax positions are appropriate, they are subject to audit or other modifications and there can be no assurance that any modifications will not materially and adversely affect our results of operations, financial condition or cash flows.
|
Note 7. |
Segment Information |
Effective in the first quarter of fiscal 2019, we aligned our financial results for all periods presented to move our merchandising displays operations from our Consumer Packaging segment to our Corrugated Packaging segment and to allocate certain previously non-allocated costs and certain pension and other postretirement non-service income (expense) to our reportable segments. Separately, in the first quarter of fiscal 2019, we began conducting our recycling operations primarily as a procurement function. Since then, recycling net sales have not been recorded and the margin from these operations has reduced cost of goods sold. Following the realignment, 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 sells real estate, primarily in the Charleston, SC region. Prior to the HH&B Sale, our Consumer Packaging segment included HH&B. 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. Items not allocated are reported as non-allocated expenses or in other line items in the table below after segment income.
Some of our operations included in the segments are located in locations such as Canada, Mexico, South America, Europe, Asia and Australia. The table below reflects financial data of our foreign operations for each of the past three fiscal years, some of which were transacted in U.S. dollars (in millions, except percentages):
|
|
|
Years Ended September 30, |
|
|||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Foreign net sales to unaffiliated customers |
|
$ |
3,332.4 |
|
|
$ |
3,236.7 |
|
|
$ |
2,621.2 |
|
|
Foreign segment income |
|
$ |
392.3 |
|
|
$ |
360.7 |
|
|
$ |
260.1 |
|
|
Foreign long-lived assets |
|
$ |
1,466.4 |
|
|
$ |
1,400.2 |
|
|
$ |
1,558.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign operations as a percent of consolidated operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign net sales to unaffiliated customers |
|
|
18.2 |
% |
|
|
19.9 |
% |
|
|
17.6 |
% |
|
Foreign segment income |
|
|
21.9 |
% |
|
|
21.1 |
% |
|
|
21.4 |
% |
|
Foreign long-lived assets |
|
|
13.1 |
% |
|
|
15.4 |
% |
|
|
17.1 |
% |
We evaluate performance and allocate resources based, in part, on profit from operations before income taxes, interest and other items. The accounting policies of the reportable segments are the same as those described in “Note 1. Description of Business and Summary of Significant Accounting Policies”. We account for intersegment sales at prices that approximate market prices. For segment reporting purposes, we include our equity in income of unconsolidated entities in segment income, as well as our investments in unconsolidated entities in segment identifiable assets. Equity in income of unconsolidated entities is not material and we disclose our investments in unconsolidated entities below.
100
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table shows selected operating data for our segments (in millions):
|
|
|
Years Ended September 30, |
|
|||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Net sales (aggregate): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging |
|
$ |
11,816.7 |
|
|
$ |
9,693.0 |
|
|
$ |
9,084.8 |
|
|
Consumer Packaging |
|
|
6,606.0 |
|
|
|
6,617.5 |
|
|
|
5,698.3 |
|
|
Land and Development |
|
|
23.4 |
|
|
|
142.4 |
|
|
|
243.8 |
|
|
Total |
|
$ |
18,446.1 |
|
|
$ |
16,452.9 |
|
|
$ |
15,026.9 |
|
|
Less net sales (intersegment): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging |
|
$ |
75.3 |
|
|
$ |
87.3 |
|
|
$ |
78.8 |
|
|
Consumer Packaging |
|
|
81.8 |
|
|
|
80.5 |
|
|
|
88.4 |
|
|
Total |
|
$ |
157.1 |
|
|
$ |
167.8 |
|
|
$ |
167.2 |
|
|
Net sales (unaffiliated customers): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging |
|
$ |
11,741.4 |
|
|
$ |
9,605.7 |
|
|
$ |
9,006.0 |
|
|
Consumer Packaging |
|
|
6,524.2 |
|
|
|
6,537.0 |
|
|
|
5,609.9 |
|
|
Land and Development |
|
|
23.4 |
|
|
|
142.4 |
|
|
|
243.8 |
|
|
Total |
|
$ |
18,289.0 |
|
|
$ |
16,285.1 |
|
|
$ |
14,859.7 |
|
|
Segment income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging |
|
$ |
1,399.6 |
|
|
$ |
1,240.0 |
|
|
$ |
818.0 |
|
|
Consumer Packaging |
|
|
388.1 |
|
|
|
445.1 |
|
|
|
385.7 |
|
|
Land and Development |
|
|
2.5 |
|
|
|
22.5 |
|
|
|
13.8 |
|
|
Segment income |
|
|
1,790.2 |
|
|
|
1,707.6 |
|
|
|
1,217.5 |
|
|
Gain on sale of certain closed facilities |
|
|
52.6 |
|
|
|
— |
|
|
|
— |
|
|
Multiemployer pension withdrawal income (expense) |
|
|
6.3 |
|
|
|
(184.2 |
) |
|
|
— |
|
|
Pension lump sum settlement |
|
|
— |
|
|
|
— |
|
|
|
(32.6 |
) |
|
Land and Development impairments |
|
|
(13.0 |
) |
|
|
(31.9 |
) |
|
|
(46.7 |
) |
|
Restructuring and other costs |
|
|
(173.7 |
) |
|
|
(105.4 |
) |
|
|
(196.7 |
) |
|
Non-allocated expenses |
|
|
(83.7 |
) |
|
|
(70.1 |
) |
|
|
(67.5 |
) |
|
Interest expense, net |
|
|
(431.3 |
) |
|
|
(293.8 |
) |
|
|
(222.5 |
) |
|
Loss (gain) on extinguishment of debt |
|
|
(5.1 |
) |
|
|
(0.1 |
) |
|
|
1.8 |
|
|
Other income, net |
|
|
2.4 |
|
|
|
12.7 |
|
|
|
11.5 |
|
|
Gain on sale of HH&B |
|
|
— |
|
|
|
— |
|
|
|
192.8 |
|
|
Income before income taxes |
|
$ |
1,144.7 |
|
|
$ |
1,034.8 |
|
|
$ |
857.6 |
|
In October 2018, our containerboard and pulp mill located in Panama City, FL sustained extensive damage from Hurricane Michael. In fiscal 2019, we received $180.0 million of insurance proceeds that were recorded as a reduction of cost of goods sold in our Corrugated Packaging segment. The insurance proceeds consisted of $55.3 million for business interruption recoveries and $124.7 million for direct costs and property damage. Our consolidated statements of cash flow in fiscal 2019 included $154.5 million in net cash provided by operating activities and $25.5 million in net cash used for investing activities.
Segment income in fiscal 2019, 2018 and 2017 was reduced by $24.7 million, $1.0 million and $26.5 million, respectively, of expense for inventory stepped-up in purchase accounting, net of related LIFO impact. The Corrugated Packaging segment income in fiscal 2019 was reduced by $24.7 million. Corrugated Packaging segment income in fiscal 2018 was reduced by $1.0 million. Corrugated Packaging segment income and Consumer Packaging segment income in fiscal 2017 were reduced by $1.4 million and $25.1 million, respectively.
101
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table shows selected operating data for our segments (in millions):
|
|
|
Years Ended September 30, |
|
|||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Identifiable assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging |
|
$ |
16,681.1 |
|
|
$ |
11,069.6 |
|
|
$ |
10,959.7 |
|
|
Consumer Packaging |
|
|
11,038.7 |
|
|
|
11,511.1 |
|
|
|
11,455.8 |
|
|
Land and Development |
|
|
28.3 |
|
|
|
49.1 |
|
|
|
89.8 |
|
|
Assets held for sale |
|
|
25.8 |
|
|
|
59.5 |
|
|
|
173.6 |
|
|
Corporate |
|
|
2,382.8 |
|
|
|
2,671.2 |
|
|
|
2,410.1 |
|
|
Total |
|
$ |
30,156.7 |
|
|
$ |
25,360.5 |
|
|
$ |
25,089.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging |
|
$ |
3,695.0 |
|
|
$ |
1,966.7 |
|
|
$ |
1,941.5 |
|
|
Consumer Packaging |
|
|
3,590.6 |
|
|
|
3,610.9 |
|
|
|
3,586.8 |
|
|
Total |
|
$ |
7,285.6 |
|
|
$ |
5,577.6 |
|
|
$ |
5,528.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging |
|
$ |
1,655.1 |
|
|
$ |
506.2 |
|
|
$ |
540.4 |
|
|
Consumer Packaging |
|
|
2,404.4 |
|
|
|
2,615.8 |
|
|
|
2,788.9 |
|
|
Total |
|
$ |
4,059.5 |
|
|
$ |
3,122.0 |
|
|
$ |
3,329.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging |
|
$ |
950.6 |
|
|
$ |
700.5 |
|
|
$ |
622.1 |
|
|
Consumer Packaging |
|
|
552.1 |
|
|
|
546.5 |
|
|
|
484.9 |
|
|
Land and Development |
|
|
— |
|
|
|
0.7 |
|
|
|
0.7 |
|
|
Corporate |
|
|
8.5 |
|
|
|
4.5 |
|
|
|
4.4 |
|
|
Total |
|
$ |
1,511.2 |
|
|
$ |
1,252.2 |
|
|
$ |
1,112.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging |
|
$ |
961.4 |
|
|
$ |
657.3 |
|
|
$ |
503.9 |
|
|
Consumer Packaging |
|
|
365.9 |
|
|
|
308.3 |
|
|
|
254.0 |
|
|
Corporate |
|
|
41.8 |
|
|
|
34.3 |
|
|
|
20.7 |
|
|
Total |
|
$ |
1,369.1 |
|
|
$ |
999.9 |
|
|
$ |
778.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in unconsolidated entities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging |
|
$ |
457.1 |
|
|
$ |
455.6 |
|
|
$ |
342.8 |
|
|
Consumer Packaging |
|
|
11.6 |
|
|
|
1.8 |
|
|
|
3.0 |
|
|
Land and Development |
|
|
— |
|
|
|
— |
|
|
|
14.4 |
|
|
Corporate |
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
Total |
|
$ |
469.1 |
|
|
$ |
457.8 |
|
|
$ |
360.6 |
|
The Corrugated Packaging segment’s investment in unconsolidated entities primarily relates to the Grupo Gondi investment. The investment in Grupo Gondi that is included in the Corrugated Packaging segment’s investment in unconsolidated entities in fiscal 2019 and 2018 exceeds our proportionate share of the underlying equity in net assets by approximately $121.4 million and $133.9 million, respectively. Approximately $53.1 million and $62.1 million remains amortizable to expense in equity in income of unconsolidated entities over the estimated life of the underlying assets ranging from 10 to 15 years beginning with our investment in fiscal 2016. The Gondi investment is denominated in Mexican Pesos. See “Note 3. Acquisitions and Investment” for information regarding changes in our equity participation in the Grupo Gondi joint venture.
102
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The changes in the carrying amount of goodwill for the fiscal years ended September 30, 2019, 2018 and 2017 are as follows (in millions):
|
|
|
Corrugated Packaging |
|
|
Consumer Packaging |
|
|
Total |
|
|||
|
Balance as of October 1, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
1,798.4 |
|
|
$ |
3,022.5 |
|
|
$ |
4,820.9 |
|
|
Accumulated impairment losses |
|
|
(0.1 |
) |
|
|
(42.7 |
) |
|
|
(42.8 |
) |
|
|
|
|
1,798.3 |
|
|
|
2,979.8 |
|
|
|
4,778.1 |
|
|
Goodwill acquired |
|
|
137.6 |
|
|
|
907.8 |
|
|
|
1,045.4 |
|
|
Goodwill disposed of |
|
|
— |
|
|
|
(329.6 |
) |
|
|
(329.6 |
) |
|
Purchase price allocation adjustments |
|
|
(1.2 |
) |
|
|
9.3 |
|
|
|
8.1 |
|
|
Translation adjustments |
|
|
6.8 |
|
|
|
19.5 |
|
|
|
26.3 |
|
|
Balance as of September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
1,941.6 |
|
|
|
3,629.5 |
|
|
|
5,571.1 |
|
|
Accumulated impairment losses |
|
|
(0.1 |
) |
|
|
(42.7 |
) |
|
|
(42.8 |
) |
|
|
|
|
1,941.5 |
|
|
|
3,586.8 |
|
|
|
5,528.3 |
|
|
Goodwill acquired |
|
|
65.4 |
|
|
|
23.8 |
|
|
|
89.2 |
|
|
Goodwill disposed of |
|
|
(4.2 |
) |
|
|
— |
|
|
|
(4.2 |
) |
|
Purchase price allocation adjustments |
|
|
2.3 |
|
|
|
18.4 |
|
|
|
20.7 |
|
|
Translation adjustments |
|
|
(38.3 |
) |
|
|
(18.1 |
) |
|
|
(56.4 |
) |
|
Balance as of September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
1,966.8 |
|
|
|
3,653.6 |
|
|
|
5,620.4 |
|
|
Accumulated impairment losses |
|
|
(0.1 |
) |
|
|
(42.7 |
) |
|
|
(42.8 |
) |
|
|
|
|
1,966.7 |
|
|
|
3,610.9 |
|
|
|
5,577.6 |
|
|
Goodwill acquired |
|
|
1,746.4 |
|
|
|
3.8 |
|
|
|
1,750.2 |
|
|
Purchase price allocation adjustments |
|
|
0.9 |
|
|
|
(1.4 |
) |
|
|
(0.5 |
) |
|
Translation and other adjustments |
|
|
(19.0 |
) |
|
|
(22.7 |
) |
|
|
(41.7 |
) |
|
Balance as of September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
3,695.1 |
|
|
|
3,633.3 |
|
|
|
7,328.4 |
|
|
Accumulated impairment losses |
|
|
(0.1 |
) |
|
|
(42.7 |
) |
|
|
(42.8 |
) |
|
|
|
$ |
3,695.0 |
|
|
$ |
3,590.6 |
|
|
$ |
7,285.6 |
|
The goodwill acquired in fiscal 2019 primarily related to the KapStone Acquisition in the Corrugated Packaging segment. The goodwill acquired in fiscal 2018 primarily related to the Plymouth Packaging Acquisition in the Corrugated Packaging segment and the Schlüter Acquisition in the Consumer Packaging segment. The purchase price adjustments to goodwill in fiscal 2018 primarily related to the MPS Acquisition and the Hannapak Acquisition. The goodwill acquired in fiscal 2017 related to the MPS Acquisition and the Hannapak Acquisition in the Consumer Packaging segment and the U.S. Corrugated Acquisition, the Island Container Acquisition and the Star Pizza Acquisition in the Corrugated Packaging segment. The goodwill disposed of in the Corrugated Packaging segment in fiscal 2018 related to the sale of our solid waste management brokerage services business. The goodwill disposed of in the Consumer Packaging segment in fiscal 2017 was primarily related to the HH&B Sale. See “Note 3. Acquisitions and Investment” for additional information.
103
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
Note 8. |
Inventories |
Inventories are as follows (in millions):
|
|
|
September 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Finished goods and work in process |
|
$ |
938.9 |
|
|
$ |
867.0 |
|
|
Raw materials |
|
|
818.8 |
|
|
|
730.0 |
|
|
Supplies and spare parts |
|
|
479.7 |
|
|
|
368.2 |
|
|
Inventories at FIFO cost |
|
|
2,237.4 |
|
|
|
1,965.2 |
|
|
LIFO reserve |
|
|
(129.9 |
) |
|
|
(135.6 |
) |
|
Net inventories |
|
$ |
2,107.5 |
|
|
$ |
1,829.6 |
|
It is impracticable to segregate the LIFO reserve between raw materials, finished goods and work in process. In fiscal 2019 and 2018, we reduced inventory quantities in some of our LIFO pools. These reductions result in liquidations of LIFO inventory quantities generally carried at lower costs prevailing in prior years as compared with the cost of the purchases in the respective fiscal years, the effect of which typically decreases cost of goods sold. The impact of the liquidations in fiscal 2019 and 2018 was not significant. In fiscal 2017, we had no LIFO layer liquidations.
|
Note 9. |
Assets Held For Sale |
Due to the accelerated monetization strategy, our Land and Development portfolio has met the held for sale criteria and is classified as assets held for sale. Assets held for sale at September 30, 2019 of $25.8 million include $16.1 million of Land and Development portfolio assets, with the remainder primarily related to closed facilities. Assets held for sale at September 30, 2018 of $59.5 million include $33.5 million of Land and Development portfolio assets, with the remainder primarily related to closed facilities.
|
Note 10. |
Property, Plant and Equipment |
Property, plant and equipment consists of the following (in millions):
|
|
|
September 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
Property, plant and equipment at cost: |
|
|
|
|
|
|
|
|
|
Land and buildings |
|
$ |
2,442.3 |
|
|
$ |
2,078.9 |
|
|
Machinery and equipment |
|
|
14,743.6 |
|
|
|
12,064.0 |
|
|
Forestlands and mineral rights |
|
|
144.0 |
|
|
|
158.0 |
|
|
Transportation equipment |
|
|
31.2 |
|
|
|
30.1 |
|
|
Leasehold improvements |
|
|
100.2 |
|
|
|
88.9 |
|
|
|
|
|
17,461.3 |
|
|
|
14,419.9 |
|
|
Less: accumulated depreciation, depletion and amortization |
|
|
(6,271.8 |
) |
|
|
(5,337.4 |
) |
|
Property, plant and equipment, net |
|
$ |
11,189.5 |
|
|
$ |
9,082.5 |
|
Depreciation expense for fiscal 2019, 2018 and 2017 was $1,074.6 million, $923.8 million and $855.9 million, respectively.
104
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
Note 11. |
Other Intangible Assets |
The gross carrying amount and accumulated amortization relating to intangible assets, excluding goodwill, are as follows (in millions, except weighted avg. life):
|
|
|
|
|
|
|
September 30, |
|
|||||||||||||
|
|
|
|
|
|
|
2019 |
|
|
2018 |
|
||||||||||
|
|
|
Weighted Avg. Life (in years) |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|||||
|
Customer relationships |
|
|
15.3 |
|
|
$ |
5,395.5 |
|
|
$ |
(1,452.1 |
) |
|
$ |
4,123.7 |
|
|
$ |
(1,079.8 |
) |
|
Trademarks and tradenames |
|
|
20.0 |
|
|
|
129.9 |
|
|
|
(55.3 |
) |
|
|
77.6 |
|
|
|
(43.9 |
) |
|
Favorable contracts |
|
|
10.1 |
|
|
|
57.0 |
|
|
|
(42.6 |
) |
|
|
47.8 |
|
|
|
(34.8 |
) |
|
Technology and patents |
|
|
11.4 |
|
|
|
39.2 |
|
|
|
(21.2 |
) |
|
|
41.2 |
|
|
|
(18.0 |
) |
|
License costs |
|
|
9.0 |
|
|
|
25.7 |
|
|
|
(20.5 |
) |
|
|
24.6 |
|
|
|
(18.1 |
) |
|
Non-compete agreements |
|
|
2.0 |
|
|
|
3.4 |
|
|
|
(2.9 |
) |
|
|
3.4 |
|
|
|
(1.7 |
) |
|
Other |
|
|
29.5 |
|
|
|
3.6 |
|
|
|
(0.2 |
) |
|
|
— |
|
|
|
— |
|
|
Total |
|
|
15.3 |
|
|
$ |
5,654.3 |
|
|
$ |
(1,594.8 |
) |
|
$ |
4,318.3 |
|
|
$ |
(1,196.3 |
) |
Estimated intangible asset amortization expense for the succeeding five fiscal years is as follows (in millions):
|
Fiscal 2020 |
|
$ |
404.2 |
|
|
Fiscal 2021 |
|
$ |
356.4 |
|
|
Fiscal 2022 |
|
$ |
348.9 |
|
|
Fiscal 2023 |
|
$ |
342.7 |
|
|
Fiscal 2024 |
|
$ |
322.3 |
|
Intangible amortization expense was $408.0 million, $300.8 million and $234.0 million during fiscal 2019, 2018 and 2017, respectively. We had other intangible amortization expense, primarily for packaging equipment leased to customers of $28.6 million, $27.6 million and $22.2 million during fiscal 2019, 2018 and 2017, respectively.
|
Note 12. |
Fair Value |
Assets and Liabilities Measured or Disclosed at Fair Value
We estimate fair values in accordance with ASC 820 “Fair Value Measurement”. ASC 820 provides a framework for measuring fair value and expands disclosures required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and a hierarchy prioritizing the inputs to valuation techniques. ASC 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Additionally, ASC 820 defines levels within the hierarchy based on the availability of quoted prices for identical items in active markets, similar items in active or inactive markets and valuation techniques using observable and unobservable inputs. We incorporate credit valuation adjustments to reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in our fair value measurements.
We disclose the fair value of our long-term debt in “Note 13. Debt” and the fair value of our pension and postretirement assets and liabilities in “Note 5. Retirement Plans”. We have, or from time to time may have, financial instruments recognized at fair value including Supplemental Plans, interest rate derivatives, commodity derivatives or other similar classes of assets or liabilities, the fair value of which are not significant. See “Note 1 — Description of Business and Summary of Significant Accounting Policies — Fair Value of Financial Instruments and Nonfinancial Assets and Liabilities” for additional information.
105
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounts Receivable Sales Agreement
On September 25, 2018 we entered into a $550.0 million agreement (the “A/R Sales Agreement”) to sell to a third party financial institution all of the short-term receivables generated from certain customer trade accounts. On September 19, 2019 we amended the A/R Sales Agreement and increased the purchase limit to $650.0 million. The A/R Sales Agreement has a one year term and may be terminated early by either party. The terms of the A/R Sales Agreement limit the balance of receivables sold to the amount available to fund such receivables sold and eliminated the receivable for proceeds from the financial institution at any transfer date. Transfers under the A/R Sales Agreement meet the requirements to be accounted for as sales in accordance with guidance in ASC 860, “Transfers and Servicing”. These customers are not included in the Receivables Securitization Facility that is discussed in “Note 13. Debt”.
In connection with the September 25, 2018 termination of the prior agreement and execution of the A/R Sales Agreement, there was a non-cash transaction of $424.8 million representing the repurchase of receivables previously sold to the financial institution under the prior agreement and the sale of the same receivables to the financial institution under the A/R Sales Agreement.
The following table represents a summary of the activity under the A/R Sales Agreement for fiscal 2019 and 2018 (in millions):
|
|
|
2019 |
|
|
2018 |
|
||
|
Receivable from financial institution at beginning of fiscal year |
|
$ |
— |
|
|
$ |
24.9 |
|
|
Receivables sold to the financial institution and derecognized |
|
|
2,051.6 |
|
|
|
1,664.0 |
|
|
Receivables collected by financial institution |
|
|
(1,971.1 |
) |
|
|
(1,573.8 |
) |
|
Cash proceeds from financial institution |
|
|
(80.5 |
) |
|
|
(115.1 |
) |
|
Receivable from financial institution at September 30, |
|
$ |
— |
|
|
$ |
— |
|
Cash proceeds related to the receivables sold are included in cash from operating activities in the consolidated statement of cash flows in the accounts receivable line item. The expense recorded in connection with the sale is currently approximately $17 million per year and is recorded in “other income, net” in the consolidated statements of income. The future amount may fluctuate based on the level of activity and other factors. Although the sales are made without recourse, we maintain continuing involvement with the sold receivables as we provide collections services related to the transferred assets. The associated servicing liability is not material given the high quality of the customers underlying the receivables and the anticipated short collection period.
Financial Instruments not Recognized at Fair Value
Financial instruments not recognized at fair value on a recurring or nonrecurring basis include cash and cash equivalents, accounts receivable, certain other current assets, short-term debt, accounts payable, certain other current liabilities and long-term debt. With the exception of long-term debt, the carrying amounts of these financial instruments approximate their fair values due to their short maturities. See “Note 13. Debt” for the fair value of our long-term debt.
Fair Value of Nonfinancial Assets and Nonfinancial Liabilities
We measure certain nonfinancial assets and nonfinancial liabilities at fair value on a nonrecurring basis. These assets and liabilities include cost and equity method investments when they are deemed to be other-than-temporarily impaired, assets acquired and liabilities assumed in a merger, an acquisition or in a nonmonetary exchange, and property, plant and equipment and intangible assets that are written down to fair value when they are held for sale or determined to be impaired. See “Note 4. Restructuring and Other Costs” for impairments associated with restructuring activities including the impairment of a paper machine at our Charleston, SC mill included in the Corrugated Packaging segment and other such similar items presented as “net property, plant and equipment costs”. During fiscal 2019, 2018 and 2017, we did not have any significant non-restructuring nonfinancial assets or nonfinancial liabilities that were measured at fair value on a nonrecurring basis in periods subsequent to initial recognition other than the following pre-tax non-cash impairments: (i) the $13.0 million pre-tax non-cash impairment of certain mineral rights in fiscal 2019 following the termination of a third party leasing
106
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
relationship, (ii) the $31.9 million impairment of certain mineral rights and real estate in fiscal 2018, (iii) the $46.7 million real estate impairment recorded in fiscal 2017, and (iv) a $17.6 million write-down of a customer relationship intangible in fiscal 2017 related to an exited product line. The $23.6 million impairment of mineral rights in fiscal 2018 was driven by the non-renewal of a lease and associated with declining oil and gas prices, and the other $8.3 million recorded to write-down the carrying value on real estate projects in connection with the accelerated monetization strategy in our Land and Development segment where the projected sales proceeds were less than the carrying value.
|
Note 13. |
Debt |
The public bonds issued by WRKCo Inc. (“WRKCo”), WestRock RKT, LLC (“RKT”) and MWV are guaranteed by WestRock and have cross-guarantees between the three companies. The industrial development bonds associated with the capital lease obligations of MWV are guaranteed by the Company or its subsidiaries. The public bonds are unsecured, unsubordinated obligations that rank equally in right of payment with all of our existing and future unsecured, unsubordinated obligations. The bonds are effectively subordinated to any of our existing and future secured debt to the extent of the value of the assets securing such debt. At September 30, 2019, all of our debt was unsecured with the exception of our Receivables Securitization Facility (as defined below) and capital lease obligations.
The following were individual components of debt (in millions, except percentages):
|
|
|
September 30, 2019 |
|
|
September 30, 2018 |
|
||||||||||
|
|
|
Carrying Value |
|
|
Weighted Avg Interest Rate |
|
|
Carrying Value |
|
|
Weighted Avg Interest Rate |
|
||||
|
Public bonds due fiscal 2019 to 2022 |
|
$ |
507.8 |
|
|
|
4.9 |
% |
|
$ |
1,470.9 |
|
|
|
4.2 |
% |
|
Public bonds due fiscal 2023 to 2028 |
|
|
3,769.1 |
|
|
|
4.0 |
% |
|
|
2,534.4 |
|
|
|
3.8 |
% |
|
Public bonds due fiscal 2029 to 2033 |
|
|
2,197.6 |
|
|
|
4.9 |
% |
|
|
964.1 |
|
|
|
5.2 |
% |
|
Public bonds due fiscal 2037 to 2047 |
|
|
179.0 |
|
|
|
6.2 |
% |
|
|
178.5 |
|
|
|
6.3 |
% |
|
Term loan facilities |
|
|
2,295.5 |
|
|
|
3.3 |
% |
|
|
599.4 |
|
|
|
3.7 |
% |
|
Revolving credit and swing facilities |
|
|
396.0 |
|
|
|
2.9 |
% |
|
|
355.0 |
|
|
|
3.2 |
% |
|
Commercial paper |
|
|
339.2 |
|
|
|
2.4 |
% |
|
|
— |
|
|
N/A |
|
|
|
Capital lease obligations |
|
|
185.8 |
|
|
|
4.3 |
% |
|
|
171.0 |
|
|
|
4.1 |
% |
|
Supplier financing and commercial card programs |
|
|
123.2 |
|
|
N/A |
|
|
|
105.1 |
|
|
N/A |
|
||
|
International and other debt |
|
|
70.2 |
|
|
|
6.6 |
% |
|
|
36.8 |
|
|
|
6.1 |
% |
|
Total debt |
|
|
10,063.4 |
|
|
|
4.0 |
% |
|
|
6,415.2 |
|
|
|
4.1 |
% |
|
Less: current portion of debt |
|
|
561.1 |
|
|
|
|
|
|
|
740.7 |
|
|
|
|
|
|
Long-term debt due after one year |
|
$ |
9,502.3 |
|
|
|
|
|
|
$ |
5,674.5 |
|
|
|
|
|
A portion of the debt classified as long-term may be paid down earlier than scheduled at our discretion without penalty. Certain customary restrictive covenants govern our maximum availability under our credit facilities. We test and report our compliance with these covenants as required and were in compliance with all of our covenants at September 30, 2019. The carrying value of our debt includes the fair value step-up of debt acquired in mergers and acquisitions, and the weighted average interest rate includes the fair value step up. At September 30, 2019, excluding the step-up, the weighted average interest rate on total debt was 4.2%. At September 30, 2019, the unamortized fair market value step-up was $228.4 million, which will be amortized over a weighted average remaining life of 12.1 years. At September 30, 2019, we had $129.8 million of outstanding letters of credit not drawn upon. At September 30, 2019, we had approximately $2.9 billion of availability under our committed credit facilities. This liquidity may be used to provide for ongoing working capital needs and for other general corporate purposes including acquisitions, dividends and stock repurchases. The estimated fair value of our debt was approximately $10.6 billion and $6.4 billion as of September 30, 2019 and September 30, 2018, respectively. The fair value of our long-term debt is categorized as level 2 within the fair value hierarchy and is primarily either based on quoted prices for those or similar instruments, or approximate their carrying amount, as the variable interest rates reprice frequently at observable current market rates. During fiscal 2019, 2018 and 2017, amortization of debt issuance costs charged to interest expense were $7.8 million, $6.3 million and $4.5 million, respectively.
107
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Public Bonds / Notes Issued
At September 30, 2019 and September 30, 2018, the face value of our public bond obligations outstanding were $6.5 billion and $4.9 billion, respectively.
On May 16, 2019, WRKCo issued $500.0 million aggregate principal amount of its 3.90% Senior Notes due 2028 (the “June 2028 Notes”) and $500.0 million aggregate principal amount of its 4.20% Senior Notes due 2032 (the “2032 Notes” and, together with the June 2028 Notes, the “May 2019 Notes”) in a registered offering pursuant to the Company’s automatic shelf registration statement on Form S-3 under the Securities Act of 1933, as amended, (the “Securities Act”).The Company, MWV and RKT (RKT and MWV are together referred to as the “Subsidiary Guarantors”) have guaranteed WRKCo’s obligations under the May 2019 Notes. We may redeem the May 2019 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 the May 2019 Notes were used primarily to repay $600.0 million principal amount of outstanding notes coming due in the next several quarters and reduce outstanding indebtedness under our 3-year delayed draw term loan.
On December 3, 2018, WRKCo issued $750.0 million aggregate principal amount of its 4.65% Senior Notes due 2026 (the “2026 Notes”) and $750.0 million aggregate principal amount of its 4.90% Senior Notes due 2029 (the “2029 Notes” and, together with the 2026 Notes, the “December 2018 Notes”) in an unregistered offering. The Company and the Subsidiary Guarantors have guaranteed WRKCo’s obligations under the December 2018 Notes. We may redeem the 2026 Notes and the 2029 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 the December 2018 Notes were used primarily to prepay a portion of the amounts outstanding under our Delayed Draw Credit Facilities (as hereinafter defined).
On March 6, 2018, we issued $600.0 million aggregate principal amount of 3.75% senior notes due 2025 and $600.0 million aggregate principal amount of 4.0% senior notes due 2028 (collectively, the “March 2018 Notes”) in an unregistered offering. The Company may redeem the March 2018 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 the March 2018 Notes were used primarily to pay down the remaining $540.0 million of our then existing term loan facility, pay down $445.0 million of our commercial paper program, pay down $100.0 million of our Receivables Securitization Facility and pay down $104.7 million of one of our other credit facilities.
On August 24, 2017, we issued $500.0 million aggregate principal amount of 3.0% Senior Notes due September 15, 2024 and $500.0 million aggregate principal amount of 3.375% Senior Notes due September 15, 2027 collectively, the “August 2017 Notes” in an unregistered offering. The proceeds from the issuance of the August 2017 Notes was used to pre-pay $575.0 million of amortization payments through the maturity of our term loan and $415.0 million then outstanding on the Receivables Securitization Facility.
Exchanged Notes
During fiscal 2019, we conducted offers to exchange WRKCo’s $500.0 million aggregate principal amount of 3.00% Senior Notes due 2024 (the “2024 Notes”), $600.0 million aggregate principal amount of 3.75% Senior Notes due 2025 (the “2025 Notes”), 2026 Notes, $500.0 million aggregate principal amount of 3.375% Senior Notes due 2027 (the “2027 Notes”), $600.0 million aggregate principal amount of 4.00% Senior Notes due 2028 (the “2028 Notes”) and 2029 Notes for new notes of the applicable series with terms substantially identical with the notes of such series that are registered under the Securities Act. As a result of the exchange offer, $490.0 million in aggregate principal amount of the 2024 Notes, $600.0 million in aggregate principal amount of the 2025 Notes, $749.3 million in aggregate principal amount of the 2026 Notes, $491.0 million in aggregate principal amount of the 2027 Notes, $590.0 million in aggregate principal amount of the 2028 Notes and $750.0 million in aggregate principal amount of the 2029 Notes were validly tendered and subsequently exchanged.
Term Loan and Revolving Credit Facility
On June 7, 2019, we entered into a $300.0 million credit agreement providing for a 5-year unsecured term loan with Bank of America, N.A., as administrative agent. The facility is scheduled to mature on June 7, 2024. The proceeds from the facility were used to prepay a portion of the amounts outstanding under our 3-year term loan and repay amounts outstanding under our commercial paper program. The applicable interest rate margin was initially
108
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
0.825% to 1.750% per annum for LIBOR rate loans and 0.000% to 0.750% per annum for alternate base rate loans, in each case depending on the Leverage Ratio (as defined in the credit agreement) or our corporate credit ratings, whichever yields a lower applicable interest rate margin, at such time. At September 30, 2019, there was $300.0 million outstanding.
In connection with the Combination, on July 1, 2015, we entered into a credit agreement (the “Credit Agreement”), which provided for a 5-year senior unsecured term loan in an aggregate principal amount of $2.3 billion and a 5-year senior unsecured revolving credit facility in an aggregate committed principal amount of $2.0 billion (together the “Credit Facility”). On July 1, 2015, we drew $1.2 billion on the term loan and on March 24, 2016, we drew another $600.0 million and the balance of the delayed draw term loan facility was terminated. The Credit Facility is unsecured and is guaranteed by the Company and the Subsidiary Guarantors. On June 22, 2016, we pre-paid $200.0 million of the term loan amortization payments due through the second quarter of fiscal 2018. On August 24, 2017, in connection with the issuance of public bonds, we pre-paid $575.0 million of the term loan amortization payments due through the maturity of the term loan. On October 31, 2017, we pre-paid $485.0 million of the outstanding principal balance by borrowing on our Receivables Securitization Facility. On March 14, 2018, in connection with the issuance of public bonds, we pre-paid the remaining $540.0 million principal balance.
In fiscal 2016 and 2017, we executed options to extend the term of the 5-year senior unsecured revolving credit facility initially for one year beyond the original term and subsequently, for a second additional year. Approximately $1.9 billion of the original $2.0 billion aggregate committed principal amount has been extended to July 1, 2022, and the remainder will continue to mature on July 1, 2020. Up to $150 million under the revolving credit facility may be used for the issuance of letters of credit. In addition, up to $400 million of the revolving credit facility may be used to fund borrowings in non-U.S. dollar currencies including Canadian dollars, Euro and British Pound. Additionally, we may request up to $200 million of the revolving credit facility to be allocated to a Mexican peso revolving credit facility. At September 30, 2019 and September 30, 2018, we had no amounts outstanding under the revolving credit facility.
At our option, loans issued under the Credit Facility will bear interest at either LIBOR or an alternate base rate, in each case plus an applicable interest rate margin. Loans will initially bear interest at LIBOR plus 1.125% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 0.125% per annum, in the alternative, and thereafter the interest rate will fluctuate between LIBOR plus 1.00% per annum and LIBOR plus 1.50% per annum (or between the alternate base rate plus 0.00% per annum and the alternate base rate plus 0.50% per annum), based upon our corporate credit ratings or the leverage ratio (as defined in the Credit Agreement) (whichever yields a lower applicable interest rate margin) at such time. In addition, we will be required to pay fees that will fluctuate between 0.125% per annum to 0.25% per annum on the unused amount of the revolving credit facility, based upon our corporate credit ratings or the leverage ratio (whichever yields a lower fee) at such time. Loans under the Credit Facility may be prepaid at any time without premium.
Farm Loan Credit Facilities
On July 1, 2015, three WestRock wholly-owned subsidiaries, WestRock CP, LLC, a Delaware limited liability company, WestRock Converting, LLC, a Georgia limited liability company, and WestRock Virginia, LLC, a Delaware limited liability company, as borrowers, entered into a credit agreement (the “Prior Farm Loan Credit Agreement”) with CoBank ACB, as administrative agent. The Prior Farm Loan Credit Agreement provided for a 7-year senior unsecured term loan in an aggregate principal amount of $600.0 million (the “Prior Farm Loan Credit Facility”). The Prior Farm Credit Facility was guaranteed by the Company and the Subsidiary Guarantors. The carrying value of this facility at September 30, 2018 was $599.4 million. On September 27, 2019, we repaid the entire balance of the Prior Farm Loan Credit Facility and entered into a new agreement.
On September 27, 2019, one of our wholly-owned subsidiaries, WestRock Southeast LLC, entered into a credit agreement (the “Farm Loan Credit Agreement”) with CoBank ACB, as administrative agent. The Farm Loan Credit Agreement provides for a 7-year senior unsecured term loan in an aggregate principal amount of $600.0 million (the “Farm Loan Credit Facility”). At any time, we may increase the principal amount by up to $300.0 million by written notice. The Farm Credit Facility is guaranteed by the Company, WRKCo and the Subsidiary Guarantors. The carrying value of this facility at September 30, 2019 was $598.6 million.
109
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
European Revolving Credit Facility
On April 27, 2018, we entered into a €500.0 million revolving credit facility with an incremental €100.0 million accordion feature with Coöperatieve Rabobank U.A., New York Branch as the administrative agent for the syndicate of banks (the “European Revolving Credit Facility”). This facility provides for a 3-year unsecured U.S. dollar, Euro and British Pound denominated borrowing of not more than €500.0 million and matures on April 27, 2021. At September 30, 2019, we had borrowed $350.0 million under this facility and entered into foreign currency exchange contracts of $351.0 million as an economic hedge for the U.S. dollar denominated borrowing plus interest by a non-U.S. dollar functional currency entity. The net of gains or losses from these foreign currency exchange contracts and the changes in the remeasurement of the U.S. dollar denominated borrowing in our foreign subsidiaries have been immaterial to our consolidated statements of income. As of September 30, 2019, $175.0 million of the total amount outstanding was classified as short-term debt. At September 30, 2018, we had borrowed $355.0 million under this facility.
Other Revolving Credit Facilities
On October 31, 2017, we entered into a credit agreement with Wells Fargo Bank, National Association, as administrative agent, providing for a 364-day senior unsecured revolving credit facility in an aggregate committed principal amount of $450.0 million. The proceeds of the credit facility may be used for working capital and for other general corporate purposes. The credit facility is unsecured and is guaranteed by RKT and MWV and WestRock, Inc. At our option, loans issued under the credit facility will bear interest at either LIBOR or an alternate base rate, in each case plus an applicable interest rate margin. On October 29, 2018, we renewed the term of the credit facility for another 364 days, and subsequently, on October 25, 2019, we renewed the term of the credit facility for another 364 days. The facility now matures on October 23, 2020, or earlier, as specified in the agreement. At September 30, 2019 and 2018, there were no amounts outstanding. At September 30, 2019, the average borrowing rate under the facility would have been 3.17%.
Receivables Securitization Facility
On May 2, 2019, we amended our $700.0 million receivables securitization agreement (the “Receivables Securitization Facility”) to, among other things, extend its maturity date from July 22, 2019 to May 2, 2022. Borrowing availability under this facility is based on the eligible underlying accounts receivable and compliance with certain covenants. The agreement governing the Receivables Securitization Facility contains restrictions, including, among others, on the creation of certain liens on the underlying collateral. We test and report our compliance with these covenants monthly; we were in compliance with all of these covenants at September 30, 2019. The Receivables Securitization Facility includes certain restrictions on what constitutes eligible receivables under the facility and allows for the exclusion of eligible receivables of specific obligors each calendar year subject to the following restrictions: (i) the aggregate of excluded receivables may not exceed 7.5% of eligible receivables under the Receivables Securitization Facility and (ii) the excluded receivables of each obligor may not exceed 2.5% of the aggregate outstanding balance. At September 30, 2019 and September 30, 2018 there were no amounts outstanding under this facility. At September 30, 2019 and September 30, 2018, maximum available borrowings, excluding amounts outstanding under the Receivables Securitization Facility, were $592.1 million and $571.0 million, respectively. The carrying amount of accounts receivable collateralizing the maximum available borrowings at September 30, 2019 and September 30, 2018 were approximately $959.3 million and $887.0 million, respectively. We have continuing involvement with the underlying receivables as we provide credit and collections services pursuant to the Receivables Securitization Facility agreement. The borrowing rate consists of a blend of the market rate for asset-backed commercial paper and the one month LIBOR rate plus a credit spread of 0.80%. The commitment fee was 0.25% and 0.25% as of September 30, 2019 and September 30, 2018, respectively.
Commercial Paper Program
On October 31, 2017, we established an unsecured commercial paper program, pursuant to which we were able to issue short-term, unsecured commercial paper notes in an aggregate principal amount at any time not to exceed $1.0 billion with up to 397-day maturities. On December 7, 2018, we terminated the commercial paper program and established a new unsecured commercial paper program with WRKCo as the issuer. Under the new program, we may issue short-term unsecured commercial paper notes in an aggregate principal amount at any time not to exceed $1.0 billion with up to 397-day maturities. The program has no expiration date and can be terminated
110
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
by either the agent or us with not less than 30 days’ notice. Our $2.0 billion unsecured revolving credit facility is intended to backstop the commercial paper program. Amounts available under the program may be borrowed, repaid and re-borrowed from time to time. The net proceeds from issuances of notes under the program were used to repay amounts outstanding under the KapStone securitization facility that was assumed in the KapStone Acquisition and subsequently terminated, and have been, and are expected to continue to be, used for general corporate purposes. At September 30, 2019, there was $339.2 million outstanding and the average borrowing rate was 2.39%. As of September 30, 2019, $250.0 million of the total amount outstanding was classified as long-term debt.
Delayed Draw Credit Facilities
On March 7, 2018, we entered into a credit agreement (the “Delayed Draw Credit Agreement”) with Wells Fargo as administrative agent to provide for $3.8 billion of senior unsecured term loans, consisting of a 364-day $300.0 million term loan, a 3-year $1.75 billion term loan and a 5-year $1.75 billion term loan (collectively, the “Delayed Draw Credit Facilities”). On November 2, 2018, in connection with the closing of the KapStone Acquisition, we drew upon the facility in full. The proceeds of the Delayed Draw Credit Facilities and other sources of cash were used to pay the consideration for the KapStone Acquisition, to repay certain existing indebtedness of KapStone and to pay fees and expenses incurred in connection with the KapStone Acquisition. The Delayed Draw Credit Facilities are senior unsecured obligations of WRKCo, as borrower, and each of the Company and the Subsidiary Guarantors, respectively, as guarantors. Loans under the Delayed Draw Credit Facilities may be prepaid at any time without premium.
On December 3, 2018, in connection with the issuance of the December 2018 Notes, we repaid the $300.0 million 364-day term loan under the Delayed Draw Credit Facilities, and prepaid $926.5 million of the 3-year term loan and $262.5 million of the 5-year term loan. In the third quarter of fiscal 2019, we prepaid $700.0 million of the 3-year term loan primarily using proceeds from the issuance of the May 2019 Notes. In the fourth quarter of fiscal 2019, we prepaid all amounts due on the 3-year term loan and $87.5 million of the 5-year term loan using proceeds from the issuance of commercial paper. At September 30, 2019, there was $1,396.9 million outstanding on the 5-year term loan.
At our option, loans issued under the Delayed Draw Credit Facilities will bear interest at a floating rate based on either LIBOR or an alternate base rate, in each case plus an applicable interest rate margin. The applicable interest rate margin was initially 1.125% to 2.000% per annum for LIBOR rate loans and 0.125% to 1.000% per annum for alternate base rate loans, in each case depending on the Leverage Ratio (as defined in the credit agreement) or our corporate credit ratings, whichever yields a lower applicable interest rate margin, at such time. On February 26, 2019, we amended the Delayed Draw Credit Agreement. The applicable interest rate margin for the 3-year term loan is now 1.000% to 1.875% for LIBOR rate loans and 0.000% to 0.875% for alternate base rate loans. The applicable interest rate margin for the 5-year term loan is now 1.000% to 1.950% for LIBOR rate loans and 0.000% to 0.950% for alternate base rate loans.
Brazil Delayed Draw Credit Facilities
On April 10, 2019, we entered into a credit agreement to provide for R$750.0 million of senior unsecured term loans with an incremental R$250.0 million accordion feature (the “Brazil Delayed Draw Credit Facilities”). The principal can be drawn at any time over the initial 18 months in up to 10 drawdowns of at least BRL 50.0 million each and will be repaid in equal, semiannual installments beginning on April 10, 2021 until the facility matures on April 10, 2024. The proceeds of the Brazil Delayed Draw Credit Facilities are to be used to support the production of goods or acquisition of inputs that are essential or ancillary to export activities. The Brazil Delayed Draw Credit Facilities are senior unsecured obligations of Rigesa Celulose, Papel E Embalagens Ltda. (a subsidiary of the Company), as borrower, and the Company, as guarantor. Loans issued under the Brazil Delayed Draw Credit Facilities will bear interest at a floating rate based on Brazil’s Certificate of Interbank Deposit rate plus a spread of 1.50%. In addition, we will be required to pay fees of 0.45% on the unused amount of the facility. At September 30, 2019, there was R$199.5 million outstanding.
111
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Capital Lease and Other Indebtedness
The range of due dates on our capital lease obligations are primarily in fiscal 2027 to 2035. Our international debt is primarily in Europe, Brazil and India.
As of September 30, 2019, the aggregate maturities of debt, excluding capital lease obligations, for the succeeding five fiscal years and thereafter are as follows (in millions):
|
Fiscal 2020 |
|
$ |
550.8 |
|
|
Fiscal 2021 |
|
|
184.8 |
|
|
Fiscal 2022 |
|
|
755.0 |
|
|
Fiscal 2023 |
|
|
542.6 |
|
|
Fiscal 2024 |
|
|
1,951.7 |
|
|
Thereafter |
|
|
5,729.2 |
|
|
Fair value of debt step-up, deferred financing costs and unamortized bond discounts |
|
|
163.5 |
|
|
Total |
|
$ |
9,877.6 |
|
As of September 30, 2019, the aggregate maturities of capital lease obligations for the succeeding five fiscal years and thereafter are as follows (in millions):
|
Fiscal 2020 |
|
$ |
6.4 |
|
|
Fiscal 2021 |
|
|
4.8 |
|
|
Fiscal 2022 |
|
|
3.9 |
|
|
Fiscal 2023 |
|
|
2.0 |
|
|
Fiscal 2024 |
|
|
0.9 |
|
|
Thereafter |
|
|
150.9 |
|
|
Fair value step-up |
|
|
16.9 |
|
|
Total |
|
$ |
185.8 |
|
|
Note 14. |
Selected Condensed Consolidating Financial Statements of Parent, Issuer, Guarantors and Non-Guarantors |
The 2024 Notes, the 2025 Notes, the 2026 Notes, the 2027 Notes, the 2028 Notes, the June 2028 Notes, the 2029 Notes and the 2032 Notes (the “Notes”) were issued by WRKCo (the “Issuer”). Upon issuance, the 2024 Notes, the 2025 Notes, the 2027 Notes and the 2028 Notes were fully and unconditionally guaranteed by the Subsidiary Guarantors. 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 the 2024 Notes, the 2025 Notes, the 2027 Notes and the 2028 Notes. The 2026 Notes, the June 2028 Notes, the 2029 Notes and the 2032 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 Subsidiary Guarantors. Accordingly, each series of the Notes is fully and unconditionally guaranteed on a joint and several basis by Parent and the Subsidiary Guarantors.
In accordance with GAAP, we retrospectively account for changes in our legal structure that constitute transfers of businesses between issuers, guarantors and non-guarantors. As such, our prior period financials may vary from those previously reported. The information in the tables reflect such revisions, as well as revisions to correct immaterial errors in the prior presentation of our financial statements.
In accordance with Rule 3-10 of Regulation S-X, the following tables present condensed consolidating financial data of the Parent, the Issuer, the Subsidiary Guarantors, the non-guarantor subsidiaries and eliminations. Such financial data include Condensed Consolidating Balance Sheet data as of September 30, 2019 and 2018 and the related Condensed Consolidating Statement of Income and Cash Flow data for each of the three years in the period ended September 30, 2019.
112
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
CONDENSED CONSOLIDATING STATEMENTS OF INCOME |
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2019 |
|
|||||||||||||||||||||
|
(In millions) |
|
Parent |
|
|
Issuer |
|
|
Guarantor Subsidiaries |
|
|
Non-Guarantor Subsidiaries |
|
|
Eliminations |
|
|
Consolidated Total |
|
||||||
|
|
|
|
|
|||||||||||||||||||||
|
Net sales |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,543.8 |
|
|
$ |
18,364.4 |
|
|
$ |
(2,619.2 |
) |
|
$ |
18,289.0 |
|
|
Cost of goods sold |
|
|
— |
|
|
|
— |
|
|
|
2,026.0 |
|
|
|
15,114.2 |
|
|
|
(2,600.2 |
) |
|
|
14,540.0 |
|
|
Selling, general and administrative, excluding intangible amortization |
|
|
— |
|
|
|
(0.9 |
) |
|
|
120.0 |
|
|
|
1,596.1 |
|
|
|
— |
|
|
|
1,715.2 |
|
|
Selling, general and administrative intangible amortization |
|
|
— |
|
|
|
— |
|
|
|
104.4 |
|
|
|
295.8 |
|
|
|
— |
|
|
|
400.2 |
|
|
Loss (gain) on disposal of assets |
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
|
|
(41.3 |
) |
|
|
— |
|
|
|
(41.2 |
) |
|
Multiemployer pension withdrawal income |
|
|
— |
|
|
|
(0.2 |
) |
|
|
(0.3 |
) |
|
|
(5.8 |
) |
|
|
— |
|
|
|
(6.3 |
) |
|
Land and Development impairments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13.0 |
|
|
|
— |
|
|
|
13.0 |
|
|
Restructuring and other costs |
|
|
— |
|
|
|
7.6 |
|
|
|
0.3 |
|
|
|
165.8 |
|
|
|
— |
|
|
|
173.7 |
|
|
Operating profit (loss) |
|
|
— |
|
|
|
(6.5 |
) |
|
|
293.3 |
|
|
|
1,226.6 |
|
|
|
(19.0 |
) |
|
|
1,494.4 |
|
|
Interest expense, net |
|
|
— |
|
|
|
(246.8 |
) |
|
|
(163.4 |
) |
|
|
(21.1 |
) |
|
|
— |
|
|
|
(431.3 |
) |
|
Intercompany interest (expense) income, net |
|
|
— |
|
|
|
(3.2 |
) |
|
|
(115.3 |
) |
|
|
99.5 |
|
|
|
19.0 |
|
|
|
— |
|
|
Loss on extinguishment of debt |
|
|
— |
|
|
|
(3.0 |
) |
|
|
(1.9 |
) |
|
|
(0.2 |
) |
|
|
— |
|
|
|
(5.1 |
) |
|
Pension and other postretirement non-service (expense) income |
|
|
— |
|
|
|
— |
|
|
|
(6.5 |
) |
|
|
80.7 |
|
|
|
— |
|
|
|
74.2 |
|
|
Other (expense) income, net |
|
|
— |
|
|
|
(5.1 |
) |
|
|
3.4 |
|
|
|
4.1 |
|
|
|
— |
|
|
|
2.4 |
|
|
Equity in income of unconsolidated entities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10.1 |
|
|
|
— |
|
|
|
10.1 |
|
|
Equity in income of consolidated entities |
|
|
862.9 |
|
|
|
1,149.9 |
|
|
|
729.2 |
|
|
|
— |
|
|
|
(2,742.0 |
) |
|
|
— |
|
|
Income before income taxes |
|
|
862.9 |
|
|
|
885.3 |
|
|
|
738.8 |
|
|
|
1,399.7 |
|
|
|
(2,742.0 |
) |
|
|
1,144.7 |
|
|
Income tax benefit (expense) |
|
|
— |
|
|
|
67.9 |
|
|
|
7.2 |
|
|
|
(351.9 |
) |
|
|
— |
|
|
|
(276.8 |
) |
|
Consolidated net income |
|
|
862.9 |
|
|
|
953.2 |
|
|
|
746.0 |
|
|
|
1,047.8 |
|
|
|
(2,742.0 |
) |
|
|
867.9 |
|
|
Less: Net income attributable to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5.0 |
) |
|
|
— |
|
|
|
(5.0 |
) |
|
Net income attributable to common stockholders |
|
$ |
862.9 |
|
|
$ |
953.2 |
|
|
$ |
746.0 |
|
|
$ |
1,042.8 |
|
|
$ |
(2,742.0 |
) |
|
$ |
862.9 |
|
|
Comprehensive income attributable to common stockholders |
|
$ |
489.0 |
|
|
$ |
577.7 |
|
|
$ |
377.3 |
|
|
$ |
682.4 |
|
|
$ |
(1,637.4 |
) |
|
$ |
489.0 |
|
113
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
CONDENSED CONSOLIDATING STATEMENTS OF INCOME |
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2018 |
|
|||||||||||||||||||||
|
(In millions) |
|
Parent |
|
|
Issuer |
|
|
Guarantor Subsidiaries |
|
|
Non-Guarantor Subsidiaries |
|
|
Eliminations |
|
|
Consolidated Total |
|
||||||
|
|
|
|
|
|||||||||||||||||||||
|
Net sales |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,593.0 |
|
|
$ |
16,345.4 |
|
|
$ |
(2,653.3 |
) |
|
$ |
16,285.1 |
|
|
Cost of goods sold |
|
|
— |
|
|
|
— |
|
|
|
2,004.2 |
|
|
|
13,572.2 |
|
|
|
(2,653.3 |
) |
|
|
12,923.1 |
|
|
Selling, general and administrative, excluding intangible amortization |
|
|
— |
|
|
|
1.5 |
|
|
|
94.1 |
|
|
|
1,451.0 |
|
|
|
— |
|
|
|
1,546.6 |
|
|
Selling, general and administrative intangible amortization |
|
|
— |
|
|
|
— |
|
|
|
104.2 |
|
|
|
192.4 |
|
|
|
— |
|
|
|
296.6 |
|
|
Loss on disposal of assets |
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
|
|
9.9 |
|
|
|
— |
|
|
|
10.1 |
|
|
Multiemployer pension withdrawals |
|
|
— |
|
|
|
6.5 |
|
|
|
12.5 |
|
|
|
165.2 |
|
|
|
— |
|
|
|
184.2 |
|
|
Land and Development impairments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31.9 |
|
|
|
— |
|
|
|
31.9 |
|
|
Restructuring and other costs |
|
|
— |
|
|
|
8.7 |
|
|
|
5.6 |
|
|
|
91.1 |
|
|
|
— |
|
|
|
105.4 |
|
|
Operating profit (loss) |
|
|
— |
|
|
|
(16.7 |
) |
|
|
372.2 |
|
|
|
831.7 |
|
|
|
— |
|
|
|
1,187.2 |
|
|
Interest expense, net |
|
|
(12.5 |
) |
|
|
(76.9 |
) |
|
|
(173.5 |
) |
|
|
(30.9 |
) |
|
|
— |
|
|
|
(293.8 |
) |
|
Intercompany interest income (expense), net |
|
|
— |
|
|
|
28.1 |
|
|
|
(87.6 |
) |
|
|
59.5 |
|
|
|
— |
|
|
|
— |
|
|
(Loss) gain on extinguishment of debt |
|
|
(0.2 |
) |
|
|
(1.4 |
) |
|
|
1.9 |
|
|
|
(0.4 |
) |
|
|
— |
|
|
|
(0.1 |
) |
|
Pension and other postretirement non-service (expense) income |
|
|
— |
|
|
|
— |
|
|
|
(6.9 |
) |
|
|
102.2 |
|
|
|
— |
|
|
|
95.3 |
|
|
Other income (expense), net |
|
|
— |
|
|
|
0.7 |
|
|
|
(22.5 |
) |
|
|
34.5 |
|
|
|
— |
|
|
|
12.7 |
|
|
Equity in income of unconsolidated entities |
|
|
— |
|
|
|
— |
|
|
|
7.5 |
|
|
|
26.0 |
|
|
|
— |
|
|
|
33.5 |
|
|
Equity in income of consolidated entities |
|
|
— |
|
|
|
1,962.0 |
|
|
|
1,343.8 |
|
|
|
— |
|
|
|
(3,305.8 |
) |
|
|
— |
|
|
Income (loss) before income taxes |
|
|
(12.7 |
) |
|
|
1,895.8 |
|
|
|
1,434.9 |
|
|
|
1,022.6 |
|
|
|
(3,305.8 |
) |
|
|
1,034.8 |
|
|
Income tax benefit |
|
|
3.1 |
|
|
|
19.9 |
|
|
|
131.8 |
|
|
|
719.7 |
|
|
|
— |
|
|
|
874.5 |
|
|
Consolidated net income (loss) |
|
|
(9.6 |
) |
|
|
1,915.7 |
|
|
|
1,566.7 |
|
|
|
1,742.3 |
|
|
|
(3,305.8 |
) |
|
|
1,909.3 |
|
|
Less: Net income attributable to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3.2 |
) |
|
|
— |
|
|
|
(3.2 |
) |
|
Net income (loss) attributable to common stockholders |
|
$ |
(9.6 |
) |
|
$ |
1,915.7 |
|
|
$ |
1,566.7 |
|
|
$ |
1,739.1 |
|
|
$ |
(3,305.8 |
) |
|
$ |
1,906.1 |
|
|
Comprehensive income (loss) attributable to common stockholders |
|
$ |
(9.6 |
) |
|
$ |
1,677.7 |
|
|
$ |
1,351.4 |
|
|
$ |
1,498.6 |
|
|
$ |
(2,850.0 |
) |
|
$ |
1,668.1 |
|
114
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
CONDENSED CONSOLIDATING STATEMENTS OF INCOME |
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2017 |
|
|||||||||||||||||||||
|
(In millions) |
|
Parent |
|
|
Issuer |
|
|
Guarantor Subsidiaries |
|
|
Non-Guarantor Subsidiaries |
|
|
Eliminations |
|
|
Consolidated Total |
|
||||||
|
|
|
|
|
|||||||||||||||||||||
|
Net sales |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,485.6 |
|
|
$ |
15,208.5 |
|
|
$ |
(2,834.4 |
) |
|
$ |
14,859.7 |
|
|
Cost of goods sold |
|
|
— |
|
|
|
— |
|
|
|
2,289.0 |
|
|
|
12,686.9 |
|
|
|
(2,834.4 |
) |
|
|
12,141.5 |
|
|
Selling, general and administrative, excluding intangible amortization |
|
|
— |
|
|
|
0.8 |
|
|
|
123.9 |
|
|
|
1,332.5 |
|
|
|
— |
|
|
|
1,457.2 |
|
|
Selling, general and administrative intangible amortization |
|
|
— |
|
|
|
— |
|
|
|
104.2 |
|
|
|
125.4 |
|
|
|
— |
|
|
|
229.6 |
|
|
Loss on disposal of assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.8 |
|
|
|
— |
|
|
|
4.8 |
|
|
Land and Development impairments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
46.7 |
|
|
|
— |
|
|
|
46.7 |
|
|
Restructuring and other costs |
|
|
— |
|
|
|
1.3 |
|
|
|
26.0 |
|
|
|
169.4 |
|
|
|
— |
|
|
|
196.7 |
|
|
Operating profit (loss) |
|
|
— |
|
|
|
(2.1 |
) |
|
|
(57.5 |
) |
|
|
842.8 |
|
|
|
— |
|
|
|
783.2 |
|
|
Interest expense, net |
|
|
— |
|
|
|
(40.1 |
) |
|
|
(172.5 |
) |
|
|
(9.9 |
) |
|
|
— |
|
|
|
(222.5 |
) |
|
Intercompany interest income (expense), net |
|
|
— |
|
|
|
18.5 |
|
|
|
(53.1 |
) |
|
|
34.6 |
|
|
|
— |
|
|
|
— |
|
|
(Loss) gain on extinguishment of debt |
|
|
— |
|
|
|
(0.9 |
) |
|
|
3.1 |
|
|
|
(0.4 |
) |
|
|
— |
|
|
|
1.8 |
|
|
Pension and other postretirement non-service income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
51.8 |
|
|
|
— |
|
|
|
51.8 |
|
|
Other (expense) income, net |
|
|
— |
|
|
|
(1.0 |
) |
|
|
(30.2 |
) |
|
|
42.7 |
|
|
|
— |
|
|
|
11.5 |
|
|
Equity in income of unconsolidated entities |
|
|
— |
|
|
|
— |
|
|
|
12.7 |
|
|
|
26.3 |
|
|
|
— |
|
|
|
39.0 |
|
|
Equity in income of consolidated entities |
|
|
— |
|
|
|
724.2 |
|
|
|
643.7 |
|
|
|
— |
|
|
|
(1,367.9 |
) |
|
|
— |
|
|
Gain on sale of HH&B |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
192.8 |
|
|
|
— |
|
|
|
192.8 |
|
|
Income before income taxes |
|
|
— |
|
|
|
698.6 |
|
|
|
346.2 |
|
|
|
1,180.7 |
|
|
|
(1,367.9 |
) |
|
|
857.6 |
|
|
Income tax benefit (expense) |
|
|
— |
|
|
|
9.6 |
|
|
|
120.5 |
|
|
|
(289.1 |
) |
|
|
— |
|
|
|
(159.0 |
) |
|
Consolidated net income |
|
|
— |
|
|
|
708.2 |
|
|
|
466.7 |
|
|
|
891.6 |
|
|
|
(1,367.9 |
) |
|
|
698.6 |
|
|
Net loss attributable to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9.6 |
|
|
|
— |
|
|
|
9.6 |
|
|
Net income attributable to common stockholders |
|
$ |
— |
|
|
$ |
708.2 |
|
|
$ |
466.7 |
|
|
$ |
901.2 |
|
|
$ |
(1,367.9 |
) |
|
$ |
708.2 |
|
|
Comprehensive income attributable to common stockholders |
|
$ |
— |
|
|
$ |
877.3 |
|
|
$ |
609.0 |
|
|
$ |
1,071.8 |
|
|
$ |
(1,680.8 |
) |
|
$ |
877.3 |
|
115
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
CONDENSED CONSOLIDATING BALANCE SHEETS |
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019 |
|
|||||||||||||||||||||
|
(In millions) |
|
Parent |
|
|
Issuer |
|
|
Guarantor Subsidiaries |
|
|
Non-Guarantor Subsidiaries |
|
|
Eliminations |
|
|
Consolidated Total |
|
||||||
|
|
|
|
|
|||||||||||||||||||||
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
17.8 |
|
|
$ |
133.8 |
|
|
$ |
— |
|
|
$ |
151.6 |
|
|
Accounts receivable |
|
|
— |
|
|
|
— |
|
|
|
31.1 |
|
|
|
2,201.7 |
|
|
|
(39.6 |
) |
|
|
2,193.2 |
|
|
Inventories |
|
|
— |
|
|
|
— |
|
|
|
254.3 |
|
|
|
1,853.2 |
|
|
|
— |
|
|
|
2,107.5 |
|
|
Other current assets |
|
|
— |
|
|
|
1.2 |
|
|
|
11.8 |
|
|
|
483.2 |
|
|
|
— |
|
|
|
496.2 |
|
|
Intercompany receivables |
|
|
— |
|
|
|
238.2 |
|
|
|
— |
|
|
|
1,340.5 |
|
|
|
(1,578.7 |
) |
|
|
— |
|
|
Assets held for sale |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25.8 |
|
|
|
— |
|
|
|
25.8 |
|
|
Total current assets |
|
|
— |
|
|
|
239.4 |
|
|
|
315.0 |
|
|
|
6,038.2 |
|
|
|
(1,618.3 |
) |
|
|
4,974.3 |
|
|
Property, plant and equipment, net |
|
|
— |
|
|
|
— |
|
|
|
18.9 |
|
|
|
11,170.6 |
|
|
|
— |
|
|
|
11,189.5 |
|
|
Goodwill |
|
|
— |
|
|
|
— |
|
|
|
1,158.6 |
|
|
|
6,127.0 |
|
|
|
— |
|
|
|
7,285.6 |
|
|
Intangibles, net |
|
|
— |
|
|
|
— |
|
|
|
1,485.0 |
|
|
|
2,574.5 |
|
|
|
— |
|
|
|
4,059.5 |
|
|
Restricted assets held by special purpose entities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,274.3 |
|
|
|
— |
|
|
|
1,274.3 |
|
|
Prepaid pension asset |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
224.7 |
|
|
|
— |
|
|
|
224.7 |
|
|
Intercompany notes receivable |
|
|
— |
|
|
|
155.0 |
|
|
|
156.9 |
|
|
|
3,026.8 |
|
|
|
(3,338.7 |
) |
|
|
— |
|
|
Investments in consolidated subsidiaries |
|
|
11,973.7 |
|
|
|
18,460.4 |
|
|
|
20,039.9 |
|
|
|
— |
|
|
|
(50,474.0 |
) |
|
|
— |
|
|
Other assets |
|
|
— |
|
|
|
67.8 |
|
|
|
185.3 |
|
|
|
971.8 |
|
|
|
(76.1 |
) |
|
|
1,148.8 |
|
|
Total Assets |
|
$ |
11,973.7 |
|
|
$ |
18,922.6 |
|
|
$ |
23,359.6 |
|
|
$ |
31,407.9 |
|
|
$ |
(55,507.1 |
) |
|
$ |
30,156.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of debt |
|
$ |
— |
|
|
$ |
135.3 |
|
|
$ |
108.9 |
|
|
$ |
316.9 |
|
|
$ |
— |
|
|
$ |
561.1 |
|
|
Accounts payable |
|
|
— |
|
|
|
0.7 |
|
|
|
31.3 |
|
|
|
1,839.4 |
|
|
|
(39.6 |
) |
|
|
1,831.8 |
|
|
Accrued compensation and benefits |
|
|
0.2 |
|
|
|
— |
|
|
|
14.6 |
|
|
|
455.6 |
|
|
|
— |
|
|
|
470.4 |
|
|
Other current liabilities |
|
|
— |
|
|
|
18.6 |
|
|
|
83.8 |
|
|
|
469.4 |
|
|
|
— |
|
|
|
571.8 |
|
|
Intercompany payables |
|
|
303.6 |
|
|
|
10.5 |
|
|
|
1,052.9 |
|
|
|
211.7 |
|
|
|
(1,578.7 |
) |
|
|
— |
|
|
Total current liabilities |
|
|
303.8 |
|
|
|
165.1 |
|
|
|
1,291.5 |
|
|
|
3,293.0 |
|
|
|
(1,618.3 |
) |
|
|
3,435.1 |
|
|
Long-term debt due after one year |
|
|
— |
|
|
|
6,608.0 |
|
|
|
1,982.9 |
|
|
|
911.4 |
|
|
|
— |
|
|
|
9,502.3 |
|
|
Intercompany notes payable |
|
|
— |
|
|
|
636.3 |
|
|
|
2,390.5 |
|
|
|
311.9 |
|
|
|
(3,338.7 |
) |
|
|
— |
|
|
Pension liabilities, net of current portion |
|
|
— |
|
|
|
— |
|
|
|
147.6 |
|
|
|
146.4 |
|
|
|
— |
|
|
|
294.0 |
|
|
Postretirement benefit liabilities, net of current portion |
|
|
— |
|
|
|
— |
|
|
|
25.7 |
|
|
|
136.4 |
|
|
|
— |
|
|
|
162.1 |
|
|
Non-recourse liabilities held by special purpose entities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,145.2 |
|
|
|
— |
|
|
|
1,145.2 |
|
|
Deferred income taxes |
|
|
— |
|
|
|
— |
|
|
|
278.9 |
|
|
|
2,675.2 |
|
|
|
(76.1 |
) |
|
|
2,878.0 |
|
|
Other long-term liabilities |
|
|
— |
|
|
|
12.9 |
|
|
|
131.2 |
|
|
|
909.8 |
|
|
|
— |
|
|
|
1,053.9 |
|
|
Redeemable noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.9 |
|
|
|
— |
|
|
|
1.9 |
|
|
Total stockholders’ equity |
|
|
11,669.9 |
|
|
|
11,500.3 |
|
|
|
17,111.3 |
|
|
|
21,862.4 |
|
|
|
(50,474.0 |
) |
|
|
11,669.9 |
|
|
Noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14.3 |
|
|
|
— |
|
|
|
14.3 |
|
|
Total equity |
|
|
11,669.9 |
|
|
|
11,500.3 |
|
|
|
17,111.3 |
|
|
|
21,876.7 |
|
|
|
(50,474.0 |
) |
|
|
11,684.2 |
|
|
Total Liabilities and Equity |
|
$ |
11,973.7 |
|
|
$ |
18,922.6 |
|
|
$ |
23,359.6 |
|
|
$ |
31,407.9 |
|
|
$ |
(55,507.1 |
) |
|
$ |
30,156.7 |
|
116
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
CONDENSED CONSOLIDATING BALANCE SHEETS |
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 |
|
|||||||||||||||||||||
|
(In millions) |
|
Parent |
|
|
Issuer |
|
|
Guarantor Subsidiaries |
|
|
Non-Guarantor Subsidiaries |
|
|
Eliminations |
|
|
Consolidated Total |
|
||||||
|
|
|
|
|
|||||||||||||||||||||
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
— |
|
|
$ |
0.2 |
|
|
$ |
490.8 |
|
|
$ |
145.8 |
|
|
$ |
— |
|
|
$ |
636.8 |
|
|
Accounts receivable, net |
|
|
— |
|
|
|
0.1 |
|
|
|
196.5 |
|
|
|
1,840.2 |
|
|
|
(26.1 |
) |
|
|
2,010.7 |
|
|
Inventories |
|
|
— |
|
|
|
— |
|
|
|
233.4 |
|
|
|
1,596.2 |
|
|
|
— |
|
|
|
1,829.6 |
|
|
Other current assets |
|
|
— |
|
|
|
0.4 |
|
|
|
17.2 |
|
|
|
230.9 |
|
|
|
— |
|
|
|
248.5 |
|
|
Intercompany receivables |
|
|
— |
|
|
|
27.7 |
|
|
|
269.8 |
|
|
|
792.8 |
|
|
|
(1,090.3 |
) |
|
|
— |
|
|
Assets held for sale |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
59.5 |
|
|
|
— |
|
|
|
59.5 |
|
|
Total current assets |
|
|
— |
|
|
|
28.4 |
|
|
|
1,207.7 |
|
|
|
4,665.4 |
|
|
|
(1,116.4 |
) |
|
|
4,785.1 |
|
|
Property, plant and equipment, net |
|
|
— |
|
|
|
— |
|
|
|
21.3 |
|
|
|
9,061.2 |
|
|
|
— |
|
|
|
9,082.5 |
|
|
Goodwill |
|
|
— |
|
|
|
— |
|
|
|
1,151.3 |
|
|
|
4,426.3 |
|
|
|
— |
|
|
|
5,577.6 |
|
|
Intangibles, net |
|
|
— |
|
|
|
— |
|
|
|
1,589.4 |
|
|
|
1,532.6 |
|
|
|
— |
|
|
|
3,122.0 |
|
|
Restricted assets held by special purpose entities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,281.0 |
|
|
|
— |
|
|
|
1,281.0 |
|
|
Prepaid pension asset |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
420.0 |
|
|
|
— |
|
|
|
420.0 |
|
|
Intercompany notes receivable |
|
|
— |
|
|
|
884.2 |
|
|
|
33.1 |
|
|
|
2,865.4 |
|
|
|
(3,782.7 |
) |
|
|
— |
|
|
Investments in consolidated subsidiaries |
|
|
— |
|
|
|
13,260.3 |
|
|
|
15,066.3 |
|
|
|
— |
|
|
|
(28,326.6 |
) |
|
|
— |
|
|
Other assets |
|
|
3.4 |
|
|
|
12.4 |
|
|
|
172.8 |
|
|
|
910.8 |
|
|
|
(7.1 |
) |
|
|
1,092.3 |
|
|
Total Assets |
|
$ |
3.4 |
|
|
$ |
14,185.3 |
|
|
$ |
19,241.9 |
|
|
$ |
25,162.7 |
|
|
$ |
(33,232.8 |
) |
|
$ |
25,360.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of debt |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
609.5 |
|
|
$ |
131.2 |
|
|
$ |
— |
|
|
$ |
740.7 |
|
|
Accounts payable |
|
|
— |
|
|
|
0.8 |
|
|
|
40.3 |
|
|
|
1,701.8 |
|
|
|
(26.1 |
) |
|
|
1,716.8 |
|
|
Accrued compensation and benefits |
|
|
— |
|
|
|
0.2 |
|
|
|
10.7 |
|
|
|
388.4 |
|
|
|
— |
|
|
|
399.3 |
|
|
Other current liabilities |
|
|
— |
|
|
|
3.2 |
|
|
|
77.7 |
|
|
|
395.6 |
|
|
|
— |
|
|
|
476.5 |
|
|
Intercompany payables |
|
|
13.0 |
|
|
|
506.6 |
|
|
|
570.4 |
|
|
|
0.3 |
|
|
|
(1,090.3 |
) |
|
|
— |
|
|
Total current liabilities |
|
|
13.0 |
|
|
|
510.8 |
|
|
|
1,308.6 |
|
|
|
2,617.3 |
|
|
|
(1,116.4 |
) |
|
|
3,333.3 |
|
|
Long-term debt due after one year |
|
|
— |
|
|
|
2,179.4 |
|
|
|
2,460.1 |
|
|
|
1,035.0 |
|
|
|
— |
|
|
|
5,674.5 |
|
|
Intercompany notes payable |
|
|
— |
|
|
|
— |
|
|
|
2,865.4 |
|
|
|
917.3 |
|
|
|
(3,782.7 |
) |
|
|
— |
|
|
Pension liabilities, net of current portion |
|
|
— |
|
|
|
— |
|
|
|
135.9 |
|
|
|
125.4 |
|
|
|
— |
|
|
|
261.3 |
|
|
Postretirement benefit liabilities, net of current portion |
|
|
— |
|
|
|
— |
|
|
|
28.1 |
|
|
|
106.7 |
|
|
|
— |
|
|
|
134.8 |
|
|
Non-recourse liabilities held by special purpose entities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,153.7 |
|
|
|
— |
|
|
|
1,153.7 |
|
|
Deferred income taxes |
|
|
— |
|
|
|
— |
|
|
|
291.0 |
|
|
|
2,037.6 |
|
|
|
(7.1 |
) |
|
|
2,321.5 |
|
|
Other long-term liabilities |
|
|
— |
|
|
|
16.1 |
|
|
|
106.2 |
|
|
|
872.5 |
|
|
|
— |
|
|
|
994.8 |
|
|
Redeemable noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.2 |
|
|
|
— |
|
|
|
4.2 |
|
|
Total stockholders’ equity |
|
|
(9.6 |
) |
|
|
11,479.0 |
|
|
|
12,046.6 |
|
|
|
16,280.0 |
|
|
|
(28,326.6 |
) |
|
|
11,469.4 |
|
|
Noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13.0 |
|
|
|
— |
|
|
|
13.0 |
|
|
Total equity |
|
|
(9.6 |
) |
|
|
11,479.0 |
|
|
|
12,046.6 |
|
|
|
16,293.0 |
|
|
|
(28,326.6 |
) |
|
|
11,482.4 |
|
|
Total Liabilities and Equity |
|
$ |
3.4 |
|
|
$ |
14,185.3 |
|
|
$ |
19,241.9 |
|
|
$ |
25,162.7 |
|
|
$ |
(33,232.8 |
) |
|
$ |
25,360.5 |
|
117
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS |
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2019 |
|
|||||||||||||||||||||
|
(In millions) |
|
Parent |
|
|
Issuer |
|
|
Guarantor Subsidiaries |
|
|
Non-Guarantor Subsidiaries |
|
|
Eliminations |
|
|
Consolidated Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities |
|
$ |
538.2 |
|
|
$ |
(203.8 |
) |
|
$ |
442.1 |
|
|
$ |
1,533.7 |
|
|
$ |
— |
|
|
$ |
2,310.2 |
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,369.1 |
) |
|
|
— |
|
|
|
(1,369.1 |
) |
|
Cash paid related to business combinations, net of cash acquired |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,374.2 |
) |
|
|
— |
|
|
|
(3,374.2 |
) |
|
Investment in unconsolidated entities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11.2 |
) |
|
|
— |
|
|
|
(11.2 |
) |
|
Proceeds from sale of property, plant and equipment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
119.1 |
|
|
|
— |
|
|
|
119.1 |
|
|
Proceeds from property, plant and equipment insurance settlement |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25.5 |
|
|
|
— |
|
|
|
25.5 |
|
|
Intercompany notes issued |
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
(75.7 |
) |
|
|
75.8 |
|
|
|
— |
|
|
Intercompany notes proceeds |
|
|
— |
|
|
|
9.3 |
|
|
|
6.7 |
|
|
|
3,870.1 |
|
|
|
(3,886.1 |
) |
|
|
— |
|
|
Intercompany capital investment |
|
|
(563.0 |
) |
|
|
(563.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
1,126.0 |
|
|
|
— |
|
|
Other |
|
|
— |
|
|
|
— |
|
|
|
30.2 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
30.3 |
|
|
Net cash (used for) provided by investing activities |
|
|
(563.0 |
) |
|
|
(553.7 |
) |
|
|
36.8 |
|
|
|
(815.4 |
) |
|
|
(2,684.3 |
) |
|
|
(4,579.6 |
) |
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of notes |
|
|
— |
|
|
|
2,498.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,498.2 |
|
|
Additions (repayments) to revolving credit facilities |
|
|
— |
|
|
|
46.0 |
|
|
|
— |
|
|
|
(8.8 |
) |
|
|
— |
|
|
|
37.2 |
|
|
Additions to debt |
|
|
— |
|
|
|
4,101.8 |
|
|
|
— |
|
|
|
959.8 |
|
|
|
— |
|
|
|
5,061.6 |
|
|
Repayments of debt |
|
|
— |
|
|
|
(2,400.0 |
) |
|
|
(957.5 |
) |
|
|
(2,274.1 |
) |
|
|
— |
|
|
|
(5,631.6 |
) |
|
Changes in commercial paper, net |
|
|
— |
|
|
|
339.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
339.2 |
|
|
Other financing additions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10.0 |
|
|
|
— |
|
|
|
10.0 |
|
|
Issuances of common stock, net of related minimum tax withholdings |
|
|
18.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18.3 |
|
|
Purchases of common stock |
|
|
(88.6 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(88.6 |
) |
|
Cash dividends paid to stockholders |
|
|
(467.9 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(467.9 |
) |
|
Cash distributions paid to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4.3 |
) |
|
|
— |
|
|
|
(4.3 |
) |
|
Intercompany notes borrowing |
|
|
— |
|
|
|
— |
|
|
|
75.7 |
|
|
|
0.1 |
|
|
|
(75.8 |
) |
|
|
— |
|
|
Intercompany notes payments |
|
|
— |
|
|
|
(3,800.0 |
) |
|
|
(70.1 |
) |
|
|
(16.0 |
) |
|
|
3,886.1 |
|
|
|
— |
|
|
Intercompany capital receipt |
|
|
563.0 |
|
|
|
— |
|
|
|
— |
|
|
|
563.0 |
|
|
|
(1,126.0 |
) |
|
|
— |
|
|
Other |
|
|
— |
|
|
|
(27.9 |
) |
|
|
— |
|
|
|
36.0 |
|
|
|
— |
|
|
|
8.1 |
|
|
Net cash provided by (used for) financing activities |
|
|
24.8 |
|
|
|
757.3 |
|
|
|
(951.9 |
) |
|
|
(734.3 |
) |
|
|
2,684.3 |
|
|
|
1,780.2 |
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.0 |
|
|
|
— |
|
|
|
4.0 |
|
|
Decrease in cash, cash equivalents and restricted cash |
|
|
— |
|
|
|
(0.2 |
) |
|
|
(473.0 |
) |
|
|
(12.0 |
) |
|
|
— |
|
|
|
(485.2 |
) |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
— |
|
|
|
0.2 |
|
|
|
490.8 |
|
|
|
145.8 |
|
|
|
— |
|
|
|
636.8 |
|
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
17.8 |
|
|
$ |
133.8 |
|
|
$ |
— |
|
|
$ |
151.6 |
|
118
The condensed consolidating statements of cash flows for the year ended September 30, 2019 do not include non-cash transactions between Parent, Issuer, Guarantor Subsidiaries and Non-Guarantor Subsidiaries. From time to time, we may enter into non-cash transactions for simplicity of execution of intercompany transactions. These may include intercompany non-cash capitalizations, intercompany non-cash returns of capital, intercompany debt-to-equity conversions or other transactions of a similar nature. The table below summarizes these non-cash transactions.
|
|
|
Year Ended September 30, 2019 |
|
|||||||||||||||||||||
|
(In millions) |
|
Parent |
|
|
Issuer |
|
|
Guarantor Subsidiaries |
|
|
Non-Guarantor Subsidiaries |
|
|
Eliminations |
|
|
Consolidated Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany receivables |
|
$ |
(140.9 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
140.9 |
|
|
$ |
— |
|
|
Intercompany payables |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
140.9 |
|
|
$ |
(140.9 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany notes issued |
|
$ |
— |
|
|
$ |
(3,800.0 |
) |
|
$ |
(4,667.2 |
) |
|
$ |
(10,777.8 |
) |
|
$ |
19,245.0 |
|
|
$ |
— |
|
|
Intercompany notes proceeds |
|
$ |
— |
|
|
$ |
4,519.8 |
|
|
$ |
4,536.8 |
|
|
$ |
6,822.0 |
|
|
$ |
(15,878.6 |
) |
|
$ |
— |
|
|
Intercompany capital investment |
|
$ |
(10,396.2 |
) |
|
$ |
(5,895.5 |
) |
|
$ |
(6,889.3 |
) |
|
$ |
— |
|
|
$ |
23,181.0 |
|
|
$ |
— |
|
|
Intercompany return of capital |
|
$ |
606.7 |
|
|
$ |
1,479.6 |
|
|
$ |
1,032.7 |
|
|
$ |
— |
|
|
$ |
(3,119.0 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany notes borrowing |
|
$ |
— |
|
|
$ |
4,436.3 |
|
|
$ |
2,541.5 |
|
|
$ |
12,267.2 |
|
|
$ |
(19,245.0 |
) |
|
$ |
— |
|
|
Intercompany notes payments |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(3,022.0 |
) |
|
$ |
(12,856.6 |
) |
|
$ |
15,878.6 |
|
|
$ |
— |
|
|
Intercompany capital receipt |
|
$ |
— |
|
|
$ |
10,396.2 |
|
|
$ |
5,413.7 |
|
|
$ |
7,371.1 |
|
|
$ |
(23,181.0 |
) |
|
$ |
— |
|
|
Intercompany capital distribution |
|
$ |
(563.0 |
) |
|
$ |
(606.7 |
) |
|
$ |
(457.5 |
) |
|
$ |
(1,491.8 |
) |
|
$ |
3,119.0 |
|
|
$ |
— |
|
|
Intercompany dividends paid |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(302.2 |
) |
|
$ |
(1,435.0 |
) |
|
$ |
1,737.2 |
|
|
$ |
— |
|
119
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS |
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2018 |
|
|||||||||||||||||||||
|
(In millions) |
|
Parent |
|
|
Issuer |
|
|
Guarantor Subsidiaries |
|
|
Non-Guarantor Subsidiaries |
|
|
Eliminations |
|
|
Consolidated Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
4.1 |
|
|
$ |
563.4 |
|
|
$ |
375.8 |
|
|
$ |
1,016.3 |
|
|
$ |
(28.4 |
) |
|
$ |
1,931.2 |
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
— |
|
|
|
— |
|
|
|
(1.2 |
) |
|
|
(998.7 |
) |
|
|
— |
|
|
|
(999.9 |
) |
|
Cash paid for purchase of businesses, net of cash acquired |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(239.9 |
) |
|
|
— |
|
|
|
(239.9 |
) |
|
Cash receipts on sold trade receivables |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
461.6 |
|
|
|
— |
|
|
|
461.6 |
|
|
Investment in unconsolidated entities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(114.3 |
) |
|
|
— |
|
|
|
(114.3 |
) |
|
Proceeds from sale of property, plant and equipment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23.3 |
|
|
|
— |
|
|
|
23.3 |
|
|
Proceeds from property, plant and equipment insurance settlement |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7.9 |
|
|
|
— |
|
|
|
7.9 |
|
|
Intercompany notes issued |
|
|
— |
|
|
|
— |
|
|
|
(1.4 |
) |
|
|
— |
|
|
|
1.4 |
|
|
|
— |
|
|
Intercompany notes proceeds |
|
|
— |
|
|
|
— |
|
|
|
4.5 |
|
|
|
— |
|
|
|
(4.5 |
) |
|
|
— |
|
|
Intercompany capital investment |
|
|
— |
|
|
|
(2.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
2.0 |
|
|
|
— |
|
|
Intercompany return of capital |
|
|
— |
|
|
|
— |
|
|
|
82.6 |
|
|
|
— |
|
|
|
(82.6 |
) |
|
|
— |
|
|
Other |
|
|
— |
|
|
|
— |
|
|
|
18.6 |
|
|
|
27.6 |
|
|
|
— |
|
|
|
46.2 |
|
|
Net cash (used for) provided by investing activities |
|
|
— |
|
|
|
(2.0 |
) |
|
|
103.1 |
|
|
|
(832.5 |
) |
|
|
(83.7 |
) |
|
|
(815.1 |
) |
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of notes |
|
|
— |
|
|
|
1,197.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,197.3 |
|
|
Repayments to revolving credit facilities |
|
|
— |
|
|
|
(106.7 |
) |
|
|
— |
|
|
|
(8.8 |
) |
|
|
— |
|
|
|
(115.5 |
) |
|
Additions to debt |
|
|
— |
|
|
|
2.7 |
|
|
|
— |
|
|
|
852.5 |
|
|
|
— |
|
|
|
855.2 |
|
|
Repayments of debt |
|
|
(0.1 |
) |
|
|
(1,025.2 |
) |
|
|
(22.5 |
) |
|
|
(985.1 |
) |
|
|
— |
|
|
|
(2,032.9 |
) |
|
Other financing repayments |
|
|
— |
|
|
|
— |
|
|
|
(8.9 |
) |
|
|
(15.3 |
) |
|
|
— |
|
|
|
(24.2 |
) |
|
Issuances of common stock, net of related minimum tax withholdings |
|
|
— |
|
|
|
26.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26.6 |
|
|
Purchases of common stock |
|
|
— |
|
|
|
(195.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(195.1 |
) |
|
Cash dividends paid to stockholders |
|
|
— |
|
|
|
(440.9 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(440.9 |
) |
|
Cash distributions paid to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(33.3 |
) |
|
|
— |
|
|
|
(33.3 |
) |
|
Intercompany notes borrowing |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.4 |
|
|
|
(1.4 |
) |
|
|
— |
|
|
Intercompany notes payments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4.5 |
) |
|
|
4.5 |
|
|
|
— |
|
|
Intercompany capital receipt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.0 |
|
|
|
(2.0 |
) |
|
|
— |
|
|
Intercompany capital distribution |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(82.6 |
) |
|
|
82.6 |
|
|
|
— |
|
|
Intercompany dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(28.4 |
) |
|
|
28.4 |
|
|
|
— |
|
|
Other |
|
|
(4.0 |
) |
|
|
(19.9 |
) |
|
|
— |
|
|
|
31.6 |
|
|
|
— |
|
|
|
7.7 |
|
|
Net cash used for financing activities |
|
|
(4.1 |
) |
|
|
(561.2 |
) |
|
|
(31.4 |
) |
|
|
(270.5 |
) |
|
|
112.1 |
|
|
|
(755.1 |
) |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(28.2 |
) |
|
|
— |
|
|
|
(28.2 |
) |
|
Increase (decrease) in cash, cash equivalents and restricted cash |
|
|
— |
|
|
|
0.2 |
|
|
|
447.5 |
|
|
|
(114.9 |
) |
|
|
— |
|
|
|
332.8 |
|
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
— |
|
|
|
— |
|
|
|
43.3 |
|
|
|
260.7 |
|
|
|
— |
|
|
|
304.0 |
|
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
— |
|
|
$ |
0.2 |
|
|
$ |
490.8 |
|
|
$ |
145.8 |
|
|
$ |
— |
|
|
$ |
636.8 |
|
120
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The condensed consolidating statements of cash flows for the year ended September 30, 2018 do not include non-cash transactions between Parent, Issuer, Guarantor Subsidiaries and Non-Guarantor Subsidiaries. From time to time, we may enter into non-cash transactions for simplicity of execution of intercompany transactions. These may include intercompany non-cash capitalizations, intercompany non-cash returns of capital, intercompany debt-to-equity conversions or other transactions of a similar nature. The table below summarizes these non-cash transactions.
|
|
|
Year Ended September 30, 2018 |
|
|||||||||||||||||||||
|
(In millions) |
|
Parent |
|
|
Issuer |
|
|
Guarantor Subsidiaries |
|
|
Non-Guarantor Subsidiaries |
|
|
Eliminations |
|
|
Consolidated Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany notes issued |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(392.1 |
) |
|
$ |
392.1 |
|
|
$ |
— |
|
|
Intercompany notes proceeds |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
83.0 |
|
|
$ |
(83.0 |
) |
|
$ |
— |
|
|
Intercompany capital investment |
|
$ |
— |
|
|
$ |
(755.3 |
) |
|
$ |
(335.3 |
) |
|
$ |
— |
|
|
$ |
1,090.6 |
|
|
$ |
— |
|
|
Intercompany return of capital |
|
$ |
— |
|
|
$ |
1,356.3 |
|
|
$ |
766.0 |
|
|
$ |
— |
|
|
$ |
(2,122.3 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany notes borrowing |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
392.1 |
|
|
$ |
— |
|
|
$ |
(392.1 |
) |
|
$ |
— |
|
|
Intercompany notes payments |
|
$ |
— |
|
|
$ |
(69.0 |
) |
|
$ |
(14.0 |
) |
|
$ |
— |
|
|
$ |
83.0 |
|
|
$ |
— |
|
|
Intercompany capital receipt |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
736.9 |
|
|
$ |
353.7 |
|
|
$ |
(1,090.6 |
) |
|
$ |
— |
|
|
Intercompany capital distribution |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(1,356.3 |
) |
|
$ |
(766.0 |
) |
|
$ |
2,122.3 |
|
|
$ |
— |
|
|
Intercompany dividends paid |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(285.9 |
) |
|
$ |
285.9 |
|
|
$ |
— |
|
121
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS |
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2017 |
|
|||||||||||||||||||||
|
(In millions) |
|
Parent |
|
|
Issuer |
|
|
Guarantor Subsidiaries |
|
|
Non-Guarantor Subsidiaries |
|
|
Eliminations |
|
|
Consolidated Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
— |
|
|
$ |
928.6 |
|
|
$ |
344.2 |
|
|
$ |
192.4 |
|
|
$ |
(1.4 |
) |
|
$ |
1,463.8 |
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
— |
|
|
|
— |
|
|
|
(1.4 |
) |
|
|
(777.2 |
) |
|
|
— |
|
|
|
(778.6 |
) |
|
Cash paid for purchase of businesses, net of cash acquired |
|
|
— |
|
|
|
(61.0 |
) |
|
|
(118.1 |
) |
|
|
(1,409.4 |
) |
|
|
— |
|
|
|
(1,588.5 |
) |
|
Cash receipts on sold trade receivables |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
411.2 |
|
|
|
— |
|
|
|
411.2 |
|
|
Investment in unconsolidated entities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2.5 |
) |
|
|
— |
|
|
|
(2.5 |
) |
|
Proceeds from sale of HH&B |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,005.9 |
|
|
|
— |
|
|
|
1,005.9 |
|
|
Proceeds from sale of property, plant and equipment |
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
|
|
52.4 |
|
|
|
— |
|
|
|
52.6 |
|
|
Proceeds from property, plant and equipment insurance settlement |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3.5 |
|
|
|
— |
|
|
|
3.5 |
|
|
Intercompany notes issued |
|
|
— |
|
|
|
(734.1 |
) |
|
|
— |
|
|
|
(523.3 |
) |
|
|
1,257.4 |
|
|
|
— |
|
|
Intercompany notes proceeds |
|
|
— |
|
|
|
5.0 |
|
|
|
2.4 |
|
|
|
523.3 |
|
|
|
(530.7 |
) |
|
|
— |
|
|
Intercompany capital investment |
|
|
— |
|
|
|
(200.0 |
) |
|
|
(200.4 |
) |
|
|
— |
|
|
|
400.4 |
|
|
|
— |
|
|
Intercompany return of capital |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Other |
|
|
— |
|
|
|
— |
|
|
|
8.3 |
|
|
|
19.4 |
|
|
|
— |
|
|
|
27.7 |
|
|
Net cash used for investing activities |
|
|
— |
|
|
|
(990.1 |
) |
|
|
(309.0 |
) |
|
|
(696.7 |
) |
|
|
1,127.1 |
|
|
|
(868.7 |
) |
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of notes |
|
|
— |
|
|
|
998.4 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
998.4 |
|
|
Additions to revolving credit facilities |
|
|
— |
|
|
|
421.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
421.8 |
|
|
Additions to debt |
|
|
— |
|
|
|
742.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
742.6 |
|
|
Repayments of debt |
|
|
— |
|
|
|
(1,657.1 |
) |
|
|
(206.6 |
) |
|
|
(468.2 |
) |
|
|
— |
|
|
|
(2,331.9 |
) |
|
Other financing (repayments) additions |
|
|
— |
|
|
|
— |
|
|
|
(26.9 |
) |
|
|
50.8 |
|
|
|
— |
|
|
|
23.9 |
|
|
Issuances of common stock, net of related minimum tax withholdings |
|
|
— |
|
|
|
35.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
35.8 |
|
|
Purchases of common stock |
|
|
— |
|
|
|
(93.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(93.0 |
) |
|
Cash dividends paid to stockholders |
|
|
— |
|
|
|
(403.2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(403.2 |
) |
|
Cash distributions paid to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(47.0 |
) |
|
|
— |
|
|
|
(47.0 |
) |
|
Intercompany notes borrowing |
|
|
— |
|
|
|
3.5 |
|
|
|
519.8 |
|
|
|
734.1 |
|
|
|
(1,257.4 |
) |
|
|
— |
|
|
Intercompany notes payments |
|
|
— |
|
|
|
(3.5 |
) |
|
|
(519.8 |
) |
|
|
(7.4 |
) |
|
|
530.7 |
|
|
|
— |
|
|
Intercompany capital receipt |
|
|
— |
|
|
|
— |
|
|
|
200.0 |
|
|
|
200.4 |
|
|
|
(400.4 |
) |
|
|
— |
|
|
Intercompany capital distribution |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Intercompany dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1.4 |
) |
|
|
1.4 |
|
|
|
— |
|
|
Other |
|
|
— |
|
|
|
(3.2 |
) |
|
|
— |
|
|
|
0.4 |
|
|
|
— |
|
|
|
(2.8 |
) |
|
Net cash provided by (used for) financing activities |
|
|
— |
|
|
|
42.1 |
|
|
|
(33.5 |
) |
|
|
461.7 |
|
|
|
(1,125.7 |
) |
|
|
(655.4 |
) |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2.1 |
) |
|
|
— |
|
|
|
(2.1 |
) |
|
(Decrease) increase in cash, cash equivalents and restricted cash |
|
|
— |
|
|
|
(19.4 |
) |
|
|
1.7 |
|
|
|
(44.7 |
) |
|
|
— |
|
|
|
(62.4 |
) |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
— |
|
|
|
19.4 |
|
|
|
41.6 |
|
|
|
305.4 |
|
|
|
— |
|
|
|
366.4 |
|
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
43.3 |
|
|
$ |
260.7 |
|
|
$ |
— |
|
|
$ |
304.0 |
|
122
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The condensed consolidating statements of cash flows for the year ended September 30, 2017 do not include non-cash transactions between Parent, Issuer, Guarantor Subsidiaries and Non-Guarantor Subsidiaries. From time to time, we may enter into non-cash transactions for simplicity of execution of intercompany transactions. These may include intercompany non-cash capitalizations, intercompany non-cash returns of capital, intercompany debt-to-equity conversions or other transactions of a similar nature. The table below summarizes these non-cash transactions.
|
|
|
Year Ended September 30, 2017 |
|
|||||||||||||||||||||||||||||
|
(In millions) |
|
Parent |
|
|
|
|
Issuer |
|
|
|
|
Guarantor Subsidiaries |
|
|
|
|
Non-Guarantor Subsidiaries |
|
|
|
|
Eliminations |
|
|
Consolidated Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany notes issued |
|
$ |
— |
|
|
|
|
$ |
— |
|
|
|
|
$ |
— |
|
|
|
|
$ |
(1,673.9 |
) |
|
|
|
$ |
1,673.9 |
|
|
$ |
— |
|
|
Intercompany notes proceeds |
|
$ |
— |
|
|
|
|
$ |
1,604.9 |
|
|
|
|
$ |
— |
|
|
|
|
$ |
— |
|
|
|
|
$ |
(1,604.9 |
) |
|
$ |
— |
|
|
Intercompany capital investment |
|
$ |
— |
|
|
|
|
$ |
(2,200.5 |
) |
|
|
|
$ |
(2,908.0 |
) |
|
|
|
$ |
— |
|
|
|
|
$ |
5,108.5 |
|
|
$ |
— |
|
|
Intercompany return of capital |
|
$ |
— |
|
|
|
|
$ |
1,083.6 |
|
|
|
|
$ |
1,556.2 |
|
|
|
|
$ |
— |
|
|
|
|
$ |
(2,639.8 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany notes borrowing |
|
$ |
— |
|
|
|
|
$ |
69.0 |
|
|
|
|
$ |
1,604.9 |
|
|
|
|
$ |
— |
|
|
|
|
$ |
(1,673.9 |
) |
|
$ |
— |
|
|
Intercompany notes payments |
|
$ |
— |
|
|
|
|
$ |
— |
|
|
|
|
$ |
(1,604.9 |
) |
|
|
|
$ |
— |
|
|
|
|
$ |
1,604.9 |
|
|
$ |
— |
|
|
Intercompany capital receipt |
|
$ |
— |
|
|
|
|
$ |
— |
|
|
|
|
$ |
1,728.4 |
|
|
|
|
$ |
3,380.1 |
|
|
|
|
$ |
(5,108.5 |
) |
|
$ |
— |
|
|
Intercompany capital distribution |
|
$ |
— |
|
|
|
|
$ |
— |
|
|
|
|
$ |
(1,083.6 |
) |
|
|
|
$ |
(1,556.2 |
) |
|
|
|
$ |
2,639.8 |
|
|
$ |
— |
|
|
Intercompany dividends paid |
|
$ |
— |
|
|
|
|
$ |
— |
|
|
|
|
$ |
(144.1 |
) |
|
|
|
$ |
(204.5 |
) |
|
|
|
$ |
348.6 |
|
|
$ |
— |
|
|
Note 15. |
Operating Leases |
We lease certain manufacturing and warehousing facilities and equipment, primarily transportation equipment, and office space under various operating leases. Some leases contain escalation clauses and provisions for lease renewal. As of September 30, 2019, future minimum lease payments under all noncancelable operating leases for the succeeding five fiscal years and thereafter are as follows (in millions):
|
Fiscal 2020 |
|
$ |
214.3 |
|
|
Fiscal 2021 |
|
|
180.1 |
|
|
Fiscal 2022 |
|
|
136.3 |
|
|
Fiscal 2023 |
|
|
108.3 |
|
|
Fiscal 2024 |
|
|
85.3 |
|
|
Thereafter |
|
|
206.1 |
|
|
Total future minimum lease payments |
|
$ |
930.4 |
|
Rental expense for the years ended September 30, 2019, 2018 and 2017 was approximately $346.7 million, $243.7 million and $210.5 million, respectively, including lease payments under cancelable leases and maintenance charges on transportation equipment.
|
Note 16. |
Special Purpose Entities |
Pursuant to a sale of certain large-tract forestlands in 2007, a special purpose entity MWV Timber Notes Holding, LLC (“MWV TN”) received, and WestRock assumed upon the Combination, an installment note receivable in the amount of $398.0 million (“Timber Note”). The Timber Note does not require any principal payments until its maturity in October 2027 and bears interest at a rate approximating LIBOR. In addition, the Timber Note is supported by a bank-issued irrevocable letter of credit obtained by the buyer of the forestlands. The Timber Note is not subject to prepayment in whole or in part prior to maturity. The bank’s credit rating as of October 2019 was investment grade.
Using the Timber Note as collateral, MWV TN received $338.3 million in proceeds under a secured financing agreement with a bank. Under the terms of the agreement, the liability from this transaction is non-recourse to the
123
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company and is payable from the Timber Note proceeds upon its maturity in October 2027. As a result, the Timber Note is not available to satisfy any obligations of WestRock. MWV TN can elect to prepay at any time the liability in whole or in part, however, given that the Timber Note is not prepayable, MWV TN expects to only repay the liability at maturity from the Timber Note proceeds.
The Timber Note and the secured financing liability were fair valued on the opening balance sheet in connection with the Combination. As of September 30, 2019, the Timber Note was $369.1 million and is included within restricted assets held by special purpose entities on the consolidated balance sheet and the secured financing liability was $324.5 million and is included within non-recourse liabilities held by special purpose entities on the consolidated balance sheet.
Pursuant to the sale of MWV’s remaining U.S. forestlands, which occurred on December 6, 2013, another special purpose entity MWV Timber Notes Holding Company II, LLC (“MWV TN II”) received, and WestRock assumed upon the Combination, an installment note receivable in the amount of $860.0 million (the “Installment Note”). The Installment Note does not require any principal payments until its maturity in December 2023 and bears interest at a fixed rate of 5.207%. However, at any time during a 180-day period following receipt by the borrower of notice from us that we intend to withhold our consent to any amendment or waiver of this Installment Note that was requested by the borrower and approved by any eligible assignees, the borrower may prepay the Installment Note in whole but not in part for cash at 100% of the principal, plus accrued but unpaid interest, breakage, or other similar amount if any. As of September 30, 2019, no event had occurred that would allow for the prepayment of the Installment Note. We monitor the credit quality of the borrower and receive quarterly compliance certificates. The borrower’s credit rating as of October 2019 was investment grade.
Using the Installment Note as collateral, MWV TN II received $774.0 million in proceeds under a secured financing agreement with a bank. Under the terms of the agreement, the liability from this transaction is non-recourse to WestRock and is payable from the Installment Note proceeds upon its maturity in December 2023. As a result, the Installment Note is not available to satisfy any obligations of WestRock. MWV TN II can elect to prepay, at any time, the liability in whole or in part, with sufficient notice, but would avail itself of this provision only in the event the Installment Note was prepaid in whole or in part. The secured financing agreement however requires a mandatory repayment, up to the amount of cash received, if the Installment Note is prepaid in whole or in part.
The Installment Note and the secured financing liability were fair valued on the opening balance sheet in connection with the Combination. As of September 30, 2019, the Installment Note was $905.2 million and is included within restricted assets held by special purpose entities on the consolidated balance sheet and the secured financing liability was $820.7 million and is included within non-recourse liabilities held by special purpose entities on the consolidated balance sheet.
|
Note 17. |
Related Party Transactions |
We sell products to affiliated companies. Net sales to the affiliated companies for the fiscal years ended September 30, 2019, 2018 and 2017 were approximately $368.4 million, $418.8 million and $423.6 million, respectively. Accounts receivable due from the affiliated companies at September 30, 2019 and 2018 was $23.0 million and $64.2 million, respectively, and was included in accounts receivable on our consolidated balance sheets.
|
Note 18. |
Commitments and Contingencies |
Capital Additions
Estimated costs for future purchases of fixed assets that we are obligated to purchase as of September 30, 2019 total approximately $623 million.
Environmental and Other Matters
Environmental compliance requirements are a significant factor affecting our business. We employ manufacturing processes that result in various discharges, emissions and wastes. These processes are subject to numerous federal, state, local and international environmental laws and regulations, as well as the requirements of environmental permits and similar authorizations issued by various governmental authorities.
124
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On January 31, 2013, the EPA published Boiler MACT. Boiler MACT required compliance by January 31, 2016 or by January 31, 2017 for those mills for which we obtained a prior compliance extension. All work required for our boilers to comply with the rule has been completed. On July 29, 2016, the U.S. Court of Appeals for the District of Columbia Circuit issued a ruling on the consolidated cases challenging Boiler MACT. The court vacated key portions of the rule, including emission limits for certain subcategories of solid fuel boilers, and remanded other issues to the EPA for further rulemaking. At this time, we cannot predict with certainty how this decision will impact our existing Boiler MACT strategies or whether we will incur additional costs to comply with any revised Boiler MACT standards.
In addition to Boiler MACT, we are subject to several other federal, state, local and international environmental rules that may impact our business, including the National Ambient Air Quality Standards for nitrogen oxide, sulfur dioxide, fine particulate matter and ozone for facilities in the U.S.
We are involved in various administrative proceedings relating to environmental matters that arise in the normal course of business, and we may become involved in similar matters in the future. Although the ultimate outcome of these proceedings cannot be predicted with certainty and we cannot at this time estimate any reasonably possible losses based on available information, we do not believe that the currently expected outcome of any environmental proceedings and claims that are pending or threatened against us will have a material adverse effect on our results of operations, financial condition or cash flows.
CERCLA and Other Remediation Costs
We face potential liability under federal, state, local and international laws as a result of releases, or threatened releases, of hazardous substances into the environment from various sites owned and operated by third parties at which Company-generated wastes have allegedly been deposited. Generators of hazardous substances sent to off-site disposal locations at which environmental problems exist, as well as the owners of those sites and certain other classes of persons, are liable for response costs for the investigation and remediation of such sites under CERCLA and analogous laws. While joint and several liability is authorized under CERCLA, liability is typically shared with other PRPs and costs are commonly allocated according to relative amounts of waste deposited and other factors.
In addition, certain of our current or former locations are being investigated or remediated under various environmental laws, including CERCLA. Based on information known to us and assumptions, we do not believe that the costs of these projects will have a material adverse effect on our results of operations, financial condition or cash flows. However, the discovery of contamination or the imposition of additional obligations, including natural resources damaged at these or other sites in the future could result in additional costs.
On January 26, 2009, Smurfit-Stone, which we acquired in fiscal 2011 and certain of its subsidiaries filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. Smurfit-Stone’s Canadian subsidiaries also filed to reorganize in Canada. We believe that matters relating to previously identified third-party PRP sites and certain facilities formerly owned or operated by Smurfit-Stone have been satisfied by claims in the Smurfit-Stone bankruptcy proceedings. However, we may face additional liability for cleanup activity at sites that are not subject to the bankruptcy discharge, but are not currently identified. The final bankruptcy distributions were made in fiscal 2018.
We believe that we can assert claims for indemnification pursuant to existing rights we have under purchase and other agreements in connection with certain remediation sites. In addition, we believe that we have insurance coverage, subject to applicable deductibles/retentions, policy limits and other conditions, for certain environmental matters. However, there can be no assurance that we will be successful with respect to any claim regarding these insurance or indemnification rights or that, if we are successful, any amounts paid pursuant to the insurance or indemnification rights will be sufficient to cover all our costs and expenses. We also cannot predict with certainty whether we will be required to perform remediation projects at other locations, and it is possible that our remediation requirements and costs could increase materially in the future and exceed current reserves. In addition, we cannot currently assess with certainty the impact that future changes in cleanup standards or federal, state or other environmental laws, regulations or enforcement practices will have on our results of operations, financial condition or cash flows.
125
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of September 30, 2019, we had $10.8 million reserved for environmental liabilities on an undiscounted basis, of which $5.6 million is included in other long-term liabilities and $5.2 million is included in other current liabilities, including amounts accrued in connection with environmental obligations relating to manufacturing facilities that we have closed. We believe the liability for these matters was adequately reserved at September 30, 2019.
Climate Change
Certain jurisdictions in which we have manufacturing facilities or other investments have taken actions to address climate change. The EPA has issued the Clean Air Act permitting regulations applicable to certain facilities that emit GHG. The EPA also has promulgated a rule requiring certain industrial facilities that emit 25,000 metric tons or more of carbon dioxide equivalent per year to file an annual report of their emissions. While we have facilities subject to existing GHG permitting and reporting requirements, the impact of these requirements has not been material to date.
Additionally, the EPA has been working on rulemakings aimed at cutting carbon emissions from power plants. On June 20, 2019, the EPA issued the final ACE rule, which establishes emission guidelines for states to use in developing plans to address greenhouse gas emissions from existing coal-fired power plants. The ACE rule replaced a final rule issued by the EPA in 2015 establishing GHG emission guidelines for existing electric utility generating units, which was stayed by the U.S. Supreme Court and has never gone into effect. Although the ACE rule does not apply directly to the power generation facilities at our mills, it has the potential to increase the cost of purchased electricity for our manufacturing operations and change the treatment of certain types of biomass that are currently considered carbon neutral. Due to uncertainties regarding the implementation of the ACE rule, its potential impacts on us cannot be quantified with certainty at this time.
In addition to national efforts to regulate climate change, some U.S. states in which we have manufacturing operations are taking measures to reduce GHG emissions, such as requiring GHG emissions reporting or developing regional cap-and trade programs. California has enacted a cap-and-trade program that took effect in 2012, and includes enforceable compliance obligations that began in 2013. In 2017, California extended the cap-and-trade program to 2030. We do not have any manufacturing facilities that are subject to the cap-and-trade requirements in California; however, we are continuing to monitor the implementation of this program as well as proposed mandatory GHG reduction efforts in other states. The Washington Department of Ecology issued a final rule, known as the Clean Air Rule, in 2016, which applies to GHGs from facilities that have average annual carbon dioxide equivalent emissions equal to or exceeding 100,000 metric tons/year. Energy intensive and trade exposed facilities, including our Tacoma, WA and Longview, WA mills, and transportation fuel importers are subject to regulation under this program. Various groups filed lawsuits against the Washington Department of Ecology challenging the Clean Air Rule, and in 2018, the Thurston County Superior Court invalidated the Clean Air Rule. The case was argued before the Supreme Court on March 19, 2019, and an opinion is expected before the end of 2019. The Washington Department of Ecology subsequently filed an appeal with the State Supreme Court. Implementation of the Clean Air Rule has been stayed while the appeal is pending. In June 2019, the State of New York passed the CLCPA. This legislation, which becomes effective in January 2020, commits the state to reaching net zero GHG emissions, with interim goals of a 40% reduction in absolute terms from 1990 levels by 2030 and an 85% reduction by 2050. Our Solvay, NY mill could be affected by the implementation of the CLCPA, although we cannot currently quantify any impacts due to uncertainties regarding implementation of the law. The Virginia Department of Environmental Quality has issued regulations that would link the Commonwealth to the RGGI, which is a nine-state, market-based carbon cap-and-trade program. Although industrial facilities like our paper mills and converting facilities in Virginia would be exempt from the RGGI regulations, electric generating units and utilities subject to the RGGI carbon reduction requirements may incur increased costs that could be passed on to ratepayers like our industrial facilities in Virginia. The State Air Pollution Control Board approved the final RGGI carbon trading regulations in April 2019; however, legislative amendments made to Virginia’s 2019 budget currently block the use of state funds to join RGGI or any climate change compacts, and to prevent using any cap-and-trade revenue without General Assembly approval. In September 2019, Governor Ralph Northam issued EO 43, setting goals for Virginia to generate 30 percent of its electricity from carbon-free sources by 2030 and 100 percent by 2050. EO 43 directs various state agencies, including the Department of Environmental Quality, to develop a plan of action to meet these energy goals and address related issues such as energy storage, energy efficiency and environmental justice.
The Paris Agreement established a framework for reducing global GHG emissions. By signing the Paris Agreement, the U.S. made a non-binding commitment to reduce economy-wide GHG emissions by 26% to 28%
126
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
below 2005 levels by 2025. Other countries in which we conduct business, including China, European Union member states and India, have set GHG reduction targets. The Paris Agreement became effective in November 2016. Although a party to the agreement may not provide the required one-year notice of withdrawal until three years after the effective date, in 2017, President Trump announced that the U.S. intended to withdraw from the Paris Agreement. At this time, it is not possible to determine how the Paris Agreement, or any potential U.S. commitments in lieu of those under the agreement, may impact U.S. industrial facilities, including our domestic operations.
Several of our international facilities are located in countries that have already adopted GHG emissions trading schemes. For example, Quebec has become a member of the Western Climate Initiative, which is a collaboration among California and certain Canadian provinces that have joined together to create a cap-and-trade program to reduce GHG emissions. In 2009, Quebec adopted a target of reducing GHG emissions by 20% below 1990 levels by 2020 and 37.5% from 1990 levels by 2030. In 2011, Quebec issued a final regulation establishing a regional cap-and-trade program that required reductions in GHG emissions from covered emitters as of January 1, 2013. Our mill in Quebec is subject to these cap-and-trade requirements, although the direct impact of this regulation has not been material to date. Compliance with this program and other similar programs may require future expenditures to meet required GHG emission reduction requirements in future years.
Regulation related to climate change continues to develop in the areas of the world where we conduct business. We have systems in place for tracking the GHG emissions from our energy-intensive facilities, and we carefully monitor developments in climate related laws, regulations and policies to assess the potential impact of such developments on our results of operations, financial condition, cash flows and disclosure obligations.
Litigation
A lawsuit filed in the U.S. District Court of the Northern District of Illinois in 2010 alleged that certain named defendants violated the Sherman Act by conspiring to limit the supply and fix the prices of containerboard and products containing containerboard from February 15, 2004 through November 8, 2010 (the “Antitrust Litigation”). WestRock CP, LLC, as the successor to Smurfit-Stone, was a named defendant with respect to the period after Smurfit-Stone’s discharge from bankruptcy on June 30, 2010 through November 8, 2010. The complaint sought treble damages and costs, including attorney’s fees. In March 2015, the court granted the plaintiffs’ motion for class certification. On January 9, 2017, the defendants filed individual and joint Motions for Summary Judgment in the District Court. On August 3, 2017, the District Court granted our Motion for Summary Judgment and entered a judgment in our favor with respect to all claims against us. The U.S. Court of Appeals for the Seventh Circuit affirmed the District Court’s decision on December 7, 2018. Plaintiff’s time to appeal this affirmation expired on March 7, 2019. Accordingly, the Order of the District Court granting summary judgment and our complete dismissal became final. Additionally, the District Court ordered entry of stipulation of the parties that required the plaintiffs to reimburse us for costs of approximately $0.1 million.
We have been named a defendant in asbestos-related personal injury litigation. To date, the costs resulting from the litigation, including settlement costs, have not been significant. As of September 30, 2019, there were approximately 825 such lawsuits. We believe that we have substantial insurance coverage, subject to applicable deductibles and policy limits, with respect to asbestos claims. We also have valid defenses to these asbestos-related personal injury claims and intend to continue to defend them vigorously. Should the volume of litigation grow substantially, it is possible that we could incur significant costs resolving these cases. We do not expect the resolution of pending asbestos litigation and proceedings to have a material adverse effect on our results of operations, financial condition or cash flows. In any given period or periods, however, it is possible such proceedings or matters could have a material adverse effect on our results of operations, financial condition or cash flows.
We are a defendant in a number of other lawsuits and claims arising out of the conduct of our business. While the ultimate results of such suits or other proceedings against us cannot be predicted with certainty, we believe the resolution of these other matters will not have a material adverse effect on our results of operations, financial condition or cash flows.
Brazil Tax Liability
On October 4, 2019, we filed an annulment action in federal tax court challenging an administrative decision of the Brazil Administrative Council of Tax Appeals (“CARF”). This federal court action arises from a claim that a
127
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
subsidiary of MeadWestvaco had reduced its tax liability related to the goodwill generated by the 2002 merger of two subsidiaries in Brazil. The matter has proceeded through the CARF principally in two proceedings, covering tax years 2003 to 2008 and 2009 to 2012. On August 6, 2019, CARF published a decision finding us liable for underpayment of tax and interest with respect to the period 2009 to 2012. Certain aspects of the two cases remain pending before CARF, including the dispute related to tax years 2003 to 2008, and penalties relating to tax years 2009 to 2012. The total amount in dispute before CARF and in the annulment action relating to the claimed tax deficiency is R$678 million ($163 million) as of September 30, 2019, including penalties and interest. We assert that we have no liability in these matters. Our uncertain tax position reserve for this matter is included in the unrecognized tax benefits table in “Note 6. Income Taxes”. 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.
Guarantees
We make certain guarantees in the normal course of conducting our operations, for compliance with certain laws and regulations, or in connection with certain business dispositions. The guarantees include items such as funding of net losses in proportion to our ownership share of certain joint ventures, debt guarantees related to certain unconsolidated entities acquired in acquisitions, indemnifications of lessors in certain facilities and equipment operating leases for items such as additional taxes being assessed due to a change in tax law and certain other agreements. We estimate our exposure to these matters could be approximately $50 million. As of September 30, 2019, we had recorded $10.1 million for the estimated fair value of these guarantees. We are unable to estimate our maximum exposure under operating leases because it is dependent on potential changes in the tax laws; however, we believe our exposure related to guarantees would not have a material impact on our results of operations, financial condition or cash flows.
Indirect Tax Claim
In March 2017, the Supreme Court of Brazil issued a decision concluding that certain state value added tax should not be included in the calculation of federal gross receipts taxes. Subsequently, in fiscal 2019, the Supreme Court of Brazil rendered favorable decisions on six of our cases granting us the right to recover certain state value added tax. We believe the decision reduced our gross receipts tax in Brazil prospectively and retrospectively, and will allow us to recover tax amounts collected by the government. Based on our preliminary evaluation and the opinion of our tax and legal advisors, in the fourth quarter of fiscal 2019 we recorded a $12.2 million receivable for our expected recovery and interest primarily as a reduction of cost of goods sold for the period March 2017 to September 2019. We are still evaluating the impact of the court’s decision on periods prior to March 2017 and may record additional amounts in the future as we complete our analysis.
128
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
Note 19. |
Accumulated Other Comprehensive Loss and Other Comprehensive Income |
The following table summarizes the changes in accumulated other comprehensive loss by component for the fiscal years ended September 30, 2019 and 2018 (in millions):
|
|
|
Deferred (Loss) Income on Cash Flow Hedges |
|
|
Defined Benefit Pension and Postretirement Plans |
|
|
Foreign Currency Items |
|
|
Available for Sale Security |
|
|
Total (1) |
|
|||||
|
Balance at September 30, 2017 |
|
$ |
(0.7 |
) |
|
$ |
(462.5 |
) |
|
$ |
5.2 |
|
|
$ |
0.7 |
|
|
$ |
(457.3 |
) |
|
Other comprehensive (loss) income before reclassifications |
|
|
— |
|
|
|
(18.6 |
) |
|
|
(234.4 |
) |
|
|
0.8 |
|
|
|
(252.2 |
) |
|
Amounts reclassified from accumulated other comprehensive loss (income) |
|
|
0.5 |
|
|
|
15.2 |
|
|
|
— |
|
|
|
(1.5 |
) |
|
|
14.2 |
|
|
Net current period other comprehensive income (loss) |
|
|
0.5 |
|
|
|
(3.4 |
) |
|
|
(234.4 |
) |
|
|
(0.7 |
) |
|
|
(238.0 |
) |
|
Balance at September 30, 2018 |
|
$ |
(0.2 |
) |
|
$ |
(465.9 |
) |
|
$ |
(229.2 |
) |
|
$ |
— |
|
|
$ |
(695.3 |
) |
|
Other comprehensive income (loss) before reclassifications |
|
|
1.1 |
|
|
|
(250.7 |
) |
|
|
(142.7 |
) |
|
|
— |
|
|
|
(392.3 |
) |
|
Amounts reclassified from accumulated other comprehensive (income) loss |
|
|
(0.2 |
) |
|
|
18.6 |
|
|
|
— |
|
|
|
— |
|
|
|
18.4 |
|
|
Net current period other comprehensive income (loss) |
|
|
0.9 |
|
|
|
(232.1 |
) |
|
|
(142.7 |
) |
|
|
— |
|
|
|
(373.9 |
) |
|
Balance at September 30, 2019 |
|
$ |
0.7 |
|
|
$ |
(698.0 |
) |
|
$ |
(371.9 |
) |
|
$ |
— |
|
|
$ |
(1,069.2 |
) |
|
(1) |
All amounts are net of tax and noncontrolling interest. |
The following table summarizes the reclassifications out of accumulated other comprehensive loss by component for the fiscal years ended September 30, 2019 and 2018 (in millions):
|
|
|
Years Ended September 30, |
|
|||||||||||||||||||||
|
|
|
2019 |
|
|
2018 |
|
||||||||||||||||||
|
|
|
Pre-Tax |
|
|
Tax |
|
|
Net of Tax |
|
|
Pre-Tax |
|
|
Tax |
|
|
Net of Tax |
|
||||||
|
Amortization of defined benefit pension and postretirement items: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial losses (2) |
|
$ |
(22.7 |
) |
|
|
5.9 |
|
|
$ |
(16.8 |
) |
|
$ |
(20.9 |
) |
|
|
5.9 |
|
|
$ |
(15.0 |
) |
|
Prior service costs (2) |
|
|
(2.4 |
) |
|
|
0.6 |
|
|
|
(1.8 |
) |
|
|
(0.3 |
) |
|
|
0.1 |
|
|
|
(0.2 |
) |
|
Subtotal defined benefit plans |
|
|
(25.1 |
) |
|
|
6.5 |
|
|
|
(18.6 |
) |
|
|
(21.2 |
) |
|
|
6.0 |
|
|
|
(15.2 |
) |
|
Available for sale security (1)(3) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.5 |
|
|
|
— |
|
|
|
1.5 |
|
|
Derivative Instruments: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap hedge gain (4) |
|
|
0.3 |
|
|
|
(0.1 |
) |
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Foreign currency cash flow hedge loss (5) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.7 |
) |
|
|
0.2 |
|
|
|
(0.5 |
) |
|
Total reclassifications for the period |
|
$ |
(24.8 |
) |
|
$ |
6.4 |
|
|
$ |
(18.4 |
) |
|
$ |
(20.4 |
) |
|
$ |
6.2 |
|
|
$ |
(14.2 |
) |
|
(1) |
Amounts in parentheses indicate charges to earnings. Amounts pertaining to noncontrolling interests are excluded. |
|
(2) |
These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See “Note 5. Retirement Plans” for additional details. |
|
(3) |
These accumulated other comprehensive income components are included in other income, net. |
|
(4) |
These accumulated other comprehensive income components are included in interest expense, net. |
|
(5) |
These accumulated other comprehensive income components are included in net sales. |
129
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the components of other comprehensive (loss) income, including noncontrolling interest, for the years ended September 30, 2019, 2018 and 2017, is as follows (in millions):
|
Fiscal 2019 |
|
Pre-Tax |
|
|
Tax |
|
|
Net of Tax |
|
|||
|
Foreign currency translation loss |
|
$ |
(143.4 |
) |
|
$ |
— |
|
|
$ |
(143.4 |
) |
|
Deferred gain on cash flow hedges |
|
|
1.5 |
|
|
|
(0.4 |
) |
|
|
1.1 |
|
|
Reclassification adjustment of net gain on cash flow hedges included in earnings |
|
|
(0.3 |
) |
|
|
0.1 |
|
|
|
(0.2 |
) |
|
Net actuarial loss arising during period |
|
|
(335.9 |
) |
|
|
87.4 |
|
|
|
(248.5 |
) |
|
Amortization and settlement recognition of net actuarial loss |
|
|
23.3 |
|
|
|
(6.1 |
) |
|
|
17.2 |
|
|
Prior service cost arising during the period |
|
|
(3.9 |
) |
|
|
0.6 |
|
|
|
(3.3 |
) |
|
Amortization of prior service cost |
|
|
2.4 |
|
|
|
(0.6 |
) |
|
|
1.8 |
|
|
Consolidated other comprehensive loss |
|
|
(456.3 |
) |
|
|
81.0 |
|
|
|
(375.3 |
) |
|
Less: Other comprehensive loss attributable to noncontrolling interests |
|
|
1.5 |
|
|
|
(0.1 |
) |
|
|
1.4 |
|
|
Other comprehensive loss attributable to common stockholders |
|
$ |
(454.8 |
) |
|
$ |
80.9 |
|
|
$ |
(373.9 |
) |
|
Fiscal 2018 |
|
Pre-Tax |
|
|
Tax |
|
|
Net of Tax |
|
|||
|
Foreign currency translation loss |
|
$ |
(234.4 |
) |
|
$ |
— |
|
|
$ |
(234.4 |
) |
|
Reclassification adjustment of net loss on cash flow hedges included in earnings |
|
|
0.7 |
|
|
|
(0.2 |
) |
|
|
0.5 |
|
|
Net actuarial loss arising during period |
|
|
(29.0 |
) |
|
|
15.9 |
|
|
|
(13.1 |
) |
|
Amortization and settlement recognition of net actuarial loss |
|
|
20.9 |
|
|
|
(5.9 |
) |
|
|
15.0 |
|
|
Prior service cost arising during the period |
|
|
(7.8 |
) |
|
|
2.3 |
|
|
|
(5.5 |
) |
|
Amortization of prior service cost |
|
|
0.3 |
|
|
|
(0.1 |
) |
|
|
0.2 |
|
|
Unrealized gain on available for sale security |
|
|
0.8 |
|
|
|
— |
|
|
|
0.8 |
|
|
Reclassification adjustment of net gain on available for sale security included in earnings |
|
|
(1.5 |
) |
|
|
— |
|
|
|
(1.5 |
) |
|
Consolidated other comprehensive loss |
|
|
(250.0 |
) |
|
|
12.0 |
|
|
|
(238.0 |
) |
|
Less: Other comprehensive income attributable to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Other comprehensive loss attributable to common stockholders |
|
$ |
(250.0 |
) |
|
$ |
12.0 |
|
|
$ |
(238.0 |
) |
|
Fiscal 2017 |
|
Pre-Tax |
|
|
Tax |
|
|
Net of Tax |
|
|||
|
Foreign currency translation gain |
|
$ |
80.7 |
|
|
$ |
— |
|
|
$ |
80.7 |
|
|
Sale of HH&B, foreign currency |
|
|
26.8 |
|
|
|
— |
|
|
|
26.8 |
|
|
Reclassification adjustment of net gain on cash flow hedges included in earnings |
|
|
(0.8 |
) |
|
|
0.3 |
|
|
|
(0.5 |
) |
|
Net actuarial gain arising during period |
|
|
34.1 |
|
|
|
(11.9 |
) |
|
|
22.2 |
|
|
Amortization and settlement recognition of net actuarial loss |
|
|
56.4 |
|
|
|
(20.4 |
) |
|
|
36.0 |
|
|
Prior service credit arising during the period |
|
|
1.0 |
|
|
|
(0.3 |
) |
|
|
0.7 |
|
|
Amortization of prior service credit |
|
|
(0.4 |
) |
|
|
0.2 |
|
|
|
(0.2 |
) |
|
Unrealized gain on available for sale security |
|
|
0.7 |
|
|
|
— |
|
|
|
0.7 |
|
|
Sale of HH&B, defined benefit pension plans |
|
|
4.2 |
|
|
|
(1.3 |
) |
|
|
2.9 |
|
|
Consolidated other comprehensive income |
|
|
202.7 |
|
|
|
(33.4 |
) |
|
|
169.3 |
|
|
Less: Other comprehensive income attributable to noncontrolling interests |
|
|
(0.2 |
) |
|
|
— |
|
|
|
(0.2 |
) |
|
Other comprehensive income attributable to common stockholders |
|
$ |
202.5 |
|
|
$ |
(33.4 |
) |
|
$ |
169.1 |
|
130
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
Note 20. |
Stockholders’ Equity |
Capitalization
Our capital stock consists solely of Common Stock. Holders of our Common Stock are entitled to one vote per share. Our amended and restated certificate of incorporation also authorizes preferred stock, of which no shares have been issued. The terms and provisions of such shares will be determined by our board of directors upon any issuance of such shares in accordance with our certificate of incorporation.
Stock Repurchase Plan
In July 2015, our board of directors authorized a repurchase program of up to 40.0 million shares of our Common Stock, representing approximately 15% of our outstanding Common Stock as of July 1, 2015. The shares of our Common Stock may be repurchased over an indefinite period of time at the discretion of management. In fiscal 2019, we repurchased approximately 2.1 million shares of our Common Stock for an aggregate cost of $88.6 million. In fiscal 2018, we repurchased approximately 3.4 million shares of our Common Stock for an aggregate cost of $195.1 million. In fiscal 2017, we repurchased approximately 1.8 million shares of our Common Stock for an aggregate cost of $93.0 million. As of September 30, 2019, we had remaining authorization under the repurchase program authorized in July 2015 to purchase approximately 19.1 million shares of our Common Stock.
|
Note 21. |
Share-Based Compensation |
Share-based Compensation Plans
At our Annual Meeting of Stockholders held on February 2, 2016, our stockholders approved the WestRock Company 2016 Incentive Stock Plan. The 2016 Incentive Stock Plan was amended and restated on February 2, 2018 (the “Amended and Restated 2016 Incentive Stock Plan”). The Amended and Restated 2016 Incentive Stock Plan allows for the granting of options, restricted stock, SARs and restricted stock units to certain key employees and directors.
The table below shows the approximate number of shares: available for issuance, available for future grant, to be issued if restricted awards granted with a performance condition recorded at target achieve the maximum award, and if new grants pursuant to the plan are expected to be issued, each as adjusted as necessary for corporate actions (in millions).
|
|
|
Shares Available For Issuance |
|
|
Shares Available For Future Grant |
|
|
Shares To Be Issued If Performance Is Achieved At Maximum |
|
|
Expect To Make New Awards |
|||
|
Amended and Restated 2016 Incentive Stock Plan (1) |
|
|
11.7 |
|
|
|
5.1 |
|
|
|
2.3 |
|
|
Yes |
|
2004 Incentive Stock Plan (1)(2) |
|
|
15.8 |
|
|
|
3.1 |
|
|
|
0.0 |
|
|
No |
|
2005 Performance Incentive Plan (1)(2) |
|
|
12.8 |
|
|
|
9.0 |
|
|
|
0.0 |
|
|
No |
|
RockTenn (SSCC) Equity Inventive Plan (1)(3) |
|
|
7.9 |
|
|
|
5.9 |
|
|
|
0.0 |
|
|
No |
|
|
(1) |
As part of the Separation, equity-based incentive awards were generally adjusted to maintain the intrinsic value of awards immediately prior to the Separation. The number of unvested restricted stock awards and unexercised stock options and SARs at the time of the Separation were increased by an exchange factor of approximately 1.12. In addition, the exercise price of unexercised stock options and SARs at the time of the Separation was converted to decrease the exercise price by an exchange factor of approximately 1.12. |
|
|
(2) |
In connection with the Combination, WestRock assumed all RockTenn and MWV equity incentive plans. We issued awards to certain key employees and our directors pursuant to our RockTenn 2004 Incentive Stock Plan, as amended, and our MWV 2005 Performance Incentive Plan, as amended. The awards were converted into WestRock awards using the conversion factor as described in the Business Combination Agreement. |
|
|
(3) |
In connection with the Smurfit-Stone acquisition, we assumed the Smurfit-Stone equity incentive plan, which was renamed the Rock-Tenn Company (SSCC) Equity Incentive Plan. The awards were converted into shares of RockTenn common stock, options and restricted stock units, as applicable, using the conversion factor as described in the merger agreement. |
131
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our results of operations for the fiscal years ended September 30, 2019, 2018 and 2017 include share-based compensation expense of $64.2 million, $66.8 million and $60.9 million, respectively, including $2.9 million included in the gain on sale of HH&B in fiscal 2017. Share-based compensation expense in fiscal 2017 was reduced by $5.4 million for the rescission of shares granted to our CEO that were inadvertently granted in excess of plan limits in fiscal 2014 and 2015. The total income tax benefit in the results of operations in connection with share-based compensation was $16.3 million, $19.4 million and $22.5 million, for the fiscal years ended September 30, 2019, 2018 and 2017, respectively.
Cash received from share-based payment arrangements for the fiscal years ended September 30, 2019, 2018 and 2017 was $61.5 million, $44.4 million and $59.2 million, respectively.
Equity Awards Issued in Connection with Acquisitions
In connection with the KapStone Acquisition, we replaced certain outstanding awards of restricted stock units granted under the KapStone long-term incentive plan with WestRock stock options and restricted stock units. No additional shares will be granted under the KapStone plan. The KapStone equity awards were replaced with awards with identical terms utilizing an approximately 0.83 conversion factor as described in the Merger Agreement. The acquisition consideration included approximately $70.8 million related to outstanding KapStone equity awards related to service prior to the effective date of the KapStone Acquisition – the balance related to service after the effective date will be expensed over the remaining service period of the awards.
As part of the KapStone Acquisition, we issued 2,665,462 options that were valued at a weighted average fair value of $20.99 per share using the Black-Scholes option pricing model. The weighted average significant assumptions used were:
|
|
|
2019 |
|
|
|
Expected term in years |
|
|
3.1 |
|
|
Expected volatility |
|
|
27.7 |
% |
|
Risk-free interest rate |
|
|
3.0 |
% |
|
Dividend yield |
|
|
4.1 |
% |
In connection with the MPS Acquisition, we replaced certain outstanding awards of restricted stock units granted under the MPS long-term incentive plan with WestRock restricted stock units. No additional shares will be granted under the MPS plan. The MPS equity awards were replaced with identical terms utilizing an approximately 0.33 conversion factor as described in the merger agreement. As part of the MPS Acquisition, we granted 119,373 awards of restricted stock units, which contain service conditions and were valued at $54.24 per share. The acquisition consideration included approximately $1.9 million related to outstanding MPS equity awards related to service prior to the effective date of the MPS Acquisition – the balance related to service after the effective date will be expensed over the remaining service period of the awards.
Stock Options and Stock Appreciation Rights
Stock options granted under our plans generally have an exercise price equal to the closing market price on the date of the grant, generally vest in three years, in either one tranche or in approximately one-third increments, and have 10-year contractual terms. However, a portion of our grants are subject to earlier expense recognition due to retirement eligibility rules. Presently, other than circumstances such as death, disability and retirement, grants will include a provision requiring both a change of control and termination of employment to accelerate vesting.
At the date of grant, we estimate the fair value of stock options granted using a Black-Scholes option pricing model. We use historical data to estimate option exercises and employee terminations in determining the expected term in years for stock options. Expected volatility is calculated based on the historical volatility of our stock. The risk-free interest rate is based on U.S. Treasury securities in effect at the date of the grant of the stock options. The dividend yield is estimated based on our historic annual dividend payments and current expectations for the future. Other than in connection with replacement awards in connection with acquisitions, we did not grant any stock options in fiscal 2019, 2018 and 2017.
132
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below summarizes the changes in all stock options during the fiscal year ended September 30, 2019:
|
|
|
Stock Options |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term (in years) |
|
|
Aggregate Intrinsic Value (in millions) |
|
||||
|
Outstanding at September 30, 2018 |
|
|
4,253,654 |
|
|
$ |
33.75 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,665,462 |
|
|
|
22.06 |
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(2,403,217 |
) |
|
|
21.38 |
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
(84,560 |
) |
|
|
42.04 |
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(35,162 |
) |
|
|
26.52 |
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019 |
|
|
4,396,177 |
|
|
$ |
33.32 |
|
|
3.7 |
|
|
$ |
26.7 |
|
|
|
Exercisable at September 30, 2019 |
|
|
4,296,067 |
|
|
$ |
33.48 |
|
|
|
3.6 |
|
|
$ |
25.7 |
|
|
Vested and expected to vest at September 30, 2019 |
|
|
4,394,409 |
|
|
$ |
33.33 |
|
|
3.7 |
|
|
$ |
26.7 |
|
|
The aggregate intrinsic value of options exercised during the years ended September 30, 2019, 2018 and 2017 was $44.5 million, $67.4 million and $54.3 million, respectively.
As of September 30, 2019, there was $0.5 million of total unrecognized compensation cost related to nonvested stock options; that cost is expected to be recognized over a weighted average remaining vesting period of 0.5 years. We amortize these costs on a straight-line basis over the explicit service period.
As part of the Combination, we issued SARs to replace outstanding MWV SARs. The SARs were valued using the Black-Scholes option pricing model. We measure compensation expense related to the SAR awards at the end of each period. We do not expect to issue additional SARs.
The table below summarizes the changes in all SARs during the fiscal year ended September 30, 2019:
|
|
|
SARs |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term (in years) |
|
Aggregate Intrinsic Value (in millions) |
|
|||
|
Outstanding at September 30, 2018 |
|
|
36,986 |
|
|
$ |
27.36 |
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Expired |
|
|
(2,014 |
) |
|
|
9.02 |
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019 |
|
|
34,972 |
|
|
$ |
28.41 |
|
|
1.5 |
|
$ |
0.3 |
|
|
Exercisable at September 30, 2019 |
|
|
34,972 |
|
|
$ |
28.41 |
|
|
1.5 |
|
$ |
0.3 |
|
The aggregate intrinsic value of SARs exercised during the years ended September 30, 2019, 2018 and 2017 was zero, $0.5 million and $0.4 million, respectively.
Restricted Stock
Restricted stock is typically granted annually to non-employee directors and certain of our employees. Our non-employee director awards generally vest over a period of up to one year and are treated as issued and carry dividend and voting rights until they vest. The vesting provisions for our employee awards may vary from grant to grant; however, vesting generally is contingent upon meeting various service and/or performance or market goals including, but not limited to, achievement of various financial targets including Cash Flow Per Share, Cash Flow to Equity Ratio and relative Total Shareholder Return (each as defined in the award documents). Subject to the level of performance attained, the target award for some of the grants may increase up to 200% of target or decrease to zero depending upon the terms of the individual grant. The employee grants generally vest in three years. Presently,
133
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
other than circumstances such as death, disability and retirement, the grants generally include a provision requiring both a change of control and termination of employment to accelerate vesting. For certain employee grants, the grantee is entitled to receive dividend equivalent units, but will generally forfeit the restricted award and the dividend equivalents if the employee separates from us during the vesting period or if the predetermined goals are not accomplished.
The table below summarizes the changes in unvested restricted stock during the fiscal year ended September 30, 2019:
|
|
|
Shares/Units |
|
|
Weighted Average Grant Date Fair Value |
|
||
|
Unvested at September 30, 2018 (1) |
|
|
3,224,174 |
|
|
$ |
51.01 |
|
|
Granted |
|
|
3,673,445 |
|
|
|
38.71 |
|
|
Vested |
|
|
(2,933,556 |
) |
|
|
34.51 |
|
|
Forfeited |
|
|
(318,525 |
) |
|
|
50.43 |
|
|
Unvested at September 30, 2019 (1) |
|
|
3,645,538 |
|
|
$ |
51.94 |
|
|
(1) |
Target awards granted with a performance condition, net of subsequent forfeitures, may be increased up to 200% of the target or decreased to zero, subject to the level of performance attained. The awards are reflected in the table at the target award amount of 100%. Based on current facts and assumptions we are forecasting the performance of the grants to be attained at levels less than target. However, it is possible that the performance attained may vary. |
There was approximately $80.5 million of unrecognized compensation cost related to all unvested restricted shares as of September 30, 2019 that will be recognized over a weighted average remaining vesting period of 1.5 years.
The following table represents a summary of restricted stock shares granted in fiscal 2019, 2018 and 2017 with terms defined in the applicable grant letters. The shares are not deemed to be issued and carry voting rights until the relevant conditions defined in the award documents have been met, unless otherwise noted.
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Shares of restricted stock granted to non-employee directors (1) |
|
|
39,792 |
|
|
|
23,285 |
|
|
|
26,521 |
|
|
Shares of restricted stock granted to employees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares granted for attainment of a performance condition at an amount in excess of target (2) |
|
|
1,149,592 |
|
|
|
45,964 |
|
|
|
340,319 |
|
|
Shares granted with a service condition and a Cash Flow Per Share performance condition at target (3) |
|
|
652,465 |
|
|
|
432,655 |
|
|
|
507,070 |
|
|
Shares granted with a service condition and a relative Total Shareholder Return market condition at target (3) |
|
|
407,300 |
|
|
|
259,695 |
|
|
|
301,980 |
|
|
Shares granted with a service condition (4) |
|
|
682,264 |
|
|
|
354,512 |
|
|
|
309,850 |
|
|
Share of restricted stock assumed in purchase accounting: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares granted with a service condition (5) |
|
|
742,032 |
|
|
|
— |
|
|
|
119,373 |
|
|
Total restricted stock granted |
|
|
3,673,445 |
|
|
|
1,116,111 |
|
|
|
1,605,113 |
|
|
(1) |
Non-employee director grants generally vest over a period of up to one year and are deemed issued on the grant date and have voting and dividend rights. |
|
(2) |
Shares granted in the table above include shares subsequently issued for the level of performance attained in excess of target. Shares issued in fiscal 2019 for the fiscal 2016 Cash Flow Per Share were at 200% of target. Shares issued in fiscal 2018 for the fiscal 2015 Cash Flow Per Share were at 103.7% of target. Shares issued in fiscal 2017 for the fiscal 2014 Cash Flow Per Share were at 176.6% of target. Shares issued in fiscal 2017 also include shares accelerated for terminated employees primarily as a result of the Combination, which were achieved at between 146.5% and 200% of target. |
|
(3) |
These employee grants vest over approximately three years and have adjustable ranges from 0 - 200% of target subject to the level of performance attained in the respective award agreement. The employee grants with a relative Total Shareholder Return condition were valued using a Monte Carlo simulation, the terms of which are outlined below. |
134
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
(4) |
These shares vest over approximately three to four years. |
|
(5) |
These shares vest over approximately one to three years. |
The employee grants with a relative Total Shareholder Return market condition in fiscal 2019 were valued using a Monte Carlo simulation at $42.64 per share. The significant assumptions used in valuing these grants included: an expected term of 2.9 years, an expected volatility of 27.2% and a risk-free interest rate of 2.4%. We amortize these costs on a straight-line basis over the explicit service period.
The employee grants with a relative Total Shareholder Return market condition in fiscal 2018 were valued using a Monte Carlo simulation at $66.28 per share. The significant assumptions used in valuing these grants included: an expected term of 2.9 years, an expected volatility of 29.7% and a risk-free interest rate of 2.3%. We amortize these costs on a straight-line basis over the explicit service period.
The employee grants with a relative Total Shareholder Return market condition in fiscal 2017 were valued using a Monte Carlo simulation at $64.41 per share. The significant assumptions used in valuing these grants included: an expected term of 2.9 years, an expected volatility of 30.6% and a risk-free interest rate of 1.4%. We amortize these costs on a straight-line basis over the explicit service period.
Expense is recognized on restricted stock grants on a straight-line basis over the explicit service period or for performance based grants over the explicit service period when we estimate that it is probable the performance conditions will be satisfied. Expense recognized on grants with a performance condition that affects how many shares are ultimately awarded is based on the number of shares expected to be awarded.
The following table represents a summary of restricted stock vested in fiscal 2019, 2018 and 2017 (in millions, except shares):
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Shares of restricted stock vested |
|
|
2,933,556 |
|
|
|
697,717 |
|
|
|
1,112,909 |
|
|
Aggregate fair value of restricted stock vested |
|
$ |
115.2 |
|
|
$ |
46.1 |
|
|
$ |
59.5 |
|
The shares vested in fiscal 2019 reflect the vesting of the fiscal 2016 grants, with a Cash Flow Per Share performance condition that vested at 200% of target, as well as certain shares with a performance and/or service condition. The shares vested in fiscal 2018 reflect the vesting of the fiscal 2015 grants, with a Cash Flow Per Share performance condition that vested at 103.7% of target, as well as certain shares with a performance and/or service condition, including those shares assumed upon the Combination. The shares vested in 2017 reflect the vesting of the fiscal 2014 grant, with a Cash Flow Per Share performance condition that vested at 176.6% of target, certain shares assumed upon the Combination with a performance and/or service condition, as well as other awards accelerated in connection with the Combination for certain former employees.
Employee Stock Purchase Plan
At our Annual Meeting of Stockholders held on February 2, 2016, our stockholders approved the WestRock Company Employee Stock Purchase Plan (“ESPP”). Under the ESPP, shares of Common Stock are reserved for purchase by our qualifying employees. The ESPP allowed for the purchase of a total of approximately 2.5 million shares of Common Stock. During fiscal 2019, 2018 and 2017, employees purchased approximately 0.4 million, 0.2 million and 0.2 million shares, respectively, under the ESPP. We recognized $1.2 million, $1.6 million and $1.3 million of expense for fiscal 2019, 2018 and 2017, respectively, related to the 15% discount on the purchase price allowed to employees. As of September 30, 2019, adjusted for the Separation, approximately 2.0 million shares of Common Stock remained available for purchase under the ESPP.
135
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
Note 22. |
Earnings per Share |
The restricted stock awards that we grant to non-employee directors are considered participating securities as they receive non-forfeitable rights to dividends at the same rate as our Common Stock. As participating securities, we include these instruments in the earnings allocation in computing earnings per share under the two-class method described in ASC 260, “Earnings per Share.” The following table sets forth the computation of basic and diluted earnings per share under the two-class method (in millions, except per share data):
|
|
|
September 30, |
|
|||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
862.9 |
|
|
$ |
1,906.1 |
|
|
$ |
708.2 |
|
|
Less: Distributed and undistributed income available to participating securities |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
Distributed and undistributed income available to common stockholders |
|
$ |
862.8 |
|
|
$ |
1,905.9 |
|
|
$ |
708.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
256.6 |
|
|
|
255.5 |
|
|
|
252.2 |
|
|
Effect of dilutive stock options and non-participating securities |
|
|
2.5 |
|
|
|
4.3 |
|
|
|
3.5 |
|
|
Diluted weighted average shares outstanding |
|
|
259.1 |
|
|
|
259.8 |
|
|
|
255.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to common stockholders |
|
$ |
3.36 |
|
|
$ |
7.46 |
|
|
$ |
2.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to common stockholders |
|
$ |
3.33 |
|
|
$ |
7.34 |
|
|
$ |
2.77 |
|
Weighted average shares include zero and 0.2 million of reserved, but unissued shares at September 30, 2018 and 2017, respectively. These reserved shares were distributed as claims were liquidated or resolved in accordance with the resolution of Smurfit-Stone bankruptcy claims. The final bankruptcy distributions were made in fiscal 2018.
Options and restricted stock in the amount of 1.3 million, 0.2 million and 0.7 million common shares in fiscal 2019, 2018 and 2017, respectively, were not included in computing diluted earnings per share because the effect would have been antidilutive. The dilutive impact of the remaining awards outstanding in each year were included in the effect of dilutive securities.
136
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
Note 23. |
Financial Results by Quarter (Unaudited) |
|
Fiscal 2019 |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
||||
|
|
|
(In millions, except per share data) |
|
|||||||||||||
|
Net sales |
|
$ |
4,327.4 |
|
|
$ |
4,620.0 |
|
|
$ |
4,690.0 |
|
|
$ |
4,651.6 |
|
|
Cost of goods sold |
|
$ |
3,545.6 |
|
|
$ |
3,720.4 |
|
|
$ |
3,701.1 |
|
|
$ |
3,572.9 |
|
|
(Gain) loss on disposal of assets |
|
$ |
(43.8 |
) |
|
$ |
— |
|
|
$ |
6.5 |
|
|
$ |
(3.9 |
) |
|
Multiemployer pension withdrawal income |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(1.7 |
) |
|
$ |
(4.6 |
) |
|
Land and Development impairments |
|
$ |
— |
|
|
$ |
13.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Restructuring and other costs |
|
$ |
54.4 |
|
|
$ |
34.8 |
|
|
$ |
17.9 |
|
|
$ |
66.6 |
|
|
(Loss) gain on extinguishment of debt |
|
$ |
(1.9 |
) |
|
$ |
0.4 |
|
|
$ |
(3.2 |
) |
|
$ |
(0.4 |
) |
|
Income tax expense |
|
$ |
(62.7 |
) |
|
$ |
(47.2 |
) |
|
$ |
(77.6 |
) |
|
$ |
(89.3 |
) |
|
Consolidated net income |
|
$ |
139.8 |
|
|
$ |
161.9 |
|
|
$ |
253.8 |
|
|
$ |
312.4 |
|
|
Net income attributable to common stockholders |
|
$ |
139.1 |
|
|
$ |
160.4 |
|
|
$ |
252.6 |
|
|
$ |
310.8 |
|
|
Basic earnings per share attributable to common stockholders |
|
$ |
0.55 |
|
|
$ |
0.63 |
|
|
$ |
0.98 |
|
|
$ |
1.21 |
|
|
Diluted earnings per share attributable to common stockholders |
|
$ |
0.54 |
|
|
$ |
0.62 |
|
|
$ |
0.98 |
|
|
$ |
1.20 |
|
|
Fiscal 2018 |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
||||
|
|
|
(In millions, except per share data) |
|
|||||||||||||
|
Net sales |
|
$ |
3,894.0 |
|
|
$ |
4,017.0 |
|
|
$ |
4,137.5 |
|
|
$ |
4,236.6 |
|
|
Cost of goods sold |
|
$ |
3,120.5 |
|
|
$ |
3,227.6 |
|
|
$ |
3,270.4 |
|
|
$ |
3,304.6 |
|
|
Multiemployer pension withdrawal expense |
|
$ |
180.0 |
|
|
$ |
— |
|
|
$ |
4.2 |
|
|
$ |
— |
|
|
Land and Development impairments |
|
$ |
27.6 |
|
|
$ |
— |
|
|
$ |
1.7 |
|
|
$ |
2.6 |
|
|
Restructuring and other costs |
|
$ |
16.3 |
|
|
$ |
31.7 |
|
|
$ |
17.1 |
|
|
$ |
40.3 |
|
|
(Loss) gain on extinguishment of debt |
|
$ |
(1.0 |
) |
|
$ |
0.1 |
|
|
$ |
0.9 |
|
|
$ |
(0.1 |
) |
|
Income tax benefit (expense) |
|
$ |
1,073.2 |
|
|
$ |
(18.8 |
) |
|
$ |
(84.5 |
) |
|
$ |
(95.4 |
) |
|
Consolidated net income |
|
$ |
1,133.5 |
|
|
$ |
224.5 |
|
|
$ |
271.3 |
|
|
$ |
280.0 |
|
|
Net income attributable to common stockholders |
|
$ |
1,135.1 |
|
|
$ |
223.2 |
|
|
$ |
268.2 |
|
|
$ |
279.6 |
|
|
Basic earnings per share attributable to common stockholders |
|
$ |
4.45 |
|
|
$ |
0.87 |
|
|
$ |
1.05 |
|
|
$ |
1.10 |
|
|
Diluted earnings per share attributable to common stockholders |
|
$ |
4.38 |
|
|
$ |
0.86 |
|
|
$ |
1.03 |
|
|
$ |
1.08 |
|
We computed the interim earnings per common and common equivalent share amounts as if each quarter was a discrete period. As a result, the sum of the basic and diluted earnings per share by quarter will not necessarily total the annual basic and diluted earnings per share.
Consolidated net income in the first quarter of fiscal 2019 financial results by quarter (unaudited) table was decreased by $39.8 million of direct expenses from Hurricane Michael (net of $20.0 million of insurance proceeds) and an estimated $31.4 million of lost production and sales. Additionally, consolidated net income in the first quarter was decreased by $24.7 million of expense for inventory stepped-up in purchase accounting related to the KapStone Acquisition and increased by a $48.5 million gain on sale of our Atlanta beverage facility. Basic and diluted earnings per share attributable to common stockholders were decreased by approximately $0.14 and $0.14 per share, respectively for these items.
Consolidated net income in the fourth quarter of fiscal 2019 financial results by quarter (unaudited) table was increased by $63.4 million related to Hurricane Michael as $70.0 million of insurance proceeds were partially offset by $6.6 million of direct expenses. Basic and diluted earnings per share attributable to common stockholders were increased by approximately $0.19 and $0.18 per share, respectively for these items.
137
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Consolidated net income in the first quarter of fiscal 2018 financial results by quarter (unaudited) table was decreased as the result of recording an estimated MEPP withdrawal of $180.0 million, or $179.1 million net of noncontrolling interest, to withdraw from a MEPP. See “Note 5. Retirement Plans — Multiemployer Plans”. Additionally, consolidated net income in the first quarter of fiscal 2018 financial results by quarter (unaudited) table was decreased due to a $27.6 million, or $25.6 million net of noncontrolling interest, pre-tax non-cash impairment of certain mineral rights and real estate. Further, consolidated net income in the first quarter of fiscal 2018 financial results by quarter (unaudited) table was increased by $1,086.9 million for the provisional amount recorded for the remeasurement of our deferred tax balances in connection with the Tax Act. See “Note 6. Income Taxes”. Basic and diluted earnings per share attributable to common stockholders were increased by approximately $3.67 and $3.61 per share, respectively for these items.
Consolidated net income in the second quarter of fiscal 2018 financial results by quarter (unaudited) table increased by $36.3 million related to an adjustment to the provisional amount previously recorded for the remeasurement of our deferred tax balances in connection with the Tax Act. Basic and diluted earnings per share attributable to common stockholders were each increased by $0.14 per share.
138
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
WestRock Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of WestRock Company (the Company) as of September 30, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended September 30, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated November 15, 2019 expressed an unqualified opinion thereon.
Adoption of New Accounting Standards
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for revenue from contracts with customers and certain fulfillment costs in 2019 due to the adoption of ASC 606, Revenue from Contracts with Customers.
As discussed in Note 1 to the consolidated financial statements, the Company changed its classification of cash receipts on the deferred purchase price receivable on asset-backed securitization transactions in 2019 due to the adoption of ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments.
As discussed in Note 1 to the consolidated financial statements, the Company changed its presentation of non-service components of pension and other postretirement income (expense) in 2019 due to the adoption of ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to
139
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
|
|
Accounting for the Acquisition of KapStone Paper and Packaging Corporation |
|
Description of the Matter |
During 2019, the Company completed its acquisition of KapStone Paper and Packaging Corporation (KapStone) for net consideration of $4.9 billion including debt assumed (the “Transaction”), as disclosed in Note 3 to the consolidated financial statements. The Transaction is accounted for as a business combination and the Company preliminarily allocated $1,303.0 million of the purchase price to the fair value of the acquired customer relationship intangible assets. The Company is in the process of analyzing the estimated values of all assets acquired and liabilities assumed including, among other things, finalizing third-party valuations of certain tangible and intangible assets, as well as the fair value of certain contracts and the determination of certain tax balances; therefore, the allocation of the purchase price is preliminary and subject to revision as of September 30, 2019. Auditing management's preliminary allocation of purchase price for its acquisition of KapStone involved especially subjective and complex judgements due to the significant estimation required in determining the fair value of customer relationship intangible assets. The significant estimation was primarily due to the complexity of the valuation models used to measure that fair value as well as the sensitivity of the respective fair values to the underlying significant assumptions. The significant assumptions used to estimate the fair value of the customer relationship intangible assets and subsequent amortization expense included discount rates, customer attrition rates and economic lives. These significant assumptions are forward-looking and could be affected by future economic and market conditions. |
|
How We Addressed the Matter in Our Audit |
We tested the design and operating effectiveness of the Company's controls related to the accounting for the KapStone acquisition. For example, we tested controls over the recognition and measurement of customer relationship intangible assets in the acquisition, including the Company’s controls over the valuation model, the mathematical accuracy of the valuation model and development of underlying assumptions used to develop such fair value measurement estimates. To test the fair value of the Company's customer relationship intangible assets, our audit procedures included, among others, evaluating the Company's valuation model, the method and significant assumptions used and testing the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We involved our valuation specialists to assist with our evaluation of the valuation model and certain significant assumptions. For example, we reconciled the discount rates to the projected internal rate of return for the Transaction and compared the attrition rates to industry data. In addition, to evaluate the effect of changes in assumptions, we performed sensitivity analysis of the fair value of customer relationship intangible assets, and of amortization expense to the economic lives assigned to the customer relationship intangible assets. |
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|
Test of Goodwill for Impairment |
140
|
Description of the Matter |
At September 30, 2019, the Company’s goodwill is $7,285.6 million. As discussed in Note 1 of the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. This requires management to estimate the fair value of the reporting units with goodwill allocated to them. Auditing management’s goodwill impairment tests involved especially subjective judgements due to the significant estimation required in determining the fair value of the reporting units. In particular, the estimates for the fair values of the Company’s reporting units are sensitive to assumptions such as the discount rate and expected future net cash flows, including projected operating results, capital expenditures and tax rates, which are affected by expectations about future market or economic conditions. |
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How We Addressed the Matter in Our Audit |
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment review process. For example, we tested controls over the estimation of the fair values of the reporting units, including the Company’s controls over the valuation models, the mathematical accuracy of the valuation models and development of underlying assumptions used to develop such fair values of the reporting units. We also tested management’s review of the reconciliation of the aggregate estimated fair value of the reporting units to the market capitalization of the Company. To test the estimated fair values of the Company’s reporting units, our audit procedures included, among others, assessing the valuation methodology and the underlying data used by the Company in its analysis, including testing the significant assumptions discussed above. We compared the significant assumptions used by management to current industry and economic trends, changes to the Company’s business model and other relevant factors. We assessed the historical accuracy of management’s assumptions of future expected net cash flows and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair values of the reporting units that would result from changes in the assumptions. We involved valuation specialists to assist in our evaluation of the valuation methodology and the significant assumptions, including the discount rate used in determining the fair values of the reporting units. We also tested the reconciliation of the aggregate estimated fair value of the reporting units to the market capitalization of the Company. |
|
|
Uncertain Tax Positions |
|
Description of the Matter |
As discussed in Note 6 to the consolidated financial statements, the Company has unrecognized income tax benefits of $224.3 million related to its uncertain tax positions at September 30, 2019. The Company uses significant judgment in determining (1) whether a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination, and (2) measuring the tax benefit as the largest amount of benefit which is more likely than not to be realized upon ultimate settlement. The Company does not record any benefit for the tax positions that do not meet the more-likely-than-not initial recognition threshold. Auditing management’s analysis of its uncertain tax positions and resulting unrecognized income tax benefits involved especially subjective and complex judgements because each tax position carries unique facts and circumstances that require interpretation of laws, regulations and legal rulings, and other factors. |
|
How We Addressed the Matter in Our Audit |
We tested the Company’s controls that address the risks of material misstatement relating to uncertain tax positions. For example, we tested controls over management’s identification of uncertain tax positions and application of the two-step recognition and measurement principles, including management’s review of the inputs and resulting calculations of unrecognized income tax benefits. To test the Company’s measurement and recording of its uncertain tax positions, our audit procedures included, among others, inspecting the Company’s analysis and related tax opinions to evaluate the assumptions the Company used to develop its uncertain tax positions and related unrecognized income tax benefit amounts by jurisdiction. We also tested the completeness and accuracy of the underlying data used by the Company to calculate its uncertain tax positions. For example, we compared the unrecognized income tax benefits to similar positions in prior periods and assessed management’s consideration of current tax controversy and litigation trends in similar positions challenged by tax authorities. In addition, we involved tax subject matter resources to evaluate the application of relevant tax laws in the Company’s recognition determination. We also evaluated the Company’s income tax disclosures in relation to these matters included in Note 6 to the consolidated financial statements. |
141
/s/ Ernst & Young LLP
We have served as the Company’s or its predecessor’s auditor since at least 1975, but we are unable to determine the specific year.
Atlanta, Georgia
November 15, 2019
142
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
WestRock Company
Opinion on Internal Control over Financial Reporting
We have audited WestRock Company’s internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, WestRock Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2019, based on the COSO criteria.
As indicated in the accompanying Management’s Annual Report On Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of KapStone Paper and Packaging Corporation, which is included in the 2019 consolidated financial statements of the Company and constituted $5.7 billion of total assets as of September 30, 2019 and $2.8 billion of total revenues for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of KapStone Paper and Packaging Corporation.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of WestRock Company as of September 30, 2019 and 2018, and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended September 30, 2019, and the related notes and our report dated November 15, 2019, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitation of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
143
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Atlanta, Georgia
November 15, 2019
144
WESTROCK COMPANY
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s Responsibility for the Financial Statements
The management of WestRock Company is responsible for the preparation and integrity of the consolidated financial statements appearing in our Annual Report on Form 10-K. The financial statements were prepared in conformity with GAAP appropriate in the circumstances and, accordingly, include certain amounts based on our best judgments and estimates. Financial information in this Annual Report on Form 10-K is consistent with that in the financial statements.
Internal Control Over Financial Reporting
Management of our company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements. Our internal control over financial reporting is supported by a program of internal audits and appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel and a written code of conduct adopted by our board of directors that is applicable to all officers and employees of our Company and subsidiaries, as well as a code of conduct that is applicable to all of our directors.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 framework). The scope of our efforts to comply with Section 404 of the Sarbanes-Oxley Act with respect to fiscal 2019 included all of our operations other than those we acquired in fiscal 2019 related to the KapStone Acquisition. In accordance with the SEC’s published guidance, because we acquired these operations during the fiscal year, we excluded these operations from our efforts to comply with Section 404 with respect to fiscal 2019. Total assets as of September 30, 2019 and total revenues for the year ending September 30, 2019 for the operations acquired in the KapStone Acquisitions were $5.7 billion and $2.8 billion, respectively. The SEC’s published guidance specifies that the period in which management may omit an assessment of an acquired business’s internal control over financial reporting from its assessment of the Company’s internal control may not extend beyond one year from the date of acquisition. Based on our assessment, which as discussed herein excluded the KapStone operations, management believes that we maintained effective internal control over financial reporting as of September 30, 2019. Our independent auditors, Ernst & Young LLP, an independent registered public accounting firm, are appointed by the Audit Committee of our board of directors. Ernst & Young LLP has audited and reported on the consolidated financial statements of WestRock Company, and has issued an attestation report on the effectiveness of our internal control over financial reporting. The report of the independent registered public accounting firm is contained in this Annual Report.
Audit Committee Responsibility
The Audit Committee of our board of directors, composed solely of directors who are independent in accordance with the requirements of the NYSE listing standards, the Exchange Act and our Corporate Governance Guidelines, meets with the independent auditors, management and internal auditors periodically to discuss internal control over financial reporting and auditing and financial reporting matters. The Audit Committee reviews with the independent auditors the scope and results of the audit effort. The Audit Committee also meets periodically with the independent auditors and the chief internal auditor without management present to ensure that the independent auditors and the chief internal auditor have free access to the Audit Committee. Our Audit Committee’s Report will be contained in our definitive proxy statement issued in connection with our 2020 annual meeting of stockholders and is incorporated herein by reference.
145
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STEVEN C. VOORHEES, |
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Chief Executive Officer and President |
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WARD H. DICKSON, |
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Executive Vice President and Chief Financial Officer |
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November 15, 2019 |
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146
Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and financial disclosure.
|
Item 9A. |
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and other procedures that are designed with the objective of ensuring the following:
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|
• |
that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and |
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• |
that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our CEO and our Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure. |
We have performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2019, under the supervision and with the participation of our management, including our CEO and CFO. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of September 30, 2019, to provide reasonable assurance that we record, process, summarize and report the information we must disclose in reports that we file or submit under the Exchange Act within the time periods specified in the SEC's rules and forms and to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do. Management also noted that the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and that there can be no assurance that any such design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Internal Control Over Financial Reporting
The report called for by Item 308(a) of Regulation S-K is incorporated herein by reference to Management’s Annual Report on Internal Control over Financial Reporting of WestRock Company, included in Part II, Item 8 of this report.
The attestation report called for by Item 308(b) of Regulation S-K is incorporated herein by reference to the Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting, included in Part II, Item 8 of this report.
Management has evaluated, with the participation of our CEO and CFO, changes in our internal controls over financial reporting during the quarter ended September 30, 2019. In connection with that evaluation, we have determined that there has been no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the fourth quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except as described below. During fiscal 2019, we completed the KapStone Acquisition. Subsequent to the KapStone Acquisition, we have begun integration and controls assessment activities. See “Note 3. Acquisitions and Investment” of the Notes to Consolidated Financial Statements for more information. KapStone represented approximately $2.8 billion of our net sales for the year ended September 30, 2019, and approximately $5.7 billion of our total assets, at September 30, 2019. In accordance with the SEC’s published guidance, because we acquired these operations during the current fiscal year, we have excluded these operations from our efforts to
147
comply with Section 404 of the Sarbanes-Oxley Act for fiscal 2019. SEC rules require that we complete our assessment of the internal control over financial reporting of the acquisition within one year after the date of the acquisition.
CEO and CFO Certifications
Our CEO and CFO have filed with the SEC the certifications required by Section 302 of the Sarbanes-Oxley Act as Exhibits 31.1 and 31.2, respectively, to this Annual Report on Form 10-K. In addition, on February 12, 2019, our CEO certified to the NYSE that he was not aware of any violation by the Company of the NYSE corporate governance listing standards as in effect on February 12, 2019. The foregoing certification was unqualified.
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Item 9B. |
OTHER INFORMATION |
Not applicable.
148
PART III
|
Item 10. |
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
EXECUTIVE OFFICERS
Identification of Executive Officers
The executive officers of the Company are as follows as of November 13, 2019:
|
Name |
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Age |
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Position Held |
|
Steven C. Voorhees |
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65 |
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Chief Executive Officer and President |
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Patrick E. Lindner |
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50 |
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Chief Innovation Officer and President Consumer Packaging |
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Jeffrey W. Chalovich |
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56 |
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Chief Commercial Officer and President Corrugated Packaging |
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James B. Porter III |
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68 |
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President, Business Development and Latin America |
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Marc P. Shore |
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65 |
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President, Multi Packaging Solutions |
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Ward H. Dickson |
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57 |
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Executive Vice President and Chief Financial Officer |
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Robert B. McIntosh |
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62 |
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Executive Vice President, General Counsel and Secretary |
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Vicki L. Lostetter |
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60 |
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Chief Human Resources Officer |
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Kelly C. Janzen |
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46 |
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Chief Accounting Officer |
Steven C. Voorhees has served as WestRock’s chief executive officer and president since July 1, 2015. He served as RockTenn’s chief executive officer from November 2013 through June 30, 2015, as RockTenn’s president and chief operating officer from January 2013 through October 2013 and as RockTenn’s executive vice president and chief financial officer, from September 2000 through January 2013. Mr. Voorhees also served as RockTenn’s chief administrative officer from July 2008 through January 2013.
Patrick E. Lindner has served as WestRock’s president, consumer packaging since March 2019 and as chief innovation officer since October 2019. He previously served as chief operating officer for W.L. Gore & Associates. Prior to joining W.L. Gore & Associates, Mr. Lindner served in various leadership roles with E. I. Du Pont De Nemours and Company, including as president – DuPont Performance Materials and president – DuPont Performance Polymers.
Jeffrey W. Chalovich has served as WestRock’s president, corrugated packaging since September 2016 and as chief commercial officer since February 2019. He previously served as WestRock’s executive vice president of corrugated containers and commercial excellence. He served as Rock-Tenn’s senior vice president and general manager of corrugated containers through June 30, 2015. Mr. Chalovich joined RockTenn in connection with its acquisition of Southern Container Corp in 2008, where he served in a variety of sales and general management roles.
James B. Porter III has served as WestRock’s president, business development and Latin America since September 2016. He previously served as WestRock’s president, paper solutions since July 1, 2015. He served as RockTenn’s president, paper solutions from April 2014 through June 30, 2015, as RockTenn’s president - corrugated packaging from July 2012 to April 2014, as RockTenn’s president - corrugated packaging and recycling from May 2011 to July 2012 and as executive vice president of RockTenn’s corrugated packaging business from July 2008 until May 2011. Mr. Porter joined RockTenn in connection with its acquisition of Southern Container Corp. in 2008. Prior to his appointment as executive vice president of RockTenn, Mr. Porter served as the president and chief operating officer of Southern Container from 2004 and as the president of Solvay Paperboard, a subsidiary of Southern Container, from 1997 through 2004.
Marc P. Shore has served as WestRock’s president, multi packaging solutions since June 2017. He had previously served as chief executive officer of MPS and Shorewood Packaging. Mr. Shore has 40 years of experience in the print-based specialty packaging industry. He founded MPS in 2005 with private equity sponsorship and helped take the company public in 2015. During his time at Shorewood Packaging, he led the company through a successful initial public offering and for 14 years as a public company before its sale to International Paper in 2000. Mr. Shore continued as president of the business and as a corporate officer of International Paper until 2004.
149
Ward H. Dickson has served as WestRock’s executive vice president and chief financial officer since July 1, 2015. He served as RockTenn’s executive vice president and chief financial officer from September 2013 through June 30, 2015. From November 2011 until September 2013, he served as the senior vice president of finance for the global sales and service organization of Cisco Systems, Inc., and, from July 2009 to November 2011, he served as the vice president of finance for the global sales and service organization of Cisco. Mr. Dickson served as the vice president of finance at Scientific Atlanta, Inc., a division of Cisco, from February 2006 until July 2009. Prior to Cisco’s acquisition of Scientific Atlanta, Inc. in February 2006, Mr. Dickson had served as that company’s vice president of worldwide financial operations since 2003.
Robert B. McIntosh has served as WestRock’s executive vice president, general counsel and secretary since July 1, 2015. He served as RockTenn’s executive vice president, general counsel and secretary from January 2009 through June 30, 2015 and as RockTenn’s senior vice president, general counsel and secretary from August 2000 until January 2009. Mr. McIntosh joined RockTenn in 1995 as vice president and general counsel.
Vicki L. Lostetter has served as WestRock’s chief human resources officer since February 2018. She previously served as General Manager, Talent and Organization Capability and General Manager, Global Talent Management with Microsoft Incorporated. Prior to joining Microsoft, Ms. Lostetter served in various leadership roles within the human resources function with Coca-Cola Enterprises, Inc., The Coca-Cola Company and Honeywell, Inc.
Kelly C. Janzen has served as WestRock’s chief accounting officer since November 2017. She previously had served as the Company’s senior vice president – accounting since August 2017. Prior to joining the Company, she served as vice president, controller and chief accounting officer for Baker Hughes Inc., vice president finance and chief accounting officer for McDermott International Inc. and served in various leadership roles within the Controllership function with General Electric.
All of our executive officers are elected annually by, and serve at the discretion of, the board of directors.
See Part I, Item 1 “Available Information” of this Form 10-K for information about our Code of Ethical Conduct for our Chief Executive Officer and Senior Financial Officers, including that any amendments to, or waiver from, any provision of such code required to be disclosed will be posted on our website. The remainder of the information required by this item will be contained in our definitive proxy statement issued in connection with our 2020 annual meeting of stockholders and is incorporated herein by reference.
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Item 11. |
EXECUTIVE COMPENSATION |
The information required by this item will be contained in our definitive proxy statement issued in connection with our 2020 annual meeting of stockholders and is incorporated herein by reference.
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Item 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this item will be contained in our definitive proxy statement issued in connection with our 2020 annual meeting of stockholders and is incorporated herein by reference.
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Item 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this item will be contained in our definitive proxy statement issued in connection with our 2020 annual meeting of stockholders and is incorporated herein by reference.
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Item 14. |
PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this item will be contained in our definitive proxy statement issued in connection with our 2020 annual meeting of stockholders and is incorporated herein by reference.
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PART IV
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Item 15. |
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) 1. Financial Statements.
The following consolidated financial statements of our company and our consolidated subsidiaries and the Report of the Independent Registered Public Accounting Firm are included in Part II, Item 8 of this report:
2. Financial Statement Schedule of WestRock Company.
All schedules are omitted because they are not applicable or not required because this information is provided in the financial statements.
3. Exhibits.
See separate Exhibit Index attached hereto and incorporated herein.
(b) See Item 15(a)(3) and separate Exhibit Index attached hereto and incorporated herein.
(c) Not applicable.
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Item 16. |
FORM 10-K SUMMARY |
None.
151
INDEX TO EXHIBITS
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Exhibit Number |
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Description of Exhibits |
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2.1 |
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2.2(a) |
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2.2(b) |
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2.3 |
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2.4 |
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2.5 |
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2.6 |
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3.1 |
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3.2 |
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3.3 |
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4.1(a) |
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4.1(b) |
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4.1(c) |
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152
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4.1(d) |
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4.1(e) |
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4.1(f) |
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4.1(g) |
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4.1(h) |
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4.1(i) |
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P 4.2(a) |
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Form of Indenture, dated as of March 1, 1983, between Westvaco Corporation and The Bank of New York (formerly Irving Trust Company), as Trustee (incorporated by reference to Exhibit 2 of Westvaco Corporation’s Registration Statement on Form 8-A filed on January 24, 1984). |
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4.2(b) |
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4.2(c) |
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4.2(d) |
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4.2(e) |
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4.3(a) |
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4.3(b) |
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153
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4.3(c) |
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4.3(d) |
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4.3(e) |
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4.3(f) |
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4.4(a) |
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4.4(b) |
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4.4(c) |
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4.5(a) |
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4.5(b) |
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4.5(c) |
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4.5(d) |
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4.5(e) |
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4.6(a) |
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154
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4.6(b) |
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4.6(c) |
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4.6(d) |
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4.6(e) |
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4.7(a) |
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4.7(b) |
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4.7(c) |
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4.7(d) |
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4.8(a) |
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4.8(b) |
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4.8(c) |
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4.9 |
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*10.1(a) |
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*10.1(b) |
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155
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*10.1(c) |
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*10.1(d) |
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*10.2(a) |
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*10.2(b) |
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*10.3 |
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*10.4(a) |
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*10.4(b) |
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*10.4(c) |
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*10.4(d) |
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*10.4(e) |
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*10.4(f) |
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*10.5 |
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*10.6(a) |
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*10.6(b) |
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*10.6(c) |
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*10.7(a) |
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*10.7(b) |
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156
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*10.7(c) |
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*10.7(d) |
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*10.8 |
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*10.9 |
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*10.10 |
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*10.11 |
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*10.12 |
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*10.13 |
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*10.14 |
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*10.15 |
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*10.16 |
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*10.17 |
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*10.18 |
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*10.19 |
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*10.20(a) |
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*10.20(b) |
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10.21 |
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*10.22 |
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157
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*10.23 |
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10.24(a) |
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10.24(b) |
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10.25(a) |
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10.25(b) |
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10.25(c) |
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10.26(a) |
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10.26(b) |
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10.26(c) |
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158
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10.26(d) |
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10.26(e) |
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10.27(a) |
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10.27(b) |
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10.27(c) |
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10.27(d) |
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10.28 |
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10.29 |
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10.30 |
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10.31 |
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@10.32 |
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10.33 |
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159
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10.34(a) |
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10.34(b) |
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10.34(c) |
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10.34(d) |
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10.34(e) |
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10.35(a) |
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10.35(b) |
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10.36(a) |
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10.36(b) |
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10.37 |
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*10.38 |
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*10.39(a) |
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*10.39(b) |
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160
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*10.40 |
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*10.41 |
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*10.42 |
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*10.43 |
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21 |
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23 |
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Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. |
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31.1 |
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31.2 |
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#32.1 |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema. |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase. |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Label Linkbase. |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase. |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase. |
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104 |
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Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101). |
*Management contract or compensatory plan or arrangement.
† Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. WestRock hereby undertakes to furnish supplementally copies of any of the omitted schedules upon request by the SEC.
@ Confidential treatment has been requested for certain portions omitted from this exhibit pursuant to Rule 24b-2 under the Exchange Act. Confidential portions of this exhibit have been separately filed with the SEC.
P Paper filing.
#In accordance with SEC Release No. 33-8238, Exhibit 32.1 is to be treated as “accompanying” this report rather than “filed” as part of the report.
161
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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||||
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|
WESTROCK COMPANY |
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Dated: |
November 15, 2019 |
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By: |
/s/ STEVEN C. VOORHEES |
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Steven C. Voorhees |
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Chief Executive Officer and President |
162
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
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Signature |
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Title |
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Date |
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/s/ STEVEN C. VOORHEES |
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Chief Executive Officer and President |
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November 15, 2019 |
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Steven C. Voorhees |
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(Principal Executive Officer), Director |
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/s/ WARD H. DICKSON |
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Executive Vice President and Chief Financial Officer |
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November 15, 2019 |
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Ward H. Dickson |
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(Principal Financial Officer) |
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/s/ KELLY C. JANZEN |
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Chief Accounting Officer |
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November 15, 2019 |
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Kelly C. Janzen |
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(Principal Accounting Officer) |
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/s/ JOHN A. LUKE, JR. |
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Director, Non-Executive Chairman of the Board |
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November 15, 2019 |
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John A. Luke, Jr. |
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/s/ COLLEEN F. ARNOLD |
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Director |
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November 15, 2019 |
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Colleen F. Arnold |
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/s/ TIMOTHY J. BERNLOHR |
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Director |
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November 15, 2019 |
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Timothy J. Bernlohr |
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/s/ J. POWELL BROWN |
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Director |
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November 15, 2019 |
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J. Powell Brown |
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/s/ MICHAEL E. CAMPBELL |
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Director |
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November 15, 2019 |
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Michael E. Campbell |
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/s/ TERRELL K. CREWS |
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Director |
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November 15, 2019 |
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Terrell K. Crews |
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/s/ RUSSELL M. CURREY |
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Director |
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November 15, 2019 |
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Russell M. Currey |
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/s/ GRACIA C. MARTORE |
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Director |
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November 15, 2019 |
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Gracia C. Martore |
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/s/ JAMES E. NEVELS |
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Director |
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November 15, 2019 |
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James E. Nevels |
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/s/ TIMOTHY H. POWERS |
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Director |
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November 15, 2019 |
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Timothy H. Powers |
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/s/ BETTINA M. WHYTE |
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Director |
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November 15, 2019 |
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Bettina M. Whyte |
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/s/ ALAN D. WILSON |
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Director |
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November 15, 2019 |
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Alan D. Wilson |
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163
Description of the Registrant’s Common Stock
Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
WestRock Company (“WestRock”, the “Company” or “our”) has one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended: our common stock.
Description of Capital Stock
The following description of WestRock Company’s common stock is based on and qualified by the Company’s Amended and Restated Certificate of Incorporation (the “Charter”) and Amended and Restated Bylaws (the “Bylaws”). See the Charter and the Bylaws, both of which are filed as exhibits to this annual report on Form 10-K, for a complete description of the terms and provisions of the Company’s common stock.
Authorized Capital Stock
Our authorized capital stock consists of 600,000,000 shares of common stock, par value $0.01 per share (“Common Stock”), and 30,000,000 shares of preferred stock, par value $0.01 per share (“Preferred Stock”). The outstanding shares of Common Stock are duly authorized, validly issued, fully paid and non-assessable.
The Charter permits the Company’s Board of Directors (the “Board”), without further action by the stockholders, to issue authorized Preferred Stock in one or more series with such designations, powers, preferences, special rights, qualifications, limitations and restrictions as the Board may determine from time to time. There are no shares of Preferred Stock currently outstanding.
Voting Rights
Holders of Common Stock are entitled to one vote per share on all questions presented to the stockholders. Subject to the express terms of the Preferred Stock, holders of Common Stock have the exclusive right to vote for the election of directors and for all other purposes. Except as otherwise required by law, all other matters are to be decided by a vote of a majority of votes cast by the holders of Common Stock entitled to vote and present in person or represented by proxy. Our stock does not have cumulative voting rights with respect to the election of directors. The Board is declassified and each director stands for election every year.
Dividend Rights
Subject to the rights of holders of outstanding shares of Preferred Stock, if any, the holders of Common Stock are entitled to receive dividends as may be declared from time to time by the Board out of funds legally available for the payment of dividends.
Liquidation Rights
Holders of Common Stock will share pro rata, upon any liquidation or dissolution of the Company, in all remaining assets available for distribution to stockholders after payment or providing for the Company’s liabilities and the liquidation preference of any outstanding Preferred Stock.
Other Rights and Preferences
Our Common Stock has no redemption or sinking fund provisions or preemptive, conversion or exchange rights.
Listing
Our Common Stock is traded on the New York Stock Exchange under the trading symbol “WRK”.
Certain provisions in our Charter, Bylaws and the Delaware General Corporation Law (“DGCL”) may have the effect of delaying, deferring or preventing a change in control of the Company.
Structure of Board. The Board is declassified and each director stands for election every year. In accordance with our Bylaws, the Board consists of a number of directors determined only by resolution adopted by the Board. Any vacancies on the Board and any newly created directorships resulting from an increase in the authorized number of directors are permitted to be filled only be a majority vote of the directors then in office. This provision could prevent a stockholder from obtaining majority representation on the Board by allowing the Board to enlarge the Board and fill the new directorships with the Board’s own nominees.
Advance Notice of Proposals and Nominations. Our Bylaws provide for an advance notice procedure for stockholders to nominate persons to stand for election as a director or to bring other business before meetings of our stockholders. Any stockholder wishing to nominate persons to stand for election as a director or to bring other business before meetings must deliver advance written notice and certain other information to our Secretary in accordance with our Bylaws.
Limits on Special Meetings. Our Bylaws provide that special meetings of our stockholders may only be called under certain circumstances described therein. Business transacted at any special meeting will be limited to the purposes specified in the notice calling such meeting.
Preferred Stock. Our Board is authorized to approve the issuance of one or more series of Preferred Stock without further authorization of our stockholders and to fix the number of shares, designations, powers, preferences, special rights, qualifications, limitations and restrictions of any series of Preferred Stock. As a result, our Board, without stockholder approval, could authorize the issuance of Preferred Stock with voting, conversion and other rights that could proportionately reduce, minimize or otherwise adversely affect the voting power and other rights of holders of Common Stock or other series of Preferred Stock or that could have the effect of delaying, deferring or preventing a change in our control.
Takeover Statutes. Section 203 of the DGCL generally prohibits “business combinations”, including mergers, sales and leases of assets, issuances of securities and similar transactions by a corporation or a subsidiary with an interested stockholder who beneficially owns 15% or more of a corporation’s voting stock, within three years after the person or entity becomes an interested stockholder, unless: (i) the board of directors of the target corporation has approved, before the acquisition time, either the business combination or the transaction that resulted in the person becoming an interested stockholder, (ii) upon consummation of the transaction that resulted in the person becoming an interested stockholder, the person owns at least 85% of the corporation’s voting stock (excluding shares owned by directors who are officers and shares owned by employee stock plans in which participants do not have the right to determine confidentially whether shares will be tendered in a tender or exchange offer) or (iii) after the person or entity becomes an interested stockholder, the business combination is approved by the board of directors and authorized at a meeting of stockholders by the affirmative vote of at least 66-2/3% of the outstanding voting stock now owned by the interested stockholder. Section 203 of the DGCL applies to the Company.
Exclusive Forum. Our Bylaws provide that, unless the Company consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of the Company to the Company or our stockholders, (iii) any action asserting a claim against the Company or any director or officer or other employee of the Company arising pursuant to any provision of the DGCL, our Charter or our Bylaws, or (iv) any action asserting a claim against the Company or any director or officer or other employee of the Company governed by the internal affairs doctrine will be a state court located within the State of Delaware (or, if no state court within the State of Delaware has jurisdiction, the federal district court for the District of Delaware).
EXHIBIT 10.27(b)
EXECUTION VERSION
AMENDMENT NO. 1
AMENDMENT NO. 1, dated as of July 1, 2016 (this “Amendment”), among WESTROCK COMPANY, a Delaware corporation (the “Parent”), WESTROCK CP, LLC (f/k/a RockTenn CP, LLC), a Delaware limited liability company (together with its permitted successors, “WestRock CP”), WESTROCK CONVERTING COMPANY, (f/k/a Rock-Tenn Converting Company), a Georgia corporation (together with its permitted successors, “WestRock Converting”), WESTROCK VIRGINIA CORPORATION (f/k/a MeadWestvaco Virgina), a Delaware corporation (together with its permitted successors, “WestRock Virginia”, and, together with WestRock CP and WestRock Converting, the “Borrowers”), the other Credit Parties, the Lenders party hereto, the Voting Participants party hereto and COBANK, ACB, as administrative agent for the Lenders (in such capacity, the “Administrative Agent”) to the Credit Agreement dated as of July 1, 2015 (as amended, restated, amended and restated or otherwise modified from time to time, the “Credit Agreement”), by and among the Borrowers, the Guarantors from time to time party thereto, the Administrative Agent and the Lenders referred to therein. Capitalized terms used and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement.
WHEREAS, pursuant to Section 9.1 of the Credit Agreement, the Credit Parties, the Required Lenders (including, for the avoidance of doubt, Voting Participants) and the Agent desire to amend the Credit Agreement as set forth herein to effect certain amendments.
NOW, THEREFORE, in consideration of the premises and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:
Section 1.Amendment. The Credit Agreement is, effective as of the Effective Date (as defined below), hereby amended to delete the stricken text (indicated textually in the same manner as the following example: stricken text) and to add the double-underlined text (indicated textually in the same manner as the following example: double-underlined text) as set forth in the pages of the Credit Agreement attached as Exhibit A hereto.
Section 2.Representations and Warranties. The Credit Parties represent and warrant to the Lenders and the Agent as of the date hereof and the Effective Date (as defined below) that:
(a)At the time of and immediately after giving effect to this Amendment, the representations and warranties of the Credit Parties set forth in the Credit Documents are true and correct in all material respects (except to the extent that any such representation or warranty is qualified by materiality, in which case such representation and warranty shall be true and correct) with the same effect as if made on the Effective Date, except to the extent such representations and warranties expressly relate to an earlier date.
(b)At the time of and immediately after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing.
Section 3.Conditions to Effectiveness. This Amendment shall become effective on the date (the “Effective Date”) on which:
-2-
(a)the Agent (or its counsel) shall have received from the Credit Parties and the Required Lenders (including Voting Participants), a counterpart of this Amendment signed on behalf of each such party;
(b)the representations and warranties set forth in Section 2 hereof shall be true and correct; and
(c)the Borrowers shall have paid all fees and expenses due and payable pursuant to Section 4 hereof.
Section 4.Fees and Expenses. The Borrowers agree to reimburse the Administrative Agent for the reasonable and documented out-of-pocket expenses incurred by them in connection with this Amendment, including the reasonable and documented fees, charges and disbursements of Moore & Van Allen PLLC, counsel for the Administrative Agent.
Section 5.Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be deemed to be an original, but all of which when taken together shall constitute a single instrument. Delivery of an executed counterpart of a signature page of this Amendment by facsimile transmission or by email in Adobe “.pdf” format shall be effective as delivery of a manually executed counterpart hereof.
Section 6.Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
Section 7.Headings. The headings of this Amendment are for purposes of reference only and shall not limit or otherwise affect the meaning hereof.
Section 8.Effect of Amendment. On and after the effectiveness of this Amendment, each reference in the Credit Agreement to “this Credit Agreement”, “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the Notes and each of the other Credit Documents to “the Credit Agreement”, “thereunder”, “thereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended or waived by this Amendment. The Credit Agreement, the Notes and each of the other Credit Documents, as specifically amended or waived by this Amendment, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of or otherwise affect the rights and remedies of the Lenders or the Agents under the Credit Agreement or any other Credit Document, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other provision of the Credit Agreement or any other Credit Document, all of which are ratified and affirmed in all respects and shall continue in full force and effect. The parties hereto expressly acknowledge that it is not their intention that this Amendment or any of the other Credit Documents executed or delivered pursuant hereto constitute a novation of any of the obligations, covenants or agreements contained in the Credit Agreement or any other Credit Document, but rather constitute a modification thereof pursuant to the terms contained herein.
-3-
Section 9.Acknowledgement and Consent. (a) Each Guarantor hereby acknowledges that it has reviewed the terms and provisions of the Credit Agreement and this Amendment and consents to the amendments of the Credit Agreement effected pursuant to this Amendment. Each Guarantor hereby confirms that each Credit Document to which it is a party or otherwise bound will continue to guarantee to the fullest extent possible in accordance with the Credit Documents the payment and performance of all “Credit Party Obligations” under each of the Credit Documents to which is a party (in each case as such terms are defined in the applicable Credit Document).
(b)Each Guarantor acknowledges and agrees that any of the Credit Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment.
[Signature Pages Follow]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written.
|
BORROWERS: |
WESTROCK CP, LLC (f/k/a RockTenn CP, LLC) |
By: /s/ John Stakel
Name: John Stakel
Title: SVP and Treasurer
WESTROCK CONVERTING COMPANY (f/k/a Rock-Tenn Converting Company)
By: /s/ John Stakel
Name: John Stakel
Title: SVP and Treasurer
WESTROCK VIRGINIA CORPORATION (f/k/a MeadWestvaco Virginia Corporation)
By: /s/ John Stakel
Name: John Stakel
Title: SVP and Treasurer
|
GUARANTORS: |
WESTROCK COMPANY |
By: /s/ John Stakel
Name: John Stakel
Title: SVP and Treasurer
|
|
By: |
/s/ Zachary Carpenter
|
|
|
By: |
/s/ Zachary Carpenter
|
If a second signature is necessary:
|
|
By: |
n/a________________________________
|
1st Farm Credit Services, FLCA,
as a Voting Participant
|
|
By: |
/s/ Corey J. Waldinger
|
Northwest Farm Credit Services, FLCA,
as a Voting Participant
|
|
By: |
/s/ Jeremy A. Roewe
|
Fresno Madera Production Credit Association,
as a Voting Participant
|
|
By: |
/s/ Robert L. Herrick
|
Yosemite Land Bank, FLCA,
as a Voting Participant
|
|
By: |
/s/ Les C. Crutcher
|
AgFirst Farm Credit Bank,
as a Voting Participant
|
|
By: |
/s/ Matthew H. Jeffords
|
GreenStone Farm Credit Services, FLCA,
as a Voting Participant
|
|
By: |
/s/ Nichole L. Wilcox
|
Farm Credit Bank of Texas,
as a Voting Participant
|
|
By: |
/s/ Chris M. Levine
|
United FCS, FLCA d/b/a FCS Commercial Finance Group,
as a Voting Participant
|
|
By: |
/s/ Lisa Caswell
|
Badgerland Financial, FLCA
as a Voting Participant
|
|
By: |
/s/ Anthony G. Endres
|
Farm Credit Mid-America, FLCA, f/k/a Farm Credit Services of Mid-America, FLCA
as a Voting Participant
|
|
By: |
/s/ Ralph M. Bowman
|
American AgCredit, PCA
as a Voting Participant
|
|
By: |
/s/ Michael J. Balok
|
Farm Credit West, FLCA
as a Voting Participant
|
|
By: |
/s/ Ben Madonna
|
$600,000,000
CREDIT AGREEMENT
Dated as of July 1, 2015
as amended by Amendment No.1 on July 1, 2016
among,
WESTROCK CP, LLC (f/k/a ROCKTENN CP, LLC),
WESTROCK CONVERTING COMPANY (f/k/a ROCK-TENN CONVERTING COMPANY)
and
WESTROCK VIRGINA CORPORATION (f/k/a MEADWESTVACO VIRGINIA CORPORATION),
as the Borrowers,
THE GUARANTORS FROM TIME TO TIME PARTY HERETO,
THE LENDERS PARTIES HERETO,
and
COBANK, ACB,
as Administrative Agent
COBANK, ACB,
as Lead Arranger and Book Runner
|
Article I DEFINITIONS |
1 |
|
i
|
|
3.13 |
Compliance with Trading with the Enemy Act, OFAC Rules and Regulations, Patriot Act and FCPA |
|
|
Article V AFFIRMATIVE COVENANTS |
60 |
|
|
Article VI NEGATIVE COVENANTS |
65 |
|
|
Article VII EVENTS OF DEFAULT |
70 |
|
|
Article IX MISCELLANEOUS |
78 |
|
ii
iii
Exhibit A[Reserved]
Exhibit BForm of Notice of Borrowing
Exhibit CForm of Notice of Conversion/Extension
Exhibit DForm of Designation Notice
Exhibit EForm of Closing Date Term Loan Note
Exhibit FForm of Tax Exempt Certificate
Exhibit GForm of Officer’s Compliance Certificate
Exhibit HForm of Joinder Agreement
Exhibit IForm of Assignment and Assumption
Exhibit JForm of Discounted Prepayment Option Notice
Exhibit KForm of Lender Participation Notice
Exhibit LForm of Discounted Voluntary Prepayment Notice
SCHEDULES
Schedule 1.1(a)(i)Existing MWV Notes
Schedule 1.1(a)(ii)Existing RockTenn Notes
Schedule 2.1(a)Lenders, Voting Participants and Commitments
Schedule 3.9Subsidiaries and Joint Ventures
Schedule 9.2Lending Offices
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THIS CREDIT AGREEMENT, dated as of July 1, 2015, and as amended as of July 1, 2016 (this “Agreement” or “Credit Agreement”), is by and among WESTROCK COMPANY, a Delaware corporation (the “Parent”), WESTROCK CP, LLC (f/k/a ROCKTENN CP, LLC), a Delaware limited liability company (together with its permitted successors, “RockTennWestRock CP”), WESTROCK CONVERTING COMPANY (f/k/a ROCK-TENN CONVERTING COMPANY), a Georgia corporation (together with its permitted successors, “Rock-TennWestRock Converting”), MEADWESTVACOWESTROCK VIRGINIA CORPORATION (f/k/a MeadWestvaco Virginia Corporation), a Delaware corporation (together with its permitted successors, “MWVWestRock Virginia”, and, together with RockTennWestRock CP and Rock-TennWestRock Converting, the “Borrowers”), Rock-Tenn Company, a Georgia corporation (“RockTenn”) and MeadWestvaco Corporation, a Delaware corporation (“MWV” and, together with RockTenn and the Parent, the “Initial Guarantors”), the lenders named herein and such other lenders that hereafter become parties hereto, and COBANK, ACB, as Administrative Agent for the Lenders (in such capacity, the “Administrative Agent”).
W I T N E S S E T H
WHEREAS, the Borrowers have requested that the Lenders provide a term loan facility for the purposes hereinafter set forth; and
WHEREAS, the Lenders have agreed to make the requested term loan facility available to the Borrowers on the terms and conditions hereinafter set forth.
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
As used in this Credit Agreement, the following terms have the meanings specified below unless the context otherwise requires:
“Acceptable Price” has the meaning specified in Section 2.11(c)(iii).
“Acceptance Date” has the meaning specified in Section 2.11(c)(ii).
“Acquisition” means any acquisition, whether by stock purchase, asset purchase, merger, amalgamation, consolidation or otherwise, of a Person or a business line of a Person.
“Additional Credit Party” means each Person that becomes a Guarantor by execution of a Joinder Agreement in accordance with Section 5.10.
“Administrative Agent” has the meaning set forth in the introductory paragraph hereof, together with any successors or assigns.
“Administrative Questionnaire” means an administrative questionnaire in a form supplied by the Administrative Agent.
“Affiliate” means as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, a Person shall be deemed to be “controlled by” a Person if such Person possesses, directly or indirectly, power either (i) to vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (ii) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise.
“Agreement” has the meaning set forth in the introductory paragraph hereof.
“Alternate Base Rate” means the rate per annum determined by the Administrative Agent on the first Business Day of each week or more frequently, in the sole discretion of the Administrative Agent, as the highest of (i) the Prime Rate, (ii) the Federal Funds Rate plus ½ of 1.00% and (iii) the LIBOR Rate for a one-month interest period plus 1.00%, in each case as of such date. If for any reason the Administrative Agent shall have reasonably determined (which determination shall be conclusive absent manifest error) that it is unable after due inquiry to ascertain the Federal Funds Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms hereof, the Alternate Base Rate shall be determined without regard to clause (ii) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the calculation thereof shall be effective at the opening of business on the first Business Day of each week or, if determined more frequently, at the opening of business on the first Business Day immediately following the date of such determination and without necessity of notice being provided to any Borrower or any other Person.
“Anti-Corruption Laws” means all laws, rules, and regulations of any jurisdiction applicable to the Parent or any of its Subsidiaries from time to time concerning or relating to bribery or corruption.
“Applicable Discount” has the meaning specified in Section 2.11(c)(iii).
“Applicable Percentage” means, for any day, the percentages per annum set forth in the table below corresponding with the then applicable Level, which will be the lower of (a) the applicable Level determined by reference to the Leverage Ratio and (b) the applicable Level determined by reference to the Rating (the “Ratings Level”), such that Level I is the lowest Level and Level IV is the highest Level; provided that, prior to five (5) Business Days after the delivery of financial statements for the period ending September 30, 2015 in accordance with the provisions of Section 5.7, the applicable Level shall be Level I.
For purposes of the foregoing, (a) (i) if the applicable Ratings established by Moody’s and S&P are different but correspond to consecutive pricing levels, then the Ratings Level will be based on the higher applicable Rating (e.g., if Moody’s applicable Rating corresponds to Level I and S&P’s applicable Rating corresponds to Level II, then the Ratings Level will be Level I), and (ii) if the applicable Ratings established by Moody’s and S&P are more than one pricing level apart, then the Ratings Level will be based on the rating which is one level higher than the lower rating (e.g., if Moody’s and S&P’s applicable Ratings correspond to Levels I and IV, respectively, then the Ratings Level will be Level III), (b) in the event that either S&P or Moody’s (but not both) shall no longer issue a Rating, the Ratings Level shall be determined by the remaining Rating, and (c) in the event that neither S&P nor Moody’s issues a Rating, unless and until the date, if any, that the Parent and the Required Lenders agree on a different arrangement, the existing Ratings Level shall continue in effect for the 60-day period immediately following such event, and subsequent to such period the Ratings Level shall be Level IV.
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|
Leverage
|
Rating
|
Applicable
|
Applicable
|
|
|
I |
< 2.50 to 1.00 |
BBB / Baa2
|
1.500% |
0.500% |
|
II |
> 2.50 to 1.00 but < 3.00 to 1.00 |
BBB- / Baa3 |
1.625% |
0.625% |
|
III |
> 3.00 to 1.00 but < 3.25 to 1.00 |
BB+ / Ba1 |
1.875% |
0.875% |
|
IV |
> 3.25 to 1.00 |
BB / Ba2 (or worse) |
2.125% |
1.125% |
The Applicable Percentage shall, in each case, be determined and adjusted quarterly on the date five (5) Business Days after the date on which the Administrative Agent has received from the Parent the financial information and certifications required to be delivered to the Administrative Agent and the Lenders in accordance with the provisions of Section 5.7 (each an “Interest Determination Date”). Such Applicable Percentage shall be effective from such Interest Determination Date until the next such Interest Determination Date. After the Closing Date, if the Credit Parties shall fail to provide the Required Financial Information for any fiscal quarter or fiscal year of the Parent, the Applicable Percentage from such Interest Determination Date shall, on the date five (5) Business Days after the date by which the Credit Parties were so required to provide such Required Financial Information to the Administrative Agent and the Lenders, be based on Level IV until such time as such Required Financial Information is provided, whereupon the Level shall be determined by the then current Leverage Ratio. In the event that any Required Financial Information that is delivered to the Administrative Agent is shown to be inaccurate in a manner that results in the miscalculation of the Leverage Ratio (regardless of whether this Agreement or the Commitments are in effect when such inaccuracy is discovered), and such inaccuracy, if corrected, would have led to the application of a higher Applicable Percentage for any period (an “Applicable Period”) than the Applicable Percentage applied for such Applicable Period, then the Credit Parties shall immediately (i) deliver to the Administrative Agent corrected Required Financial Information for such Applicable Period, (ii) determine the Applicable Percentage for such Applicable Period based upon the corrected Required Financial Information (which Applicable Percentage shall be made effective immediately in the current period, to the extent applicable) and (iii) immediately pay to the Administrative Agent the accrued additional interest owing as a result of such increased Applicable Percentage for such Applicable Period, which payment shall be promptly applied by the Administrative Agent in accordance with Section 2.14(a). It is acknowledged and agreed that nothing contained herein shall limit the rights of the Administrative Agent and the Lenders under the Credit Documents, including their rights under Sections 2.9 and 7.2.
“Applicable Period” has the meaning set forth in the definition of “Applicable Percentage.”
“Approved Fund” means any Fund that is administered, managed or underwritten by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
“Assignment and Assumption” means an Assignment and Assumption substantially in the form of Exhibit I.
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“Bail-In Action” means the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution.
“Bail-In Legislation” means, with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule.
“Bankruptcy Code” means the Bankruptcy Code in Title 11 of the United States Code, as amended, modified, succeeded or replaced from time to time.
“Base Rate Loans” means all Loans accruing interest based on the Alternate Base Rate.
“Borrowers” has the meaning set forth in the introductory paragraph hereof.
“Borrowing Minimum” means (a) in the case of LIBOR Rate Loans, $2,000,000 and (b) in the case of Base Rate Loans, $1,000,000.
“Borrowing Multiple” means $1,000,000.
“Business Day” means a day other than a Saturday, Sunday or other day on which commercial banks in Greenwood Village, Colorado or New York, New York are authorized or required by law to close; provided, however, that when used in connection with a rate determination, borrowing or payment in respect of a LIBOR Rate Loan, the term “Business Day” shall also exclude any day on which banks in London, England are not open for dealings in deposits of U.S. Dollars in the London interbank market.
“Calculation Date” means the date of the applicable Specified Transaction which gives rise to the requirement to calculate the financial covenants set forth in Section 6.1(a) and (b) or the Leverage Ratio, in each case on a Pro Forma Basis.
“Calculation Period” means, in respect of any Calculation Date, the period of four fiscal quarters of the Parent ended as of the last day of the most recent fiscal quarter of the Parent preceding such Calculation Date for which the Administrative Agent shall have received the Required Financial Information.
“Canadian AML Acts” means applicable Canadian law regarding anti-money laundering, anti-terrorist financing, government sanction and “know your client” matters, including the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada).
“Capital Assets” means, collectively, for any Person, all fixed assets of such Person, whether tangible or intangible determined in accordance with GAAP.
“Capital Lease” means, as applied to any Person, any lease of any Property (whether real, personal or mixed) by such Person as lessee which would, in accordance with GAAP as of the Closing Date, be required to be classified and accounted for as a capital lease on a balance sheet of such Person, other than, in the case of a Consolidated Company, any such lease under which another Consolidated Company is the lessor.
“Capital Stock” means (i) in the case of a corporation, capital stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of capital stock, (iii) in the case of a partnership, units or partnership interests (whether general or limited), (iv) in the case of a limited liability company, membership interests and (v) any other interest or
4
participation that confers on a Person the right to receive a share of the profits and losses of, or distribution of assets of, the issuing Person.
“Cash Management Agreement” means any agreement to provide cash management services, including treasury, depository, overdraft, credit or debit card, electronic funds transfer and other cash management arrangements.
“Cash Management Bank” means any Person that, (i)(a) at the time it enters into a Cash Management Agreement, is a Lender, the Administrative Agent or an Affiliate of a Lender or the Administrative Agent or (b) is a Lender, the Administrative Agent or an Affiliate of a Lender or the Administrative Agent on the Closing Date and the Cash Management Agreement to which such Person is a party was entered into on or prior to the Closing Date (even if such Person ceases to be a Lender or the Administrative Agent or such Person’s Affiliate ceased to be a Lender or the Administrative Agent), in each case (a) or (b) in its capacity as a party to such Cash Management Agreement; provided, in the case of a Cash Management Agreement with a Person who is no longer a Lender, such Person shall be considered a Cash Management Bank only through the stated maturity date (without extension or renewal or increase in amount) of such Cash Management Agreement and (ii) to the extent it is not a Lender, has provided the Administrative Agent with a fully executed Designation Notice, substantially in the form of Exhibit D.
“Change in Control” means (i) as applied to the Parent, after giving effect to the Combination, that any Person or “Group” (as defined in Section 13(d)(3) of the Exchange Act, but excluding (A) any employee benefit or stock ownership plans of the Parent, and (B) members of the Board of Directors and executive officers of the Parent as of the Closing Date, members of the immediate families of such members and executive officers, and family trusts and partnerships established by or for the benefit of any of the foregoing individuals) shall have acquired more than fifty percent (50%) of the combined voting power of all classes of common stock of the Parent, except that the Parent’s purchase of its common stock outstanding on the Closing Date which results in one or more of the Parent’s shareholders of record as of the Closing Date controlling more than fifty percent (50%) of the combined voting power of all classes of the common stock of the Parent shall not constitute an acquisition hereunder and (ii) subject to Section 9.199.20(d) (and except as otherwise permitted under Sections 6.4(a) and 6.4(g)), any Borrower shall cease to be a Wholly-Owned Subsidiary of the Parent.
“Closing Date” means the date hereof.
“Closing Date Term Loan” has the meaning set forth in Section 2.4(a).
“Closing Date Term Loan Commitment” means, with respect to each Closing Date Term Loan Lender, the commitment of such Closing Date Term Loan Lender to make its portion of the Closing Date Term Loan in a principal amount equal to such Closing Date Term Loan Lender’s Closing Date Term Loan Commitment Percentage of the Closing Date Term Loan Committed Amount.
“Closing Date Term Loan Commitment Percentage” means, for any Closing Date Term Loan Lender, the percentage identified as its Closing Date Term Loan Commitment Percentage on Schedule 2.1(a), as such percentage may be modified in connection with any Incremental Term Loan Commitment and/or any assignment made in accordance with the provisions of Section 9.6(b).
“Closing Date Term Loan Committed Amount” has the meaning set forth in Section 2.4(a).
“Closing Date Term Loan Lender” means, as of any date of determination, any Lender that holds a Closing Date Term Loan Commitment or a portion of the outstanding Closing Date Term Loan on such date.
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“Closing Date Term Loan Note” or “Closing Date Term Loan Notes” means the promissory notes of the Borrowers in favor of each of the Closing Date Term Loan Lenders that requests a promissory note evidencing the portion of the Closing Date Term Loan provided pursuant to Section 2.4(d), individually or collectively, as appropriate, as such promissory notes may be amended, modified, restated, supplemented, extended, renewed or replaced from time to time.
“CoBank” means CoBank, ACB, and its successors.
“Code” means the Internal Revenue Code of 1986, as amended.
“Collateralized Bonds” means the Solid Waste Disposal Facility Revenue Bonds, Series 1997A, issued by the City of Wickliffe, Kentucky, and maturing on January 15, 2027.
“Combination” means, collectively, the MWV Merger and the RockTenn Merger.
“Combination Agreement” means the Second Amended and Restated Business Combination Agreement, dated as of April 17, 2015, among WestRock Company (f/k/a Rome-Milan Holdings, Inc.), MeadWestvaco Corporation, Rock-Tenn Company, Milan Merger Sub, LLC and Rome Merger Sub, Inc., including all schedules, exhibits and attachments thereto and as such agreement may be amended, restated, amended and restated or otherwise modified from time to time prior to the Closing Date.
“Commitment” means the Closing Date Term Loan Commitment and/or any Incremental Term Loan Commitment, individually or collectively, as appropriate.
“Commodity Exchange Act” means the Commodity Exchange Act (7 U.S.C. § 1 et seq.), as amended from time to time, and any successor statute.
“Consolidated Companies” means, collectively, the Parent, each Borrower, all of the Restricted Subsidiaries, each Permitted Securitization Subsidiary and, to the extent required to be consolidated with the Parent under GAAP, any Joint Venture.
“Consolidated Company Investment” has the meaning set forth in the definition of “EBITDA.”
“Consolidated Funded Debt” means the Funded Debt of the Consolidated Companies on a consolidated basis.
“Consolidated Interest Coverage Ratio” means, as of any date of determination, the ratio of (i) EBITDA for the period of the four prior fiscal quarters of the Parent ending on such date to (ii) Consolidated Interest Expense paid or payable in cash during such period (together with any sale discounts given in connection with sales of accounts receivable and/or inventory by the Consolidated Companies during such period).
“Consolidated Interest Expense” means, for any period, all Interest Expense of the Consolidated Companies net of interest income and income from corporate-owned life insurance programs (excluding (i) deferred financing costs included in amortization, (ii) interest expense in respect of insurance premiums, (iii) interest expense in respect of Indebtedness that is non-recourse to the Parent and its Restricted Subsidiaries under the laws of the applicable jurisdiction, except for Standard Securitization Undertakings and (iv) interest expense in respect of the write-up or write-down of the fair market value of Indebtedness) of the Consolidated Companies determined on a consolidated basis in accordance with GAAP; provided, however, that, for purposes of calculating Consolidated Interest Expense for the fiscal periods ending September 30, 2015, December 31, 2015 and March 31, 2016, Consolidated Interest Expense shall be annualized such
6
that (a) for the calculation of Consolidated Interest Expense for the four fiscal quarters of the Parent ending September 30, 2015, Consolidated Interest Expense shall be Consolidated Interest Expense for the fiscal quarter of the Parent then ending multiplied by four (4), (b) for the calculation of Consolidated Interest Expense for the four fiscal quarters of the Parent ending December 31, 2015, Consolidated Interest Expense shall be Consolidated Interest Expense for the two fiscal quarter period of the Parent then ending multiplied by two (2) and (c) for the calculation of Consolidated Interest Expense for the four fiscal quarters of the Parent ending March 31, 2016, Consolidated Interest Expense shall be Consolidated Interest Expense for the three fiscal quarter period of the Parent then ending multiplied by one and one-third (1 1/3).
“Consolidated Net Income” means the consolidated net income of the Consolidated Companies on a consolidated basis as defined according to GAAP before giving effect to any non-controlling interests; provided that there shall be excluded from Consolidated Net Income (in each case, to the extent included in consolidated net income of the Consolidated Companies) (i) any net loss or net income of any Unrestricted Subsidiary that is not a Consolidated Company and the proportionate share of any net loss or net income of any Joint Venture that is a Consolidated Company attributable to a Person other than a Consolidated Company, (ii) the net income or loss of any Consolidated Company for any period prior to the date it became a Consolidated Company as a result of any Consolidated Company Investment, (iii) the gain or loss (net of any tax effect) resulting from the sale, transfer or other disposition of any Capital Assets by the Consolidated Companies other than in the ordinary course of business of the Consolidated Companies or from the sale, transfer or other disposition of the Non-Core MWV Businesses, (iv) any expense in respect of severance payments to the extent paid from the assets of any Plan and (v) other extraordinary items, as defined by GAAP, of the Consolidated Companies.
“Consolidated Net Tangible Assets” means, as of any date of determination, with respect to the Consolidated Companies, total assets minus goodwill, other intangible assets and current liabilities (other than current maturities of long term debt and other short term Funded Debt), all as determined in accordance with GAAP on a consolidated basis and any Consolidated Net Tangible Assets attributable to the MWV SPE Assets.
“Contractual Obligation” of any Person means any provision of any security issued by such Person or of any agreement, instrument or undertaking under which such Person is obligated or by which it or any of the property owned by it is bound.
“Copyright Licenses” means any written agreement, naming any Credit Party as licensor, granting any right under any Copyright.
“Copyrights” means (a) all copyrights, now existing or hereafter created or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Copyright Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and (b) all renewals thereof.
“Credit Agreement” has the meaning set forth in the introductory paragraph hereof.
“Credit Documents” means a collective reference to this Credit Agreement, the Notes, the Fee Letter, any Joinder Agreement and all other related agreements and documents issued or delivered hereunder or thereunder or pursuant hereto or thereto (excluding, however, any Guaranteed Hedging Agreement and any Guaranteed Cash Management Agreement).
“Credit Party” means any of the Parent, any other Guarantor or any Borrower.
7
“Credit Party Obligations” means, without duplication, (i) all of the obligations of the Credit Parties to the Lenders and the Administrative Agent, whenever arising, under this Credit Agreement and the other Credit Documents (including any interest accruing after the occurrence of a filing of a petition of bankruptcy under the Bankruptcy Code with respect to any Credit Party, regardless of whether such interest is an allowed claim under the Bankruptcy Code) and (ii) all liabilities and obligations, whenever arising, owing from any Credit Party or any of its Subsidiaries to any Hedging Agreement Provider under any Guaranteed Hedging Agreement or to any Cash Management Bank under any Guaranteed Cash Management Agreement. Notwithstanding anything to the contrary contained in this Credit Agreement or any provision of any other Credit Document, Credit Party Obligations shall not extend to or include any Excluded Swap Obligation.
“Debt to Capitalization Ratio” means, as of the last day of any fiscal quarter of the Parent, the ratio (expressed as a percentage) of (a)(i) Total Funded Debt minus (ii) the aggregate amount of cash on the consolidated balance sheet of the Parent and its Restricted Subsidiaries attributable to the net proceeds of an issuance or incurrence of Indebtedness that constitutes Refinancing Indebtedness in respect of existing Indebtedness maturing within 180 days of such issuance or incurrence, to (b) the sum of (i)(x) Total Funded Debt minus (y) the aggregate amount of cash on the consolidated balance sheet of the Parent and its Restricted Subsidiaries attributable to the net proceeds of an issuance or incurrence of Indebtedness that constitutes Refinancing Indebtedness in respect of existing Indebtedness maturing within 180 days of such issuance or incurrence plus (ii) the Equity Capitalization plus (iii) deferred Taxes of the Parent and its consolidated Subsidiaries, each as of the last day of such fiscal quarter.
“Default” means any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default.
“Defaulting Lender” means, at any time, any Lender that, at such time, (a) has failed to fund any portion of any Term Loan required to be funded by it hereunder within two Business Days of the date required to be funded by it hereunder unless such Lender notifies the Administrative Agent and the Parent in writing that such failure is the result of such Lender’s good faith determination that one or more conditions precedent to funding (each of which conditions precedent, together with any applicable default, shall be specifically identified in such writing) has not been satisfied, (b) has otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within two Business Days of the date when due, unless such amount is the subject of a good faith dispute, (c) has notified any Credit Party, the Administrative Agent or any other Lender in writing that it does not intend to comply with any of its funding obligations under this Agreement or has made a public statement to the effect that it does not intend to comply or has failed to comply with its funding obligations under this Agreement or under other agreements generally in which it commits or is obligated to extend credit, or (d) has become or is, or has a direct or indirect parent company that has become or is, insolvent or has become, or has a direct or indirect parent company that has become, the subject of a bankruptcy or insolvency proceeding, or has had, or has a direct or indirect parent company that has had, a receiver, conservator, trustee or custodian appointed for it, or has taken, or has a direct or indirect parent company that has taken, any action in furtherance of, or indicating its consent to, approval of or acquiescence in any such proceeding or appointment, or has become the subject of a Bail-In Action; provided that a Lender shall not be a Defaulting Lender solely by virtue of (x) the ownership or acquisition of any Capital Stock in that Lender or any direct or indirect parent company thereof by a Governmental Authority or (y) in the case of a solvent Person, the precautionary appointment of an administrator, guardian, custodian or other similar official by a Governmental Authority under or based on the applicable law of the country where such Person is subject to home jurisdiction supervision if any applicable law requires that such appointment not be publicly disclosed, in any such case, so long as such ownership interest or appointment, as applicable, does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such lender (or such
8
Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender.
“Discount Range” has the meaning specified in Section 2.11(c)(ii).
“Discounted Prepayment Option Notice” means a Discounted Prepayment Option Notice substantially in the form of Exhibit J.
“Discounted Voluntary Prepayment” has the meaning specified in Section 2.11(c)(i).
“Discounted Voluntary Prepayment Notice” means a Discounted Voluntary Prepayment Notice substantially in the form of Exhibit L.
“Disqualified Institution” means (a) certain banks, financial institutions and other institutional lenders or investors or any competitors of the Parent that, in each case, have been specified by name to the Administrative Agent by the Parent in writing prior to the Closing Date (collectively, the “Identified Institutions”) and (b) with respect to such Identified Institutions, Persons (such Persons, “Known Affiliates”) that are Affiliates of such Identified Institutions readily identifiable as such by the name of such Person, but excluding any Person that is a bona fide debt fund or investment vehicle that is engaged in making, purchasing, holding or otherwise investing in loans, bonds or similar extensions of credit or securities in the ordinary course of business; provided that, upon reasonable notice to the Administrative Agent after the Closing Date, the Parent shall be permitted to supplement in writing the list of Persons that are Disqualified Institutions with the name of any Person that is or becomes a competitor of the Parent or a Known Affiliate of one of the competitors of the Parent, which supplement shall be in the form of a list of names provided to the Administrative Agent and shall become effective upon delivery to the Administrative Agent, but which supplement shall not apply retroactively to disqualify any persons that have previously acquired an interest in respect of the Loans or Commitments hereunder.
“Domestic Subsidiary” means any Subsidiary that is organized and existing under the laws of the United States, any state thereof or the District of Columbia.
“EBITDA” means for any fiscal period, Consolidated Net Income for such period plus (a) the following (without duplication) to the extent deducted in determining such Consolidated Net Income, in each case as determined for the Consolidated Companies in accordance with GAAP for the applicable period: (i) Consolidated Interest Expense, (ii) consolidated tax expenses, including all federal, state, provincial, local income and similar taxes (provided that, if the entry for consolidated tax expenses increases (rather than decreases) Consolidated Net Income for such fiscal period, then EBITDA shall be reduced by the amount of consolidated tax expenses for such fiscal period), (iii) depreciation and amortization expenses, (iv) all charges and expenses for financing fees and expenses and write-offs of deferred financing fees and expenses, remaining portions of original issue discount on prepayment of Indebtedness, premiums paid in respect of prepayment of Indebtedness, and commitment fees (including bridge fees and ticking fees but excluding, for the avoidance of doubt, periodic revolver drawn or unused line fees) in respect of financing commitments, (v) all charges and expenses associated with the write up of inventory acquired in Acquisitions or in any other Investments that become Consolidated Companies (or Property of Consolidated Companies, including by way of merger, consolidation or amalgamation) (such Acquisitions or Investments, “Consolidated Company Investments”), in each case as required by Accounting Standards Codification (“ASC”) 805 – “Business Combinations”, (vi) all other non-cash charges, including non-cash charges for the impairment of goodwill taken pursuant to ASC 350 – “Intangibles - Goodwill and Other”, acquisition-related expenses taken pursuant to ASC 805 (whether consummated or not), stock-based compensation and restructuring and other charges, (vii) all legal, accounting and other professional advisory fees and expenses incurred in respect of Consolidated Company Investments and related financing transactions, (viii) (A) all
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expenses related to payments made to officers and employees, including any applicable excise taxes, of the acquired companies and businesses in any Consolidated Company Investment and other payments due in respect of employment agreements entered into as provided in the agreements relating to any Consolidated Company Investment, and retention bonuses and other transition and integration costs, including information technology transition costs, related to any Consolidated Company Investment, (B) change of control expenses of the acquired companies and businesses in any Consolidated Company Investment, (C) all non-recurring cash expenses taken in respect of any multi-employer and defined benefit pension plan obligations (without duplication) that are not related to plant and other facilities closures and (D) all cash acquisition-related expenses taken pursuant to ASC 805 (whether consummated or not), all cash charges and expenses for plant and other facility closures (whether complete or partial) and other cash restructuring charges, labor disruption charges and officer payments in connection with any Consolidated Company Investment or associated with efforts to achieve EBITDA synergies or improvements; provided that the amount added back under this clause (viii) shall not exceed 10% of EBITDA (calculated prior to such addback), in each case in the aggregate for any period of four consecutive fiscal quarters, (ix) run-rate synergies expected to be achieved within 12 months following the end of such period due to any Consolidated Company Investment as a result of specified actions taken or expected in good faith to be taken (calculated on a pro forma basis as though such synergies had been realized on the first day of such period) and not already included in EBITDA; provided that (A) the aggregate initial estimated run-rate synergies for any Consolidated Company Investment with respect to which an add-back is made pursuant to this clause (ix) during any period of four consecutive fiscal quarters shall not exceed 10% of EBITDA (calculated prior to such addback) and (B) the aggregate add-back that may be made pursuant to this clause (ix) in respect of the expected run-rate synergies for any Consolidated Company Investment shall not exceed, for the four consecutive fiscal quarter period ending (v) on the last day of the first fiscal quarter ending after the date of such Consolidated Company Investment, 100% of the initial estimated run-rate synergies thereof (or such lesser amount necessary to comply with the immediately preceding clause (A)), (w) on the last day of the second fiscal quarter ending after the date of such Consolidated Company Investment, 75% of the initial estimated run-rate synergies thereof (or such lesser amount necessary to comply with the immediately preceding clause (A)), (x) on the last day of the third fiscal quarter ending after the date of such Consolidated Company Investment, 50% of the initial estimated run-rate synergies thereof (or such lesser amount necessary to comply with the immediately preceding clause (A)), (y) on the last day of the fourth fiscal quarter ending after the date of such Consolidated Company Investment, 25% of the initial estimated run-rate synergies thereof (or such lesser amount necessary to comply with the immediately preceding clause (A)), and (z) on the last day of each subsequent fiscal quarter, 0% of the initial estimate run-rate synergies thereof and (C) such synergies are reasonably identifiable, factually supportable and certified by the chief executive officer or the chief financial officer of the Parent and acceptable to the Administrative Agent (not to be unreasonably withheld) (it is understood and agreed that “run-rate” means the full recurring benefit for a period that is associated with any action taken or expected to be taken provided that such benefit is expected to be realized within 12 months of taking such action), (x) all non-recurring cash expenses taken in respect of any multi-employer and defined benefit pension plan obligations (without duplication) that are related to plant and other facilities closures (whether complete or partial), (xi) business interruption insurance items and other expenses, in each case during such period that the Parent believes, in good faith, shall be reimbursed by a third party (including through insurance or indemnity payments) not later than 365 days after the last day of the fiscal quarter for which an add back is first taken under this clause (xi) for such item or expense (provided that, if such item or expense has not been reimbursed, in whole or in part, on or prior to such 365th day, then EBITDA for the period next ending after such 365th day shall be reduced by an amount equal to the excess of the add-back taken for such item or expense pursuant to this clause (xi) over the amount, if any, that is reimbursed with respect to such item or expense on or prior to such 365th day), and (xii) all sale discounts given in connection with sales of accounts receivables and/or inventory, plus (b) cash distributions of earnings of Unrestricted Subsidiaries made to a Consolidated Company to the extent previously excluded in the determination of Consolidated Net Income by virtue of clause (i) of the definition of Consolidated Net Income, minus (c) the following (without duplication) to the extent added in determining such Consolidated
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Net Income, in each case as determined for the Consolidated Companies in accordance with GAAP for the applicable period: all non-cash gains (other than any such non-cash gains (i) in respect of which cash was received in a prior period or will be received in a future period and (ii) that represent the reversal of any accrual in a prior period for, or the reversal of any cash reserves established in any prior period for, anticipated cash charges). EBITDA (after giving effect to the Combination) shall be $545 million, $629 million and $739 million for the fiscal quarters ended March 31, 2015, December 31, 2014 and September 30, 2014, respectively.
“EEA Financial Institution” means (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with is parent.
“EEA Member Country” means any of the member states of the European Union, Iceland, Liechtenstein, and Norway.
“EEA Resolution Authority” means any public administrative authority or any person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.
“Eligible Assignee” means (a) a Lender, (b) an Affiliate of a Lender, (c) an Approved Fund and (d) any other Person (other than (i) a natural person or (ii) a Disqualified Institution to the extent that the list of Disqualified Institutions has been provided to the Lenders at the Parent’s request); provided that notwithstanding the foregoing, “Eligible Assignee” shall not include any Credit Party or any of the Credit Party’s Affiliates or Subsidiaries.
“Environment” means indoor air, ambient air, surface water, groundwater, drinking water, land surface, subsurface strata, and natural resources such as wetlands, flora and fauna.
“Environmental Laws” means any and all applicable foreign, federal, state, provincial, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirement of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the Environment, as now or is at any relevant time in effect during the term of this Credit Agreement.
“Equity Capitalization” means as of the date of its determination, consolidated shareholders’ equity of the Parent and its consolidated Subsidiaries, as determined in accordance with GAAP.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto, as interpreted by the rules and regulations thereunder, all as the same may be in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections.
“ERISA Affiliate” means an entity which is under common control with any Credit Party within the meaning of Section 4001(a)(14) of ERISA, or is a member of a group which includes any Credit Party and which is treated as a single employer under subsection (b) or (c) of Section 414 of the Code.
“ERISA Event” means (a) a Reportable Event with respect to a Pension Plan; (b) with respect to any Pension Plan, the failure to satisfy the minimum funding standard under Section 412 of the Code and
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Section 302 of ERISA, whether or not waived; (c) a withdrawal by the Parent or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (d) a complete or partial withdrawal, within the meaning of Section 4203 or 4205 of ERISA, by the Parent or any ERISA Affiliate from a Multiemployer Plan or the receipt by any Credit Party or any ERISA Affiliate of notification that a Multiemployer Plan is insolvent or in reorganization, within the meaning of Title IV of ERISA or in “endangered” or “critical” status, within the meaning of Section 432 of the Code or Section 305 of ERISA ; (e) the filing of a notice with the PBGC of intent to terminate a Pension Plan in a distress termination described in Section 4041(c) of ERISA or the commencement of proceedings by the PBGC to terminate or to appoint a trustee to administer a Pension Plan; or (f) the imposition of any liability under Title IV of ERISA with respect to the termination of any Pension Plan upon the Parent or any ERISA Affiliate.
“EU Bail-In Legislation Schedule” means the EU Bail-In Legislation Schedule published by the Loan Market Association (or any successor person), as in effect from time to time.
“Eurodollar Reserve Percentage” means for any day, the percentage which is in effect for such day as prescribed by the Federal Reserve Board (or any successor) for determining the maximum reserve requirement (including any basic, supplemental or emergency reserves) in respect of eurocurrency liabilities, as defined in Regulation D of such Board as in effect from time to time, or any similar category of liabilities for a member bank of the Federal Reserve System in New York City.
“Event of Default” has the meaning set forth in Section 7.1.
“Exchange Act” means Securities Exchange Act of 1934, as amended.
“Excluded Swap Obligation” means, with respect to any Guarantor, any Swap Obligation if, and to the extent that, all or a portion of the Guaranty of such Guarantor of such Swap Obligation (or any Guaranty thereof) is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such Guarantor’s failure for any reason to constitute an “eligible contract participant” as defined in the Commodity Exchange Act and the regulations thereunder at the time the Guaranty of such Guarantor becomes effective with respect to such Swap Obligation. If a Swap Obligation arises under a master agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to swaps for which such Guaranty is or becomes illegal.
“Excluded Taxes” means, with respect to the Administrative Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of any Credit Party hereunder or under any other Credit Document, (i) any Tax on such recipient’s net income or profits (or franchise Tax or branch profits Tax), in each case (a) imposed by a jurisdiction as a result of such recipient being organized or having its principal office or applicable lending office in such jurisdiction or (b) that is an Other Connection Tax, (ii) solely with respect to any Loans or advances to the Borrower, any U.S. federal withholding Tax imposed on amounts payable to a Lender (other than any Lender becoming a party hereto pursuant to a request under Section 2.23) with respect to an applicable interest in a Loan or Commitment pursuant to a law in effect on the date on which (A) such Lender acquired such interest in the applicable Commitment or, if such Lender did not fund the applicable Loan pursuant to a prior Commitment, on the date such Lender acquired its interest in such Loan or (B) such Lender designates a new lending office, except in each case to the extent that amounts with respect to such Taxes were payable under Section 2.21 either to such Lender’s assignor immediately before such Lender acquired the applicable interest in a Loan or Commitment or such Lender immediately before it changed its lending office, (iii) any withholding Taxes attributable to a Lender’s failure to comply with Section 2.21(d) and (iv) any Tax imposed under FATCA.
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“Existing Credit Agreements” means the Existing RockTenn Credit Agreement and the Existing MWV Credit Agreement.
“Existing MWV Credit Agreement” means the Credit Agreement dated as of January 30, 2012 (as amended, supplemented or otherwise modified from time to time), among MWV, MeadWestvaco Coated Board, LLC and the other entities from time to time party thereto as borrowers, the lenders from time to time party thereto, Citibank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and Barclays Bank plc, The Bank of Tokyo-Mitsubishi UFJ, Ltd. and UBS Loan Finance LLC, as documentation agents.
“Existing MWV Notes” means, collectively, the notes of MWV set forth on Schedule 1.1(a)(i).
“Existing RockTenn Credit Agreement” means the Amended and Restated Credit Agreement dated as of May 27, 2011, and amended and restated as of September 27, 2012 (as amended, supplemented or otherwise modified from time to time), among RockTenn, the Canadian Borrower (formerly, Rock-Tenn Company of Canada/Compagnie Rock-Tenn du Canada), the guarantors from time to time party thereto, the lenders from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent, and Bank of America, N.A., acting through its Canada branch, as Canadian administrative agent.
“Existing RockTenn Senior Notes” means, collectively, the notes of RockTenn set forth on Schedule 1.1(a)(ii).
“Existing Senior Notes” means, collectively, the Existing MWV Notes and the Existing RockTenn Senior Notes.
“Extension of Credit” means, as to any Lender, the making of a Loan by such Lender.
“Farm Credit Equity Documents” has the meaning given such term in Section 9.199.20(a).
“Farm Credit Equities” has the meaning specified in Section 9.199.20(a).
“Farm Credit Lender” means a federally chartered Farm Credit System lending institution organized under the Farm Credit Act of 1971.
“FATCA” means Sections 1471 through 1474 of the Code as of the Closing Date (and any amended or successor version that is substantively comparable and not materially more onerous to comply with), and any current or future Treasury regulations or other official administrative interpretations thereof, any agreements entered into pursuant to current Section 1471(b)(1) of the Code (and any amended or successor version described above) and any intergovernmental agreements implementing the foregoing.
“Federal Funds Rate” means, for any day, the rate of interest per annum (rounded upwards, if necessary, to the nearest whole multiple of 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System of the United States arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (i) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day and (ii) if no such rate is so published on such next preceding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to the Administrative Agent on such day on such transactions as reasonably determined by the Administrative Agent. Notwithstanding the foregoing, if the Federal Funds Rate shall be less than zero, such rate shall be deemed to be zero for purposes of this Agreement.
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“Fee Letter” means the Fee Letter dated as of April 28, 2015, among RockTenn and CoBank, as amended, restated, modified or supplemented from time to time.
“Fees” means all fees payable pursuant to Section 2.13.
“Foreign Plan” means each employee benefit plan (within the meaning of Section 3(3) of ERISA, whether or not subject to ERISA) maintained or contributed to by any Credit Party or any of its Subsidiaries or in respect of which any Credit Party or any of its Subsidiaries is obligated to make contributions, in each case, for the benefit of employees of any Credit Party or any of its Subsidiaries other than those employed within the United States, other than a plan maintained exclusively by a Governmental Authority.
“Foreign Plan Event” means, with respect to any Foreign Plan, (A) the failure to make or, if applicable, accrue in accordance with applicable accounting practices, any employer or employee contributions required by applicable law or by the terms of such Foreign Plan; (B) the failure to register or loss of good standing with applicable regulatory or tax authorities of any such Foreign Plan required to be registered or registered to maintain advantageous tax status; or (C) the failure of any Foreign Plan to comply with any provisions of applicable law and regulations or with the material terms of such Foreign Plan.
“Foreign Subsidiary” means any Subsidiary that is not a Domestic Subsidiary.
“Fund” means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.
“Funded Debt” means, with respect to any Person, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (iii) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person (other than customary reservations or retentions of title under agreements with suppliers entered into in the ordinary course of business), (iv) all obligations of such Person incurred, issued or assumed as the deferred purchase price of property or services purchased by such Person (other than trade debt and other accrued obligations incurred in the ordinary course of business and due within six (6) months of the incurrence thereof) that would appear as liabilities on a balance sheet of such Person, (v) the principal portion of all obligations of such Person under Capital Leases, (vi) the maximum amount of all letters of credit issued or bankers’ acceptances facilities created for the account of such Person (other than letters of credit issued for the account of such Person in support of industrial revenue or development bonds that are already included as Indebtedness of such Person under clause (ii) above) and, without duplication, all drafts drawn thereunder (to the extent unreimbursed), (vii) all preferred Capital Stock or other equity interests issued by such Person and which by the terms thereof could be (at the request of the holders thereof or otherwise) subject to (A) mandatory sinking fund payments prior to the date six (6) months after the Latest Maturity Date, (B) redemption prior to the date six (6) months after the Latest Maturity Date or (C) other acceleration prior to the date six (6) months after the Latest Maturity Date, (viii) the principal balance outstanding under any Synthetic Lease, (ix) all Indebtedness of others of the type described in clauses (i) through (viii) hereof (which, for purposes of clarity, will not include any of the items described in clause (A)(I) through (A)(IXXI) below) secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on, or payable out of the proceeds of production from, property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed and (x) all Guaranty Obligations of such Person with respect to Indebtedness of another Person of the type described in clauses (i) through (ix) hereof (which, for purposes of clarity, will not include any of the items described in clause (A)(I) through (A)(IXXI) below); provided, however, that (A) in the case of the Consolidated Companies, Funded Debt
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shall not include (I) intercorporate obligations solely among the Consolidated Companies, (II) lease obligations pledged as collateral to secure industrial development bonds, (III) hedge adjustments resulting from terminated fair value interest rate derivatives, (IV) Indebtedness that is non-recourse to such Person under the laws of the applicable jurisdiction (except for Standard Securitization Undertakings), including installment notes issued in timber transactions in the ordinary course of business of the Consolidated Companies, (V) guarantees of the debt of suppliers and vendors incurred in the ordinary course of business of the Consolidated Companies to the extent that the obligations thereunder do not exceed, in the aggregate, $35,000,000, (VI) trade payables re-characterized as Indebtedness in accordance with GAAP under travel and expense reimbursement cards, procurement cards, supply chain finance and similar programs to the extent that the obligations thereunder are satisfied within 180 days of their incurrence under the applicable program, (VII) any obligation in respect of earn-outs, purchase price adjustments or similar acquisition consideration arrangements except to the extent such obligation is no longer contingent and appears as a liability on the balance sheet of the Consolidated Companies in accordance with GAAP, (VIII) any industrial development bonds or similar instruments with respect to which both the debtor and the investor are Consolidated Companies and, (IX) any industrial revenue or development bonds that have been redeemed, repurchased or defeased by the Consolidated Companies or otherwise (and any other Indebtedness, including Guarantee Obligations, in respect of such bonds), (X) the portion of any industrial revenue or development bonds that have been cash collateralized (and any other Indebtedness, including Guarantee Obligations, in respect of such portion of such bonds) (it being understood and agreed that the carveout in this clause (X) shall include the aggregate principal amount of the Collateralized Bonds that is outstanding as of the effective date of Amendment No. 1 to this Agreement (and any other Indebtedness, including Guarantee Obligations, in respect of such bonds)) and (XI) obligations with respect to insurance policy loans to the extent offset by the assets of the applicable insurance policies, (B) the Funded Debt of any Person shall include the Funded Debt of any other entity that is not a Consolidated Company (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Funded Debt expressly provide that such Person is not liable therefor and (C) with respect to any Funded Debt of any Consolidated Company that is a partnership or Joint Venture, the Funded Debt of such partnership or Joint Venture shall be limited to the product of the Ownership Share of the Credit Parties and their Restricted Subsidiaries in such partnership or Joint Venture multiplied by the principal amount of such Funded Debt, unless a larger amount of such Funded Debt is recourse to a Credit Party or any Restricted Subsidiary (in which event such larger amount of such Funded Debt shall constitute Funded Debt).
“GAAP” means generally accepted accounting principles in the United States applied on a consistent basis and subject to the terms of Section 1.3.
“Government Acts” has the meaning set forth in Section 2.22(a).
“Governmental Authority” means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).
“Guaranteed Cash Management Agreement” means any Cash Management Agreement that is entered into by and between any Credit Party and any Cash Management Bank, as amended, restated, amended and restated, modified, supplemented or extended from time to time.
“Guaranteed Hedging Agreement” means any Hedging Agreement between a Credit Party and a Hedging Agreement Provider, as amended, restated, amended and restated, modified, supplemented or extended from time to time.
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“Guarantors” means the Initial Guarantors and any Additional Credit Party.
“Guaranty” means the guaranty of the Guarantors set forth in Article X.
“Guaranty Obligations” means, with respect to any Person, without duplication, any obligations of such Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or intended to guarantee any Indebtedness of any other Person in any manner, whether direct or indirect, and including any obligation, whether or not contingent, (i) to purchase any such Indebtedness or any property constituting security therefor, (ii) to advance or provide funds or other support for the payment or purchase of any such Indebtedness or to maintain working capital, solvency or other balance sheet condition of such other Person (including keep well agreements, maintenance agreements, comfort letters or similar agreements or arrangements) for the benefit of any holder of Indebtedness of such other Person, (iii) to lease or purchase Property, securities or services primarily for the purpose of assuring the holder of such Indebtedness, or (iv) to otherwise assure or hold harmless the holder of such Indebtedness against loss in respect thereof. The amount of any Guaranty Obligation hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Guaranty Obligation is made.
“Hazardous Substances” means any substance, waste, chemical, pollutant or contaminant, material or compound in any form, including petroleum, crude oil or any fraction thereof, asbestos or asbestos containing materials, or polychlorinated biphenyls, that is regulated pursuant to any Environmental Law.
“Hedging Agreement Provider” means any Person that (i) to the extent it is not a Lender, has provided the Administrative Agent with a fully executed Designation Notice, substantially in the form of Exhibit D and (ii) enters into a Hedging Agreement with a Credit Party or any of its Subsidiaries that is permitted by Section 6.3 to the extent that (a) such Person is a Lender, the Administrative Agent, an Affiliate of a Lender or the Administrative Agent or any other Person that was a Lender or the Administrative Agent (or an Affiliate of a Lender or the Administrative Agent) at the time it entered into the Hedging Agreement but has ceased to be a Lender or the Administrative Agent (or whose Affiliate has ceased to be a Lender or the Administrative Agent) under the Credit Agreement or (b) such Person is a Lender, the Administrative Agent or an Affiliate of a Lender or the Administrative Agent on the Closing Date and the Hedging Agreement to which such Person is a party was entered into on or prior to the Closing Date (even if such Person ceases to be a Lender or the Administrative Agent or such Person’s Affiliate ceased to be a Lender or the Administrative Agent); provided, in the case of a Guaranteed Hedging Agreement with a Person who is no longer a Lender, such Person shall be considered a Hedging Agreement Provider only through the stated maturity date (without extension or renewal or increase in notional amount) of such Guaranteed Hedging Agreement.
“Hedging Agreements” means, with respect to any Person, any agreement entered into to protect such Person against fluctuations in interest rates, or currency or raw materials values, including any interest rate swap, cap or collar agreement or similar arrangement between such Person and one or more counterparties, any foreign currency exchange agreement, currency protection agreements, commodity purchase or option agreements or other interest or exchange rate or commodity price hedging agreements, but excluding (i) any purchase, sale or option agreement relating to commodities used in the ordinary course of such Person’s business and (ii) any agreement existing as of the Closing Date or entered into after the Closing Date in accordance with the historical practices of the Consolidated Companies related to the fiber trading and fiber brokerage business of such Persons.
“Identified Institutions” has the meaning set forth in the definition of “Disqualified Institutions”.
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“Immaterial Subsidiary” means any Restricted Subsidiary (other than a Borrower) where (a) the Consolidated Net Tangible Assets of such Restricted Subsidiary are less than 5.0% of the Consolidated Net Tangible Assets of the Consolidated Companies as of the end of the most recent full fiscal quarter for which internal financial statements are available immediately preceding the date of determination and (b) the EBITDA of such Restricted Subsidiary is less than 5.0% of the EBITDA of the Consolidated Companies as of the end of the four most recent full fiscal quarters, treated as one period, for which internal financial statements are available immediately preceding the date of determination, in each of the foregoing cases (a) and (b), determined in accordance with GAAP; provided that Immaterial Subsidiaries may not in the aggregate have (x) Consolidated Net Tangible Assets constituting in excess of 15.0% of the Consolidated Net Tangible Assets of the Consolidated Companies as of the end of the most recent full fiscal quarter for which internal financial statements are available immediately preceding the date of determination or (y) EBITDA constituting in excess of 15.0% of the EBITDA of the Consolidated Companies as of the end of the four most recent full fiscal quarters, treated as one period, for which internal financial statements are available immediately preceding the date of determination, in each of the foregoing clauses (x) and (y), determined in accordance with GAAP (and, in the event that the Consolidated Net Tangible Assets and/or the EBITDA of all Immaterial Subsidiaries exceed the thresholds specified in the foregoing clauses (x) and (y), as applicable, one or more of the Restricted Subsidiaries that would otherwise have qualified as Immaterial Subsidiaries shall be deemed to be Material Subsidiaries in descending order based on the amounts of their respective Consolidated Net Tangible Assets or EBITDA, as the case may be, until such excess has been eliminated).
“Increased Amount Date” has the meaning assigned thereto in Section 2.26(a).
“Incremental Term Loan” has the meaning assigned thereto in Section 2.26(a)(i).
“Incremental Term Loan Lender” means a Lender with an Incremental Term Loan Commitment or an outstanding Incremental Term Loan.
“Incremental Term Loan Commitment” has the meaning assigned thereto in Section 2.26(a)(i).
“Incremental Term Loan Note” or “Incremental Term Loan Notes” means the promissory notes of the Borrowers in favor of each of the Incremental Term Loan Lenders that requests a promissory note evidencing the portion of the Incremental Term Loans provided pursuant to Section 2.26, individually or collectively, as appropriate, as such promissory notes may be amended, modified, restated, supplemented, extended, renewed or replaced from time to time.
“Indebtedness” means, with respect to any Person, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (iii) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person (other than customary reservations or retentions of title under agreements with suppliers entered into in the ordinary course of business), (iv) all obligations of such Person issued or assumed as the deferred purchase price of property or services purchased by such Person (other than trade debt and other accrued obligations incurred in the ordinary course of business and due within six (6) months of the incurrence thereof) that would appear as liabilities on a balance sheet of such Person, (v) all obligations of such Person under take-or-pay or similar arrangements or under commodities agreements (excluding (a) any purchase, sale or option agreement relating to commodities used in the ordinary course of such Person’s business and (b) any agreement existing as of the Closing Date or entered into after the Closing Date in the ordinary course of business of the Credit Parties and the Restricted Subsidiaries related to the fiber trading and fiber brokerage businesses (other than any agreement entered into for speculative purposes) of such Persons), (vi) all Indebtedness of others (which, for purposes of clarity, will not include any of the items described in clause (A)(I) through (A)(IXXI) below) secured by
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(or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on, or payable out of the proceeds of production from, property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed; provided that so long as such Indebtedness is non-recourse to such Person, only the portion of such obligations which is secured shall constitute Indebtedness hereunder, (vii) all Guaranty Obligations of such Person with respect to Indebtedness of another Person (which, for purposes of clarity, will not include any of the items described in clause (A)(I) through (A)(IXXI) below), (viii) the principal portion of all obligations of such Person under Capital Leases plus any accrued interest thereon, (ix) all obligations of such Person under Hedging Agreements to the extent required to be accounted for as a liability under GAAP, excluding any portion thereof which would be accounted for as interest expense under GAAP, (x) the maximum amount of all letters of credit issued or bankers’ acceptances facilities created for the account of such Person and, without duplication, all drafts drawn thereunder (to the extent unreimbursed), (xi) all preferred Capital Stock or other equity interests issued by such Person and which by the terms thereof could be (at the request of the holders thereof or otherwise) subject to (A) mandatory sinking fund payments prior to the date six (6) months after the Latest Maturity Date, (B) redemption prior to the date six (6) months after the Latest Maturity Date or (C) other acceleration prior to the date six (6) months after the Latest Maturity Date and (xii) the principal balance outstanding under any Synthetic Lease plus any accrued interest thereon; provided, however, that (A) in the case of the Consolidated Companies, Indebtedness shall not include (I) intercorporate obligations solely among the Consolidated Companies, (II) lease obligations pledged as collateral to secure industrial development bonds, (III) hedge adjustments resulting from terminated fair value interest rate derivatives, (IV) non-recourse installment notes issued in timber transactions in the ordinary course of business of the Consolidated Companies, (V) guarantees of the debt of suppliers and vendors incurred in the ordinary course of business of the Consolidated Companies to the extent that the obligations thereunder do not exceed, in the aggregate, $35,000,000, (VI) trade payables re-characterized as Indebtedness in accordance with GAAP under travel and expense reimbursement cards, procurement cards, supply chain finance and similar programs to the extent that the obligations thereunder are satisfied within 180 days of their incurrence under the applicable program, (VII) any obligations in respect of earn-outs, purchase price adjustments or similar acquisition consideration arrangements except to the extent such obligation is no longer contingent and appears as a liability on the balance sheet of the Consolidated Companies in accordance with GAAP, (VIII) any industrial development bonds or similar instruments with respect to which both the debtor and the investor are Consolidated Companies and, (IX) any industrial revenue or development bonds that have been redeemed, repurchased or defeased by the Consolidated Companies or otherwise (and any other Indebtedness, including Guarantee Obligations, in respect of such bonds), (X) the portion of any industrial revenue or development bonds that have been cash collateralized (and any other Indebtedness, including Guarantee Obligations, in respect of such portion of such bonds) (it being understood and agreed that the carveout in this clause (X) shall include the aggregate principal amount of the Collateralized Bonds that is outstanding as of the effective date of Amendment No. 1 to this Agreement (and any other Indebtedness, including Guarantee Obligations, in respect of such bonds)) and (XI) obligations with respect to insurance policy loans to the extent offset by the assets of the applicable insurance policies, (B) the Indebtedness of any Person shall include the Indebtedness of any other entity that is not a Consolidated Company (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness expressly provide that such Person is not liable therefor and (C) with respect to any Indebtedness of any Consolidated Company that is a partnership or Joint Venture, the Indebtedness of such partnership or Joint Venture shall be limited to the product of the Ownership Share of the Credit Parties and their Restricted Subsidiaries in such partnership or Joint Venture multiplied by the principal amount of such Indebtedness, unless a larger amount of such Indebtedness is recourse to a Credit Party or any Restricted Subsidiary (in which event such larger amount of such Indebtedness shall constitute Indebtedness).
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“Indemnified Taxes” means (a) all Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of any Credit Party under any Credit Document and (b) to the extent not otherwise described in (a), Other Taxes.
“Indemnitee” has the meaning set forth in Section 9.5(b).
“Information” has the meaning set forth in Section 9.14.
“Information Materials” has the meaning set forth in Section 5.7.
“Initial Guarantors” has the meaning set forth in the introductory paragraph hereof.
“Intellectual Property” means all Copyrights, Copyright Licenses, Patents, Patent Licenses, Trademarks and Trademark Licenses.
“Intercompany Debt” has the meaning set forth in Section 9.18.
“Interest Determination Date” has the meaning set forth in the definition of “Applicable Percentage”.
“Interest Expense” means, with respect to any Person for any period, the sum of the amount of interest paid or accrued in respect of such period.
“Interest Payment Date” means (a) as to any Base Rate Loan, the last day of each March, June, September and December and the Maturity Date, (b) as to any LIBOR Rate Loan having an Interest Period of three (3) months or less, the last day of such Interest Period, and (c) as to any LIBOR Rate Loan having an Interest Period longer than three (3) months, each day which is three (3) months after the first day of such Interest Period and the last day of such Interest Period.
“Interest Period” means, as to any LIBOR Rate Loan, a period of one (1), two (2), three (3) or six (6) months duration (or any other period if agreed to by each applicable Lender), as the Borrowers may elect, commencing in each case, on the date of the borrowing (including conversions, extensions and renewals); provided, however, (i) if any Interest Period would end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day (except that in the case of LIBOR Rate Loans where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day), (ii) no Interest Period shall extend beyond the Maturity Date and (iii) in the case of LIBOR Rate Loans, where an Interest Period begins on a day for which there is no numerically corresponding day in the calendar month in which the Interest Period is to end, such Interest Period shall end on the last day of such calendar month; provided, however, (A) if the Borrowers shall fail to give notice as provided above, the Borrowers shall be deemed to have selected a Base Rate Loan and (B) no more than twelve (12) LIBOR Rate Loans may be in effect at any time. For purposes hereof, LIBOR Rate Loans with different Interest Periods shall be considered as separate LIBOR Rate Loans, even if they shall begin on the same date, although borrowings, extensions and conversions may, in accordance with the provisions hereof, be combined at the end of existing Interest Periods to constitute a new LIBOR Rate Loan with a single Interest Period.
“Investment” means, as to any Person, any direct or indirect acquisition or investment by such Person, whether by means of (a) the purchase or other acquisition of capital stock or other securities of another Person or (b) the purchase or other acquisition (in one transaction or a series of transactions) of assets of another Person that constitute a business unit.
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“Investment Purpose” means the financing (or refinancing) of investments by any Credit Party that satisfy both of the following criteria: (a) such investments are (or were) made in order to allow existing mills of any Borrower to (i) utilize waste and waste product (including mixed paper post-consumer materials and old corrugated containers) as inputs for their operations or (ii) generate electric power from renewable energy sources (namely, energy conversion systems fueled by biomass) and to use the renewable power generated by the mills for their operations and (b) such investments are (or were) made in mills that are located in rural areas with populations of no more than 20,000.
“IRS” means the United States Internal Revenue Service.
“Joinder Agreement” means a Joinder Agreement in substantially the form of Exhibit H, executed and delivered by each Person who becomes a Guarantor in accordance with the provisions of Section 5.10.
“Joint Venture” means, with respect to any Person, any corporation or other entity (including limited liability companies, partnerships, joint ventures, and associations) regardless of its jurisdiction of organization or formation, of which some but less than 100% of the total combined voting power of all classes of Voting Stock or other ownership interests, at the time as of which any determination is being made, is owned by such Person, either directly or indirectly through one or more Subsidiaries of such Person.
“Known Affiliates” has the meaning set forth in the definition of “Disqualified Institutions”.
“Latest Maturing Loan” means the Term Loan incurred and outstanding under this Credit Agreement with the Latest Maturity Date.
“Latest Maturity Date” means the latest maturity date of any Term Loan incurred and outstanding under this Credit Agreement at any given time after giving effect to any renewal, refinancing, refunding or extension of Loans incurred or outstanding pursuant to this Credit Agreement.
“Lead Arranger” means CoBank in its capacity as the sole lead arranger with respect to this Agreement.
“Lender Joinder Agreement” means a joinder agreement in form and substance reasonably satisfactory to the Administrative Agent delivered in connection with Section 2.26.
“Lender Participation Notice” means a Lender Participation Notice substantially in the form of Exhibit K.
“Lenders” means each of the Persons identified as a “Lender” on the signature pages hereto, and their respective successors and assigns and any Incremental Term Loan Lender.
“Lending Office” means initially, the office of each Lender designated as such Lender’s Lending Office shown on Schedule 9.2; and thereafter, such other office of such Lender as such Lender may from time to time specify to the Administrative Agent and the Parent as the office of such Lender at which Loans of such Lender are to be made.
“Leverage Ratio” means, as of any date of determination, the ratio of (a)(i) Total Funded Debt as of such date minus (ii) the aggregate amount of cash on the consolidated balance sheet of the Parent and its Restricted Subsidiaries attributable to the net proceeds of an issuance or incurrence of Indebtedness that constitutes Refinancing Indebtedness in respect of existing Indebtedness maturing within 180 days of such issuance or incurrence, to (b) EBITDA for the period of the four prior fiscal quarters ending on such date.
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“LIBOR” means for any LIBOR Rate Loan made to the Borrowers for any Interest Period therefor, the rate per annum reported by Bloomberg Information Services (or any successor or substitute service comparable thereto, as determined by the Administrative Agent from time to time, that provides quotations of interest rates applicable to U.S. Dollar deposits in the London interbank market) as the London interbank offered rate for deposits in U.S. Dollars at approximately 11:00 a.m. (London time) two (2) London Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period.
Notwithstanding the foregoing, in no event shall LIBOR be less than 0.00% per annum.
“LIBOR Rate” means a rate per annum determined by the Administrative Agent pursuant to the following formula:
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LIBOR Rate = |
LIBOR |
|
|
1.00 - Eurodollar Reserve Percentage |
“LIBOR Rate Loan” means any Loan bearing interest at a rate determined by reference to the LIBOR Rate.
“License” has the meaning set forth in Section 5.6(c).
“Lien” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, security interest, encumbrance, lien (statutory or otherwise), preference, priority or charge of any kind in the nature of a security interest (including any conditional sale or other title retention agreement and any lease in the nature thereof).
“Loan” or “Loans” means a Closing Date Term Loan or an Incremental Term Loan, as appropriate.
“London Business Day” means a day other than a day on which banks in London, England are not open for dealings in deposits of U.S. Dollars in the London interbank market.
“Material Adverse Effect” means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, liabilities or financial condition of the Parent and its Restricted Subsidiaries taken as a whole; (b) a material impairment of the ability of the Credit Parties, taken as a whole, to perform their obligations under any Credit Document; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Credit Parties, taken as a whole, of the Credit Documents.
“Material Contract” means any contract or other arrangement to which the Parent or any of its Subsidiaries is a party that is required to be filed with the SEC.
“Material Subsidiary” means each Restricted Subsidiary that is not an Immaterial Subsidiary.
“Maturity Date” means the date that is seven (7) years after the Closing Date.
“MNPI” has the meaning specified in Section 2.11(c)(i).
“Moody’s” means Moody’s Investors Service, Inc., or any successor or assignee of the business of such company in the business of rating securities.
“Multiemployer Plan” means any employee benefit plan of the type defined in Section 3(37) of ERISA or described in Section 4001(a)(3) of ERISA and that is subject to ERISA, to which the Parent or
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any ERISA Affiliate makes or is obligated to make contributions, or during the preceding five (5) plan years, has made or been obligated to make contributions.
“MWV” has the meaning set forth in the introductory paragraph hereof.
“MWV Merger” means the merger of MWV and Milan Merger Sub, Inc., a Delaware corporation, pursuant to the Combination Agreement, pursuant to which MWV will be the surviving corporation.
“MWV SPE Assets” means the Timber Note assets held by MeadWestvaco Timber Note Holding Co. II, LLC, MeadWestvaco Timber Note Holding LLC or any other Restricted Subsidiary.
“MWV Virginia” has the meaning set forth in the introductory paragraph hereof.
“Non-Core MWV Businesses” means each of (a) the Specialty Chemicals business of MWV and (b) Community Development and Land Management business of MWV.
“Note” or “Notes” means the Closing Date Term Loan Notes and/or the Incremental Term Loan Notes, collectively, separately or individually, as appropriate.
“Notice of Borrowing” means a request for the Closing Date Term Loan pursuant to Section 2.4. A Form of Notice of Borrowing is attached as Exhibit B.
“Notice of Conversion/Extension” means the written notice of (i) conversion of a LIBOR Rate Loan to a Base Rate Loan, (ii) conversion of a Base Rate Loan to a LIBOR Rate Loan or (iii) extension of a LIBOR Rate Loan, as appropriate, in each case substantially in the form of Exhibit C.
“OFAC” has the meaning set forth in Section 3.13(a).
“Offered Loans” has the meaning specified in Section 2.11(c)(iii).
“Other Connection Taxes” means, with respect to the Administrative Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of any Credit Party hereunder or under any other Credit Document, Taxes imposed as a result of any present or former connection between such recipient and the jurisdiction imposing such Tax (other than any connection arising solely from such recipient having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to and/or enforced, any Credit Documents).
“Other Parties” has the meaning specified in Section 10.7(c).
“Other Taxes” means all present or future stamp or documentary Taxes or any other excise or property Taxes arising from any payment made hereunder or under any other Credit Document or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Credit Document, except any such Taxes that are Other Connection Taxes imposed with respect to an assignment of Loans (other than an assignment made pursuant to Section 2.23).
“Ownership Share” means, with respect to any Joint Venture, a Credit Party’s or any Restricted Subsidiary’s relative equity ownership (calculated as a percentage) in such Joint Venture determined in accordance with the applicable provisions of the declaration of trust, articles or certificate of incorporation, articles of organization, partnership agreement, joint venture agreement or other applicable organizational document of such Joint Venture.
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“Parent” has the meaning set forth in the introductory paragraph hereof.
“Participant” has the meaning set forth in Section 9.6(d).
“Participant Register” has the meaning set forth in Section 9.6(d).
“Patent License” means all agreements, whether written or oral, providing for the grant by or to a Credit Party of any right to manufacture, use or sell any invention covered by a Patent.
“Patents” means (a) all letters patent of the United States or any other country and all reissues and extensions thereof, and (b) all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof.
“Patriot Act” means the USA Patriot Act, Title III of Pub. L. 107-56, signed into law October 26, 2001.
“PBGC” means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA.
“Pension Plan” means any “employee pension benefit plan” (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by the Parent or any ERISA Affiliate or to which the Parent or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer or other plan described in Section 4064(a) of ERISA, has made contributions at any time during the immediately preceding five (5) plan years.
“Permitted Securitization Entity” means a Person (other than a Permitted Securitization Subsidiary, individual or Governmental Authority) that was established by a financial institution or Affiliate thereof to purchase or otherwise acquire assets for the principal purpose of securitization, and which purchase or acquisition of such assets is funded through the issuance of securities by such Person or by such Person incurring indebtedness; provided that a financial institution or Affiliate of a financial institution that purchases or acquires assets for the principal purpose of securitization shall also be considered a Permitted Securitization Entity.
“Permitted Securitization Subsidiary” means any Subsidiary of the Parent that (i) is directly or indirectly wholly-owned by the Parent, (ii) is formed and operated solely for purposes of a Permitted Securitization Transaction, (iii) is formed to qualify as a “bankruptcy remote” entity, (iv) has organizational documents which limit the permitted activities of such Permitted Securitization Subsidiary to the acquisition of Securitization Assets from the Parent or one or more of its Subsidiaries, the securitization of such Securitization Assets and activities necessary or incidental to the foregoing, (v) if organized within the United States, is organized so as to meet S&P’s requirements for special purpose entities engaged in the securitization of assets, (vi) if organized within Canada or any province or territory thereof, is organized so as to meet the requirements for special purpose entities engaged in the securitization of assets by any recognized rating agency operating in such jurisdiction and (vii) if organized outside the United States and Canada (and any province or territory thereof), is organized so as to meet the requirements for special purpose entities engaged in the securitization of assets by any recognized rating agency operating in such jurisdiction; provided that if no requirements for special purpose entities exist in such jurisdiction, the Parent shall certify to the Administrative Agent that no recognized rating agency is operating in such jurisdiction that customarily rates securitization transactions.
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“Permitted Securitization Transaction” means (a) the transfer by the Parent or one or more of its Restricted Subsidiaries of Securitization Assets to one or more (x) Permitted Securitization Subsidiaries or (y) Permitted Securitization Entities and, in each case, the related financing of such Securitization Assets; provided that, in each case, (i) such transaction is the subject of a favorable legal opinion as to the “true sale” of the applicable Securitization Assets under the laws of the applicable jurisdiction and (ii) such transaction is non-recourse to the Parent and its Restricted Subsidiaries under the laws of the applicable jurisdiction, except for Standard Securitization Undertakings, (b) any credit facility backed or secured by Receivables or any other Securitization Assets of the Consolidated Companies among one or more Consolidated Companies and a financial institution, which credit facility is non-recourse to the Parent and its Restricted Subsidiaries under the laws of the applicable jurisdiction, except for Standard Securitization Undertakings or (c) any other arrangement or agreement in respect of a “true sale” (or any similar concept in the applicable jurisdiction) of Receivables or any other Securitization Assets in accordance with the laws of the United States or any State thereof, Canada, any province or territory of Canada or other applicable jurisdiction.
“Person” means any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise (whether or not incorporated) or any Governmental Authority.
“Plan” means any employee benefit plan (as defined in Section 3(3) of ERISA) which is covered by ERISA and with respect to which any Credit Party or any ERISA Affiliate is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.
“Prime Rate” means a variable rate of interest per annum equal to the “U.S. prime rate” as reported on such day in the Money Rates Section of the Eastern Edition of The Wall Street Journal, or if the Eastern Edition of The Wall Street Journal is not published on such day, such rate as last published in the Eastern Edition of The Wall Street Journal.
“Priority Debt Basket” shall mean, at any time, (I) in the case of Section 6.2(w), (a) an amount equal to 10% of Consolidated Net Tangible Assets as of the last day of the most recently ended fiscal quarter of the Parent, less without duplication (b) (i) solely to the extent in excess of the amount in clause (a) above the aggregate principal amount of Indebtedness incurred under Section 6.3(c) then outstanding plus (ii) the aggregate amount of obligations (or, if applicable, the fair market value of inventory) secured by Liens under Section 6.2(w) then outstanding and (II) in the case of Section 6.3(c), (a) an amount equal to 20% of Consolidated Net Tangible Assets as of the last day of the most recently ended fiscal quarter of the Parent, less without duplication (b) (i) the aggregate principal amount of Indebtedness incurred under Section 6.3(c) then outstanding plus (ii) the aggregate amount of obligations (or, if applicable, the fair market value of inventory) secured by Liens under Section 6.2(w) then outstanding. In the event that any Indebtedness would otherwise count against both the basket in Section 6.3(c) and the basket in Section 6.2(w), such Indebtedness shall be counted, for purposes of calculating the size of the Priority Debt Basket under each of clauses (I) and (II) of this definition, as outstanding only under Section 6.2(w) (and, for purposes of clarity, shall not be counted as outstanding under Section 6.3(c)).
“Private Information” has the meaning set forth in Section 5.7.
“Pro Forma Basis” means, in connection with the calculation as of the applicable Calculation Date (utilizing the principles set forth in Section 1.3(iii)) of the financial covenants set forth in Section 6.1(a) and (b) or the Leverage Ratio in respect of a proposed transaction or designation of a Restricted Subsidiary as an Unrestricted Subsidiary (a “Specified Transaction”), the making of such calculation after giving effect on a pro forma basis to:
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the consummation of such Specified Transaction as of the first day of the applicable Calculation Period;
the assumption, incurrence or issuance of any Indebtedness of a Consolidated Company (including any Person which became a Consolidated Company pursuant to or in connection with such Specified Transaction) in connection with such Specified Transaction, as if such Indebtedness had been assumed, incurred or issued (and the proceeds thereof applied) on the first day of such Calculation Period (with any such Indebtedness bearing interest at a floating rate being deemed to have an implied rate of interest for the applicable period equal to the rate which is or would be in effect with respect to such Indebtedness as of the applicable Calculation Date);
the permanent repayment, retirement or redemption of any Indebtedness (other than revolving Indebtedness, except to the extent accompanied by a permanent commitment reduction) by a Consolidated Company (including any Person which became a Consolidated Company pursuant to or in connection with such Specified Transaction) in connection with such Specified Transaction, as if such Indebtedness had been repaid, retired or redeemed on the first day of such Calculation Period;
other than in connection with such Specified Transaction, any assumption, incurrence or issuance of any Indebtedness by a Consolidated Company after the first day of the applicable Calculation Period, as if such Indebtedness had been assumed, incurred or issued (and the proceeds thereof applied) on the first day of such Calculation Period (with any such Indebtedness so incurred or issued bearing interest at a floating rate being deemed to have an implied rate of interest for the applicable period equal to the rate which is or would be in effect with respect to such Indebtedness as of the applicable Calculation Date, and with any such Indebtedness so assumed bearing interest at a floating rate being calculated using the actual interest rate in effect during such period); and
other than in connection with such Specified Transaction, the permanent repayment, retirement or redemption of any Indebtedness (other than revolving Indebtedness, except to the extent accompanied by a permanent commitment reduction) by a Consolidated Company after the first day of the applicable Calculation Period, as if such Indebtedness had been repaid, retired or redeemed on the first day of such Calculation Period.
“Pro Forma Compliance Certificate” means a certificate of a Responsible Officer of the Parent delivered to the Administrative Agent in connection with a Specified Transaction, such certificate to contain reasonably detailed calculations satisfactory to the Administrative Agent, upon giving effect to the applicable Specified Transaction on a Pro Forma Basis, of the financial covenants set forth in Section 6.1(a) and (b) for the applicable Calculation Period.
“Property” means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible.
“Proposed Discounted Prepayment Amount” has the meaning specified in Section 2.11(c)(ii).
“Pro Rata Additional Borrower” means any Borrower (as defined in the Pro Rata Credit Agreement) other than the Parent.
“Pro Rata Credit Agreement” means the Credit Agreement dated as of July 1, 2015, among the Parent, as parent borrower, RockTenn Company of Canada Holdings Corp./Compagnie de Holdings RockTenn du Canada Corp., as Canadian borrower, the subsidiary borrowers party thereto, RockTenn and
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MWV, as initial guarantors, the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent and multicurrency agent.
“Pro Rata Credit Facilities” means the revolving credit facilities and term loan facilities established pursuant to the Pro Rata Credit Agreement.
“Public Information” has the meaning set forth in Section 5.7.
“Purchasing Borrower Party” means the Parent or any of its Subsidiaries.
“Qualified ECP Guarantor” means, in respect of any Swap Obligation, each Credit Party that has total assets exceeding $10,000,000 at the time the relevant Guaranty becomes effective with respect to such Swap Obligation or such other person as constitutes an “eligible contract participant” under the Commodity Exchange Act or any regulations promulgated thereunder and can cause another person to qualify as an “eligible contract participant” at such time by entering into a keepwell under Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.
“Qualifying Lenders” has the meaning specified in Section 2.11(c)(iv).
“Qualifying Loans” has the meaning specified in Section 2.11(c)(iv).
“Rating” means the Parent’s long-term senior unsecured non-credit-enhanced debt rating as was most recently announced by S&P or Moody’s, as applicable.
“Ratings Level” has the meaning set forth in the definition of “Applicable Percentage”.
“Receivables” has the meaning set forth in the definition of “Securitization Assets”.
“Refinanced Term Loan” has the meaning set forth in Section 9.1.
“Refinancing Indebtedness” means, with respect to any Indebtedness (the “Existing Indebtedness”), any other Indebtedness that renews, refinances, refunds, replaces or extends such Existing Indebtedness (or any Refinancing Indebtedness in respect thereof); provided that the principal amount of such Refinancing Indebtedness shall not exceed the principal amount of such Existing Indebtedness except by an amount no greater than accrued and unpaid interest with respect to such Existing Indebtedness and any reasonable fees, premium and expenses relating to such renewal, refinancing, refunding, replacement or extension, unless at the time such Refinancing Indebtedness is incurred, such excess amount shall be permitted under Section 6.3 and, if applicable, utilize a basket thereunder.
“Register” has the meaning set forth in Section 9.6(c).
“Regulation S-X” has the meaning set forth in Section 3.10(a).
“Regulation T, U or X” means Regulation T, U or X, respectively, of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof.
“Related Parties” means, with respect to any Person, such Person’s Affiliates and the directors, officers, employees, agents, trustees, managers, advisors, representatives and controlling persons of such Person and of such Person’s Affiliates.
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“Release” means any release, spill, emission, discharge, deposit, disposal, leaking, pumping, pouring, dumping, emptying, injection, migrating or leaching into the Environment, or into or from any building or facility.
“Replacement Term Loan” has the meaning set forth in Section 9.1.
“Reportable Event” means any of the events set forth in Section 4043(c) of ERISA, other than events for which the 30-day notice period has been waived by regulation.
“Required Financial Information” means, as to any fiscal quarter or fiscal year of the Parent, the financial information required by subsections (a) through (c) of Section 5.7 for such fiscal quarter or fiscal year, as applicable.
“Required Lenders” means, at any time, Lenders holding in the aggregate more than fifty percent (50%) of the outstanding Term Loans at such time; provided, however, that if any Lender shall be a Defaulting Lender at such time, then there shall be excluded from the determination of Required Lenders, Term Loans owing to such Defaulting Lender.
“Requirement of Law” means, as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its material property.
“Responsible Officer” means any of the Chief Executive Officer, Chief Financial Officer, the Treasurer, the Chief Accounting Officer, or the Controller of the Parent.
“Restricted Subsidiary” means any Subsidiary of the Parent other than any such Subsidiary that is or shall become an Unrestricted Subsidiary as provided herein.
“Rock-Tenn Converting” has the meaning set forth in the introductory paragraph hereof.
“RockTenn” has the meaning set forth in the introductory paragraph hereof.
“RockTenn CP” has the meaning set forth in the introductory paragraph hereof.
“RockTenn Merger” means the merger of RockTenn and Rome Merger Sub, Inc., a Georgia corporation, pursuant to the Combination Agreement, pursuant to which RockTenn will be the surviving corporation.
“S&P” means Standard & Poor’s Ratings Group, a division of McGraw-Hill Financial, Inc., or any successor or assignee of the business of such division in the business of rating securities.
“Sanctioned Entity” means (a) a country or a government of a country, (b) an agency of the government of a country, (c) an organization directly or indirectly controlled by a country or its government, or (d) a person or entity resident in or determined to be resident in a country, that is subject to Sanctions.
“Sanctioned Person” means (a) a person named on the list of Specially Designated Nationals maintained by OFAC, (b) any Person operating, organized or resident in a Sanctioned Entity or (c) any Person owned or controlled by any such Person or Persons described in the foregoing clauses (a) or (b).
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“Sanctions” means all economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by (a) the U.S. government, including those administered by OFAC or the U.S. Department of State, (b) the Canadian government or (c) the United Nations Security Council, the European Union or Her Majesty’s Treasury of the United Kingdom.
“SEC” means the Securities and Exchange Commission, any successor thereto and any analogous Governmental Authority succeeding to any of its principal functions.
“Securities Act” means the Securities Act of 1933, as amended.
“Securitization Assets” means any accounts receivable, notes receivable, rights to future lease payments or residuals (collectively, the “Receivables”) owed to or owned by the Parent or any Subsidiary (whether now existing or arising or acquired in the future), all collateral securing such Receivables, all contracts and contract rights, purchase orders, records, security interests, financing statements or other documentation in respect of such Receivables and all guarantees, letters of credit, insurance or other agreements or arrangements supporting or securing payment in respect of such Receivables, all lockboxes and collection accounts in respect of such Receivables (but only to the extent such lockboxes and collection accounts contain only amounts related to such Receivables subject to a Permitted Securitization Transaction), all collections and proceeds of such Receivables and other assets which are of the type customarily granted or transferred in connection with securitization transactions involving receivables similar to such Receivables.
“Specified Transaction” has the meaning set forth in the definition of Pro Forma Basis set forth in this Section 1.1.
“Standard Securitization Undertakings” means (i) any obligations and undertakings of the Parent or any Restricted Subsidiary on terms and conditions consistent with the sale treatment of Securitization Assets in a transaction that results in a legal “true sale” of Securitization Assets in accordance with the laws of the United States, Canada, any province or territory of Canada or other applicable jurisdiction and (ii) any obligations and undertakings of the Parent or any Restricted Subsidiary not inconsistent with the treatment of the transfer of Securitization Assets in a transaction as a legal “true sale” and otherwise consistent with customary securitization undertakings in accordance with the laws of the United States, Canada, any province or territory of Canada or other applicable jurisdiction; provided that Standard Securitization Undertakings shall not include any guaranty or other obligation of the Parent and its Restricted Subsidiaries with respect to any Securitization Asset that is not collected, not paid or otherwise uncollectible on account of the insolvency, bankruptcy, creditworthiness or financial inability to pay of the applicable obligor with respect to such Securitization Asset.
“Subsidiary” means, as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power to elect a majority of the directors or other managers of such corporation, partnership, limited liability company or other entity (irrespective of whether or not at the time, any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) are at the time owned by such Person directly or indirectly through one or more intermediaries or subsidiaries. Unless otherwise identified, “Subsidiary” or “Subsidiaries” means Subsidiaries of the Parent.
“Successor Borrower” has the meaning set forth in Section 6.4(b).
“Swap Obligation” means, with respect to any Guarantor, any obligation to pay or perform under any agreement, contract or transaction that constitutes a “swap” within the meaning of section 1a(47) of the Commodity Exchange Act.
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“Synthetic Lease” means any synthetic lease, tax retention operating lease or similar off-balance sheet financing product where such transaction is considered borrowed money indebtedness for tax purposes but is classified as an operating lease under GAAP.
“Tax Exempt Certificate” has the meaning set forth in Section 2.21(d).
“Taxes” has the meaning set forth in Section 2.21(a).
“Term Loan Lenders” means, collectively, the Closing Date Term Loan Lenders and the Incremental Term Loan Lenders.
“Term Loan Note” means a Closing Date Term Loan Note and/or an Incremental Term Loan Note, as appropriate.
“Term Loans” means, collectively, Closing Date Term Loans and the Incremental Term Loans, and “Term Loan” means any of such Term Loans.
“Total Funded Debt” means, without duplication, the sum of: (a) Consolidated Funded Debt, (b) with respect to a Permitted Securitization Transaction, (i) if a Permitted Securitization Subsidiary is a party to such Permitted Securitization Transaction, the aggregate principal, stated or invested amount of outstanding loans made to the relevant Permitted Securitization Subsidiary under such Permitted Securitization Transaction and (ii) if a Permitted Securitization Entity is a party to such Permitted Securitization Transaction, the aggregate amount of cash consideration received as of the date of such sale or transfer by the Parent and its Restricted Subsidiaries from the sale or transfer of Receivables or other Securitization Assets during the applicable calendar month in which such sale or transfer took place under such Permitted Securitization Transaction, and (c) to the extent not otherwise included, the outstanding principal balance of Indebtedness under any Permitted Securitization Transaction referenced in clause (b) of the definition thereof.
“Trademark License” means any agreement, written or oral, providing for the grant by or to a Credit Party of any right to use any Trademark.
“Trademarks” means (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade dress and service marks, logos and other source or business identifiers, and the goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and (b) all renewals thereof.
“Transactions” means, collectively, the Combination, the repayment and refinancing of certain existing Indebtedness of RockTenn and MWV in connection with the Combination, the initial borrowings under this Agreement and the payment of fees, commissions and expenses in connection with each of the foregoing.
“Type” means, as to any Loan, its nature as a Base Rate Loan or a LIBOR Rate Loan, as the case may be.
“U.S. Dollars” and “$” means dollars in lawful currency of the United States of America.
“Unrestricted Subsidiary” means (i) any Permitted Securitization Subsidiary, (ii) any Joint Venture that is a Subsidiary and (iii) any Subsidiary which, at the option of the Parent, is designated in writing by
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the Parent to the Administrative Agent as being an Unrestricted Subsidiary; provided that the Parent may designate any such Permitted Securitization Subsidiary or Joint Venture as a Restricted Subsidiary in its discretion. The Parent may designate a Restricted Subsidiary as an Unrestricted Subsidiary at any time so long as (A) no Default or Event of Default is in existence or would be caused by such designation and (B) the Parent supplies to the Administrative Agent a Pro Forma Compliance Certificate demonstrating pro forma compliance with the financial covenants in Section 6.1 after giving effect to such designation.
“Voting Participant” has the meaning set forth in Section 9.6(d).
“Voting Participant Notice” has the meaning set forth in Section 9.6(d).
“Voting Stock” means, with respect to any Person, Capital Stock issued by such Person the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency.
“WestRock Converting” has the meaning set forth in the introductory paragraph hereof.
“WestRock CP” has the meaning set forth in the introductory paragraph hereof.
“WestRock Virginia” has the meaning set forth in the introductory paragraph hereof.
“Wholly-Owned Restricted Subsidiary” means, at any time, any Restricted Subsidiary that is a Wholly-Owned Subsidiary.
“Wholly-Owned Subsidiary” means, at any time, any Subsidiary of which all of the equity interests (except directors’ qualifying shares or shares aggregating less than 1% of the outstanding shares of such Subsidiary which are owned by individuals) and voting interests are owned by any one or more of the Parent and the Parent’s other Wholly-Owned Subsidiaries at such time.
“Write-Down and Conversion Powers” means, with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule.
1.2Computation of Time Periods..
All time references in this Credit Agreement and the other Credit Documents shall be to New York, New York time unless otherwise indicated. For purposes of computation of periods of time hereunder, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding.”
(i)Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP applied on a basis consistent with the most recent audited consolidated financial statements of Parent delivered to the Lenders; provided that, if the Parent shall notify the Administrative Agent that it wishes to amend any covenant in Section 6.1 or the definition of Leverage Ratio (or any component thereof) to eliminate the effect of any change in GAAP on the operation of such covenant or such ratio (or if the Administrative Agent notifies the Parent
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that the Required Lenders wish to amend Section 6.1 or the definition of Leverage Ratio (or any component thereof) for such purpose), then the Parent’s compliance with such covenant shall be determined on the basis of GAAP in effect and as adopted by the Parent on March 31, 2015 (which, for the avoidance of doubt, shall exclude any prospective changes to lease accounting under GAAP), until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Parent and the Required Lenders.
(ii)The Parent shall deliver to the Administrative Agent and each Lender at the same time as the delivery of any Required Financial Information, (a) a description in reasonable detail of any material change in the application of accounting principles employed in the preparation of such financial statements from those applied in the most recently preceding quarterly or annual financial statements as to which no objection shall have been made in accordance with the provisions above and (b) a reasonable estimate of the effect on the financial statements on account of such changes in application (it being understood that the requirement in this subsection (ii) shall be satisfied if the information required by clauses (a) and (b) above are included the applicable Required Financial Information.
(iii)Notwithstanding the above, the parties hereto acknowledge and agree that, for purposes of all calculations made in determining compliance for any applicable period with the financial covenants set forth in Section 6.1 or in determining the Leverage Ratio for any applicable period (including for purposes of the definitions of “Applicable Percentage,” “Consolidated Interest Expense,” “EBITDA,” “Pro Forma Basis” and “Total Funded Debt” set forth in Section 1.1), if any Acquisition or disposition of Property, in each case involving consideration in excess of $50,000,000, occurred during such period, such calculations with respect to such period shall be made on a Pro Forma Basis.
(iv)Notwithstanding anything herein to the contrary, the parties hereto acknowledge and agree that after the Credit Parties’ obligations with respect to a series of debt securities are deemed to be no longer outstanding under an indenture or other operative document governing such debt securities (including due to having paid or irrevocably deposited funds sufficient to pay the entire Indebtedness represented by such debt securities at a given date), (A) such debt securities will thereafter be deemed to be no longer “outstanding” for purposes of all calculations made under this Credit Agreement and (B) any interest expense attributable to such debt securities will thereafter be deemed not to constitute Interest Expense for purposes of all calculations made under this Agreement.
The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The word “will” shall be construed to have the same meaning and effect as the word “shall”. Unless the context requires otherwise or except as expressly provided herein, (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, amended and restated, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any definition of or reference to any statute, rule or regulation shall be construed as referring thereto as from time to time amended, supplemented or otherwise modified (including by succession of comparable successor laws), unless otherwise expressly stated to the contrary, (c) any reference herein to any Person shall be construed to include such Person’s successors and assigns,
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(d) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (e) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (f) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.
(a)Closing Date Term Loan. Subject to the terms and conditions hereof and in reliance upon the representations and warranties set forth herein, each Closing Date Term Loan Lender severally agrees to make available to the Borrowers on the Closing Date such Closing Date Term Loan Lender’s Closing Date Term Loan Commitment Percentage of a term loan in U.S. Dollars (the “Closing Date Term Loan”) in the aggregate principal amount of SIX HUNDRED MILLION U.S. DOLLARS ($600,000,000) (the “Closing Date Term Loan Committed Amount”) for the purposes hereinafter set forth. The Closing Date Term Loan may consist of Base Rate Loans or LIBOR Rate Loans, or a combination thereof, as the Borrowers may request in their Notice of Borrowing. Amounts repaid or prepaid on the Closing Date Term Loan may not be reborrowed.
(b)Repayment of Closing Date Term Loan. The principal amount of the Closing Date Term Loan shall be repaid on the Maturity Date.
(c)Interest on the Closing Date Term Loan. Subject to the provisions of Sections 2.9 and 2.14, the Closing Date Term Loan shall bear interest as follows:
(i)Base Rate Loans. During such periods as the Closing Date Term Loan shall be comprised of Base Rate Loans, each such Base Rate Loan shall bear interest at a per annum rate equal to the sum of the Alternate Base Rate plus the Applicable Percentage; and
(ii)LIBOR Rate Loans. During such periods as the Closing Date Term Loan shall be comprised of LIBOR Rate Loans, each such LIBOR Rate Loan shall bear interest at a per annum rate equal to the sum of the LIBOR Rate plus the Applicable Percentage.
Interest on the Closing Date Term Loan shall be payable in arrears on each Interest Payment Date.
(d)Closing Date Term Loan Notes. The Borrowers’ obligation to pay each Closing Date Term Loan Lender’s Closing Date Term Loan shall be evidenced, upon such Closing Date Term Loan Lender’s request, by a Closing Date Term Loan Note made payable to such Lender in substantially the form of Exhibit E.
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If any principal of or interest on any Loan or any fee or other amount payable by any Credit Party hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, payable on demand, at a per annum rate two percent (2%) greater than the interest rate which would otherwise be applicable (or if no rate is applicable, whether in respect of interest, fees or other amounts, then two percent (2%) greater than the Alternate Base Rate plus the Applicable Percentage).
(a)The Borrowers may elect from time to time to convert Base Rate Loans to LIBOR Rate Loans and/or LIBOR Rate Loans to Base Rate Loans, by delivering a Notice of Conversion/Extension to the Administrative Agent at least three (3) Business Days’ prior to the proposed date of conversion. If the date upon which a Base Rate Loan is to be converted to a LIBOR Rate Loan or a LIBOR Rate Loans is to be converted to a Base Rate Loan is not a Business Day, then such conversion shall be made on the next succeeding Business Day and during the period from such last day of an Interest Period to such succeeding Business Day such Loan shall bear interest as if it were a Base Rate Loan or LIBOR Rate Loan, as applicable. All or any part of outstanding Base Rate Loans and LIBOR Rate Loans may be converted as provided herein; provided that (i) no Loan may be converted into a LIBOR Rate Loan when any Default or Event of Default has occurred and is continuing except with the consent of the Required Lenders, and (ii) partial conversions shall be in a minimum aggregate principal amount of the Borrowing Minimum or a whole multiple amount of the Borrowing Multiple in excess thereof.
(b)Any LIBOR Rate Loan may be continued as such upon the expiration of an Interest Period with respect thereto by compliance by the Borrowers with the notice provisions contained in Section 2.10(a); provided, that no LIBOR Rate Loan may be continued as such when any Default or Event of Default has occurred and is continuing, except with the consent of the Required Lenders, in which case such LIBOR Rate Loan shall be automatically converted to a Base Rate Loan at the end of the applicable Interest Period with respect thereto. If the Borrowers shall fail to give timely notice of an election to continue a LIBOR Rate Loan, or the continuation of LIBOR Rate Loans is not permitted hereunder, such LIBOR Rate Loans shall be automatically converted to a Base Rate Loan at the end of the applicable Interest Period with respect thereto.
(a)Voluntary Prepayments. Term Loans may be repaid in whole or in part without premium or penalty; provided that (i) LIBOR Rate Loans may be repaid only upon three (3) Business Days’ prior written notice to the Administrative Agent, (ii) repayments of LIBOR Rate Loans must be accompanied by payment of any amounts owing under Section 2.20 and (iii) partial repayments of Loans shall be in minimum principal amount of the Borrowing Minimum, and in integral multiples of the Borrowing Multiple in excess thereof. To the extent that the Borrowers elect to
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prepay the Closing Date Term Loan or, if applicable, any Incremental Term Loans, amounts prepaid under this Section 2.11(a) shall be applied to such Term Loans (to the remaining principal installments thereof, if any, as directed by the Borrowers) first ratably to any Base Rate Loans and then to LIBOR Rate Loans in direct order of Interest Period maturities. All prepayments under this Section 2.11(a) shall be subject to Section 2.20, but otherwise without premium or penalty. Interest on the principal amount prepaid shall be payable on the next occurring Interest Payment Date that would have occurred had such loan not been prepaid or, at the request of the Administrative Agent in the case of a prepayment under this clause (a) or clause (b) below, interest on the principal amount prepaid shall be payable on any date that a prepayment is made hereunder through the date of prepayment. Amounts prepaid on the Term Loans may not be reborrowed. Each notice delivered by the Borrowers pursuant to this Section 2.11(a) shall be revocable by the Borrowers (by notice to the Administrative Agent on or prior to the proposed prepayment date specified therein).
(b)[Reserved].
(c)Discounted Prepayments.
(i)Notwithstanding anything to the contrary in Section 2.11(a) or 2.15 (which provisions shall not be applicable to this Section 2.11(c)) or any other provision of this Agreement, any Purchasing Borrower Party shall have the right at any time and from time to time to prepay Term Loans to the Lenders at a discount to the par value of such Loans and on a non pro rata basis (each, a “Discounted Voluntary Prepayment”) pursuant to the procedures described in this Section 2.11(c) (it being understood that such prepayment may be made with either debt or cash); provided that (A) no Discounted Voluntary Prepayment shall be made from the proceeds of any revolving credit loan or swingline loan under the Pro Rata Credit Facilities, (B) any Discounted Voluntary Prepayment shall be offered to all Lenders with Term Loans on a pro rata basis and (C) such Purchasing Borrower Party shall deliver to the Administrative Agent a certificate stating that (1) no Default or Event of Default has occurred and is continuing or would result from the Discounted Voluntary Prepayment (after giving effect to any related waivers or amendments obtained in connection with such Discounted Voluntary Prepayment), (2) each of the conditions to such Discounted Voluntary Prepayment contained in this Section 2.11(c) has been satisfied and (3) except as previously disclosed in writing to the Administrative Agent and the Term Loan Lenders, such Purchasing Borrower Party does not have, as of the date of each Discounted Prepayment Option Notice and each Discounted Voluntary Prepayment Notice, any material non-public information (“MNPI”) with respect to the Parent or any of its Subsidiaries that has not been disclosed to the Lenders (other than Lenders that do not wish to receive MNPI with respect to the Parent, any of its Subsidiaries or Affiliates) prior to such time that could reasonably be expected to have a material effect upon, or otherwise be material to, a Term Loan Lender’s decision to offer Term Loans to the Purchasing Borrower Party to be repaid, except to the extent that such Term Loan Lender has entered into a customary “big boy” letter with the Parent.
(ii)To the extent a Purchasing Borrower Party seeks to make a Discounted Voluntary Prepayment, such Purchasing Borrower Party will provide a Discounted Prepayment Option Notice that such Purchasing Borrower Party desires to prepay Term Loans in an aggregate principal amount specified therein by the Purchasing Borrower Party (each, a “Proposed Discounted Prepayment Amount”), in each case at a discount to the par value of such Term Loans as specified below. The Proposed Discounted Prepayment Amount of Term Loans shall not be less than $5,000,000. The Discounted Prepayment Option Notice shall further specify with respect to the proposed Discounted Voluntary Prepayment: (A)
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the Proposed Discounted Prepayment Amount of Term Loans, (B) a discount range (which may be a single percentage) selected by the Purchasing Borrower Party with respect to such proposed Discounted Voluntary Prepayment (representing the percentage of par of the principal amount of Term Loans to be prepaid) (the “Discount Range”), and (C) the date by which Lenders are required to indicate their election to participate in such proposed Discounted Voluntary Prepayment which shall be at least five Business Days following the date of the Discounted Prepayment Option Notice (the “Acceptance Date”).
(iii)Upon receipt of a Discounted Prepayment Option Notice in accordance with Section 2.11(c)(ii), the Administrative Agent shall promptly notify each Term Loan Lender thereof. On or prior to the Acceptance Date, each such Lender may specify by Lender Participation Notice to the Administrative Agent (A) a minimum price (the “Acceptable Price”) within the Discount Range (for example, 80% of the par value of the Loans to be prepaid) and (B) a maximum principal amount (subject to rounding requirements specified by the Administrative Agent) of Term Loans with respect to which such Lender is willing to permit a Discounted Voluntary Prepayment at the Acceptable Price (“Offered Loans”). Based on the Acceptable Prices and principal amounts of Term Loans specified by the Lenders in the applicable Lender Participation Notice, the Administrative Agent, in consultation with the Purchasing Borrower Party, shall determine the applicable discount for Term Loans (the “Applicable Discount”), which Applicable Discount shall be (A) the percentage specified by the Purchasing Borrower Party if the Purchasing Borrower Party has selected a single percentage pursuant to Section 2.11(c)(ii) for the Discounted Voluntary Prepayment or (B) otherwise, the lowest Acceptable Price at which the Purchasing Borrower Party can pay the Proposed Discounted Prepayment Amount in full (determined by adding the principal amounts of Offered Loans commencing with the Offered Loans with the lowest Acceptable Price); provided, however, that in the event that such Proposed Discounted Prepayment Amount cannot be repaid in full at any Acceptable Price, the Applicable Discount shall be the highest Acceptable Price specified by the Lenders that is within the Discount Range. The Applicable Discount shall be applicable for all Lenders who have offered to participate in the Discounted Voluntary Prepayment and have Qualifying Loans. Any Lender with outstanding Term Loans whose Lender Participation Notice is not received by the Administrative Agent by the Acceptance Date shall be deemed to have declined to accept a Discounted Voluntary Prepayment of any of its Term Loans at any discount to their par value within the Applicable Discount. For the avoidance of doubt, any Term Loans redeemed by the Parent pursuant to a Discounted Voluntary Prepayment shall immediately cease to be outstanding.
(iv)The Purchasing Borrower Party shall make a Discounted Voluntary Prepayment by prepaying those Term Loans (or the respective portions thereof) offered by the Lenders (“Qualifying Lenders”) that specify an Acceptable Price that is equal to or lower than the Applicable Discount (“Qualifying Loans”) at the Applicable Discount; provided that if the aggregate proceeds required to prepay all Qualifying Loans (disregarding any interest payable at such time) would exceed the amount of aggregate proceeds required to prepay the Proposed Discounted Prepayment Amount, such amounts in each case calculated by applying the Applicable Discount, the Purchasing Borrower Party shall prepay such Qualifying Loans ratably among the Qualifying Lenders based on their respective principal amounts of such Qualifying Loans (subject to rounding requirements specified by the Administrative Agent). If the aggregate proceeds required to prepay all Qualifying Loans (disregarding any interest payable at such time) would be less than the amount of aggregate proceeds required to prepay the Proposed Discounted Prepayment Amount, such
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amounts in each case calculated by applying the Applicable Discount, the Purchasing Borrower Party shall prepay all Qualifying Loans.
(v)Each Discounted Voluntary Prepayment shall be made within four Business Days of the Acceptance Date (or such other date as the Administrative Agent shall reasonably agree, given the time required to calculate the Applicable Discount and determine the amount and holders of Qualifying Loans), without premium or penalty (but subject to Section 2.19), upon irrevocable notice in the form of a Discounted Voluntary Prepayment Notice, delivered to the Administrative Agent no later than 1:00 p.m. (New York City time), three Business Days prior to the date of such Discounted Voluntary Prepayment, which notice shall specify the date and amount of the Discounted Voluntary Prepayment and the Applicable Discount determined by the Administrative Agent. Upon receipt of any Discounted Voluntary Prepayment Notice, the Administrative Agent shall promptly notify each relevant Lender thereof. If any Discounted Voluntary Prepayment Notice is given, the amount specified in such notice shall be due and payable to the applicable Lenders, subject to the Applicable Discount on the applicable Loans, on the date specified therein together with accrued interest (on the par principal amount) to but not including such date on the amount prepaid.
(vi)To the extent not expressly provided for herein, each Discounted Voluntary Prepayment shall be consummated pursuant to reasonable procedures (including as to timing, rounding and calculation of Applicable Discount in accordance with Section 2.11(c)(iii) above) established by the Administrative Agent in consultation with the Parent.
(vii)Prior to the delivery of a Discounted Voluntary Prepayment Notice, upon written notice to the Administrative Agent, the Purchasing Borrower Party may withdraw its offer to make a Discounted Voluntary Prepayment pursuant to any Discounted Prepayment Option Notice.
(viii)The aggregate principal amount of the Term Loans outstanding shall be deemed reduced by the full par value of the aggregate principal amount of the Term Loans prepaid on the date of any such Discounted Voluntary Prepayment.
(ix)Each prepayment of the outstanding Term Loans pursuant to this Section 2.11(c) shall be applied at par to the remaining principal repayment installments of the Term Loans, if any, pro rata among such installments for the respective class.
(x)For the avoidance of doubt, it is within each Lender’s sole and absolute discretion whether to accept a Discounted Voluntary Prepayment.
(a)The Credit Parties agree to pay to the Administrative Agent, for the account of each Lender having a Closing Date Term Loan Commitment on the Closing Date, a ticking fee (collectively for all Lenders, the “Ticking Fee”) on the Closing Date Term Loan Commitment of such Lender, accruing during the period from and including the date that is 60 days following the date on which the allocation of the Closing Date Term Loan Commitments is made to but excluding the Closing Date, at a rate per annum equal to 0.15%. The Ticking Fee will be computed on the
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basis of the actual number of days elapsed over a 360-day year and will be payable in arrears on the Closing Date.
(b)The Credit Parties agree to pay to the Administrative Agent the annual administrative agent fee as described in the Fee Letter.
2.14Computation of Interest and Fees..
(a)Interest on each Base Rate Loan shall be due and payable in arrears on each Interest Payment Date applicable to such Loan; and interest on each LIBOR Rate Loan shall be due and payable on each Interest Payment Date applicable to such Loan. Interest payable hereunder with respect to Base Rate Loans accruing interest at the Prime Rate shall be calculated on the basis of a year of 365 days (or 366 days, as applicable) for the actual days elapsed. All other fees, interest and all other amounts payable hereunder shall be calculated on the basis of a 360 day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrowers and the Lenders of each determination of a LIBOR Rate on the Business Day of the determination thereof. Any change in the interest rate on a Loan resulting from a change in the Alternate Base Rate shall become effective as of the opening of business on the day on which such change in the Alternate Base Rate shall become effective. The Administrative Agent shall as soon as practicable notify the Borrowers and the Lenders of the effective date and the amount of each such change.
(b)Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Credit Agreement shall be conclusive and binding on the Borrowers and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Borrowers, deliver to the Borrowers a statement showing the computations used by the Administrative Agent in determining any interest rate.
(c)It is the intent of the Administrative Agent, the Lenders and the Credit Parties to conform to and contract in strict compliance with applicable usury law from time to time in effect. All agreements between or among the Administrative Agent, the Lenders and the Credit Parties are hereby limited by the provisions of this subsection which shall override and control all such agreements, whether now existing or hereafter arising and whether written or oral. In no way, nor in any event or contingency (including prepayment or acceleration of the maturity of any Credit Party Obligation), shall the interest taken, reserved, contracted for, charged, or received under this Agreement, under the Notes or otherwise, exceed the maximum nonusurious amount permissible under applicable law. If, from any possible construction of any of the Credit Documents or any other document, interest would otherwise be payable in excess of the maximum nonusurious amount, any such construction shall be subject to the provisions of this subsection and such interest shall be automatically reduced to the maximum nonusurious amount permitted under applicable law, without the necessity of execution of any amendment or new document. If the Administrative Agent or Lender shall ever receive anything of value which is characterized as interest on the Loans under applicable law and which would, apart from this provision, be in excess of the maximum nonusurious amount, an amount equal to the amount which would have been excessive interest shall, without penalty, be applied to the reduction of the principal amount owing on the Loans and not to the payment of interest, or refunded to the Borrowers or the other payor thereof if and to the extent such amount which would have been excessive exceeds such unpaid principal amount of the Loans. The right to demand payment of the Loans or any other Indebtedness evidenced by any of the Credit Documents does not include the right to receive any interest which has not otherwise accrued on the date of such demand, and the Lenders do not intend to charge or receive any unearned interest in the event of such demand. All interest paid or agreed to be paid to the Lenders with respect to the Loans shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and
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spread throughout the full stated term (including any renewal or extension) of the Loans so that the amount of interest on account of such Indebtedness does not exceed the maximum nonusurious amount permitted by applicable law.
2.15Pro Rata Treatment and Payments..
(a)Pro Rata Distribution of Payments. Each payment on account of an amount due from the Borrowers hereunder or under any other Credit Document shall be made by the Borrowers to the Administrative Agent for the pro rata account of the Lenders entitled to receive such payment as provided herein in the currency in which such amount is denominated and in such funds as are customary at the place and time of payment for the settlement of international payments in such currency. Upon request, the Administrative Agent will give the Borrowers a statement showing the computation used in calculating such amount, which statement shall be presumptively correct in the absence of manifest error. The obligation of the Borrowers to make each payment on account of such amount in the currency in which such amount is denominated shall not be discharged or satisfied by any tender, or any recovery pursuant to any judgment, which is expressed in or converted into any other currency, except to the extent such tender or recovery shall result in the actual receipt by the Administrative Agent of the full amount in the appropriate currency payable hereunder.
(b)Application of Payments Prior to Exercise of Remedies. Unless otherwise specified in this Credit Agreement, each payment under this Credit Agreement or any Note shall be applied (i) first, to any fees then due and owing by the Borrowers pursuant to Section 2.13, (ii) second, to interest then due and owing hereunder and under the Notes of the Borrowers and (iii) third, to principal then due and owing hereunder and under the Notes of the Borrowers. Each payment on account of any fees pursuant to Section 2.13 shall be made pro rata in accordance with the respective amounts due and owing. Each payment (other than voluntary repayments) by the Borrowers on account of principal of and interest on the Term Loans shall be made pro rata according to the respective amounts due and owing hereunder. Each voluntary repayment on account of principal of the Loans shall be applied in accordance with Section 2.11(a). All payments (including prepayments) to be made by the Credit Parties on account of principal, interest and fees shall be made without defense, set-off or counterclaim and shall be made to the Administrative Agent for the account of the Lenders (except as provided in Section 2.25(b)) at the Administrative Agent’s office specified in Section 9.2 and shall be made in U.S. Dollars not later than 12:00 p.m. on the date when due. The Administrative Agent shall distribute such payments to the Lenders entitled thereto promptly upon receipt in like funds as received. If any payment hereunder (other than payments on the LIBOR Rate Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. If any payment on a LIBOR Rate Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day.
(c)Allocation of Payments After Exercise of Remedies. Notwithstanding any other provision of this Credit Agreement to the contrary, after the exercise of remedies (other than the invocation of default interest pursuant to Section 2.9) by any of the Administrative Agent pursuant to Section 7.2 (or after the Commitments shall automatically terminate and the Loans (with accrued interest thereon) and all other amounts under the Credit Documents shall automatically become due and payable in accordance with the terms of such Section), all amounts collected or received by the
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Administrative Agent or any Lender on account of the Credit Party Obligations or any other amounts outstanding under any of the Credit Documents shall be paid over or delivered as follows:
FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including reasonable attorneys’ fees) of the Administrative Agent in connection with enforcing the rights of the Lenders under the Credit Documents;
SECOND, to payment of any fees owed to the Administrative Agent;
THIRD, to the payment of all reasonable out-of-pocket costs and expenses (including reasonable attorneys’ fees) of each of the Lenders in connection with enforcing its rights under the Credit Documents or otherwise with respect to the Credit Party Obligations owing to such Lender;
FOURTH, to the payment of all of the Credit Party Obligations consisting of accrued fees and interest, and including, with respect to any Guaranteed Hedging Agreement and/or any Guaranteed Cash Management Agreement, any fees, premiums and scheduled periodic payments due under such Guaranteed Hedging Agreement and/or Guaranteed Cash Management Agreement and any interest accrued thereon;
FIFTH, to the payment of the outstanding principal amount of the Credit Party Obligations, and including with respect to any Guaranteed Hedging Agreement and/or any Guaranteed Cash Management Agreement, any breakage, termination or other payments due under such Guaranteed Hedging Agreement and any interest accrued thereon;
SIXTH, to all other Credit Party Obligations and other obligations which shall have become due and payable under the Credit Documents or otherwise and not repaid pursuant to clauses “FIRST” through “FIFTH” above; and
SEVENTH, to the payment of the surplus, if any, to whoever may be lawfully entitled to receive such surplus.
In carrying out the foregoing, (i) amounts received shall be applied in the numerical order provided until exhausted prior to application to the next succeeding category and (ii) each of the Lenders, Cash Management Banks and/or Hedging Agreement Providers shall receive an amount equal to its pro rata share (based on the proportion that the then outstanding Loans held by such Lender or the outstanding obligations payable to such Hedging Agreement Provider and/or Cash Management Bank bears to the aggregate then outstanding Loans and obligations payable under all Hedging Agreements with a Hedging Agreement Provider and/or Cash Management Agreements with a Cash Management Bank) of amounts available to be applied pursuant to clauses “THIRD”, “FOURTH”, “FIFTH” and “SIXTH” above.
No Agent shall be deemed to have notice of the existence of, notice of any Credit Party Obligations owed to, or be responsible for any distribution to, any Hedging Agreement Provider and/or Cash Management Bank for any purposes of this Agreement unless such amounts have been notified in writing to all Administrative Agent by the Parent and, as applicable, such Hedging Agreement Provider or Cash Management Bank.
(d)Defaulting Lenders. Notwithstanding the foregoing clauses (a), (b) and (c), if there exists a Defaulting Lender, each payment by the Credit Parties to such Defaulting Lender hereunder shall be applied in accordance with Section 2.25(b).
2.16Non-Receipt of Funds by the Administrative Agent..
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(a)Funding by Lenders; Presumption by Agent. Unless the Administrative Agent shall have been notified in writing by a Lender prior to the date a Loan is to be made by such Lender (which notice shall be effective upon receipt) that such Lender does not intend to make the proceeds of such Loan available to the Administrative Agent, the Administrative Agent may assume that such Lender has made such proceeds available to the Administrative Agent on such date, and the Administrative Agent may in reliance upon such assumption (but shall not be required to) make available to the Borrowers a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent, the Administrative Agent shall be able to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent’s demand therefor, the Administrative Agent will promptly notify the Borrowers, and the Borrowers shall immediately pay such corresponding amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover from the Lender or the Borrowers, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to the Borrowers to the date such corresponding amount is recovered by the Administrative Agent at a per annum rate equal to (i) from the Borrowers at the applicable rate for the applicable borrowing pursuant to the Notice of Borrowing and (ii) from a Lender at the Federal Funds Rate.
(b)Payments by Borrower; Presumptions by Agent. Unless the Administrative Agent shall have been notified in writing by the Borrowers, prior to the date on which any payment is due from it hereunder (which notice shall be effective upon receipt) that the Borrowers do not intend to make such payment, the Administrative Agent may assume that the Borrowers have made such payment when due, and the Administrative Agent may in reliance upon such assumption (but shall not be required to) make available to each Lender on such payment date an amount equal to the portion of such assumed payment to which such Lender is entitled hereunder, and if the Borrowers have not in fact made such payment to the Administrative Agent, such Lender shall, on demand, repay to the Administrative Agent the amount made available to such Lender. If such amount is repaid to the Administrative Agent on a date after the date such amount was made available to such Lender, such Lender shall pay to the Administrative Agent on demand interest on such amount in respect of each day from the date such amount was made available by the Administrative Agent at a per annum rate equal to, if repaid to the Administrative Agent within two (2) days from the date such amount was made available by the Administrative Agent, the Federal Funds Rate, and thereafter at a rate equal to the Alternate Base Rate.
(c)Evidence of Amounts Owed. A certificate of the Administrative Agent submitted to the Borrowers or any Lender with respect to any amount owing under this Section 2.16 shall be conclusive in the absence of manifest error.
(d)Failure to Satisfy Conditions Precedent. If any Lender makes available to the Administrative Agent funds for any Loan to be made by such Lender as provided in the foregoing provisions of this Article II, and such funds are not made available to the Borrowers by the Administrative Agent because the conditions to the applicable Extension of Credit set forth in Article IV are not satisfied or waived in accordance with the terms thereof, the Administrative Agent shall forthwith return such funds (in like funds as received from such Lender) to such Lender, without interest.
(e)Obligations of Lenders Several. The obligations of the Lenders hereunder to make Loans and to make payments pursuant to Section 9.5(c) are several and not joint. The failure of any Lender to make any Loan, to fund any such participation or to make any such payment under
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Section 9.5(c) on any date required hereunder shall not relieve any other Lender of its corresponding obligation to do so on such date, and no Lender shall be responsible for the failure of any other Lender to so make its Loan, to purchase its participation or to make its payment under Section 9.5(c).
(f)Funding Source. Nothing herein shall be deemed to obligate any Lender to obtain the funds for any Loan in any particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for any Loan in any particular place or manner.
2.17Inability to Determine Interest Rate..
Notwithstanding any other provision of this Credit Agreement, if (a) the Administrative Agent shall reasonably determine (which determination shall be conclusive and binding absent manifest error) that, by reason of circumstances affecting the relevant market, reasonable and adequate means do not exist for ascertaining the LIBOR Rate for such Interest Period, or (b) the Required Lenders shall reasonably determine (which determination shall be conclusive and binding absent manifest error) that the LIBOR Rate does not adequately and fairly reflect the cost to such Lenders of funding LIBOR Rate Loans that the Borrowers have requested be outstanding as a LIBOR tranche during such Interest Period, then the Administrative Agent shall forthwith give telephone notice of such determination, confirmed in writing, to the Borrowers and the Lenders at least two (2) Business Days prior to the first day of such Interest Period. If such notice is given, (a) any affected LIBOR Rate Loans requested to be made by the Borrowers on the first day of such Interest Period shall be made, at the sole option of the Borrowers, as Base Rate Loans or such request shall be cancelled and (b) any affected Loans that were to have been converted at the request of the Borrowers on the first day of such Interest Period to or continued as LIBOR Rate Loans shall be converted to or continued as Base Rate Loans. Until any such notice has been withdrawn by the Administrative Agent, no further Loans shall be made as, continued as, or converted into, LIBOR Rate Loans for the Interest Periods so affected.
Notwithstanding any other provision of this Credit Agreement, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof by the relevant Governmental Authority to any Lender shall make it unlawful for such Lender or its Lending Office to make or maintain LIBOR Rate Loans, as contemplated by this Credit Agreement or to obtain in the applicable interbank market through its Lending Office the funds with which to make such Loans, (a) such Lender shall promptly notify the Administrative Agent and the Borrowers thereof, (b) the commitment of such Lender hereunder to make LIBOR Rate Loans or continue LIBOR Rate Loans as such shall forthwith be suspended until the Administrative Agent shall give notice that the condition or situation which gave rise to the suspension shall no longer exist and (c) such Lender’s Loans then outstanding as LIBOR Rate Loans, if any, shall be converted to Base Rate Loans on the last day of the Interest Period for such Loans or within such earlier period as required by law. The Borrowers hereby agree promptly to pay any Lender, upon its demand, any additional amounts necessary to compensate such Lender for actual and direct costs (but not including anticipated profits) reasonably incurred by such Lender including any interest or fees payable by such Lender to lenders of funds obtained by it in order to make or maintain its LIBOR Rate Loans hereunder. A certificate as to any additional amounts payable pursuant to this Section submitted by such Lender, through the Administrative Agent to the Borrowers shall be conclusive in the absence of manifest error. Each Lender agrees to use reasonable efforts (including reasonable efforts to change its Lending Office) to avoid or to minimize any amounts which may otherwise be payable pursuant to this Section; provided, however, that such efforts shall not cause the imposition on such Lender of any additional costs or legal or regulatory burdens deemed by such Lender in its sole discretion to be material.
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(a)If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the Closing Date:
(i)shall subject any Lender to any Tax of any kind whatsoever with respect to this Agreement or any LIBOR Rate Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for any Indemnified Taxes indemnifiable under Section 2.21 or any Excluded Taxes);
(ii)shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of any Lender which is not otherwise included in the determination of the LIBOR Rate hereunder; or
(iii)shall impose on such Lender any other condition;
and the result of any of the foregoing is to increase the cost to such Lender of making or maintaining LIBOR Rate Loans, or to reduce any amount receivable hereunder or under any Note, then, in any such case, the Borrowers shall promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such additional cost or reduced amount receivable which such Lender reasonably deems to be material as determined by such Lender. A certificate as to any additional amounts payable pursuant to this Section submitted by such Lender, through the Administrative Agent to the Borrowers shall be conclusive in the absence of manifest error. Each Lender agrees to use reasonable efforts (including reasonable efforts to change its Lending Office) to avoid or to minimize any amounts which might otherwise be payable pursuant to this subsection (a); provided, however, that such efforts shall not cause the imposition on such Lender of any additional costs or legal or regulatory burdens deemed by such Lender in its sole discretion to be material. Notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and all requests, rules, guidelines or directives thereunder or issued in connection therewith as well as (y) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall be deemed to be a change in “Requirement of Law,” regardless of the date enacted, adopted or issued.
(b)If any Lender shall have reasonably determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or liquidity or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy or liquidity (whether or not having the force of law) from any central bank or Governmental Authority made subsequent to the Closing Date does or shall have the effect of reducing the rate of return on such Lender’s or such corporation’s capital as a consequence of its obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender’s or such corporation’s policies with respect to capital adequacy or liquidity) by an amount reasonably deemed by such Lender in its sole discretion to be material, then from time to time, within fifteen (15) days after demand by such Lender, the Borrowers shall pay to such Lender such additional amount as shall be certified by such Lender as being required to compensate it for such reduction (but, in the case of outstanding Base Rate Loans, without duplication of any
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amounts already recovered by a Lender by reason of an adjustment in the Alternate Base Rate). Such a certificate as to any additional amounts payable under this Section submitted by a Lender (which certificate shall include a description of the basis for the computation), through the Administrative Agent to the Borrowers shall be conclusive absent manifest error.
(c)Failure or delay on the part of any Lender to demand compensation pursuant to the foregoing provisions of this Section 2.19 shall not constitute a waiver of such Lender’s right to demand such compensation, provided that the Borrowers shall not be required to compensate a Lender pursuant to the foregoing provisions of this Section 2.19 for any increased costs incurred or reductions suffered more than six (6) months prior to the date that such Lender, as the case may be, notifies the Borrowers of the Requirement of Law giving rise to such increased costs or reductions and of such Lender’s intention to claim compensation therefor (except that, if the Requirement of Law giving rise to such increased costs or reductions is retroactive, then the six (6) month period referred to above shall be extended to include the period of retroactive effect thereof).
(d)The agreements in this Section 2.19 shall survive the termination of this Credit Agreement and payment of the Notes and all other amounts payable hereunder.
The Borrowers hereby agree to indemnify each Lender and to hold such Lender harmless from any funding loss or expense which such Lender may sustain or incur as a consequence of (a) default by the Borrowers in payment of the principal amount of or interest on any Loan by such Lender in accordance with the terms hereof, (b) default by the Borrowers in accepting a borrowing after the Borrowers have given a notice in accordance with the terms hereof, (c) default by the Borrowers in making any repayment after the Borrowers have given a notice in accordance with the terms hereof, and/or (d) the making by the Borrowers of a repayment or prepayment of a Loan, or the conversion thereof, on a day which is not the last day of the Interest Period with respect thereto, in each case including any such loss or expense arising from interest or fees payable by such Lender to lenders of funds obtained by it in order to maintain its Loans hereunder to the extent not received by such Lender in connection with the re-employment of such funds (but excluding loss of anticipated profits). A certificate as to any additional amounts payable pursuant to this Section submitted by any Lender, through the Administrative Agent to the Borrowers (which certificate must be delivered to the Administrative Agent within thirty (30) days following such default, repayment, prepayment or conversion and shall set forth the basis for requesting such amounts in reasonable detail) shall be conclusive in the absence of manifest error. The agreements in this Section 2.20 shall survive termination of this Credit Agreement and payment of the Notes and all other amounts payable hereunder.
(a)All payments made by any Credit Party hereunder or under any Credit Document will be, except as required by applicable law, made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any Governmental Authority or by any political subdivision or taxing authority thereof or therein, including all interest, penalties and additions to tax with respect thereto (“Taxes”). If any Credit Party, the Administrative Agent or any other applicable withholding agent is required by law to make any deduction or withholding on account of any Taxes from or in respect of any sum paid or payable by any Credit Party to any Lender or the Administrative Agent under any of the Credit Documents, then the applicable withholding agent shall make such deduction or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental Authority in accordance with applicable law and, if such Tax is an Indemnified Tax, the sum payable by the applicable Credit Party to such Lender
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or the Administrative Agent shall be increased by such Credit Party to the extent necessary to ensure that after such deduction or withholding has been made (including such deductions and withholdings applicable to additional sums payable under this Section 2.21) each Lender (or, in the case of a payment made to the Administrative Agent for its own account, the Administrative Agent) receives an amount equal to the sum it would have received had no such deduction or withholding been made. As soon as practicable after any payment of Taxes by any Credit Party to a Governmental Authority pursuant to this Section 2.21, such Credit Party shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.
(b)In addition, the Borrowers shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.
(c)The Credit Parties shall, jointly and severally, indemnify and hold harmless each Lender and the Administrative Agent, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes (including any Indemnified Taxes imposed on or attributable to amounts payable under this Section 2.21) paid or payable by such Lender or the Administrative Agent, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability prepared in good faith and delivered by a Lender (with a copy to the Administrative Agent), or by the Administrative Agent on its own behalf or on behalf of another Lender, shall be conclusive absent manifest error.
(d)Any Lender that is entitled to an exemption from or reduction of withholding Tax with respect to any payments made under any Credit Document shall deliver to the Parent and the Administrative Agent, at the time or times reasonably requested by the Parent or the Administrative Agent, such properly completed and executed documentation reasonably requested by the Parent or the Administrative Agent as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender, if reasonably requested by the Parent or the Administrative Agent, shall deliver such other documentation prescribed by applicable law or reasonably requested by the Parent or the Administrative Agent as will enable the Parent or the Administrative Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements. Notwithstanding anything to the contrary in the preceding two sentences, the completion, execution and submission of such documentation (other than any documentation relating to U.S. federal withholding Taxes) shall not be required if in the Lender’s reasonable judgment such completion, execution or submission would subject such Lender to any material unreimbursed cost or expense or would materially prejudice the legal or commercial position of such Lender. Each Lender hereby authorizes the Administrative Agent to deliver to the Parent and to any successor Administrative Agent any documentation provided to the Administrative Agent pursuant to this Section 2.21(d).
Without limiting the generality of the foregoing,
(1)Each Lender that is a “United States person” (as such term is defined in Section 7701(a)(30) of the Code) shall deliver to the Parent and the Administrative Agent on or prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Parent or the Administrative Agent), two executed originals of IRS Form W-9 certifying that such Lender is exempt from U.S. federal backup withholding.
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(2)Each Lender that is not a “United States person” (as such term is defined in Section 7701(a)(30) of the Code) agrees to deliver to the Parent and the Administrative Agent on or prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Parent or the Administrative Agent), whichever of the following is applicable:
(i)two executed originals of IRS Form W-8BEN or W-8BEN-E (or successor forms) claiming eligibility for the benefits of an income tax treaty to which the United States is a party,
(ii)two executed originals of IRS Form W-8ECI (or successor forms),
(iii)in the case of a Lender claiming the benefits of the exemption for portfolio interest under Section 871(h) or Section 881(c) of the Code, (x) two executed originals of a certificate substantially in the form of Exhibit F (any such certificate, a “Tax Exempt Certificate”) and (y) two executed originals of IRS Form W-8BEN or W-8BEN-E (or successor forms),
(iv)to the extent a Lender is not the beneficial owner (for example, where the Lender is a partnership or a participating Lender), IRS Form W-8IMY (or any successor forms) of the Lender, accompanied by a Form W-8ECI, W-8BEN or W-8BEN-E, Tax Exempt Certificate, Form W-9, Form W-8IMY or any other required information (or any successor forms) from each beneficial owner that would be required under this Section 2.21(d) if such beneficial owner were a Lender, as applicable (provided that if the Lender is a partnership (and not a participating Lender) and one or more direct or indirect partners are claiming the portfolio interest exemption, the United States Tax Compliance Certificate may be provided by such Lender on behalf of such direct or indirect partners(s)), or
(v)two executed originals of any other form prescribed by applicable U.S. federal income Tax laws (including the Treasury Regulations) as a basis for claiming a complete exemption from, or a reduction in, United States federal withholding Tax on any payments to such Lender under the Credit Documents.
(3)If a payment made to a Lender under any Credit Document would be subject to U.S. federal withholding Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Sections 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to the Parent and the Administrative Agent at the time or times prescribed by law and at such time or times reasonably requested by the Parent or the Administrative Agent such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Parent or the Administrative Agent as may be necessary for the Parent and the Administrative Agent to comply with their FATCA obligations, to determine whether such Lender has or has not complied with such Lender’s FATCA obligations and to determine the amount, if any, to deduct and withhold from such payment.
In addition, each Lender agrees that, whenever a lapse in time or change in circumstances renders any such documentation (including any specific documentation required in this Section 2.21(d)) obsolete, expired or inaccurate in any respect, it shall deliver promptly to the Parent and the Administrative Agent updated or other appropriate documentation (including any new documentation reasonably requested by
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the Parent or the Administrative Agent) or promptly notify the Parent and the Administrative Agent in writing of its legal ineligibility to do so.
Notwithstanding anything to the contrary in this Section 2.21(d), no Lender shall be required to deliver any documentation that it is not legally eligible to deliver.
(e)Each Lender that requests reimbursement for amounts owing pursuant to this Section 2.21 agrees to use reasonable efforts (including reasonable efforts to change its lending office) to avoid or to minimize any amounts which might otherwise be payable pursuant to this Section 2.21; provided, however, that such efforts shall not cause the imposition on such Lender of any additional costs or legal or regulatory burdens deemed by such Lender in its sole discretion to be material.
(f)If the Administrative Agent or any Lender determines, in its good faith discretion, that it has received a refund of any Indemnified Taxes as to which it has been indemnified by a Credit Party or with respect to which a Credit Party has paid additional amounts pursuant to this Section 2.21, it shall promptly pay to the relevant Credit Party an amount equal to such refund (but only to the extent of indemnity payments made, or additional amounts paid, by the Credit Party under this Section 2.21 with respect to the Indemnified Taxes giving rise to such refund), net of all out-of-pocket expenses (including any Taxes imposed with respect to such refund) of the Administrative Agent or such Lender, as the case may be, and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided that the applicable Credit Party, upon the request of the Administrative Agent or such Lender, agrees to repay the amount paid over to the Credit Party (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent or such Lender in the event the Administrative Agent or such Lender is required to repay such refund to such Governmental Authority. This subsection shall not be construed to interfere with the right of a Lender or the Administrative Agent to arrange its Tax affairs in whatever manner it thinks fit nor oblige any Lender or the Administrative Agent to disclose any information relating to its Tax affairs or any computations in respect thereof or require any Lender or the Administrative Agent to do anything that would prejudice its ability to benefit from any other refunds, credits, reliefs, remissions or repayments to which it may be entitled. Notwithstanding anything to the contrary, in no event will any Lender be required to pay any amount to a Credit Party the payment of which would place such Lender in a less favorable net after-tax position than it would have been in if the additional amounts or indemnification payments giving rise to such refund of any Indemnified Taxes had never been paid.
(g)The agreements in this Section 2.21 shall survive the termination of this Credit Agreement, the payment of the Notes and all other amounts payable hereunder, the resignation of the Administrative Agent and any assignment of rights by, or replacement of, any Lender.
The Borrowers shall be permitted to replace any Lender that (a) requests reimbursement for amounts owing pursuant to Section 2.18, Section 2.19 or Section 2.21 or (b) is a Defaulting Lender hereunder; provided that (i) such replacement does not conflict with any Requirement of Law, (ii) no Event of Default shall have occurred and be continuing at the time of such replacement, (iii) prior to any such replacement, such Lender shall have taken no action under Section 2.18, Section 2.19(a) or Section 2.21(e), as applicable, so as to eliminate the continued need for payment of amounts owing pursuant to Section 2.18, Section 2.19 or Section 2.21, (iv) the replacement financial institution shall purchase, at par, all Loans and
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other amounts owing to such replaced Lender on or prior to the date of replacement, (v) the Borrowers shall be liable to such replaced Lender under Section 2.20 if any LIBOR Rate Loan owing to such replaced Lender shall be purchased other than on the last day of the Interest Period relating thereto, (vi) the replacement shall be a financial institution that, if not already a Lender, shall be reasonably acceptable to the Administrative Agent, (vii) the replaced Lender shall be obligated to make such replacement in accordance with the provisions of Section 9.6 (provided that the Borrowers shall be obligated to pay the registration and processing fee referred to therein), (viii) with respect to payments due through such time as such replacement shall be consummated, the Borrowers shall pay all additional amounts (if any) required pursuant to Section 2.18, 2.19 or 2.21, as the case may be and (ix) any such replacement shall not be deemed to be a waiver of any rights that the Borrowers, the Administrative Agent or any other Lender shall have against the replaced Lender. In the event any replaced Lender fails to execute the agreements required under Section 9.6 in connection with an assignment pursuant to this Section 2.23, the Borrowers may, upon two (2) Business Days’ prior notice to such replaced Lender, execute such agreements on behalf of such replaced Lender. A Lender shall not be required to be replaced if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrowers to require such replacement cease to apply.
Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes a Defaulting Lender, then, until such time as such Lender is no longer a Defaulting Lender, to the extent permitted by applicable law:
(a)Waivers and Amendments. Such Defaulting Lender’s right to approve or disapprove any amendment, waiver or consent with respect to this Agreement shall be restricted as set forth in Section 9.1.
(b)Reallocation of Payments. Any payment of principal, interest, fees or other amounts received by the Administrative Agent for the account of such Defaulting Lender (whether voluntary or mandatory, at maturity, or otherwise, and including any amounts made available to the Administrative Agent for the account of such Defaulting Lender pursuant to Section 9.7), shall be applied at such time or times as may be determined by the Administrative Agent as follows: first, to the payment of any amounts owing by such Defaulting Lender to the Administrative Agent hereunder; second, as the Borrowers may request (so long as no Default or Event of Default exists), to the funding of any Loan in respect of which such Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as determined by the Administrative Agent; third, if so determined by the Administrative Agent and the Borrowers, to be held in a non-interest bearing deposit account and released in order to satisfy obligations of such Defaulting Lender to fund Loans under this Agreement; fourth, to the payment of any amounts owing to the Administrative Agent or the Lenders as a result of any judgment of a court of competent jurisdiction obtained by the Administrative Agent or any Lender against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement; fifth, so long as no Default or Event of Default exists, to the payment of any amounts owing to any Borrower as a result of any judgment of a court of competent jurisdiction obtained by such Borrower against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement; and sixth, to such Defaulting Lender or as otherwise directed by a court of competent jurisdiction. Any payments, prepayments or other amounts paid or payable to a Defaulting Lender that are applied (or
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held) to pay amounts owed by a Defaulting Lender or to post cash collateral pursuant to this Section 2.25(b) shall be deemed paid to and redirected by such Defaulting Lender, and each Lender irrevocably consents hereto.
(c)Defaulting Lender Cure. If the Borrowers and the Administrative Agent agree in writing in their good faith judgment that a Defaulting Lender should no longer be deemed to be a Defaulting Lender, the Administrative Agent will so notify the parties hereto, whereupon such Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of the Borrowers while such Lender was a Defaulting Lender; and provided, further, that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from Defaulting Lender to Lender will constitute a waiver or release of any claim of any party hereunder arising from such Lender’s having been a Defaulting Lender.
(a)At any time, the Borrowers may by written notice to the Administrative Agent elect to request the establishment of one or more incremental term loan commitments (any such incremental term loan commitment, which may be part of an existing tranche, an “Incremental Term Loan Commitment”) to make an incremental term loan (any such incremental term loan, an “Incremental Term Loan”); provided that the total aggregate amount for all such Incremental Term Loan Commitments shall not exceed $350,000,000. Each such notice shall specify the date (each, an “Increased Amount Date”) on which the Borrowers propose that any Incremental Term Loan Commitment shall be effective, which shall be a date not less than ten (10) Business Days after the date on which such notice is delivered to Administrative Agent. The Borrowers may invite any Lender, any Affiliate of any Lender and/or any Approved Fund, and/or any other Person reasonably satisfactory to the Administrative Agent, to provide an Incremental Term Loan Commitment (any such Person, an “Incremental Term Loan Lender”). Any Lender or any Incremental Term Loan Lender offered or approached to provide all or a portion of any Incremental Term Loan Commitment may elect or decline, in its sole discretion, to provide such Incremental Term Loan Commitment. Any Incremental Term Loan Commitment shall become effective as of such Increased Amount Date; provided that:
(A)no Default or Event of Default shall exist on such Increased Amount Date before or after giving effect to (1) any Incremental Term Loan Commitment and (2) the making of any Incremental Term Loans pursuant thereto (except in connection with any Consolidated Company Investment; provided that in such case, no Event of Default under Sections 7.1(a) or (g) shall exist after giving effect thereto);
(B)the representations and warranties made by the Credit Parties herein or in any other Credit Document or which are contained in any certificate furnished at any time under or in connection herewith or therewith shall be true and correct in all material respects (except to the extent that any such representation or warranty is qualified by materiality, in which case such representation and warranty shall be true and correct) on and as of the date of such Increased Amount Date as if made on and as of such date (except for those which expressly relate to an earlier date) (except in connection with any Acquisition not prohibited hereunder; provided that in such case, the representations and warranties set forth in Sections 3.1(i), 3.2, 3.3, 3.4, 3.6, 3.7 and 3.13 with respect to the Parent and its Subsidiaries (on a pro forma basis giving effect to such Acquisition), and customary specified acquisition agreement representations and warranties with respect to the entity and/or
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assets to be acquired, shall be true and correct in all material respects on and as of such Increased Amount Date);
(C)the Administrative Agent and the Lenders shall have received from the Borrowers a Pro Forma Compliance Certificate demonstrating that the Credit Parties will be in compliance on a pro forma basis with the financial covenants set forth in Section 6.1 after giving effect to (1) any Incremental Term Loan Commitment, (2) the making of any Incremental Term Loans pursuant thereto and (3) any Consolidated Company Investment consummated in connection therewith; provided that if such Incremental Term Loans are incurred in connection with a Consolidated Company Investment or an irrevocable redemption or repayment of Indebtedness, compliance with the financial covenants set forth in Section 6.1 may be determined, at the option of the Parent, at the time of signing the applicable acquisition agreement or the date of irrevocable notice of redemption or repayment, as applicable (in which case, such Incremental Term Loans will be deemed outstanding for purposes of calculating the maximum amount of Indebtedness that can be incurred under any leverage-based test hereunder); provided further, that if the Parent has made such election, in connection with the calculation of any financial ratio (other than the financial covenants set forth in Section 6.1) on or following such date and prior to the earlier of the date on which such Consolidated Company Investment is consummated or the definitive agreement for such Consolidated Company Investment is terminated or such redemption or repayment is made, as applicable, any such ratio shall be calculated on a Pro Forma Basis assuming such Consolidated Company Investment, redemption or repayment and other pro forma events in connection therewith (including any incurrence of Indebtedness) have been consummated, except to the extent such calculation would result in a lower leverage ratio than would apply if such calculation was made without giving pro forma effect to such Consolidated Company Investment, redemption, repayment, other pro forma events and Indebtedness;
(D)the proceeds of any Incremental Term Loans shall be used solely for the Investment Purpose;
(E)each Incremental Term Loan Commitment (and the Incremental Term Loans made thereunder) shall constitute obligations of the Borrowers and shall be guaranteed with the other Extensions of Credit on a pari passu basis;
(F)in the case of each Incremental Term Loan (the terms of which shall be set forth in the relevant Lender Joinder Agreement):
(w)such Incremental Term Loan will mature and amortize in a manner reasonably acceptable to the Administrative Agent, the Incremental Term Loan Lenders making such Incremental Term Loan and the Borrowers, but will not in any event have a shorter weighted average life to maturity than the remaining weighted average life to maturity of the Latest Maturing Loan or a maturity date earlier than the Latest Maturity Date;
(x)the Applicable Percentage and pricing grid, if applicable, for such Incremental Term Loan shall be determined by the Administrative Agent, the applicable Incremental Term Loan Lenders and the Borrowers on the applicable Increased Amount Date;
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(y)all other terms and conditions applicable to any Incremental Term Loan, to the extent not consistent with the terms and conditions applicable to the existing Term Loan, shall be reasonably satisfactory to the Administrative Agent; and
(z)such Incremental Term Loans shall be made available only to the Borrowers and only in U.S. Dollars;
it being understood that, to the extent any financial maintenance covenant is added for the benefit of any Incremental Term Loan Commitment or any Incremental Term Loans, no consent with respect to such financial maintenance covenant shall be required from the Administrative Agent or any existing Lender so long as such financial maintenance covenant is added to this Agreement for the benefit of the existing Commitments and Loans;
(G)any Incremental Term Loan Lender making any Incremental Term Loan shall be entitled to the same voting rights as the existing Term Loan Lenders under the Term Loans and each Incremental Term Loan shall receive proceeds of prepayments on the same basis as the existing Term Loans (such prepayments to be shared pro rata on the basis of the original aggregate funded amount thereof among the existing Term Loans and the Incremental Term Loans);
(H)such Incremental Term Loan Commitments shall be effected pursuant to one or more Lender Joinder Agreements executed and delivered by the Borrowers, the Administrative Agent and the applicable Incremental Term Loan Lenders (which Lender Joinder Agreement may, without the consent of any other Lenders or Credit Parties, effect such amendments to this Agreement and the other Credit Documents as may be necessary or appropriate, in the opinion of the Administrative Agent and the Borrowers, to effect the provisions of this Section 2.26); and
(I)the Credit Parties shall deliver or cause to be delivered any customary legal opinions or other customary closing documents (including a resolution duly adopted by the board of directors (or equivalent governing body) of each Credit Party authorizing such Incremental Term Loan) reasonably requested by Administrative Agent in connection with any such transaction.
(b)(i)The Incremental Term Loans shall be deemed to be Term Loans; provided that such Incremental Term Loan may be designated as a separate tranche of Term Loans for all purposes of this Credit Agreement.
(ii)The Incremental Term Loan Lenders shall be included in any determination of the Required Lenders, and the Incremental Term Loan Lenders will not constitute a separate voting class for any purposes under this Credit Agreement.
(c)On any Increased Amount Date on which any Incremental Term Loan Commitment becomes effective, subject to the foregoing terms and conditions, each Incremental Term Loan Lender with an Incremental Term Loan Commitment shall make an Incremental Term Loan to the Borrowers in an amount equal to its Incremental Term Loan Commitment and shall become a Term Loan Lender hereunder with respect to such Incremental Term Loan Commitment and the Incremental Term Loan made pursuant thereto.
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(d)Notwithstanding any provision to the contrary contained herein, if a Subsidiary of the Parent (other than any existing Borrower) shall, at the time of any proposed Incremental Term Loan, own assets consistent with those set forth in the Investment Purpose, and which the Administrative Agent deems eligible assets for purposes of this Agreement, then, at the Parent’s sole election, such Subsidiary may be joined as an additional Borrower under this Agreement, subject to joinder documentation and related terms and conditions to be agreed upon by the Administrative Agent and the Credit Parties; provided that, it is understood and agreed that such joinder may be a condition precedent to the closing and funding of the proposed Incremental Term Loan if so requested by the financial institutions providing the proposed Incremental Term Loans.
2.27Joint and Several Liability of Borrowers..
(a)Each of the Borrowers is accepting joint and several liability hereunder in consideration of the financial accommodation to be provided by the Lenders under this Agreement, for the mutual benefit, directly and indirectly, of each of the Borrowers and in consideration of the undertakings of each of the Borrowers to accept joint and several liability for the obligations of each of them.
(b)Each of the Borrowers jointly and severally hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Borrowers with respect to the payment and performance of all of the Credit Party Obligations arising under this Agreement and the other Credit Documents, it being the intention of the parties hereto that all the Credit Party Obligations shall be the joint and several obligations of each of the Borrowers without preferences or distinction among them.
(c)If and to the extent that any of the Borrowers shall fail to make any payment with respect to any of the Credit Party Obligations as and when due or to perform any of the Credit Party Obligations in accordance with the terms thereof, then in each such event, the other Borrowers will make such payment with respect to, or perform, such Credit Party Obligation.
(d)The obligations of each Borrower under the provisions of this Section 2.27 constitute full recourse Credit Party Obligations of such Borrower, enforceable against it to the full extent of its properties and assets.
(e)Except as otherwise expressly provided herein, to the extent permitted by law, each Borrower (in its capacity as a joint and several obligor in respect of the Credit Party Obligations of the other Borrowers) hereby waives notice of acceptance of its joint and several liability, notice of occurrence of any Default or Event of Default (except to the extent notice is expressly required to be given pursuant to the terms of this Agreement), or of any demand for any payment under this Agreement, notice of any action at any time taken or omitted by the Administrative Agent or the Lenders under or in respect of any of the Credit Party Obligations, any requirement of diligence and, generally, all demands, notices and other formalities of every kind in connection with this Agreement. Each Borrower hereby assents to, and waives notice of, any extension or postponement of the time for the payment of any of the Credit Party Obligations, the acceptance of any partial payment thereon, any waiver, consent or other action or acquiescence by the Administrative Agent or the Lenders at any time or times in respect of any default by the other Borrowers in the performance or satisfaction of any term, covenant, condition or provision of this Agreement, any and all other indulgences whatsoever by the Administrative Agent or the Lenders in respect of any of the Credit Party Obligations hereunder, and the taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of such Credit Party Obligations or the addition, substitution or release, in whole or in part, of the other Borrowers. Without limiting the generality
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of the foregoing, each Borrower (in its capacity as a joint and several obligor in respect of the Credit Party Obligations of the other Borrowers) assents to any other action or delay in acting or any failure to act on the part of the Administrative Agent or the Lenders, including any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with applicable laws or regulations thereunder which might, but for the provisions of this Section 2.27, afford grounds for terminating, discharging or relieving such Borrower, in whole or in part, from any of its Credit Party Obligations under this Section 2.27, it being the intention of each Borrower that, so long as any of the Credit Party Obligations hereunder remain unsatisfied, the Credit Party Obligations of such Borrower under this Section 2.27 shall not be discharged except by performance and then only to the extent of such performance. The Obligations of each Borrower under this Section 2.27 shall not be diminished or rendered unenforceable by any winding up, reorganization, arrangement, liquidation, reconstruction or similar proceeding with respect to any Borrower or a Lender. The joint and several liability of the Borrowers hereunder shall continue in full force and effect notwithstanding any absorption, merger, amalgamation or any other change whatsoever in the name, membership, constitution or place of formation of any Borrower or any of the Lenders.
(f)The provisions of this Section 2.27 are made for the benefit of the Lenders and their successors and assigns, and may be enforced by them from time to time against any of the Borrowers as often as occasion therefor may arise and without requirement on the part of the Lenders first to marshal any of its claims or to exercise any of its rights against the other Borrowers or to exhaust any remedies available to it against the other Borrowers or to resort to any other source or means of obtaining payment of any of the Credit Party Obligations hereunder or to elect any other remedy. The provisions of this Section 2.27 shall remain in effect until the Commitments have been terminated, no Loans remain outstanding and all amounts owing hereunder or under any other Credit Document or in connection herewith or therewith (other than contingent indemnity obligations) have been paid in full. If at any time, any payment, or any part thereof, made in respect of any of the Credit Party Obligations is rescinded or must otherwise be restored or returned by the Lenders upon the insolvency, bankruptcy or reorganization of any of the Borrowers, or otherwise, the provisions of this Section 2.27 will forthwith be reinstated and in effect as though such payment had not been made.
(g)Notwithstanding any provision to the contrary contained herein or in any of the other Credit Documents, to the extent the Credit Party Obligations of any Borrower shall be adjudicated to be invalid or unenforceable for any reason (including because of any applicable state or federal Law relating to fraudulent conveyances or transfers) then the Credit Party Obligations of such Borrower hereunder shall be limited to the maximum amount that is permissible under applicable Law (whether federal or state and including the Bankruptcy Code).
The Borrowers hereby appoint the RockTennWestRock CP to act as their agent and as the administrative borrower (in such capacity, the “Administrative Borrower”) for all purposes under this Agreement and the other Credit Documents (including, without limitation, with respect to all matters related to the borrowing and repayment of Loans) and agree that (a) the Administrative Borrower may execute such documents on behalf of the Borrowers as the Administrative Borrower deems appropriate in its sole discretion and the Borrowers shall be obligated by all of the terms of any such document executed on its behalf, (b) any notice or communication delivered by the Administrative Agent or any Lender to the Administrative Borrower shall be deemed delivered to all of the Borrowers and (c) the Administrative Agent or the Lenders may accept, and be permitted to rely on, any document, instrument or agreement executed by the Administrative Borrower on behalf of the Borrowers.
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Article III
REPRESENTATIONS AND WARRANTIES
To induce the Lenders to enter into this Credit Agreement and to make Loans herein provided for, the Credit Parties hereby represent and warrant to the Administrative Agent and to each Lender that:
3.1Corporate Existence; Compliance with Law..
The Parent and each of its Subsidiaries is a corporation or other legal entity duly organized, validly existing and (to the extent the concept is applicable in such jurisdiction) in good standing under the laws of its jurisdiction of organization, except where the failure to be in good standing would not reasonably be likely to have a Material Adverse Effect. The Parent and each of its Subsidiaries (i) has the corporate power and authority and the legal right to own and operate its property and to conduct its business, (ii) is duly qualified as a foreign corporation or other legal entity and in good standing under the laws of each jurisdiction where its ownership of property or the conduct of its business requires such qualification, and (iii) is in compliance with all Requirements of Law, except where (a) the failure to have such power, authority and legal right as set forth in clause (i) hereof, (b) the failure to be so qualified or in good standing as set forth in clause (ii) hereof, or (c) the failure to comply with Requirements of Law as set forth in clause (iii) hereof, is not reasonably likely, in the aggregate, to have a Material Adverse Effect. No Credit Party is an EEA Financial Institution.
3.2Corporate Power; Authorization..
Each of the Credit Parties has the corporate power and authority to make, deliver and perform the Credit Documents to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance of such Credit Documents. No consent or authorization of, or filing with, any Person (including any Governmental Authority), is required in connection with the execution, delivery or performance by a Credit Party, or the validity or enforceability against a Credit Party, of the Credit Documents, other than such consents, authorizations or filings which have been made or obtained and those consents, authorizations and filings the failure of which to make or obtain would not reasonably be likely to have a Material Adverse Effect.
This Agreement has been duly executed and delivered by the Parent and the Borrowers and, upon delivery of a counterpart signature page hereto by each of RockTenn and MWV, will be duly executed and delivered by each of RockTenn and MWV, and each other Credit Document will be duly executed and delivered, by each Credit Party party thereto, as applicable, and this Credit Agreement constitutes (or, in the case of each of RockTenn and MWV, will constitute upon the delivery of a counterpart signature page hereto), and each other Credit Document when executed and delivered will constitute, legal, valid and binding obligations of each Credit Party executing the same, enforceable against such Credit Party in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors’ rights generally and by general principles of equity.
The execution, delivery and performance by each Credit Party of the Credit Documents to which it is a party will not (a) violate (i) such Person’s articles or certificate of incorporation (or equivalent formation document), bylaws or other organizational or governing documents or (ii) any Requirement of Law or
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(b) cause a breach or default under any of their respective Material Contracts, except, with respect to any violation, breach or default referred to in clause (a)(ii) or (b), to the extent that such violation, breach or default would not reasonably be likely to have a Material Adverse Effect.
No litigation, investigation or proceeding of or before any court, tribunal, arbitrator or governmental authority is pending or, to the knowledge of any Responsible Officer of the Parent, threatened in writing by or against any Credit Party or any of the Restricted Subsidiaries, or against any of their respective properties or revenues, existing or future (a) that is adverse in any material respect to the interests of the Lenders with respect to any Credit Document or any of the transactions contemplated hereby or thereby, or (b) that is reasonably likely to have a Material Adverse Effect.
None of the Credit Parties nor any Restricted Subsidiary is an “investment company” registered or required to be registered under the Investment Company Act of 1940, as amended, and is not controlled by such a company.
No part of the proceeds of the Loans hereunder will be used, directly or indirectly, for the purpose of purchasing or carrying any “margin stock” within the meaning of Regulation U. Neither the execution and delivery hereof by the Credit Parties, nor the performance by them of any of the transactions contemplated by this Credit Agreement (including the direct or indirect use of the proceeds of the Loans) will violate or result in a violation of Regulation T, U or X.
3.8Compliance with Environmental Laws. . Except for any matters that would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect:
(a)None of the Credit Parties nor any of the Restricted Subsidiaries has received from any third party any notices of claims or potential liability under, or notices of failure to comply with, any Environmental Laws.
(b)None of the Credit Parties nor any of the Restricted Subsidiaries has received any notice of violation, or notice of any action, either judicial or administrative, from any Governmental Authority relating to the actual or alleged violation of any Environmental Law, including any such notice of violation or action based upon any actual or alleged Release or threat of Release of any Hazardous Substances by a Credit Party or any of the Restricted Subsidiaries or its employees or agents, or as to the existence of any contamination at any location for which a Credit Party or any Restricted Subsidiary is or is alleged to be responsible.
(c)None of the Credit Parties nor any of the Restricted Subsidiaries, nor, to the knowledge of any Credit Party, any other Person, has caused any Release or threat of Release of any Hazardous Substance, with respect to any real property currently or formerly owned, leased or operated by a Credit Party or any Restricted Subsidiary or has violated any Environmental Law, that is reasonably likely to result in penalties, fines, claims or other liabilities to a Credit Party or any Restricted Subsidiary pursuant to any Environmental Law.
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(d)The Credit Parties and the Restricted Subsidiaries and their respective operations are in compliance with all Environmental Laws, and have obtained, maintained and are in compliance with all necessary governmental permits, licenses and approvals required under Environmental Law for the operations conducted on their respective properties.
Schedule 3.9 is a complete and correct list of the Parent’s Subsidiaries and the Joint Ventures of the Parent and its Subsidiaries, in each case, as of the Closing Date after giving effect to the Combination, showing, as to each Subsidiary and Joint Venture, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its Capital Stock or similar equity interests outstanding owned by the Parent and each other Subsidiary.
3.10Financial Statements, Fiscal Year and Fiscal Quarters..
(a)The Parent has furnished to the Administrative Agent and the Lenders (i) copies of audited consolidated financial statements of RockTenn and its Subsidiaries (prior to giving effect to the Combination) and of MWV and its Subsidiaries for the three (3) fiscal years most recently ended prior to the Closing Date for which audited financial statements are available (it being understood that the Administrative Agent and the Lenders have received audited consolidated financial statements of RockTenn, MWV and their respective Subsidiaries for fiscal years 2012, 2013 and 2014), in each case audited by independent public accountants of recognized national standing and prepared in conformity with GAAP, (ii) copies of interim unaudited condensed consolidated balance sheets, statements of operations and statements of cash flows of RockTenn and its Subsidiaries (prior to giving effect to the Combination) as of and for December 31, 2014 and March 31, 2015 and of MWV and its Subsidiaries as of and for March 31, 2015, (iii) copies of pro forma condensed consolidated balance sheet and statement of income for the Parent and its Subsidiaries for the periods for which such pro forma financial statements would be required pursuant to Regulation S-X under the Securities Act applicable to a registration statement under the Securities Act on Form S-1 (“Regulation S-X”), in each case giving pro forma effect to the Transactions (prepared in accordance with Regulation S-X, and all other rules and regulations of the SEC under the Securities Act), and including such other adjustments as are reasonably acceptable to the Lead Arrangers, (iv) quarterly projections prepared by management of balance sheets, income statements and cash flow statements of the Parent and its Subsidiaries for the fiscal years ending September 30, 2015 and 2016 and (v) annual projections prepared by management of balance sheets, income statements and cash flow statements of the Parent and its Subsidiaries for the fiscal years ending September 30, 2017, 2018 and 2019.
(b)The financial statements referenced in subsection (a) (other than the financial statements referenced in clause (iii) and the projections referenced in clause (iv) of subsection (a)) fairly present in all material respects the consolidated financial condition of RockTenn and its Subsidiaries or MWV and its Subsidiaries, as applicable, as at the dates thereof and the results of operations for such periods in conformity with GAAP consistently applied (subject, in the case of the quarterly financial statements, to normal year-end audit adjustments and the absence of certain notes). The Credit Parties and the Restricted Subsidiaries taken as a whole did not have any material contingent obligations, contingent liabilities, or material liabilities for known taxes, long-term leases or unusual forward or long-term commitments required to be reflected in the foregoing financial statements or the notes thereto that are not so reflected.
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(c)The pro forma condensed consolidated balance sheet and statement of income referenced in clause (iii) of subsection (a) are based upon reasonable assumptions made known to the Lenders and upon information not known to be incorrect or misleading in any material respect.
(d)The projections referenced in clause (iv) of subsection (a) were prepared in good faith on the basis of the assumptions stated therein, which assumptions are fair in light of then existing conditions (it being understood that projections may vary from actual results and that such variances may be material).
(e)Since September 30, 2014, there has been no change with respect to the Consolidated Companies taken as a whole which has had or is reasonably likely to have a Material Adverse Effect.
(a)Compliance. Each Plan maintained by the Credit Parties and the Restricted Subsidiaries has at all times been maintained, by its terms and in operation, in compliance with all applicable laws, except for such instances of non-compliance that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect.
(b)Liabilities. None of the Credit Parties nor the Restricted Subsidiaries is subject to any liabilities (including withdrawal liabilities) with respect to any Plans of the Credit Parties, the Restricted Subsidiaries and their ERISA Affiliates arising from Titles I or IV of ERISA, other than obligations to fund benefits under an ongoing Plan and to pay current contributions, expenses and premiums with respect to such Plans, except for such liabilities that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect.
(c)Funding. Each Credit Party and each Restricted Subsidiary and, with respect to any Plan which is subject to Title IV of ERISA, each of their respective ERISA Affiliates, have made full and timely payment of all amounts (A) required to be contributed under the terms of each Plan and applicable law, and (B) required to be paid as expenses (including PBGC or other premiums) of each Plan, except for failures to pay such amounts (including any penalties attributable to such amounts) that, individually or in the aggregate are not reasonably likely to have a Material Adverse Effect.
(d)ERISA Event or Foreign Plan Event. No ERISA Event or Foreign Plan Event has occurred or is reasonably expected to occur, except for such ERISA Events and Foreign Plan Events that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect.
3.12Accuracy and Completeness of Information..
None of the written reports, financial statements, certificates, or final schedules to this Agreement or any other Credit Document heretofore, contemporaneously or hereafter furnished by or on behalf of any Credit Party or any of its Subsidiaries to the Administrative Agent, the Lead Arrangers or any Lender for purposes of or in connection with this Credit Agreement or any other Credit Document, or any transaction contemplated hereby or thereby, when taken as a whole, contains as of the date of such report, financial statement, certificate or schedule or, with respect to any such items so furnished on or prior to the Closing Date, as of the Closing Date any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to forecasts or projected financial information, the Credit Parties represent only that such information was prepared in good faith based upon assumptions believed by them to be
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reasonable at the time made, at the time so furnished and, with respect to any such items so furnished on or prior to the Closing Date, as of the Closing Date (it being understood that such forecasts and projections may vary from actual results and that such variances may be material).
3.13Compliance with Trading with the Enemy Act, OFAC Rules and Regulations, Patriot Act and FCPA..
(a)Neither any Credit Party nor any of its Subsidiaries is an “enemy” or an “ally of the enemy” within the meaning of Section 2 of the Trading with the Enemy Act of the United States of America (50 U.S.C. App. §§ 1 et seq.), as amended. Neither any Credit Party nor any or its Subsidiaries is in violation of (i) the Trading with the Enemy Act, as amended, (ii) any of the foreign assets control regulations of the Office of Foreign Assets Control of the United States Treasury Department (“OFAC”) (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto, (iii) the Patriot Act or (iv) the Canadian AML Acts. None of the Credit Parties (A) is subject to sanctions administered by OFAC or the U.S. Department of State or (B) to the best of its knowledge, engages in any dealings or transactions, or is otherwise associated, with any person subject to such sanctions.
(b)None of the Credit Parties or their Subsidiaries or, to the knowledge of the Credit Parties, their respective Affiliates, directors, officers, employees or agents is in violation of any Sanctions.
(c)None of the Credit Parties or their Subsidiaries or their respective Affiliates, directors, officers, employees or agents (i) is a Sanctioned Person or a Sanctioned Entity, (ii) has more than 15% of its assets located in Sanctioned Entities, or (iii) derives more than 15% of its operating income from investments in, or transactions with Sanctioned Persons or Sanctioned Entities. The proceeds of any Loan will not be used and have not been used, in each case directly by any Credit Party or any of its Subsidiaries or, to the knowledge of the Credit Parties, indirectly by any other Person, to fund any operations in, finance any investments or activities in or make any payments to, a Sanctioned Person or a Sanctioned Entity.
(d)Each of the Credit Parties and their Subsidiaries and, to the knowledge of the Credit Parties, their respective directors, officers, employees or agents is in compliance with the Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-1, et seq. and any applicable foreign counterpart thereto. None of the Credit Parties or their Subsidiaries or, to the knowledge of the Credit Parties, their respective directors, officers, employees or agents has made and no proceeds of any Loan will be used, in each case directly by any Credit Party or any of its Subsidiaries or, to the knowledge of the Credit Parties, indirectly by any other Person, to make a payment, offering, or promise to pay, or authorized the payment of, money or anything of value (a) in order to assist in obtaining or retaining business for or with, or directing business to, any foreign official, foreign political party, party official or candidate for foreign political office, (b) to a foreign official, foreign political party or party official or any candidate for foreign political office, and (c) with the intent to induce the recipient to misuse his or her official position to direct business wrongfully to such Credit Party or its Subsidiary or to any other Person, in violation of the Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-1, et seq. or any applicable foreign counterpart thereto.
The Extensions of Credit will be used solely for the Investment Purpose.
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Article IV
CONDITIONS PRECEDENT
4.1Conditions to Closing Date and Initial Term Loans..
This Credit Agreement shall become effective upon, and the obligation of each Lender to make the initial Revolving Loans and the Term Loans on the Closing Date is subject to, the satisfaction of the following conditions precedent:
(a)Execution of Credit Agreement and Credit Documents. Receipt by the Administrative Agent of (i) for the account of each Closing Date Term Loan Lender that makes a request therefor, a Closing Date Term Loan Note and (ii) a fully-executed counterpart of this Credit Agreement; in each case executed by a duly authorized officer of each party thereto and in each case conforming to the requirements of this Credit Agreement; provided that if either RockTenn or MWV is not authorized to deliver a counterpart to this Credit Agreement until after the consummation of the Combination, the delivery of a fully-executed counterpart to this Credit Agreement by such Initial Guarantor (and the delivery of the documentation required by Section 4.1(b) and Section 4.1(c) with respect to such Initial Guarantor) shall not be a condition precedent to the effectiveness of this Credit Agreement and of the obligation of each Lender to fund its portion of the Term Loan on the Closing Date; provided, however, that each such Initial Guarantor shall deliver a counterpart to this Credit Agreement (and the documentation required by Section 4.1(b) and Section 4.1(c) with respect to such Initial Guarantor) on the Closing Date promptly after the consummation of the Combination and the failure by any such Initial Guarantor to so deliver a counterpart to this Credit Agreement (and the documentation required by Section 4.1(b) and Section 4.1(c) with respect to such Initial Guarantor) on the Closing Date shall be an Event of Default.
(b)Legal Opinion. Receipt by the Administrative Agent of the following legal opinions of counsel to the Credit Parties, in form and substance reasonably acceptable to the Administrative Agent:
(i)a legal opinion of Cravath, Swaine & Moore LLP, special New York counsel to the Credit Parties, providing customary opinions regarding valid existence, good standing and organizational power and authority of the Credit Parties existing as of the Closing Date organized in New York and Delaware, the Investment Company Act of 1940, as amended, no conflicts with/no creation of liens under material contracts, enforceability of the Credit Documents, no conflicts with or consents under New York law or Delaware corporate/limited liability company law, due authorization, execution and delivery of the Credit Documents by the Credit Parties existing as of the Closing Date organized in New York and Delaware and no conflicts with organizational documents of the Credit Parties existing as of the Closing Date organized in New York and Delaware; and
(ii)legal opinion of the general counsel of the Parent, providing customary opinions regarding valid existence, good standing and organizational power and authority of the Credit Parties existing as of the Closing Date organized in Georgia, no conflicts with or consents under Georgia law, due authorization, execution and delivery of the Credit Documents by the Credit Parties existing as of the Closing Date organized in Georgia, no conflicts with organizational documents of the Credit Parties existing as of the Closing Date organized in Georgia, and no material litigation.
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(c)Corporate Documents. Receipt by the Administrative Agent of the following (or their equivalent), each (other than with respect to clause (iv)) certified by the secretary or assistant secretary of the applicable Credit Party as of the Closing Date to be true and correct and in force and effect pursuant to a certificate in a form reasonably satisfactory to the Administrative Agent:
(i)Articles of Incorporation. Copies of the articles of incorporation or charter documents of each Credit Party certified to be true and complete as of a recent date by the appropriate Governmental Authority of the state of its organization.
(ii)Resolutions. Copies of resolutions of the board of directors or comparable managing body of each Credit Party approving and adopting the respective Credit Documents (including the transactions contemplated therein) and authorizing execution and delivery thereof.
(iii)Bylaws. Copies of the bylaws, operating agreement or partnership agreement of each Credit Party.
(iv)Good Standing. Copies, where applicable, of certificates of good standing, existence or its equivalent of each Credit Party in its state or province of organization, certified as of a recent date by the appropriate Governmental Authorities of the applicable state or province of organization.
(d)Officer’s Certificate. Receipt by the Administrative Agent of a certificate, in form and substance reasonably satisfactory to it, of a Responsible Officer certifying that after giving effect to each of the Transactions (including the Combination), the Credit Parties taken as a whole are solvent as of the Closing Date.
(e)[Reserved].
(f)Financial Information. Receipt by the Administrative Agent of the financial information described Section 3.10(a) (for the avoidance of doubt, the Administrative Agent hereby acknowledges receipt of the financial information described in Section 3.10(a)).
(g)Termination of Existing Credit Agreements. The Administrative Agent shall have received evidence, in form and substance reasonably satisfactory to the Administrative Agent, that all principal, interest and other amounts outstanding in connection with the Existing Credit Agreements have been or substantially concurrently with the Closing Date are being repaid in full and terminated and all Liens relating thereto shall have been terminated and released (or arrangements reasonably satisfactory to the Administrative Agent shall have been made therefor).
(h)Fees. Receipt by the Administrative Agent and the Lenders of all fees, if any, then owing pursuant to the Fee Letter or pursuant to any other Credit Document, which fees may be paid or netted from the proceeds of the initial Extension of Credit hereunder.
(i)Consumation of the Combination. Substantially contemporaneously with the initial Extensions of Credit hereunder, the Combination shall have been consummated in accordance with the terms and conditions of the Combination Agreement without waiver or modification of any provision thereof or consent required thereunder unless approved by the Lead Arrangers (such approval not to be unreasonably withheld, conditioned or delayed), other than any such waivers, modifications or consents as are not materially adverse to the interests of the Lenders. The Administrative Agent shall have received a copy, certified by an officer of the Parent as true and complete,
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of the Combination Agreement as originally executed and delivered, together with all exhibits and schedules thereto.
(j)Patriot Act. Each of the Lenders shall have received, at least three (3) days prior to the Closing Date (to the extent reasonably requested on a timely basis at least seven (7) days prior to the Closing Date), all documentation and other information required by the applicable Governmental Authorities under applicable “know your customer” and anti-money laundering rules and regulations, including the Patriot Act.
(k)Representations and Warranties. The representations and warranties made by the Credit Parties herein or in any other Credit Document or which are contained in any certificate furnished at any time under or in connection herewith or therewith shall be true and correct in all material respects (except to the extent that any such representation or warranty is qualified by materiality, in which case such representation and warranty shall be true and correct) on and as of the date of such Extension of Credit as if made on and as of such date (except for those which expressly relate to an earlier date) (it being understood and agreed that, for purposes of this Section 4.1(k), such representations and warranties shall be made giving pro forma effect to the Combination).
(l)No Default or Event of Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Extension of Credit to be made on such date.
(m)Back-up Information on Mill Conversion Investments. The Administrative Agent shall have received reasonable back-up information regarding the Borrowers’ mill conversion investments, consistent with the Investment Purpose (it being understood that the Borrowers shall not be obligated to independently verify fair market valuation as estimated for insurance replacement purposes by the Guarantors’ property insurance carriers).
(n)Equity Investment. The Administrative Agent shall have received evidence that RockTennWestRock CP has made a minimum equity investment of $1,000 in CoBank.
(o)Delivery of Notice of Borrowing. The Administrative Agent shall have received a completed Notice of Borrowing with respect to the Closing Date Term Loan, which shall include (i) a certification from the Borrowers as to the use of proceeds of the Closing Date Term Loan consistent with the Investment Purpose and (ii) an authorization as to the account to which the net proceeds of the Closing Date Term Loan are to be disbursed.
Article V
AFFIRMATIVE COVENANTS
The Credit Parties covenant and agree that on the Closing Date, and so long as this Credit Agreement is in effect and until the Commitments have been terminated, no Loans remain outstanding and all amounts owing hereunder or under any other Credit Document or in connection herewith or therewith (other than contingent indemnity obligations) have been paid in full, the Credit Parties shall:
5.1Corporate Existence, Etc....
Preserve and maintain, and cause each of the Material Subsidiaries to preserve and maintain, its corporate existence (except as otherwise permitted pursuant to Section 6.4), its material rights, franchises, licenses, permits, consents, approvals and contracts, and its material trade names, service marks and other
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Intellectual Property (for the scheduled duration thereof), in each case material to the normal conduct of its business, and its qualification to do business as a foreign corporation in all jurisdictions where it conducts business or other activities making such qualification necessary, where the failure to be so qualified is reasonably likely to have a Material Adverse Effect.
5.2Compliance with Laws, Etc....
Comply, and cause each of the Restricted Subsidiaries to comply, with all Requirements of Law (including all Environmental Laws, ERISA, the Trading with the Enemy Act, OFAC, the Patriot Act and the Canadian AML Acts, each as amended) and Contractual Obligations applicable to or binding on any of them where the failure to comply with such Requirements of Law and Contractual Obligations is reasonably likely to have a Material Adverse Effect. Each of the Credit Parties will maintain in effect and enforce policies and procedures designed to ensure compliance by the Credit Parties, their Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions.
5.3Payment of Taxes and Claims..
File and cause each Restricted Subsidiary to file all Tax returns that are required to be filed by each of them and pay, collect, withhold and remit all Taxes that have become due pursuant to such returns or pursuant to any assessment in respect thereof received by a Credit Party or any Restricted Subsidiary, and each Credit Party and each Restricted Subsidiary will pay or cause to be paid all other Taxes due and payable (whether or not shown on a Tax return) before the same become delinquent, except, in each case, (i) such Taxes as are being contested in good faith by appropriate and timely proceedings and as to which adequate reserves have been established in accordance with GAAP or (ii) where failure to take the foregoing actions, individually or in the aggregate, is not reasonably likely to have a Material Adverse Effect.
Keep, and cause each of the Restricted Subsidiaries to keep, proper books of record and account, containing complete and accurate entries of all their respective financial and business transactions.
5.5Visitation, Inspection, Etc....
Permit, and cause each of the Restricted Subsidiaries to permit, any representative of the Administrative Agent or, during the continuance of an Event of Default, any Lender, at the Administrative Agent’s or such Lender’s expense, to visit and inspect any of its property, to examine its books and records and to make copies and take extracts therefrom, and to discuss its affairs, finances and accounts with its officers, all at such reasonable times during normal business hours of such Credit Party or the applicable Restricted Subsidiary, as the case may be, after reasonable prior notice to the Parent; provided, however, that unless an Event of Default has occurred and is continuing, such visits and inspections can occur no more frequently than once per year.
5.6Insurance; Maintenance of Properties and Licenses..
(a)Maintain or cause to be maintained with financially sound and reputable insurers or through self insurance, risk retention or risk transfer programs, insurance with respect to its properties and business, and the properties and business of the Restricted Subsidiaries, against loss or damage of the kinds that the Parent in its judgment deems reasonable, such insurance to be of such types and in such amounts and subject to such deductibles and self-insurance programs as the Parent in its judgment deems reasonable.
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(b)Cause, and cause each Restricted Subsidiary to cause, all properties material to the conduct of its business to be maintained and kept in good condition, repair and working order, ordinary wear and tear excepted, and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, settlements and improvements thereof, all as in the judgment of any Credit Party may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times except as would not, individually or in the aggregate, have a Material Adverse Effect; provided, however, that nothing in this Section 5.6(b) shall prevent a Credit Party from discontinuing the operation or maintenance of any such properties if such discontinuance is, in the judgment of the Parent, desirable in the conduct of its business or the business of any Credit Party or any of the Restricted Subsidiaries.
(c)Maintain, in full force and effect in all material respects, each and every material license, permit, certification, qualification, approval or franchise issued by any Governmental Authority (each a “License”) required for each of the Credit Parties to conduct their respective businesses as presently conducted except as would not, individually or in the aggregate, have a Material Adverse Effect; provided, however, that nothing in this Section 5.6(c) shall prevent a Credit Party from discontinuing the operation or maintenance of any such License if such discontinuance is, in the judgment, of the Parent, desirable in the conduct of its business or business of any Credit Party or any of the Restricted Subsidiaries.
5.7Financial Reports; Other Notices..
Furnish to the Administrative Agent (for delivery to each Lender):
(a)after the end of each of the first three quarterly accounting periods of each of its fiscal years (commencing with the fiscal quarter ending September 30, 2015), as soon as prepared, but in any event at the same time it files or is (or would be) required to file the same with the SEC, the quarterly unaudited consolidated balance sheet of the Parent and its consolidated Subsidiaries as of the end of such fiscal quarter and the related unaudited consolidated statements of income and cash flows (together with all footnotes thereto) of the Parent and its consolidated Subsidiaries for such fiscal quarter and the then elapsed portion of such fiscal year, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Parent’s previous fiscal year, accompanied by a certificate, dated the date of furnishing, signed by a Responsible Officer of the Parent to the effect that such financial statements accurately present in all material respects the consolidated financial condition of the Parent and its consolidated Subsidiaries and that such financial statements have been prepared in accordance with GAAP consistently applied (subject to year-end adjustments); provided, however, during any period that the Parent has consolidated Subsidiaries which are not Consolidated Companies, the Parent shall also provide such financial information in a form sufficient to enable the Administrative Agent and the Lenders to determine the compliance of the Credit Parties with the terms of this Credit Agreement with respect to the Consolidated Companies; provided further, however, that, for the fiscal quarter of the Parent ending June 30, 2015, the Parent shall furnish to the Administrative Agent the financial statements and other information to be set forth in the Quarterly Report on Form 10-Q as filed by the Parent for the fiscal quarter ending June 30, 2015;
(b)after the end of each of its fiscal years, as soon as prepared, but in any event at the same time it files or is (or would be) required to file the same with the SEC, the annual audited report for that fiscal year for the Parent and its consolidated Subsidiaries, containing a consolidated balance sheet of the Parent and its consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, stockholders’ equity and cash flows (together with all footnotes thereto) of the Parent and its consolidated Subsidiaries for such fiscal year, setting
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forth in each case in comparative form the figures for the previous fiscal year (which financial statements shall be reported on by the Parent’s independent certified public accountants, such report to state that such financial statements fairly present in all material respects the consolidated financial condition and results of operation of the Parent and its consolidated Subsidiaries in accordance with GAAP, and which shall not be subject to any “going concern” or like qualification, exception, assumption or explanatory language (other than solely as a result of a maturity date in respect of any Term Loans) or any qualification, exception, assumption or explanatory language as to the scope of such audit); provided, however, during any period that the Parent has consolidated Subsidiaries which are not Consolidated Companies, the Parent shall also provide such financial information in a form sufficient to enable the Administrative Agent and the Lenders to determine the compliance of the Credit Parties with the terms of this Credit Agreement with respect to the Consolidated Companies;
(c)not later than five days after the delivery of the financial statements described in Section 5.7(a) and (b) above, commencing with such financial statements for the period ending September 30, 2015, a certificate of a Responsible Officer substantially in the form of Exhibit G, stating that, to the best of such Responsible Officer’s knowledge, each of the Credit Parties during such period observed or performed in all material respects all of its covenants and other agreements, and satisfied in all material respects every condition, contained in this Credit Agreement to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate and such certificate shall include (i) the calculations in reasonable detail required to indicate compliance with Section 6.1 as of the last day of such period and that the financial information provided has been prepared in accordance with GAAP applied consistently for the periods related thereto and (ii) a schedule that includes actual actions taken and run-rate synergies achieved versus actions scheduled and associated estimated run-rate synergies pursuant to clause (ix) in the definition of EBITDA;
(d)promptly upon the filing thereof or otherwise becoming available, copies of all financial statements, annual, quarterly and special reports, proxy statements and notices sent or made available generally by the Parent to its public security holders, of all regular and periodic reports and all registration statements and prospectuses, if any, filed by any of them with any securities exchange or with the SEC;
(e)as soon as possible and in any event within thirty (30) days after a Credit Party or any Restricted Subsidiary knows or has reason to know that any ERISA Event or Foreign Plan Event with respect to any Plan or Foreign Plan has occurred and such ERISA Event or Foreign Plan Event involves a matter that has had, or is reasonably likely to have, a Material Adverse Effect, a statement of a Responsible Officer of such Credit Party or such Restricted Subsidiary setting forth details as to such ERISA Event or Foreign Plan Event and the action which such Credit Party or such Restricted Subsidiary proposes to take with respect thereto;
(f)[reserved];
(g)prompt written notice of the occurrence of any Default or Event of Default;
(h)prompt written notice of the occurrence of any Material Adverse Effect;
(i)a copy of any material notice to the holders of (or any trustee with respect to) the Existing Senior Notes; and
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(j)with reasonable promptness, (x) such other information relating to each Credit Party’s performance of this Credit Agreement or its financial condition as may reasonably be requested from time to time by the Administrative Agent (at the request of any Lender) and (y) all documentation and other information required by the applicable Governmental Authorities under applicable “know your customer” and anti-money laundering rules and regulations, including the Patriot Act, or applicable anti-corruption statutes, including the Foreign Corrupt Practices Act, that is reasonably requested from time to time by the Administrative Agent or any Lender.
The Credit Parties will cooperate with the Administrative Agent in connection with the publication of certain materials and/or information provided by or on behalf of the Credit Parties to the Administrative Agent and Lenders (collectively, “Information Materials”) pursuant to this Article V; provided that upon the filing by the Credit Parties of the items referenced in Section 5.7(a), 5.7(b) or 5.7(d) with the SEC for public availability, the Credit Parties, with respect to such items so filed, shall not be required to separately furnish such items to the Administrative Agent and Lenders. In addition, the Credit Parties will designate Information Materials (i) that are either available to the public or not material with respect to the Credit Parties and their Subsidiaries or any of their respective securities for purposes of United States federal and state securities laws, as “Public Information” and (ii) that are not Public Information as “Private Information”.
5.8Notices Under Certain Other Indebtedness..
Promptly following its receipt thereof, the Parent shall furnish the Administrative Agent a copy of any notice received by it, any Credit Party or any of the Restricted Subsidiaries from the holder(s) of Indebtedness (or from any trustee, agent, attorney, or other party acting on behalf of such holder(s)) which, in the aggregate, exceeds $150,000,000, where such notice states or claims the existence or occurrence of any default or event of default with respect to such Indebtedness under the terms of any indenture, loan or credit agreement, debenture, note, or other document evidencing or governing such Indebtedness.
Notify the Administrative Agent of any actions, suits or proceedings instituted by any Person against a Credit Party or any Restricted Subsidiary where the uninsured portion of the money damages sought (which shall include any deductible amount to be paid by such Credit Party or such Restricted Subsidiary) is reasonably likely to have a Material Adverse Effect. Said notice is to be given promptly, and is to specify the amount of damages being claimed or other relief being sought, the nature of the claim, the Person instituting the action, suit or proceeding, and any other significant features of the claim.
(a)The Credit Parties may, in their sole and absolute discretion, elect to cause a Restricted Subsidiary to become a Guarantor of the Credit Party Obligations by executing a Joinder Agreement. Upon the execution and delivery by such Subsidiary of a Joinder Agreement, such Restricted Subsidiary shall be deemed to be a Credit Party hereunder, and each reference in this Agreement to a “Credit Party” shall also mean and be a reference to such Restricted Subsidiary, for so long as such Joinder Agreement is in effect.
(b)In the case of each Restricted Subsidiary that becomes a Guarantor in accordance with clause (a) above, the Credit Parties shall ensure that before the execution of any Joinder Agreement, the Administrative Agent receives the items referred to in Section 4.1(a) in respect of such Guarantor, and a certificate of a Responsible Officer of the Parent with respect to the representations and warranties in Article III.
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Use the Loans (including the Incremental Loans) solely for the purposes provided in Section 3.14. The Borrowers will not request any Extension of Credit, and no Credit Party shall use directly or, to its knowledge, indirectly, and shall procure that its Subsidiaries and its or their respective directors, officers, employees and agents shall not use directly or, to its knowledge, indirectly, the proceeds of any Extension of Credit (A) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws, (B) for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Entity, to the extent such activities, businesses or transaction would be prohibited by Sanctions if conducted by a corporation incorporated in the United States, Canada (or any province or territory thereof) or in a European Union member state, or (C) in any manner that would result in the violation of any Sanctions applicable to any party hereto.
The Credit Parties covenant and agree that on the Closing Date, and so long as this Credit Agreement is in effect and until the Commitments have been terminated, no Loans remain outstanding and all amounts owing hereunder or under any other Credit Document or in connection herewith or therewith (other than contingent indemnity obligations) have been paid in full:
The Credit Parties will not:
(a)Debt to Capitalization Ratio. Suffer or permit the Debt to Capitalization Ratio as of the last day of each full fiscal quarter of the Parent ending on or after September 30, 2015 to be greater than 0.60:1.00.
(b)Consolidated Interest Coverage Ratio. Suffer or permit the Consolidated Interest Coverage Ratio as of the last day of each full fiscal quarter of the Parent ending on or after September 30, 2015, as calculated for a period consisting of the four preceding fiscal quarters of the Parent, to be less than 2.50:1.00.
The Credit Parties will not, and will not permit any Restricted Subsidiary to, create, assume or suffer to exist any Lien upon any of their respective Properties whether now owned or hereafter acquired; provided, however, that this Section 6.2 shall not apply to the following:
(a)any Lien for Taxes not yet due or Taxes or assessments or other governmental charges which are being actively contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with GAAP;
(b)any Liens, pledges or deposits (i) in connection with worker’s compensation, social security, health, disability or other employee benefits, or property, casualty or liability insurance, assessments or other similar charges or deposits incidental to the conduct of the business of a Credit Party or any Restricted Subsidiary (including security deposits posted with landlords and utility companies) or the ownership of any of their assets or properties which were not incurred in
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connection with the borrowing of money or the obtaining of advances or credit and which do not in the aggregate materially detract from the value of their Properties or materially impair the use thereof in the operation of their businesses and (ii) in respect of letters of credit, bank guarantees or similar instruments issued for the account of any Credit Party in the ordinary course of business supporting obligations of the type set forth in clause (i) above;
(c)statutory Liens of carriers, warehousemen, mechanics, materialmen and other Liens imposed by law created in the ordinary course of business for amounts not overdue by more than 30 days, or which are being contested in good faith by appropriate proceedings and for which adequate reserves have been established, or which are not material in amount;
(d)pledges or deposits for the purpose of securing a stay or discharge in the course of any legal proceeding and judgment liens in respect of judgments that do not constitute an Event of Default under Section 7.1(i);
(e)Liens consisting of encumbrances in the nature of zoning restrictions, easements, rights and restrictions on real property and statutory Liens of landlords and lessors which in each case do not materially impair the use of any material Property;
(f)any Lien in favor of the United States of America or any department or agency thereof, or in favor of any state government or political subdivision thereof, or in favor of a prime contractor under a government contract of the United States, or of any state government or any political subdivision thereof, and, in each case, resulting from acceptance of partial, progress, advance or other payments in the ordinary course of business under government contracts of the United States, or of any state government or any political subdivision thereof, or subcontracts thereunder and which do not materially impair the use of such Property as currently being utilized by a Credit Party or any Restricted Subsidiary;
(g)any Lien securing any debt securities issued (including via exchange offer and regardless of when issued) in the capital markets if and to the extent that the Credit Party Obligations under this Agreement are concurrently secured by a Lien equal and ratable with the Lien securing such debt securities;
(h)Liens (i)(A) existing on the Closing Date securing industrial development bonds and Indebtedness of Foreign Subsidiaries in an aggregate principal amount not to exceed $325,000,000 and (B) securing Refinancing Indebtedness in respect of Indebtedness referenced in clause (i)(A) above and (ii) securing any industrial development bonds or similar instruments with respect to which both the debtor and the investor are Consolidated Companies;
(i)(i) Liens existing or deemed to exist in connection with any Permitted Securitization Transaction, but only to the extent that any such Lien relates to the applicable Securitization Assets or other accounts receivable and other assets (together with related rights and proceeds) sold, contributed, financed or otherwise conveyed or pledged pursuant to such transactions and (ii) Liens existing or deemed to exist in connection with any inventory financing arrangement so long the fair market value of the inventory on which such Liens exist pursuant to this subsection (i)(ii) does not exceed $250,000,000 at any time;
(j)any interest of a lessor, licensor, sublessor or sublicensor (or of a lessee, licensee, sublessee or sublicensee) under, and Liens arising from UCC financing statements (or equivalent filings, registrations or agreements in foreign jurisdictions) relating to, leases, licenses, subleases and sublicenses not prohibited by this Agreement;
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(k)any interest of title of an owner of equipment or inventory on loan or consignment to, or subject to any title retention or similar arrangement with, a Credit Party, and Liens arising from UCC financing statements (or equivalent filings, registrations or agreements in foreign jurisdictions) relating to such arrangements entered into in the ordinary course of business (but excluding any general inventory financing);
(l)banker’s liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with depositary institutions and securities accounts and other financial assets maintained with a securities intermediary; provided that such deposit accounts or other funds and securities accounts or other financial assets are not established or deposited for the purpose of providing collateral for any Indebtedness and are not subject to restrictions on access by any Credit Party in excess of those required by applicable banking regulations;
(m)Liens of a collecting bank arising in the ordinary course of business under Section 4-208 (or the applicable corresponding section) of the Uniform Commercial Code in effect in the relevant jurisdiction covering only the items being collected upon;
(n)Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods;
(o)Liens that are contractual rights of set-off not securing any Indebtedness;
(p)Liens (i) solely on any cash earnest money deposits, escrow arrangements or similar arrangements made by any Credit Party in connection with a letter of intent or purchase agreement for an Acquisition or other transaction not prohibited hereunder and (ii) consisting of an agreement to dispose of any Property in a disposition not prohibited hereunder, including customary rights and restrictions contained in such an agreement;
(q)Liens on any Property of a Credit Party in favor of any other Credit Party or Restricted Subsidiary;
(r)any restriction or encumbrance with respect to the pledge or transfer of the Capital Stock of any Joint Venture;
(s)Liens securing insurance premium financing arrangements;
(t)any Lien renewing, extending, refinancing or refunding any Lien permitted by subsection (g) or (h) above; provided that (i) the Property covered thereby is not increased, (ii) the amount secured or benefited thereby is not increased, (iii) the direct or any contingent obligor with respect thereto is not changed, and (iv) any renewal or extension of the obligations secured or benefited thereby is permitted by Section 6.3;
(u)Liens on cash, deposits or other collateral granted in favor of the Swingline Lender or the Issuing Lender (in each case, as defined in the Pro Rata Credit Agreement) to cash collateralize any Defaulting Lender’s (as defined in the Pro Rata Credit Agreement) participation in Letters of Credit or Swingline Loans (in each case, as defined in the Pro Rata Credit Agreement);
(v)subject to Section 9.209.21, Liens on cash or deposits granted to any Agent or Issuing Lender (in each case, as defined in the Pro Rata Credit Agreement) in accordance with the terms of the Pro Rata Credit Agreement to cash collateralize any of the Credit Party Obligations (as defined in the Pro Rata Credit Agreement); and
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(w)other Liens in addition to those permitted by subsections (a) through (v) above; provided that, at the time of incurrence of any Lien under this subsection (w), the aggregate outstanding principal amount of all obligations secured by such Lien (or in the case of Liens on inventory in connection with an inventory financing arrangement, which Liens are not otherwise permitted by subsection (i) of this Section 6.2, the fair market value of the inventory on which such Liens exist) shall not exceed the Priority Debt Basket at such time (determined prior to giving effect to the incurrence of such Lien).
The Credit Parties will not permit any of the Restricted Subsidiaries (other than the Credit Parties (except as set forth in Section 6.3(c)(ii)) and the Pro Rata Additional Borrowers) to create, incur, assume or suffer to exist any Indebtedness except:
(a)(A) Indebtedness existing as of the Closing Date underin respect of industrial development bonds and Indebtedness of Foreign Subsidiaries in an aggregate amount not to exceed $325,000,000 and (B) Refinancing Indebtedness in respect of Indebtedness incurred under clause (A) above;
(b)Indebtedness of any Restricted Subsidiary owing to a Credit Party or any Restricted Subsidiary;
(c)other Indebtedness (whether secured or unsecured); provided that (i) at the time of incurrence of any Indebtedness under this subsection (c), the aggregate principal amount of such Indebtedness does not exceed the Priority Debt Basket at such time (determined prior to giving effect to the incurrence of such Indebtedness) and (ii) for the avoidance of doubt, any Indebtedness under this Agreement shall be considered Indebtedness incurred pursuant to this clause (c);
(d)Indebtedness and obligations owing under Hedging Agreements and/or Cash Management Agreements so long as such Hedging Agreements and/or Cash Management Agreements are not entered into for speculative purposes;
(e)Guaranty Obligations of any Restricted Subsidiary in respect of Indebtedness of the Parent or any other Restricted Subsidiary to the extent such Indebtedness is permitted to exist or be incurred pursuant to this Section 6.3;
(f)obligations of any Restricted Subsidiary in connection with (i) any Permitted Securitization Transaction, to the extent such obligations constitute Indebtedness and (ii) any inventory financing arrangements so long as the aggregate principal amount Indebtedness in respect thereof incurred under this subsection(f)(ii) does not exceed $250,000,000 at any time outstanding;
(g)Indebtedness of any Restricted Subsidiary consisting of completion guarantees, performance bonds, surety bonds or customs bonds incurred in the ordinary course of business;
(h)Indebtedness owed to any Person (including obligations in respect of letters of credit, bank guarantees and similar instruments for the benefit of such Person) providing workers’ compensation, social security, health, disability or other employee benefits or property, casualty or liability insurance, pursuant to reimbursement or indemnification obligations to such Person, in each case incurred in the ordinary course of business;
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(i)Indebtedness owed in respect of any overdrafts and related liabilities arising from treasury, depositary and cash management services or in connection with any automated clearinghouse transfers of funds; provided that such Indebtedness shall be repaid in full within five Business Days of the incurrence thereof;
(j)Indebtedness in respect of judgments that do not constitute an Event of Default under Section 7.1(i);
(k)Indebtedness consisting of the financing of insurance premiums with the providers of such insurance or their Affiliates; and
(l)Indebtedness created under this Agreement or any other Credit Document.
6.4Merger and Sale of Assets..
The Credit Parties will not, and will not permit any Restricted Subsidiary to, dissolve, wind-up, merge, amalgamate or consolidate with any other Person or sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or substantially all of the business or assets of the Credit Parties and their respective Restricted Subsidiaries (taken as a whole), whether now owned or hereafter acquired (excluding any inventory or other assets sold or disposed of in the ordinary course of business); provided that, notwithstanding any of the foregoing limitations, the Credit Parties and the Restricted Subsidiaries may take the following actions:
(a)(i) if no Event of Default shall then exist or immediately thereafter will exist, any Borrower may merge, amalgamate or consolidate with any Person so long as (A) such Borrower is the surviving entity or (B) the surviving entity (the “Successor Borrower”) (x) is organized under the laws of the United States or any State thereof, (y) expressly assumes such Borrower’s obligations under this Agreement and the other Credit Documents to which such Borrower is a party pursuant to a supplement hereto or thereto, as applicable, in form and substance reasonably satisfactory to the Administrative Agent and (z) each Guarantor of the Credit Party Obligations of such Borrower shall have confirmed that its obligations hereunder in respect of such Credit Party Obligations shall apply to the Successor Borrower’s obligations under this Agreement (it being understood that, if the foregoing conditions in clauses (x) through (z) are satisfied, then the Successor Borrower will automatically succeed to, and be substituted for, such Borrower under this Agreement; provided, however, that such Borrower shall have provided not less than five Business Days’ notice of any merger, amalgamation or consolidation of such Borrower, and such Borrower or Successor Borrower shall, promptly upon the request of the Administrative Agent or any Lender, supply any documentation and other evidence as is reasonably requested by the Administrative Agent or any Lender in order for the Administrative Agent or such Lender to carry out and be satisfied (1) it has complied with the results of all necessary “know your customer” or other similar checks under all applicable laws and regulations) and (2) any Successor Borrower qualifies as a directly eligible borrower of the Farm Credit Lenders then party to this Agreement (or, if applicable, replacement Farm Credit Lenders who have agreed to purchase the outstanding Loans and Commitments of such existing Farm Credit Lenders in accordance with the assignment provisions of Section 9.6(b)), (ii) any Restricted Subsidiary may merge, amalgamate or consolidate with a Credit Party if such Credit Party is the surviving entity, (iii) any Restricted Subsidiary (other than a Borrower) may merge, amalgamate or consolidate with any other Person (other than a Credit Party); provided that a Restricted Subsidiary shall be the continuing or surviving entity and to the extent such continuing or surviving Restricted Subsidiary assumes the obligations under any Existing Senior Notes, such Restricted Subsidiary shall become a Guarantor of the Credit Party Obligations and deliver an executed Joinder Agreement and the documents required pursuant to Section 5.10(b),
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(iv) any Restricted Subsidiary (other than a Borrower) may merge or amalgamate with any Person that is not a Restricted Subsidiary in connection with a sale of Property permitted under this Section 6.4, and (v) any Restricted Subsidiary (other than a Borrower) may be dissolved so long as the property and assets of such Restricted Subsidiary are transferred to the Parent, a Borrower or any other Restricted Subsidiary;
(b)any Restricted Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its Property to (i) a Borrower, (ii) any Guarantor or (iii) any Restricted Subsidiary of the Parent; provided that, with respect to transfers described in clause (iii), upon completion of such transaction (A) there shall exist no Default or Event of Default and (B) the Subsidiary to which the Restricted Subsidiary’s Property is sold, leased, transferred or otherwise disposed shall be a Restricted Subsidiary and, if such Restricted Subsidiary is a Guarantor, a Guarantor;
(c)any Restricted Subsidiary (other than a Borrower) may liquidate or dissolve if the Parent determines in good faith that such liquidation or dissolution is in the best interests of the Parent and is not materially disadvantageous to the Lenders;
(d)the Parent and its Restricted Subsidiaries may sell, transfer or otherwise dispose of or wind down the Non-Core MWV Businesses;
(e)the Parent and its Restricted Subsidiaries may consummate the transactions contemplated by the Combination Agreement to occur on the Closing Date (including the Combination);
(f)the Parent and its Restricted Subsidiaries (other than any Borrower) may consummate any other transaction permitted under Section 6.4 of the Pro Rata Credit Agreement as in effect on the date hereof; provided, however, that if the Parent is the subject of any merger, amalgamation or consolidation, it shall have provided not less than five Business Days’ notice of such merger, amalgamation or consolidation, and the Parent (or its successor) shall, promptly upon the request of the Administrative Agent or any Lender, supply any documentation and other evidence as is reasonably requested by the Administrative Agent or any Lender in order for the Administrative Agent or such Lender to carry out and be satisfied it has complied with the results of all necessary “know your customer” or other similar checks under all applicable laws and regulations; and
(g)any Borrower may merge or consolidate with any other Borrower.
An Event of Default shall exist upon the occurrence of any of the following specified events (each an “Event of Default”):
(a)Payments. The Borrowers shall fail to make when due (including by mandatory prepayment) any principal payment with respect to the Loans, or any Credit Party shall fail to make any payment of interest, fee or other amount payable hereunder within three (3) Business Days of the due date thereof; or
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(b)Covenants Without Notice. Any Credit Party shall fail to observe or perform any covenant or agreement contained in Section 5.1 (as to maintenance of existence of the Borrowers or the Parent), subsections (g) and (h) of Section 5.7, Section 5.8, Section 5.9, Section 5.11 or Article VI; or
(c)Other Covenants. Any Credit Party shall fail to observe or perform any covenant or agreement contained in this Agreement or any other Credit Document, other than those referred to in subsections (a) and (b) of Section 7.1, and such failure shall remain unremedied for thirty (30) days after the earlier of (i) a Responsible Officer of a Credit Party obtaining knowledge thereof, or (ii) written notice thereof shall have been given to the Parent by the Administrative Agent or any Lender; or
(d)Representations. Any representation or warranty made or deemed to be made by a Credit Party or by any of its officers under this Agreement or any other Credit Document (including the Schedules attached hereto and thereto), or in any certificate or other document submitted to the Administrative Agent or the Lenders by any such Person pursuant to the terms of this Agreement or any other Credit Document, shall be incorrect in any material respect when made or deemed to be made or submitted; or
(e)Non-Payments of Other Indebtedness. Any Credit Party or any Restricted Subsidiary shall fail to make when due (whether at stated maturity, by acceleration, on demand or otherwise, and after giving effect to any applicable grace period) any payment of principal of or interest on any Indebtedness (other than the Credit Party Obligations) exceeding $150,000,000 individually or in the aggregate; or
(f)Defaults Under Other Agreements. Any Credit Party or any Restricted Subsidiary shall (i) fail to observe or perform within any applicable grace period any covenants or agreements contained in any agreements or instruments relating to any of its Indebtedness (other than the Credit Documents) the principal amount of which exceeds $150,000,000 individually or in the aggregate, or any other event shall occur if the effect of such failure or other event is to accelerate, or to permit the holder of such Indebtedness or any other Person to accelerate, the maturity of such Indebtedness; or (ii) breach or default any Hedging Agreement and/or Cash Management Agreement (subject to any applicable cure periods) the termination value owed by such Credit Party or Restricted Subsidiary as a result thereof shall exceed $150,000,000 if the effect of such breach or default is to terminate such Hedging Agreement or to permit the applicable counterparty to such Hedging Agreement to terminate such Hedging Agreement; provided that this clause (f) shall not apply to (x) any secured Indebtedness that becomes due as a result of the voluntary sale, transfer or other disposition of the assets securing such Indebtedness (to the extent such sale, transfer or other disposition is not prohibited under this Agreement) so long as such Indebtedness is paid or (y) any Indebtedness that becomes due as a result of a voluntary refinancing thereof not prohibited under this Agreement; or
(g)Bankruptcy. Any Credit Party or any Material Subsidiary shall commence a voluntary case concerning itself under the Bankruptcy Code or applicable foreign bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation laws; or makes a proposal to its creditors or files notice of its intention to do so, institutes any other proceeding under applicable law seeking to adjudicate it a bankrupt or an insolvent, or seeking liquidation, dissolution, winding-up, reorganization, compromise, arrangement, adjustment, protection, moratorium, relief, stay of proceedings of creditors, composition of it or its debts or any other similar relief; or an involuntary case for bankruptcy is commenced against any Credit Party or any Material Subsidiary and the petition is not controverted within thirty (30) days, or is not
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dismissed within sixty (60) days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code), receiver, receiver-manager, trustee or similar official under applicable foreign bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation laws is appointed for, or takes charge of, all or any substantial part of the property of any Credit Party or any Material Subsidiary; or a Credit Party or a Material Subsidiary commences proceedings of its own bankruptcy or insolvency or to be granted a suspension of payments or any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction, whether now or hereafter in effect, relating to any Credit Party or any Material Subsidiary or there is commenced against any Credit Party or any Material Subsidiary any such proceeding which remains undismissed for a period of sixty (60) days; or any Credit Party or any Material Subsidiary is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or any Credit Party or any Material Subsidiary suffers any appointment of any custodian, receiver, receiver-manager, trustee or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of sixty (60) days; or any Credit Party or any Material Subsidiary makes a general assignment for the benefit of creditors; or any Credit Party or any Material Subsidiary shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or any Credit Party or any Material Subsidiary shall call a meeting of its creditors with a view to arranging a composition or adjustment of its debts; or any Credit Party or any Material Subsidiary shall by any act or failure to act indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate action is taken by any Credit Party or any Material Subsidiary for the purpose of effecting any of the foregoing; or
(h)ERISA. A Plan of a Credit Party or any Restricted Subsidiary or a Plan subject to Title IV of ERISA of any of its ERISA Affiliates:
(i)shall fail to be funded in accordance with the minimum funding standard required by applicable law, the terms of such Plan, Section 412 of the Code or Section 302 of ERISA for any plan year or a waiver of such standard is sought or granted with respect to such Plan under applicable law, the terms of such Plan or Section 412 of the Code or Section 302 of ERISA;
(ii)is being, or has been, terminated or the subject of termination proceedings under applicable law or the terms of such Plan; or
(iii)results in a liability of a Credit Party or any Restricted Subsidiary under applicable law, the terms of such Plan, or Title IV of ERISA, other than liabilities for benefits in the ordinary course;
and there shall result from any such failure, waiver, termination or other event a liability to the PBGC or such Plan that would have a Material Adverse Effect; or a Foreign Plan Event occurs that would have a Material Adverse Effect; or
(i)Money Judgment. Judgments or orders for the payment of money (net of any amounts paid by an independent third party insurance company or surety or fully covered by independent third party insurance or surety bond issued by a company with an AM Best rating in one of the two highest categories as to which the relevant insurance company or surety does not dispute coverage) in excess of $150,000,000 individually or in the aggregate or otherwise having a Material Adverse Effect shall be rendered against any Credit Party or any Restricted Subsidiary, and such judgment or order shall continue unsatisfied (in the case of a money judgment) and in effect for a
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period of thirty (30) days during which execution shall not be effectively stayed or deferred (whether by action of a court, by agreement or otherwise); or
(j)Default Under other Credit Documents; The Guaranty. (a) There shall exist or occur any “Event of Default” as provided under the terms of any Credit Document, or any Credit Document ceases to be in full force and effect or the validity or enforceability thereof is disaffirmed by or on behalf of any Credit Party, or at any time it is or becomes unlawful for any Credit Party to perform or comply with its obligations under any Credit Document, or the obligations of any Credit Party under any Credit Document are not or cease to be legal, valid and binding on any Credit Party; or (b) without limiting the foregoing, the Guaranty or any provision thereof shall cease to be in full force and effect or any Guarantor or any Person acting by or on behalf of any Guarantor shall deny or disaffirm any Guarantor’s obligations under the Guaranty; or
(k)Change in Control. A Change in Control shall occur; or
(l)Securitization Events. There shall occur any breach of any covenant by any Credit Party, any Restricted Subsidiary or any Permitted Securitization Subsidiary contained in any agreement relating to Permitted Securitization Transaction causing or permitting the acceleration of the obligations thereunder or requiring the prepayment of such obligations or termination of such securitization program prior to its stated maturity or term; provided, however, such breach shall not constitute an Event of Default unless any Credit Parties shall have payment obligations or liabilities under such Permitted Securitization Transaction that have had or are reasonably expected to have a Material Adverse Effect.
Upon the occurrence and during the continuance of an Event of Default, the Administrative Agent may, or upon the request and direction of the Required Lenders shall, by written notice to the Borrowers take any of the following actions (including any combination of such actions):
(a)Termination of Commitments. Declare the Commitments terminated whereupon the Commitments shall be immediately terminated.
(b)Acceleration; Demand. Declare the unpaid principal of and any accrued interest in respect of all Loans and any and all other indebtedness or obligations (including fees) of any and every kind owing by any Credit Party to the Administrative Agent and/or any of the Lenders hereunder to be due, whereupon the same shall be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Credit Party.
(c)Enforcement of Rights. Exercise any and all rights and remedies created and existing under the Credit Documents, whether at law or in equity.
(d)Rights Under Applicable Law. Exercise any and all rights and remedies available to the Administrative Agent or the Lenders under applicable law.
Notwithstanding the foregoing, if an Event of Default specified in Section 7.1(g) shall occur, then the Commitments shall automatically terminate and all Loans, all accrued interest in respect thereof, all accrued and unpaid Fees and other indebtedness or obligations owing to the Administrative Agent and/or any of the Lenders hereunder automatically shall immediately become due and payable without presentment, demand, protest or the giving of any notice or other action by the Administrative Agent or the Lenders, all of which are hereby waived by the Credit Parties.
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Article VIII
AGENCY PROVISIONS
Each Lender hereby irrevocably designates and appoints CoBank as the Administrative Agent of such Lender under this Credit Agreement, and each such Lender irrevocably authorizes CoBank, as the Administrative Agent for such Lender, to take such action on its behalf under the provisions of this Credit Agreement and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Credit Agreement, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Credit Agreement, none of the Administrative Agent shall have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Credit Agreement or otherwise exist against the Administrative Agent.
Anything herein to the contrary, notwithstanding, none of the bookrunners, arrangers or other agents listed on the cover page hereof shall have any powers, duties or responsibilities under this Agreement or any of the other Credit Documents, except in its capacity, as applicable, as the Administrative Agent or a Lender hereunder.
The Administrative Agent may execute any of its duties under this Credit Agreement by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by them with reasonable care. Without limiting the foregoing, the Administrative Agent may appoint one of its Affiliates as its agent to perform its functions hereunder relating to the advancing of funds to the Borrowers and distribution of funds to the Lenders and to perform other functions of the Administrative Agent hereunder.
The Administrative Agent shall not have any duties or obligations except those expressly set forth herein and in the other Credit Documents. Without limiting the generality of the foregoing, the Administrative Agent:
(a)shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;
(b)shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Credit Documents that the Administrative Agent are required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Credit Documents); provided that the Administrative Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose it to liability or that is contrary to any Credit Document or applicable law; and
(c)shall not, except as expressly set forth herein and in the other Credit Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating
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to any Credit Party or any of its Affiliates that is communicated to or obtained by the Person serving as the Administrative Agent or any of its Affiliates in any capacity.
No Agent shall be liable for any action taken or not taken by it (i) with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Administrative Agent shall believe in good faith shall be necessary, under the circumstances as provided in Sections 9.1 and 7.2) or (ii) in the absence of its own gross negligence or willful misconduct as determined by a court of competent jurisdiction pursuant to a final non-appealable judgment.
The Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Credit Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Credit Document or any other agreement, instrument or document or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.
8.4Reliance by Administrative Agent..
The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon. In determining compliance with any condition hereunder to the making of a Loan that by its terms must be fulfilled to the satisfaction of a Lender, the Administrative Agent may presume that such condition is satisfactory to such Lender unless the Administrative Agent shall have received notice to the contrary from such Lender prior to the making of such Loan. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrowers), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.
The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or the Parent referring to this Credit Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default”. In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the other Administrative Agent and the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided, however, that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders except to the extent that this Credit Agreement expressly requires that such action be taken, or not taken, only with the consent or upon the authorization of the Required Lenders, or all of the Lenders, as the case may be.
8.6Non-Reliance on Administrative Agent and Other Lenders..
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Each Lender expressly acknowledges that none of the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representation or warranty to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of the Credit Parties, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Credit Parties and made its own decision to make its Loans hereunder and enter into this Credit Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Credit Agreement, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Credit Parties. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Credit Parties which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates.
8.7Administrative Agent in its Individual Capacity..
The Administrative Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Credit Parties as though the Administrative Agent were not the Administrative Agent hereunder. With respect to its Loans made or renewed by it and any Note issued to it, the Administrative Agent shall have the same rights and powers under this Credit Agreement as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms “Lender” and “Lenders” shall include the Administrative Agent in its individual capacity.
The Administrative Agent may resign as the Administrative Agent upon thirty (30) days’ prior notice to the Parent and the Lenders. If the Administrative Agent shall resign as the Administrative Agent under this Credit Agreement and the other Credit Documents, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall be approved by the Parent (so long as no Event of Default has occurred and is continuing), whereupon such successor agent shall succeed to the rights, powers and duties of the resigning Administrative Agent, and the term “Administrative Agent” shall mean such successor agent effective upon such appointment and approval, and the resigning Administrative Agent’s rights, powers and duties as the Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Credit Agreement or any holders of the Notes or Credit Party Obligations. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within thirty (30) days after the resigning Administrative Agent gives notice of its resignation, then the resigning Administrative Agent may on behalf of the Lenders, appoint a successor Agent, which successor Administrative Agent shall be approved by the Parent; provided that if the resigning Administrative Agent shall notify the Parent and the Lenders that no qualifying Person has accepted such appointment, then such resignation shall nonetheless become effective in accordance with such notice and (a) the resigning Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Credit Documents and (b) all payments, communications and determinations provided to be made by, to or through the resigning Administrative Agent shall instead be made by or to each Lender directly, until such time as the Required Lenders appoint a successor Administrative Agent as provided for above in this Section.
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After any retiring Administrative Agent’s resignation as the Administrative Agent, the provisions of this Article VIII and Section 9.5 shall inure to its benefit (and the benefit of its sub-agents and Related Parties) as to any actions taken or omitted to be taken by it while it was the Administrative Agent under this Credit Agreement.
Each Lender and the Administrative Agent (for itself and not on behalf of any other party) hereby notifies the Credit Parties that, pursuant to the requirements of the Patriot Act, it is required to obtain, verify and record information that identifies each Credit Party, which information includes the name and address of each Credit Party, and other information that will allow such Lender or the Administrative Agent, as applicable, to identify such Credit Party in accordance with the Patriot Act.
8.10Guaranty and Borrower Matters..
(a)The Lenders irrevocably authorize and direct each of the Administrative Agent and without any consent or action by any Lender:
(i)to release any Guarantor from its obligations under the applicable Guaranty if such Person ceases to be a Restricted Subsidiary as a result of a transaction permitted hereunder; provided that, it is understood and agreed that this Section 8.10(a)(i) shall not permit the release of the Parent from its obligations under the Guaranty;
(ii)in the case of the Guaranty of RockTenn, to release the Guaranty of RockTenn when all Existing RockTenn Senior Notes have been redeemed, repurchased or defeased (including any refinancing or replacement of such Indebtedness with Indebtedness of the Parent that is not guaranteed by RockTenn);
(iii)in the case of the Guaranty of MWV, to release the Guaranty of MWV when all Existing MWV Notes have been redeemed, repurchased or defeased (including any refinancing or replacement of such Indebtedness with Indebtedness of the Parent that is not guaranteed by MWV); and
(iv)to release MWVWestRock Virginia as a Borrower in accordance with the terms of Section 9.199.20(d).
(b)Immediately upon the occurrence of any event set forth in paragraph (a) of this Section 8.10, the applicable Guaranty shall automatically be released.
(c)In connection with a release pursuant to this Section 8.10, the Administrative Agent shall promptly execute and deliver to the applicable Credit Party, at the Borrowers’ expense, all documents that the applicable Credit Party shall reasonably request to evidence such release. Upon request by the Administrative Agent at any time, the Required Lenders will confirm in writing the Administrative Agent’s authority to release any Guarantor (or, if applicable, Borrower) from its obligations under the Guaranty (or, if applicable, obligations as a Borrower under this Credit Agreement and other Credit Documents) pursuant to this Section 8.10; provided, however, that the Administrative Agent may not decline to release any guarantee (or, if applicable, Borrower) pursuant to this Section 8.10 due to the absence of any such confirmation.
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To the extent required by any applicable law (as determined in good faith by the Administrative Agent), the Administrative Agent may withhold from any payment to any Lender under any Credit Document an amount equal to any applicable withholding Tax. If the IRS or any other Governmental Authority asserts a claim that the Agent did not properly withhold Tax from any amount paid to or for the account of any Lender for any reason (including because the appropriate form was not delivered or was not properly executed, or because such Lender failed to notify the Administrative Agent of a change in circumstances that rendered the exemption from, or reduction of, withholding Tax ineffective), such Lender shall indemnify and hold harmless the Administrative Agent (to the extent that the Administrative Agent has not already been reimbursed by the Credit Parties and without limiting or expanding the obligation of the Credit Parties to do so) for all amounts paid, directly or indirectly, by the Administrative Agent as Tax or otherwise, including any penalties, additions to Tax or interest thereon, together with all expenses incurred, including legal expenses and any out-of-pocket expenses, whether or not such Tax was correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to any Lender by the Administrative Agent shall be conclusive absent manifest error. Each Lender hereby authorizes the Administrative Agent to set off and apply any and all amounts at any time owing to such Lender under this Agreement or any other Credit Document against any amount due to the Administrative Agent under this Section 8.11. The agreements in this Section 8.11 shall survive the resignation and/or replacement of the Administrative Agent, any assignment of rights by, or the replacement of a Lender, the termination of the Loans and the repayment, satisfaction or discharge of all obligations under this Agreement.
Neither this Credit Agreement, nor any of the other Credit Documents, nor any terms hereof or thereof may be amended, supplemented, waived or modified except in accordance with the provisions of this Section. The Required Lenders may, or, with the written consent of the Required Lenders, the Administrative Agent may, from time to time, (a) enter into with the Credit Parties written amendments, supplements or modifications hereto and to the other Credit Documents for the purpose of adding any provisions to this Credit Agreement or the other Credit Documents or changing in any manner the rights of the Lenders or of the Credit Parties hereunder or thereunder or (b) waive, on such terms and conditions as the Required Lenders may specify in such instrument, any of the requirements of this Credit Agreement or the other Credit Documents or any Default or Event of Default and its consequences; provided that no such waiver and no such amendment, waiver, supplement, modification or release shall:
(i)reduce the amount or extend the scheduled date of maturity of any Loan or Note or any installment thereon, or reduce the stated rate of any interest or fee payable hereunder (except in connection with a waiver of interest at the increased post-default rate or as a result of any change in the definition of “Leverage Ratio” or any component thereof) or extend the scheduled date of any payment thereof or increase the amount or extend the expiration date of any Lender’s or Voting Participant’s Commitment, in each case without the written consent of each Lender directly affected thereby; or
(ii)amend, modify or waive any provision of this Section 9.1 or reduce the percentage specified in the definition of Required Lenders without the written consent of each Lender directly affected thereby; or
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(iii)amend, modify or waive any provision of Article VIII without the written consent of the then Administrative Agent; or
(iv)release all or substantially all of the Guarantors from their obligations under the Guaranty (other than as permitted hereunder) or all or substantially all of the value of the Guaranty provided by all of the Guarantors, without the written consent of all the Lenders; or
(v)amend, modify or waive any provision of the Credit Documents requiring consent, approval or request of the Required Lenders or all Lenders, without the written consent of the Required Lenders or of all Lenders as appropriate; or
(vi)amend or modify the definition of “Credit Party Obligations” to delete or exclude any obligation or liability or any Person described therein without the written consent of each Lender directly affected thereby; or
(vii)amend, modify or waive the order in which Credit Party Obligations are paid in Section 2.15(b) or (c) without the written consent of each Lender directly affected thereby; or
(viii)subordinate the Commitments and/or Loans to any other Indebtedness without the written consent of all Lenders;
provided, further, that no amendment, waiver or consent affecting the rights or duties of the Administrative Agent under any Credit Document shall in any event be effective, unless in writing and signed by the Administrative Agent in addition to the Lenders required hereinabove to take such action. Notwithstanding anything to the contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder, except those affecting it referred to in clause (i) above.
Notwithstanding anything in any Credit Document to the contrary, under no circumstances shall any Hedging Agreement Provider or Cash Management Bank have any voting rights under the Credit Documents.
Any such waiver, any such amendment, supplement or modification and any such release shall apply equally to each of the Lenders and shall be binding upon the Borrowers, the Lenders, the other Credit Parties, the Administrative Agent and all future holders of the Notes or Credit Party Obligations. In the case of any waiver, the Borrowers, the other Credit Parties, the Lenders and the Administrative Agent shall be restored to their former position and rights hereunder and under the outstanding Loans and Notes and other Credit Documents, and any Default or Event of Default permanently waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon.
Notwithstanding any of the foregoing to the contrary, the consent of the Credit Parties shall not be required for any amendment, modification or waiver of the provisions of Article VIII (other than the provisions of Section 8.9 and Section 8.10); provided, however, that the Administrative Agent will provide written notice to the Borrowers of any such amendment, modification or waiver. In addition, notwithstanding the foregoing, this Agreement and any other Credit Document may be amended by an agreement in writing entered into by the Credit Parties and the Administrative Agent to cure any ambiguity, omission, mistake, defect or inconsistency so long as, in each case, the Lenders shall have received at least five Business Days prior written notice thereof and the Administrative Agent shall not have received, within five
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Business Days of the date of such notice to the Lenders, a written notice from the Required Lenders stating that the Required Lenders object to such amendment.
In addition, notwithstanding any of the foregoing to the contrary, this Agreement may be amended with the written consent of the Administrative Agent, the Credit Parties and the Lenders providing the relevant Replacement Term Loan to permit the refinancing of all outstanding amounts under the Term Loans (“Refinanced Term Loan”) with a replacement term loan tranche denominated in U.S. Dollars (“Replacement Term Loan”) hereunder; provided that (a) the aggregate principal amount of such Replacement Term Loan shall not exceed the aggregate principal amount of such Refinanced Term Loan, (b) the weighted average life to maturity of such Replacement Term Loan shall not be shorter than the weighted average life to maturity of such Refinanced Term Loan at the time of such refinancing (except to the extent of nominal amortization for periods where amortization has been eliminated as a result of prepayment of the Term Loans) and (c) all other terms (other than interest rate margins) applicable to such Replacement Term Loan shall be substantially identical to, or less favorable to the Lenders providing such Replacement Term Loan than those applicable to such Refinanced Term Loan, except to the extent necessary to provide for covenants and other terms applicable to any period after the Latest Maturity Date in effect immediately prior to such refinancing.
Notwithstanding anything in this Credit Agreement to the contrary, each Lender hereby irrevocably authorizes the Administrative Agent on its behalf, and without further consent, to enter into amendments or modifications to this Agreement (including amendments to this Section 9.1) or any of the other Credit Documents or to enter into additional Credit Documents as the Administrative Agent reasonably deems appropriate in order to effectuate the terms of Section 2.3(a), Section 2.26 (including as applicable, (1) to permit the Incremental Term Loans to share ratably in the benefits of this Credit Agreement and the other Credit Documents and (2) to include the Incremental Term Loan Commitments or outstanding Incremental Term Loans in any determination of (i) Required Lenders or (ii) similar required lender terms applicable thereto), Section 2.27 or Section 2.28; provided that no amendment or modification shall result in any increase in the amount of any Lender’s Commitment or any increase in any Lender’s Closing Date Term Loan Commitment Percentage, in each case, without the written consent of such affected Lender.
Notwithstanding the fact that the consent of all the Lenders is required in certain circumstances as set forth above, (A) each Lender is entitled to vote as such Lender sees fit on any bankruptcy reorganization plan that affects the Loans, and each Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy Code supersedes the unanimous consent provisions set forth herein solely with respect to approving the terms of any such bankruptcy reorganization plan and (B) the Required Lenders may consent to allow a Credit Party to use cash collateral in the context of a bankruptcy or insolvency proceeding.
The Borrowers shall be permitted to replace with a replacement financial institution acceptable to the Administrative Agent (such consent not to be unreasonably withheld or delayed) any Lender that fails to consent to any proposed amendment, modification, termination, waiver or consent with respect to any provision hereof or of any other Credit Document that requires the unanimous approval of all of the Lenders, the approval of all of the Lenders affected thereby or the approval of a class of Lenders, in each case in accordance with the terms of this Section 9.1, so long as the consent of the Required Lenders (or, in the case of any proposed amendment, modification, termination, waiver or consent that requires the approval of a class of Lenders, of Lenders holding a majority in interest of the outstanding Loans and unused Commitments in respect of such class) shall have been obtained with respect to such amendment, modification, termination, waiver or consent; provided that (1) such replacement does not conflict with any Requirement of Law, (2) the replacement financial institution shall purchase, at par, all Loans and other amounts owing to such replaced Lender on or prior to the date of replacement, (3) the replacement financial institution shall approve the proposed amendment, modification, termination, waiver or consent and together with all other replacement financial institutions is sufficient to pass the proposed amendment, modification, termination,
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waiver or consent, (4) the Borrowers shall be liable to such replaced Lender under Section 2.20 if any LIBOR Rate Loan owing to such replaced Lender shall be purchased other than on the last day of the Interest Period relating thereto, (5) the replaced Lender shall be obligated to make such replacement in accordance with the provisions of Section 9.6 (provided that the Borrowers shall be obligated to pay the registration and processing fee referred to therein), (6) the Borrowers shall pay to the replaced Lender all additional amounts (if any) required pursuant to Section 2.18, 2.19 or 2.21, as the case may be, (7) the Borrowers provide at least three (3) Business Days’ prior notice to such replaced Lender, and (8) any such replacement shall not be deemed to be a waiver of any rights that the Credit Parties, the Administrative Agent or any other Lender shall have against the replaced Lender. In the event any replaced Lender fails to execute the agreements required under Section 9.6 in connection with an assignment pursuant to this Section 9.1, the Borrowers may, upon two (2) Business Days’ prior notice to such replaced Lender, execute such agreements on behalf of such replaced Lender. A Lender shall not be required to be replaced if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrowers to require such replacement cease to apply.
(a)All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by facsimile or other electronic communications as provided below), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made (a) when delivered by hand, (b) when transmitted via facsimile to the number set out herein, (c) the day following the day on which the same has been delivered prepaid (or pursuant to an invoice arrangement) to a reputable national overnight air courier service, or (d) the third Business Day following the day on which the same is sent by certified or registered mail, postage prepaid, in each case addressed as follows in the case of the Borrowers, the other Credit Parties, the Administrative Agent, and the Lenders, or to such other address as may be hereafter notified by the respective parties hereto and any future holders of the Notes and Credit Party Obligations:
if to any of the Credit Parties
c/o WestRock Company
504 Thrasher Street, N.W.
Norcross, Georgia 30071-1956
Attention:Chief Financial Officer
Telecopier:(770) 263-3582
Telephone:(678) 291-7700
With a copy to:
WestRock Company
504 Thrasher Street, N.W.
Norcross, Georgia 30071-1956
Attention:General Counsel
Telecopier:(770) 263-3582
Telephone:(678) 291-7456
if to the Administrative Agent:
CoBank, ACB
5500 South Quebec Street
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6340 South Fiddlers Green Circle Greenwood Village, CO 80111
Attention: Brett KotalLoan Accounting
Telecopier: (303) 740-4021
E-mail address: AgencybankEmail: cobankloanaccounting@cobank.com
With a copy to:
CoBank, ACB
55006340 South Quebec StreetFiddlers Green Circle
Greenwood Village, CO 80111
Attention: Zachary Carpenter
Telecopier: (303) 224-2501
Telephone: (303) 740-4356
E-mail address: zcarpenter@cobank.com
If to any Lender:To the address set forth on the Register
(b)Notices and other communications to the Lenders or the Administrative Agent hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent. The Administrative Agent or the Credit Parties may, in their discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications. Notwithstanding the foregoing, notices, requests and demands delivered pursuant to the requirements of Article II shall be deemed to have been duly given or made when transmitted via e-mail to the e-mail address of the Administrative Agent set forth in Section 9.2(a).
Unless the Administrative Agent otherwise prescribe, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement); provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.
9.3No Waiver; Cumulative Remedies..
No failure to exercise and no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.
9.4Survival of Representations and Warranties..
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All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Credit Agreement and the Notes and the making of the Loans; provided that all such representations and warranties shall terminate on the date upon which all Credit Party Obligations (other than contingent indemnity obligations) have been paid in full.
(a)Costs and Expenses. The Credit Parties shall pay (i) all reasonable, documented out-of-pocket expenses incurred by the Administrative Agent and their Affiliates (including the reasonable fees, charges and disbursements of counsel for the Administrative Agent) in connection with the syndication of the credit facilities provided for herein, the preparation, negotiation, execution, delivery and administration of this Agreement and the other Credit Documents or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), and (ii) all out-of-pocket expenses incurred by the Administrative Agent and each Lender (including the fees, charges and disbursements of counsel for any of the Administrative Agent or Lenders), and all fees and time charges for attorneys who may be employees of any of the Administrative Agent or Lenders, in connection with the enforcement or protection of its rights (A) in connection with this Agreement and the other Credit Documents, including its rights under this Section, or (B) in connection with the Loans made hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Credit Documents or Loans.
(b)Indemnification by the Credit Parties. The Credit Parties shall indemnify the Administrative Agent (and any sub-agent thereof) and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an “Indemnitee”) against, and hold each Indemnitee harmless from, any and all losses, claims, penalties, damages, liabilities and related expenses (including the fees, charges and disbursements of one firm of counsel for all such Indemnitees, taken as a whole, and, if necessary, of a single firm of local counsel in each appropriate jurisdiction (which may include a single firm of special counsel acting in multiple jurisdictions) for all such Indemnitees, taken as a whole (and, in the case of an actual or perceived conflict of interest where the Indemnitee affected by such conflict informs the Parent of such conflict and thereafter retains its own counsel, of another firm of counsel for such affected Indemnitee and, if necessary, of a single firm of local counsel in each appropriate jurisdiction (which may include a single firm of special counsel acting in multiple jurisdictions) for such affected Indemnitee) incurred by any Indemnitee or asserted against any Indemnitee by any third party or by the Borrowers or any other Credit Party arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Credit Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto of their respective obligations hereunder or thereunder or the consummation of the transactions contemplated hereby or thereby, (ii) any Loan or the use or proposed use of the proceeds therefrom, (iii) any actual or alleged presence or Release or threat of Release of Hazardous Substances on, at, under or from any property owned, leased or operated by any Credit Party or any of its Subsidiaries, or any liability under Environmental Law related in any way to any Credit Party or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by a Borrower or any other Credit Party, and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses (A) are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from (1) the gross negligence, bad faith or willful misconduct of such Indemnitee or (2) a claim brought by a Credit Party or any Subsidiary against such
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Indemnitee for material breach in bad faith of such Indemnitee’s obligations hereunder or (B) result from a proceeding that does not involve an act or omission by a Credit Party or any of its Affiliates and that is brought by an Indemnitee against any other Indemnitee (other than claims against any arranger, bookrunner or agent hereunder in its capacity or in fulfilling its roles as an arranger, bookrunner or agent hereunder or any similar role with respect to the credit facilities hereunder). Notwithstanding the foregoing, this Section 9.5(b) shall not apply with respect to Taxes other than any Taxes that represent losses, claims or damages arising from any non-Tax claim.
(c)Reimbursement by Lenders. To the extent that the Credit Parties for any reason fail to indefeasibly pay any amount required under subsections (a) or (b) of this Section to be paid by it to the Administrative Agent (or any sub-agent thereof) or any Related Party thereof, each Lender severally agrees to pay to the Administrative Agent (or any such sub-agent) or such Related Party, as the case may be, such Lender’s pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought and based on the aggregate principal amount of all Loans and unused Commitments then outstanding) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent) in its capacity as such, or against any Related Party thereof acting for the Administrative Agent (or any such sub-agent) in connection with such capacity. The agreements in this Section 9.5(c) shall survive the termination of this Credit Agreement and payment of the Notes and all other amounts payable hereunder.
(d)Waiver of Consequential Damages, Etc. To the fullest extent permitted by applicable law, the Credit Parties shall not assert, and hereby waive, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Credit Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Loan or the use of the proceeds thereof. No Indemnitee referred to in subsection (b) above shall be liable for any damages arising from the transmission of any information or other materials through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Credit Documents or the transactions contemplated hereby or thereby.
(e)Payments. All amounts due under this Section shall be payable promptly/not later than five (5) days after demand therefor.
9.6Successors and Assigns; Participations; Purchasing Lenders..
(a)Successors and Assigns Generally. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that neither the Borrowers nor any other Credit Party may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with the provisions of subsection (b) of this Section, (ii) by way of participation in accordance with the provisions of subsection (d) of this Section or (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (f) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in subsection (d) of this Section and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative
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Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.
(b)Assignments by Lenders. Any Lender may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that any such assignment shall be subject to the following conditions:
(i)Minimum Amounts.
(A)in the case of an assignment of the entire remaining amount of the assigning Lender’s Commitment and the Loans at the time owing to it or in the case of an assignment to a Lender, an Affiliate of a Lender or an Approved Fund, no minimum amount need be assigned; and
(B)in any case not described in subsection (b)(i)(A) of this Section, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) or, if the applicable Commitment is not then in effect, the principal outstanding balance of the Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if “Trade Date” is specified in the Assignment and Assumption, as of the Trade Date) shall not be less than $1,000,000 unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Parent otherwise consents (each such consent not to be unreasonably withheld or delayed); provided that the Parent shall be deemed to have given its consent ten (10) Business Days after the date written notice thereof has been delivered by the assigning Lender (through the Administrative Agent) of an assignment unless it shall object thereto by written notice to the Administrative Agent prior to such tenth (10th) Business Day.
(ii)Proportionate Amounts. Each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement with respect to the Loan or the Commitment assigned, except that this clause (ii) shall not prohibit any Lender from assigning all or a portion of its rights and obligations among separate Types on a non-pro rata basis.
(iii)Required Consents. No consent shall be required for any assignment except to the extent required by subsection (b)(i)(B) of this Section and, in addition:
(A)the consent of the Parent (such consent not to be unreasonably withheld or delayed) shall be required unless (x) an Event of Default has occurred and is continuing at the time of such assignment or (y) such assignment is to a Lender, an Affiliate of a Lender or an Approved Fund; provided, that the Parent shall be deemed to have consented to any such assignment unless it shall object thereto by written notice to the Administrative Agent within ten (10) Business Days after having received notice thereof; and
(B)the consent of the Administrative Agent (such consent not to be unreasonably withheld or delayed) shall be required for assignments in respect of a Term Loan or an Incremental Term Loan Commitment to a Person who is not a Lender, an Affiliate of a Lender or an Approved Fund.
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(iv)Assignment and Assumption. The parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500 (unless waived by the Administrative Agent in its sole discretion) and the assignee, if it is not a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.
(v)No Assignment to a Credit Party. No such assignment shall be made to any Credit Party or any of Credit Party’s Affiliates or Subsidiaries.
(vi)No Assignment to Natural Persons and Disqualified Institutions. No such assignment shall be made to a natural person or a Disqualified Institution on the most recent list of Disqualified Institutions made available to the Lenders at the request of the Parent prior to the date of such assignment.
Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 2.18 and 9.5 with respect to facts and circumstances occurring prior to the effective date of such assignment. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section.
No Agent shall have any responsibility or liability for monitoring the list or identities of, or enforcing provisions relating to, Disqualified Institutions.
(c)Register. The Administrative Agent, acting solely for this purpose as a non-fiduciary agent of the Borrowers, shall maintain at one of its offices in Denver, Colorado a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts (and related interest amounts) of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive, in the absence of manifest error, and the Credit Parties, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrowers and, with respect to itself, any Lender, at any reasonable time and from time to time upon reasonable prior notice.
(d)Participations. Any Lender may at any time, without the consent of, or notice to, the Credit Parties or the Administrative Agent, sell participations to any Person (other than a natural person or any Credit Party or any Credit Party’s Affiliates or Subsidiaries or any Disqualified Institution on the most recent list of Disqualified Institutions made available to the Lenders at the request of the Parent prior to the date of such assignment) (each, a “Participant”) in all or a portion of such Lender’s rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans owing to it); provided that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Credit Parties, the Administrative
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Agent and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement.
Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver that affects such Participant. Subject to subsection (e) of this Section, the Credit Parties agree that each Participant shall be entitled to the benefits of Sections 2.19 and 2.21 (subject to the requirements and limitations of such Sections and Section 2.23 and it being understood that a Participant shall be required to deliver the documentation required under Section 2.21(d) to only the participating Lender) to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.7 as though it were a Lender, provided such Participant agrees to be subject to Section 2.16 as though it were a Lender. Each Lender that sells a participation shall, acting solely for this purpose as a non-fiduciary agent of the Borrowers, maintain a register on which it enters the name and address of each Participant and the principal amounts (and stated interest) of each Participant’s interest in the Loans or other obligations under this Agreement (the “Participant Register”). The entries in the Participant Register shall be conclusive (absent manifest error) and such Lender (and the Borrowers, to the extent that the Participant requests payment from the Borrowers) shall treat each Person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary. The portion of the Participant Register relating to any Participant requesting payment from the Borrowers under the Credit Documents shall be made available to the Borrowers upon reasonable request. Except as provided in the preceding sentence, a Lender shall not be required to disclose its Participant Register to the Borrowers or any other Person except to the extent required in connection with a Tax audit or inquiry to establish that the Loans hereunder are in registered form for U.S. federal income tax purposes.
Notwithstanding the preceding paragraph, any Participant that is a Farm Credit Lender that (i) has purchased a participation in a minimum amount of $7,000,000, (ii) has been designated as a “Voting Participant” in a notice (a “Voting Participant Notice”) sent by the relevant Lender to the Administrative Agent and (iii) receives, prior to becoming a “Voting Participant,” the consent of the Administrative Agent and the Parent (each such consent to be required only to the extent and under the circumstances it would be required if such Voting Participant were to become a Lender pursuant to an assignment in accordance with clause (b)) (a “Voting Participant”), shall be entitled to vote as if such Voting Participant were a Lender on all matters subject to a vote by the Lenders and the voting rights of the selling Lender shall be correspondingly reduced, on a U.S. Dollar-for-U.S. Dollar basis. Each Voting Participant Notice shall include, with respect to each Voting Participant, the information that would be included by a prospective Lender in an Assignment and Assumption. Notwithstanding the foregoing, each Farm Credit Lender designated as a Voting Participant in Schedule 2.1(a) hereto shall be a Voting Participant without delivery of a Voting Participant Notice and without the prior written consent of the Parent and the Administrative Agent. The selling Lender and the Voting Participant shall notify the Administrative Agent and the Borrowers within three (3) Business Days of any termination, reduction or increase of the amount of, such participation. The Credit Parties and the Administrative Agent shall be entitled to conclusively rely on information contained in Voting Participant Notices and all other notices delivered pursuant hereto. The voting rights of each Voting Participant are solely for the benefit of such Voting Participant and shall not inure to any assignee or participant of such Voting Participant that is not itself a Voting Participant.
(e)Limitations upon Participant Rights. A Participant shall not be entitled to receive any greater payment under Sections 2.19 and 2.21 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the
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participation to such Participant is made with the Borrowers’ prior written consent or the entitlement to a greater payment results from a change in law after the date such Participant became a participant.
(f)Certain Pledges. Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.
(a)If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by applicable law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Lender or any such Affiliate to or for the credit or the account of any Borrower or any other Credit Party against any and all of the obligations of such Borrower or such Credit Party now or hereafter existing under this Agreement or any other Credit Document to such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or any other Credit Document and although such obligations of such Borrower or such Credit Party may be contingent or unmatured or are owed to a branch or office of such Lender different from the branch or office holding such deposit or obligated on such indebtedness. The rights of each Lender and its Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that such Lender or its Affiliates may have. Each Lender agrees to notify the Parent and the Administrative Agent promptly after any such setoff and application; provided that the failure to give such notice shall not affect the validity of such setoff and application.
(b)If any Lender shall, by exercising any right of setoff or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Loans or other obligations hereunder resulting in such Lender’s receiving payment of a proportion of the aggregate amount of its Loans and accrued interest thereon or other such obligations greater than its pro rata share thereof as provided herein, then the Lender receiving such greater proportion shall (i) notify the Administrative Agent of such fact, and (ii) purchase (for cash at face value) participations in the Loans and such other obligations of the other Lenders, or make such other adjustments as shall be equitable, so that the benefit of all such payments shall be shared by the applicable Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans and other amounts owing them, provided that:
(i)if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest; and
(ii)the provisions of this subsection shall not be construed to apply to (A) any payment made by a Credit Party pursuant to and in accordance with the express terms of this Agreement or (B) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to any Credit Party or any Subsidiary thereof (as to which the provisions of this subsection shall apply).
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(c)Each Credit Party consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against each Credit Party rights of setoff and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of each Credit Party in the amount of such participation.
9.8Table of Contents and Section Headings..
The table of contents and the Section and subsection headings herein are intended for convenience only and shall be ignored in construing this Credit Agreement.
9.9Counterparts; Electronic Execution..
(a)This Credit Agreement may be executed by one or more of the parties to this Credit Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same agreement.
(b)The words “execution,” “signed,” “signature,” and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.
Any provision of this Credit Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
This Credit Agreement, the other Credit Documents and the Farm Credit Equity Documents represent the agreement of the Credit Parties, the Administrative Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent, the Credit Parties or any Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Credit Documents.
THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS (EXCEPT AS OTHERWISE PROVIDED THEREIN) AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
9.13Consent to Jurisdiction and Service of Process..
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Each of the Borrowers and each other Credit Party and each other party hereto irrevocably and unconditionally submits, for itself and its property, with respect to this Credit Agreement, any Note or any of the other Credit Documents and all judicial proceedings in respect thereof to the exclusive jurisdiction of the courts of the State of New York in New York County in the Borough of Manhattan or, if under applicable law exclusive jurisdiction is vested in the federal courts, the United States District Court for the Southern District of New York (and appellate courts thereof), and, by execution and delivery of this Credit Agreement, each of the Borrowers and the other Credit Parties (i) accepts, for itself and in connection with its properties, generally and unconditionally, the exclusive jurisdiction of the aforesaid courts and irrevocably agrees to be bound by any final judgment rendered thereby in connection with this Credit Agreement, any Note or any other Credit Document from which no appeal has been taken or is available; (ii) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court; and (iii) agrees that it will not bring or support any action, cause of action, claim, cross-claim or third-party claim of any kind or description, whether in law or in equity, whether in contract or in tort or otherwise, against any person in any way relating to this Credit Agreement, any Note or any other Credit Document in any forum other than the Supreme Court of the State of New York in New York County in the Borough of Manhattan or, if under applicable law exclusive jurisdiction is vested in the federal courts, the United States District Court for the Southern District of New York (and appellate courts thereof). Each of the Borrowers and the other Credit Parties irrevocably agrees that all service of process in any such proceedings in any such court may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to it at its address set forth in Section 9.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto, such service being hereby acknowledged by each of the Borrowers and the other Credit Parties to be effective and binding service in every respect. Each of the Credit Parties, the Administrative Agent and the Lenders irrevocably waives any objection, including any objection to the laying of venue based on the grounds of forum non conveniens which it may now or hereafter have to the bringing of any such action or proceeding in any such jurisdiction.
Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information, except that Information may be disclosed (a) to its Affiliates and to its and its Affiliates’ respective partners, directors, officers, employees, agents, advisors and other representatives who shall maintain the confidential nature of such Information, (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process (in which case the Administrative Agent or such Lender shall promptly notify the Parent in advance to the extent lawfully permitted to do so and practicable), (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder, under any other Credit Document, Guaranteed Hedging Agreement or Guaranteed Cash Management Agreement or any action or proceeding relating to this Agreement, any other Credit Document, Guaranteed Hedging Agreement or Guaranteed Cash Management Agreement or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) to (i) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to a Credit Party and its obligations, (ii) an investor or prospective investor in securities issued by an Approved Fund that also agrees that Information shall be used solely for the purpose of evaluating an investment in such securities issued by the Approved Fund, (iii) a trustee, collateral manager, servicer, backup servicer, noteholder or secured party in connection with the administration, servicing and reporting on the assets serving as collateral for securities issued by an Approved Fund, or (iv) a nationally recognized rating agency that requires access to information regarding the Credit Parties, the Loans and Credit Documents in connection with ratings issued in respect of securities issued by an Approved Fund (in each case, it being
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understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such information and instructed to keep such information confidential), (h) with the consent of the Parent or (i) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to the Administrative Agent, any Lender or any of their respective Affiliates on a nonconfidential basis from a source other than the Credit Parties that is not, to the Administrative Agent’s or Lender’s knowledge, subject to a confidentiality obligation to the Parent or any of its Affiliates with respect to such Information. For purposes of this Section, “Information” means all information received from any Credit Party or any Subsidiary thereof relating to any Credit Party or any Subsidiary thereof or any of their respective businesses, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by any Credit Party or any Subsidiary thereof; provided that, in the case of information received from a Credit Party or any Subsidiary thereof after the Closing Date, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.
Each of the Borrowers and the other Credit Parties each hereby acknowledges that:
(a)it has been advised by counsel in the negotiation, execution and delivery of each Credit Document;
(b)neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to the Borrowers or any other Credit Party arising out of or in connection with this Credit Agreement and the relationship between the Administrative Agent and the Lenders, on one hand, and the Borrowers and the other Credit Parties, on the other hand, in connection herewith is solely that of debtor and creditor;
(c)the Administrative Agent, each Lender and their respective Affiliates may have economic interests that conflict with those of the Credit Parties, their stockholders and/or their Affiliates; and
(d)no joint venture exists among the Lenders or among the Credit Parties and the Lenders.
THE BORROWERS, THE OTHER CREDIT PARTIES, THE ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS CREDIT AGREEMENT OR ANY OTHER CREDIT DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
9.18Subordination of Intercompany Debt..
Each Credit Party agrees that all intercompany Indebtedness among Credit Parties (the “Intercompany Debt”) is subordinated in right of payment, to the prior payment in full of all Credit Party Obligations.
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Notwithstanding any provision of this Agreement to the contrary, so long as no Event of Default has occurred and is continuing, the Credit Parties may make and receive payments with respect to the Intercompany Debt to the extent otherwise permitted by this Agreement; provided, that in the event of and during the continuation of any Event of Default, no payment shall be made by or on behalf of any Credit Party on account of any Intercompany Debt other than payments to a Borrower. In the event that any Credit Party other than a Borrower receives any payment of any Intercompany Debt at a time when such payment is prohibited by this Section 9.18, such payment shall be held by such Credit Party, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the Administrative Agent.
9.19Acknowledgment and Consent to Bail-In of EEA Financial Institutions.
Notwithstanding anything to the contrary in any Credit Document or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any EEA Financial Institution arising under any Credit Document, to the extent such liability is unsecured, may be subject to the write-down and conversion powers of an EEA Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by:
(a)the application of any Write-Down and Conversion Powers by an EEA Resolution Authority to any such liabilities arising hereunder which may be payable to it by any party hereto that is an EEA Financial Institution; and
(b)the effects of any Bail-In Action on any such liability, including, if applicable:
(i)a reduction in full or in part or cancellation of any such liability;
(ii)a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such EEA Financial Institution, its parent entity, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Agreement or any other Credit Document; or
(iii)the variation of the terms of such liability in connection with the exercise of the Write-Down and Conversion Powers of any EEA Resolution Authority.
9.209.19 Farm Credit Equities..
(a)So long as (i) a Farm Credit Lender is a Lender or Voting Participant hereunder and (ii) such Farm Credit Lender has notified the Borrowers that the Borrowers are eligible to receive patronage distributions directly from such Farm Credit Lender or one of its Affiliates on account of the Loans made (or participated in) by such Farm Credit Lender hereunder, the Borrowers will acquire (and such Farm Credit Lender will make available to the Borrowers for purchase) equity in such Farm Credit Lender or one of its Affiliates in such amounts and at such times as such Farm Credit Lender may require in accordance with such Farm Credit Lender’s or its Affiliates’ bylaws and capital plan or similar documents (as each may be amended from time to time), provided that the maximum amount of equity that the Borrowers may be required to purchase in such Farm Credit Lender or its Affiliate in connection with the portion of the Loans made by such Farm Credit Lender shall not exceed the maximum amount permitted by the applicable bylaws, capital plan and related documents (x) as in effect (and in the form provided to the Borrowers) on the Closing Date or (y) in the case of a Farm Credit Lender that becomes a Lender or Voting Participant as a result of an assignment or sale of participation, as in effect (and in the form provided to the Borrowers) at the time of the closing of the related assignment or sale of participation. CoBank confirms delivery to the Borrowers, and the Borrowers acknowledge receipt, of the documents from CoBank as of the Closing
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Date (and will upon reasonable request, and subject to the Borrowers’ consent to such assignment or sale of a participation by such Farm Credit Lender pursuant to Section 9.6(b), acknowledge receipt of any similar documents delivered to the Borrowers by a Farm Credit Lender that becomes a Lender or Voting Participant as a result of an assignment or sale of a participation after the Closing Date; provided that such Farm Credit Lender confirms delivery of such documents to the Borrowers) (the “Farm Credit Equity Documents”), which describe the nature of the stock and/or other equities in a Farm Credit Lender or its Affiliate required to be acquired by the Borrowers in connection with the Loans made (or participated in) by such Farm Credit Lender (the “Farm Credit Equities”), as well as applicable capitalization requirements, and the Borrowers agree to be bound by the terms thereof. CoBank acknowledges and agrees that the amount of the Farm Credit Equities of CoBank acquired by the Borrowers on or prior to the Closing Date satisfies the requirements of this Section 9.199.20 in respect of the Closing Date Term Loan Commitments as of the Closing Date.
(b)Each party hereto acknowledges that each Farm Credit Lender’s (or its Affiliate’s) bylaws, capital plan and similar documents (as each may be amended from time to time) shall govern (x) the rights and obligations of the parties with respect to the Farm Credit Equities and any patronage refunds or other distributions made on account thereof or on account of the Borrowers’ patronage with such Farm Credit Lender or its Affiliate, (y) the Borrowers’ eligibility for patronage distributions from such Farm Credit Lender or its Affiliate (in the form of Farm Credit Equities and cash) and (z) patronage distributions, if any, in the event of a sale of a participation interest. Each Farm Credit Lender reserves the right to assign or sell participations in all or any part of its Commitments or outstanding Loans hereunder on a non-patronage basis in accordance with Section 9.6(b); provided that if the Parent’s consent to such assignment or sale of a participation by such Farm Credit Lender is required pursuant to Section 9.6(b) or Section 9.6(d), as applicable, the parties hereto agree that, solely with respect to the Parent’s ability to reasonably withhold consent to such transfer because of an expected reduction in patronage distributions to the Borrowers (it being understood and agreed that the Parent may have another basis for reasonably withholding consent to such transfer), (A) if the transferring Farm Credit Lender has not delivered a Farm Credit Lender Transfer Certificate (as defined below) to the Borrowers, then the Parent may withhold its consent to such assignment or sale in its sole discretion (and in such case, the Parent shall be deemed to have acted reasonably), and (B) if the transferring Farm Credit Lender has delivered a Farm Credit Lender Transfer Certificate to the Borrowers, then the Parent may not withhold its consent to such assignment or sale (and any such withholding of consent shall be deemed unreasonable). For purposes hereof, “Farm Credit Lender Transfer Certificate” means a certificate executed by an officer of the transferring Farm Credit Lender and certifying to the Borrowers that such transferring Farm Credit Lender has used commercially reasonable efforts to consummate the relevant assignment or sale or a participation with another entity that would be expected to make patronage distributions to the Borrowers on a going forward basis that are consistent with (or better than) those that the Borrowers could reasonably have expected to have received from such transferring Farm Credit Lender.
(c)Each party hereto acknowledges that each Farm Credit Lender or its Affiliate has a statutory lien pursuant to the Farm Credit Act of 1971 (as may be amended from time to time) on all Farm Credit Equities of such Person that the Borrowers may now own or hereafter acquire, which statutory lien shall be for such Farm Credit Lender’s (or its Affiliate’s) sole and exclusive benefit. The Farm Credit Equities of a particular Farm Credit Lender or its Affiliate shall not constitute security for the Credit Party Obligations due to any other Lender. To the extent that any of the Credit Documents create a Lien on the Farm Credit Equities of a Farm Credit Lender or its Affiliate or on patronage accrued by such Farm Credit Lender or its Affiliate for the account of the Borrowers (including, in each case, proceeds thereof), such Lien shall be for such Farm Credit Lender’s (or its Affiliate’s) sole and exclusive benefit and shall not be subject to pro rata sharing hereunder. Neither the Farm Credit Equities nor any accrued patronage shall be offset against the Credit Party Obligations except that, in the event of an Event of Default, a Farm Credit
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Lender may elect, solely at its discretion, to apply the cash portion of any patronage distribution or retirement of equity to amounts due under this Agreement. The Borrowers acknowledge that any corresponding tax liability associated with such application is the sole responsibility of the Borrowers. No Farm Credit Lender or its Affiliate shall have an obligation to retire the Farm Credit Equities of such Farm Credit Lender or Affiliate upon any Event of Default, Default or any other default by the Borrowers or any other Credit Party, or at any other time, either for application to the Credit Obligations or otherwise.
(d)For so long as any Loans remain outstanding, the Borrowers agree to maintain ownership of the mills and assets that were the subject of the investments referred to in the definition of “Investment Purpose” (or similar assets reasonably acceptable to CoBank); provided that, notwithstanding the foregoing, (i) (A) MWVWestRock Virginia may (without additional consent from the Administrative Agent or any Lender) transfer its Covington, Virginia mill to another Wholly-Owned Subsidiary (whether newly formed or previously existing), so long as such Subsidiary has signed a joinder agreement to become a Borrower (effective as of the date it acquires the Covington, Virginia mill) in a form reasonably acceptable to the Administrative Agent and otherwise satisfied all applicable requirements for a Successor Borrower pursuant to Section 6.4(b) or (B) MWVWestRock Virginia may (without additional consent from the Administrative Agent) transfer its Covington, Virginia mill to any Person if, at the time of such transfer, the aggregate outstanding principal amount of the Loans is less than or equal to $500,000,000 and (ii) effective immediately after the transfer of the Covington, Virginia mill in accordance with clause (i)(A) or (i)(B) of this Section 9.199.20(d) (and, in the case of a transfer pursuant to clause (i)(A) of this Section 9.199.20(d), the effectiveness of the joinder agreement signed by the new Borrower), MWVWestRock Virginia shall be automatically (and without additional consent from the Administrative Agent or any Lender) released as a Borrower and thereafter, shall not constitute a Borrower for any purpose of this Agreement or any other Credit Document.
9.219.20 Most Favored Lender Provisions..
If at any time the Pro Rata Credit Agreement or any other Credit Document (as defined in the Pro Rata Credit Agreement), or the documentation for any replacement credit facilities therefor, includes (a) representations and warranties, covenants or events of default (including related definitions) in favor of a Lender (as defined in the Pro Rata Credit Agreement), or lender under any such replacement credit facilities, that are not provided for in this Agreement or the other Credit Documents, (b) representations and warranties, covenants or events of default (including related definitions) in favor of a Lender (as defined in the Pro Rata Credit Agreement), or lender under any such replacement credit facilities, that are more restrictive than the same or similar provisions provided for in this Agreement and the other Credit Documents and/or (c) requirements for the Pro Rata Credit Facilities to be secured by collateral or guaranteed by Domestic Subsidiaries of the Parent that are not already Guarantors (any or all of the foregoing, collectively, the “Most Favored Lender Provisions”) (in the case of each of the Most Favored Lender Provisions, other than any differences between the Pro Rata Credit Agreement and the other Credit Documents (as defined in the Pro Rata Credit Agreement), on the one hand, and this Agreement and the other Credit Documents, on the other hand, existing as of the Closing Date (or otherwise consistent with such differences)), then (i) such Most Favored Lender Provisions shall immediately and automatically be deemed incorporated into this Agreement and the other Credit Documents as if set forth fully herein and therein, mutatis mutandis, and no such incorporated provision may thereafter be waived, amended or modified except pursuant to the provisions of Section 9.1, and (ii) the Borrowers and the Guarantors shall promptly, and in any event within five (5) days after entering into any such Most Favored Lender Provisions, so advise the Administrative Agent in writing. Thereafter, upon the request of the Required Lenders, the Borrowers and the Guarantors shall enter into an amendment to this Agreement and, if applicable, the other Credit Documents evidencing the incorporation of such Most Favored Lender Provisions, it being agreed that any failure to make such request or to enter into any such amendment shall in no way qualify or limit the incorporation described in clause (i) of the immediately preceding sentence.
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Article X
GUARANTY OF BORROWER OBLIGATIONS
In order to induce the Lenders to enter into this Credit Agreement, any Hedging Agreement Provider to enter into any Guaranteed Hedging Agreement and any Cash Management Bank to enter into any Guaranteed Cash Management Agreement and to extend credit hereunder and thereunder and in recognition of the direct benefits to be received by the Guarantors from the Extensions of Credit hereunder, under any Guaranteed Hedging Agreement and under any Guaranteed Cash Management Agreement, each of the Guarantors hereby agrees with the Administrative Agent and the Lenders as follows: such Guarantor hereby unconditionally and irrevocably jointly and severally guarantees as primary obligor and not merely as surety the full and prompt payment when due, whether upon maturity, by acceleration or otherwise, of any and all Credit Party Obligations. If any or all of Credit Party Obligations become due and payable hereunder or under any Guaranteed Hedging Agreement or under any Guaranteed Cash Management Agreement, each Guarantor unconditionally promises to pay such Credit Party Obligations to the Administrative Agent, the Lenders, the Hedging Agreement Providers, the Cash Management Banks or their respective order, on demand, together with any and all reasonable expenses which may be incurred by the Administrative Agent or the Lenders in collecting any of such Credit Party Obligations.
Notwithstanding any provision to the contrary contained herein or in any other of the Credit Documents, to the extent the obligations of a Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including because of any applicable state, federal or provincial law relating to fraudulent conveyances or transfers) then the obligations of each such Guarantor hereunder shall be limited to the maximum amount that is permissible under applicable law (whether federal, state or provincial and including the Bankruptcy Code).
Additionally, each of the Guarantors unconditionally and irrevocably guarantees jointly and severally the payment of any and all Credit Party Obligations to the Lenders, any Cash Management Bank and any Hedging Agreement Provider whether or not due or payable by the Borrowers upon the occurrence of any of the events specified in Section 7.1(g), and unconditionally promises to pay such U.S. Obligations to the Administrative Agent for the account of the Lenders, to any such Cash Management Bank and to any such Hedging Agreement Provider, or order, on demand, in lawful money of the United States upon any such occurrence. Each of the Guarantors further agrees that to the extent that the Borrowers or a Guarantor shall make a payment or a transfer of an interest in any property to the Administrative Agent, any Lender, any Cash Management Bank or any Hedging Agreement Provider, which payment or transfer or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, or otherwise is avoided, and/or required to be repaid to the Borrowers or a Guarantor, the estate of the Borrowers or a Guarantor, a trustee, receiver or any other party under any bankruptcy law, state, provincial or federal law, common law or equitable cause, then to the extent of such avoidance or repayment, the obligation or part thereof intended to be satisfied shall be revived and continued in full force and effect as if said payment had not been made.
The liability of each Guarantor hereunder is exclusive and independent of any security for or other guaranty of the Credit Party Obligations whether executed by any such Guarantor, any other guarantor or by any other party, and no Guarantor’s liability hereunder shall be affected or impaired by (a) any direction as to application of payment by the Borrowers or by any other party, or (b) any other continuing or other
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guaranty, undertaking or maximum liability of a guarantor or of any other party as to the Credit Party Obligations, or (c) any payment on or in reduction of any such other guaranty or undertaking, or (d) any dissolution, termination or increase, decrease or change in personnel by the Borrowers, or (e) any payment made to the Administrative Agent, any Lender, any Cash Management Bank or any Hedging Agreement Provider on the Credit Party Obligations which the Administrative Agent, such Lender, such Cash Management Bank or such Hedging Agreement Provider repays the Borrowers pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and each of the Guarantors waives any right to the deferral or modification of its obligations hereunder by reason of any such proceeding.
The obligations of each Guarantor hereunder are independent of the obligations of any other Guarantor or any Borrower, and a separate action or actions may be brought and prosecuted against each Guarantor whether or not action is brought against any other Guarantor or any Borrower and whether or not any other Guarantor or any Borrower is joined in any such action or actions.
Each of the Guarantors authorizes the Administrative Agent, each Lender, each Cash Management Bank and each Hedging Agreement Provider, without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing its liability hereunder, from time to time to (a) renew, compromise, extend, increase, accelerate or otherwise change the time for payment of, or otherwise change the terms of the Credit Party Obligations or any part thereof in accordance with this Agreement, any Guaranteed Cash Management Agreement and any Guaranteed Hedging Agreement, as applicable, including any increase or decrease of the rate of interest thereon, (b) take and hold security from any Guarantor or any other party for the payment of the Guaranty under this Article X or the Credit Party Obligations and exchange, enforce waive and release any such security, (c) apply such security and direct the order or manner of sale thereof as the Administrative Agent and the Lenders in their discretion may determine and (d) release or substitute any one or more endorsers, Guarantors, Borrowers or other obligors.
It is not necessary for the Administrative Agent, the Lenders, any Cash Management Bank or any Hedging Agreement Provider to inquire into the capacity or powers of the Borrowers or the officers, directors, members, partners or agents acting or purporting to act on their behalf, and any Credit Party Obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder.
(a)Each of the Guarantors waives any right (except as shall be required by applicable statute and cannot be waived) to require the Administrative Agent, any Lender, any Cash Management Bank or any Hedging Agreement Provider to (i) proceed against the Borrowers, any other guarantor or any other party, (ii) proceed against or exhaust any security held from the Borrowers, any other guarantor or any other party, or (iii) pursue any other remedy in the Administrative Agent’s, any Lender’s, any Cash Management Bank’s or any Hedging Agreement Provider’s power whatsoever. Each of the Guarantors waives any defense based on or arising out of any defense of the Borrowers, any other guarantor or any other party other than payment in full of the Credit Party Obligations (other than contingent indemnity obligations), including any defense based on or aris
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ing out of (i) the disability of a Borrower, any other Guarantor or any other party, (ii) the unenforceability of the Credit Party Obligations or any part thereof from any cause, (iii) the cessation from any cause of the liability of a Borrower other than payment in full of the Credit Party Obligations of the Borrowers (other than contingent indemnity obligations), (iv) any amendment, waiver or modification of the Credit Party Obligations, (v) any substitution, release, exchange or impairment of any security for any of the Credit Party Obligations, (vi) any change in the corporate existence or structure of a Borrower or any other Guarantor, (vii) any claims or rights of set off that such Guarantor may have, and/or (viii) any Requirement of Law or order of any Governmental Authority affecting any term of the Credit Party Obligations. The Administrative Agent may, at its election, foreclose on any security held by the Administrative Agent by one or more judicial or nonjudicial sales (to the extent such sale is permitted by applicable law), or exercise any other right or remedy the Administrative Agent or any Lender may have against the Borrowers or any other party, or any security, without affecting or impairing in any way the liability of any Guarantor hereunder except to the extent the Credit Party Obligations of the Borrowers have been paid in full and the Commitments have been terminated. Each of the Guarantors waives any defense arising out of any such election by any of the Administrative Agent or Lenders, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of the Guarantors against the Borrowers or any other party or any security.
(b)Each of the Guarantors waives all presentments, demands for performance, protests and notices, including notices of nonperformance, notice of protest, notices of dishonor, notices of acceptance of the Guaranty under this Article X, and notices of the existence, creation or incurring of new or additional Credit Party Obligations. Each Guarantor assumes all responsibility for being and keeping itself informed of the Borrowers’ financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Credit Party Obligations and the nature, scope and extent of the risks which such Guarantor assumes and incurs hereunder, and agrees that neither the Administrative Agent nor any Lender shall have any duty to advise such Guarantor of information known to it regarding such circumstances or risks.
(c)Each of the Guarantors hereby agrees it will not exercise any rights of subrogation which it may at any time otherwise have as a result of the Guaranty under this Article X (whether contractual, under Section 509 of the Bankruptcy Code, or otherwise) to the claims of the Lenders, any Cash Management Bank or any Hedging Agreement Provider (collectively, the “Other Parties”) against the Borrowers or any other guarantor of the Credit Party Obligations owing to the Lenders, such Cash Management Bank or such Hedging Agreement Provider and all contractual, statutory or common law rights of reimbursement, contribution or indemnity from any Other Party which it may at any time otherwise have as a result of the Guaranty under this Article X until such time as the Credit Party Obligations shall have been paid in full and the Commitments have been terminated. Each of the Guarantors hereby further agrees not to exercise any right to enforce any other remedy which the Administrative Agent, the Lenders, any Cash Management Bank or any Hedging Agreement Provider now have or may hereafter have against any Other Party, any endorser or any other guarantor of all or any part of the Credit Party Obligations and any benefit of, and any right to participate in, any security or collateral given to or for the benefit of the Lenders, the Cash Management Banks and/or the Hedging Agreement Providers to secure payment of the Credit Party Obligations until such time as the Credit Party Obligations (other than contingent indemnity obligations) shall have been paid in full and the Commitments have been terminated.
10.8Limitation on Enforcement..
The Lenders, the Cash Management Bank and the Hedging Agreement Providers agree that the Guaranty under this Article X may be enforced only by the action of the Administrative Agent acting upon
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the instructions of the Required Lenders and that no Lender, Cash Management Bank or Hedging Agreement Provider shall have any right individually to seek to enforce or to enforce the Guaranty under this Article X, it being understood and agreed that such rights and remedies may be exercised by the Administrative Agent for the benefit of the Lenders under the terms of this Credit Agreement. The Lenders, the Cash Management Banks and the Hedging Agreement Providers further agree that the Guaranty under this Article X may not be enforced against any director, officer, employee or stockholder of the Guarantors.
The Administrative Agent and the Lenders will, upon request after payment of the U.S. Obligations which are the subject of the Guaranty under this Article X, confirm to the Borrowers, the Guarantors or any other Person that such Credit Party Obligations have been paid, subject to the provisions of Section 10.2.
Each Qualified ECP Guarantor hereby jointly and severally absolutely, unconditionally and irrevocably undertakes to provide such funds or other support as may be needed from time to time by each other Credit Party to honor all of its obligations under the Guaranty under this Article X in respect of Swap Obligations (provided, however, that each Qualified ECP Guarantor shall only be liable under this Section 10.10 for the maximum amount of such liability that can be hereby incurred without rendering its obligations under this Section 10.10, or otherwise under the Guaranty under this Article X, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer, and not for any greater amount). The obligations of each Qualified ECP Guarantor under this Section shall remain in full force and effect until the termination of this Agreement or the release of such Guarantor in accordance with Section 8.11. Each Qualified ECP Guarantor intends that this Section 10.10 constitute, and this Section 10.10 shall be deemed to constitute, a “keepwell, support, or other agreement” for the benefit of each other Credit Party for all purposes of Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first written above.
MEADWESTVACO VIRGINIA CORPORATION
Exhibit 10.34(e)
AMENDMENT NO. 3
AMENDMENT NO. 3, dated as of October 25, 2019 (this “Amendment”), among WRKCO INC. (formerly known as WESTROCK COMPANY), a Delaware corporation (the “Company”), the other Credit Parties, the Lenders party hereto and WELLS FARGO BANK, NATIONAL ASSOCIATION, as administrative agent for the Lenders (in such capacity, the “Agent”), to the Credit Agreement dated as of October 31, 2017 (as amended by Amendment No. 1, dated as of March 7, 2018, and Amendment No. 2, dated as of October 29, 2018, and as further amended, restated, amended and restated or otherwise modified from time to time, the “Credit Agreement”), by and among the Company, the other Credit Parties from time to time party thereto, the Agent and the Lenders referred to therein. Capitalized terms used and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement.
WHEREAS, pursuant to Section 9.1(i) of the Credit Agreement, the Credit Parties, the Lenders and the Agent desire to amend the Credit Agreement to extend each of the Lenders’ Commitments thereunder on the terms set forth herein and to effect certain other amendments.
NOW, THEREFORE, in consideration of the premises and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:
Section 1.Amendment. Effective as of the Amendment No. 3 Effective Date (as defined below), the Credit Agreement is hereby amended as follows:
(a)Section 1.1 of the Credit Agreement is amended by restating the definition of “Revolving Maturity Date” therein as follows:
“Revolving Maturity Date” means the earlier of (x) October 23, 2020 and (y) the date on which the 2015 Credit Agreement is amended to increase the aggregate amount of Revolving Commitments (as defined in the 2015 Credit Agreement) to an amount not less than $2,300,000,000.
(b)Section 1.3 of the Credit Agreement is amended by adding the following new paragraph (v) at the end thereof:
(v)Notwithstanding anything to the contrary contained herein, only those leases (assuming for purposes hereof that they were in existence on December 31, 2017) that would have constituted Capital Leases as of December 31, 2017, shall be considered Capital Leases hereunder and all calculations and deliverables under this Agreement or any other Credit Document shall be made or delivered, as applicable, in accordance therewith.
(c)Article I of the Credit Agreement is hereby amended by adding the following new section immediately after Section 1.5:
“Section 1.6 Divisions. For all purposes under the Credit Documents, in connection with any division or plan of division under Delaware law (or any comparable event under a
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different jurisdiction’s laws): (a) if any asset, right, obligation or liability of any Person becomes the asset, right, obligation or liability of a different Person, then it shall be deemed to have been transferred from the original Person to the subsequent Person, and (b) if any new Person comes into existence, such new Person shall be deemed to have been organized on the first date of its existence by the holders of its equity interests at such time.”
(d)Section 2.13 of the Credit Agreement is hereby amended by (x) changing the heading of such Section to “Fees,” (y) adding “(a)” immediately before “In consideration of the Commitments,” and (z) adding the following new paragraph and the end of such Section:
“(b)In consideration of the Commitments, if any Commitments are in effect or any Loans are outstanding on January 1, 2020 (the “Duration Fee Date”), the Parent Borrower agrees to pay to the Administrative Agent for the ratable benefit of the Lenders a fee (the “Duration Fee”) in an amount equal to 0.025% of the sum of (x) the aggregate principal amount of Loans outstanding and (y) the aggregate amount of unused Commitments in effect, in each case on the Duration Fee Date. The Duration Fee, if any, shall be earned on the Duration Fee Date and shall be due and payable on January 2, 2020.”
(e)Article IX of the Credit Agreement is hereby amended by adding the following new section immediately after Section 9.19:
“Section 9.20 Acknowledgment Regarding Any Supported QFCs.
To the extent that the Credit Documents provide support, through a guarantee or otherwise, of Hedging Agreements or any other agreement or instrument that is a QFC (such support, “QFC Credit Support” and each such QFC, a “Supported QFC”), the parties acknowledge and agree as follows with respect to the resolution power of the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act and Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (together with the regulations promulgated thereunder, the “U.S. Special Resolution Regimes”) in respect of such Supported QFC and QFC Credit Support (with the provisions below applicable notwithstanding that the Credit Documents and any Supported QFC may in fact be stated to be governed by the laws of the State of New York and/or of the United States or any other state of the United States):
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exercised under the U.S. Special Resolution Regime if the Supported QFC and the Credit Documents were governed by the laws of the United States or a state of the United States. Without limitation of the foregoing, it is understood and agreed that rights and remedies of the parties with respect to a Defaulting Lender shall in no event affect the rights of any Covered Party with respect to a Supported QFC or any QFC Credit Support. |
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(b) |
As used in this Section 9.20, the following terms shall have the following meanings: |
“BHC Act Affiliate” of a party means an “affiliate” (as such term is defined under, and interpreted in accordance with, 12 U.S.C. 1841(k)) of such party.
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“Covered Entity” means any of the following: |
(i)a “covered entity” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 252.82(b);
(ii)a “covered bank” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 47.3(b); or
(iii)a “covered FSI” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 382.2(b).
“Default Right” has the meaning assigned to that term in, and shall be interpreted in accordance with, 12 C.F.R. §§ 252.81, 47.2 or 382.1, as applicable.
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“QFC” has the meaning assigned to the term “qualified financial contract” in, and shall be interpreted in accordance with, 12 U.S.C. 5390(c)(8)(D).” |
Section 2.Representations and Warranties. The Credit Parties represent and warrant to the Lenders and the Agent as of the Amendment No. 3 Effective Date that:
(a)At the time of and immediately after giving effect to this Amendment, the representations and warranties set forth in the Credit Documents are true and correct in all material respects (except to the extent that any such representation or warranty is qualified by materiality, in which case such representation and warranty shall be true and correct) with the same effect as if made on the Amendment No. 3 Effective Date, except to the extent such representations and warranties expressly relate to an earlier date.
(b)At the time of and immediately after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing.
(c)As of the Amendment No. 3 Effective Date, the information included in the Beneficial Ownership Certification (as defined below) provided on or prior to the Amendment No. 3 Effective Date to any Lender in connection with this Amendment is true and correct in all respects.
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Section 3.Conditions to Effectiveness. This Amendment shall become effective on the date (the “Amendment No. 3 Effective Date”) on which:
(a)the Agent (or its counsel) shall have received from the Credit Parties and each Lender, a counterpart of this Amendment signed on behalf of each such party;
(b)the Agent (or its counsel) shall have received the following (or their equivalent), each (other than with respect to clause (iv)) certified by the secretary or assistant secretary of the Company as of the Amendment No. 3 Effective Date to be true and correct and in force and effect pursuant to a certificate in a form reasonably satisfactory to the Agent: (i) copies of the articles of incorporation or charter documents of the Company, certified by the secretary or assistant secretary of the Company as of the Amendment No. 3 Effective Date to be true and correct and in force and effect pursuant to a certificate in a form reasonably satisfactory to the Agent, and that the articles or charter documents are in full force and effect; (ii) copies of resolutions of the board of directors of the Company approving and adopting this Amendment (including the transactions contemplated herein) and authorizing execution and delivery hereof; (iii) copies of the bylaws, operating agreement or partnership agreement of the Company, and that such by-laws, operating agreements or partnership agreements are in full force and effect; and (iv) copies, where applicable, of a certificate of good standing of the Company in its state of organization, certified as of a recent date by the appropriate Governmental Authorities of the applicable state of organization;
(c)the representations and warranties set forth in Section 2 hereof shall be true and correct and the Agent shall have received a certificate of a Responsible Officer to such effect;
(d)the Agent shall have received a legal opinion of Cravath, Swaine & Moore LLP, special New York counsel to the Company, in form and substance reasonably acceptable to the Agent;
(e)the Agent shall have received a certificate, in form and substance reasonably satisfactory to it, of a Responsible Officer certifying that immediately after giving effect to this Amendment, the Credit Parties taken as a whole are solvent as of the Amendment No. 3 Effective Date;
(f)the Company shall have paid (i) all fees required to be paid on the Amendment No. 3 Effective Date pursuant to the Engagement Letter, dated as of October 9, 2019 (the “Engagement Letter”), among the Company, Wells Fargo Securities, LLC and Wells Fargo Bank, National Association and (ii) all fees and expenses due and payable pursuant to Section 4 hereof; and
(g)to the extent requested by the Agent or any Lender not less than five (5) days prior to the Amendment No. 3 Effective Date, the Lenders shall have received a certification regarding beneficial ownership as required by the Beneficial Ownership Regulation in relation to the Company (a “Beneficial Ownership Certification”).
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Section 4.Fees and Expenses. The Company agrees to reimburse the Agent for the reasonable and documented out-of-pocket expenses incurred by it in connection with this Amendment, including the reasonable and documented fees, charges and disbursements of Cahill Gordon & Reindel llp, counsel for the Agent.
Section 5.Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be deemed to be an original, but all of which when taken together shall constitute a single instrument. Delivery of an executed counterpart of a signature page of this Amendment by facsimile transmission or by email in Adobe “.pdf” format shall be effective as delivery of a manually executed counterpart hereof.
Section 6.Applicable Law. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
Section 7.Headings. The headings of this Amendment are for purposes of reference only and shall not limit or otherwise affect the meaning hereof.
Section 8.Effect of Amendment. On and after the effectiveness of this Amendment, each reference in the Credit Agreement to “this Credit Agreement”, “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the Notes and each of the other Credit Documents to “the Credit Agreement”, “thereunder”, “thereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended or waived by this Amendment. The Credit Agreement, the Notes and each of the other Credit Documents, as specifically amended or waived by this Amendment, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of or otherwise affect the rights and remedies of the Lenders or the Agents under the Credit Agreement or any other Credit Document, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other provision of the Credit Agreement or any other Credit Document, all of which are ratified and affirmed in all respects and shall continue in full force and effect. The parties hereto expressly acknowledge that it is not their intention that this Amendment or any of the other Credit Documents executed or delivered pursuant hereto constitute a novation of any of the obligations, covenants or agreements contained in the Credit Agreement or any other Credit Document, but rather constitute a modification thereof pursuant to the terms contained herein. This Amendment constitutes a Credit Document.
Section 9.Acknowledgement and Consent. (a) Each Guarantor hereby acknowledges that it has reviewed the terms and provisions of the Credit Agreement and this Amendment and consents to the amendments of the Credit Agreement effected pursuant to this Amendment. Each Guarantor hereby confirms that each Credit Document to which it is a party or otherwise bound will continue to guarantee to the fullest extent possible in accordance with the Credit Documents the payment and performance of all “Credit Party Obligations” under each of the Credit Documents to which is a party (in each case as such terms are defined in the applicable Credit Document).
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(b)Each Guarantor acknowledges and agrees that any of the Credit Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment.
(c)Each Guarantor acknowledges and agrees that (i) notwithstanding the conditions to effectiveness set forth in this Amendment, such Guarantor is not required by the terms of the Credit Agreement or any other Credit Document to consent to the amendments to the Credit Agreement effected pursuant to this Amendment and (ii) nothing in the Credit Agreement, this Amendment or any other Credit Document shall be deemed to require the consent of such Guarantor to any future amendments to the Credit Agreement.
[Signature Pages Follow]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written.
BORROWER:WRKCO INC.
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By: |
_/s/ John Stakel__________________________
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GUARANTORS:WESTROCK RKT, LLC
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By: |
_/s/ John Stakel__________________________
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WESTROCK MWV, LLC
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By: |
_/s/ John Stakel__________________________
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WESTROCK COMPANY
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By: |
_/s/ John Stakel__________________________
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[Signature Page to WestRock Amendment No. 3]
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By: |
__/s/ Kay Reedy___________________________
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[Signature Page to WestRock Amendment No. 3]
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By: |
___/s/ Donna DeMagistris___________________
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[Signature Page to WestRock Amendment No. 3]
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By: |
_/s/ Erron Powers________________________
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[Signature Page to WestRock Amendment No. 3]
EXHIBIT 21
WESTROCK COMPANY
SIGNIFICANT SUBSIDIARIES OF WESTROCK COMPANY
as of September 30, 2019
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Name |
State or Jurisdiction of Incorporation |
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WestRock - Solvay, LLC |
Delaware, USA |
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WestRock Coated Board, LLC |
Alabama, USA |
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WestRock Converting, LLC |
Georgia, USA |
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WestRock CP, LLC |
Delaware, USA |
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WestRock Fulfillment Company |
Georgia, USA |
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WestRock Holding Company III |
Georgia, USA |
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WestRock Holdings B.V. |
The Netherlands |
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WestRock Luxembourg S.A.R.L. |
Luxembourg |
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WestRock MWV, LLC |
Delaware, USA |
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WestRock RKT, LLC |
Georgia, USA |
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WestRock Shared Services, LLC |
Georgia, USA |
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WestRock Southern Container, LLC |
Delaware, USA |
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WestRockTimber Note Holding Company III |
Delaware, USA |
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WRK International Holdings Sarl |
Luxembourg |
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WRK Luxembourg, Sarl |
Luxembourg |
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WRKCo Inc |
Delaware, USA |
EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
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(1) |
Registration Statement (Form S-8 No. 333-205564) pertaining to the MeadWestvaco Corporation Savings and Employee Stock Ownership Plan for Bargained Hourly Employees, the MeadWestvaco Corporation 2005 Performance Incentive Plan, as Amended and Restated, the MeadWestvaco Corporation Compensation Plan for Non-Employee Directors, the MeadWestvaco Corporation Deferred Income Plan, the MeadWestvaco Corporation 1996 Stock Option Plan, the RockTenn Amended and Restated 2004 Incentive Stock Plan, the RockTenn 2004 Incentive Stock Plan, the RockTenn (SSCC) Equity Incentive Plan and the RockTenn Supplemental Retirement Savings Plan, |
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(2) |
Registration Statement (Form S-8 No. 333-209343) pertaining to the WestRock Company 2016 Incentive Stock Plan and the WestRock Company Employee Stock Purchase Plan, |
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(3) |
Registration Statement (Form S-8 No. 333-218572) pertaining to the Multi Packaging Solutions International Limited 2015 Incentive Award Plan, |
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(4) |
Registration Statement (Form S-8 No. 333-222849) pertaining to the WestRock Company Amended and Restated 2016 Incentive Stock Plan, |
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(5) |
Registration Statement (Form S-3 No. 333-218673) pertaining to the registration of 2,475,000 shares of WestRock Company common stock, |
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(6) |
Registration Statement (From S-8 No. 333-228257) pertaining to the registration of common stock issuable under the MeadWestvaco Corporation 2005 Performance Incentive Plan, as Amended and Restated, the Rock-Tenn Company Amended and Restated 2004 Incentive Stock Plan, the Rock-Tenn Company (SSCC) Equity Incentive Plan, the WestRock Company Amended and Restated 2016 Incentive Stock Plan, the Multi Packaging Solutions International Limited 2015 Incentive Award Plan, the WestRock Company Employee Stock Purchase Plan, the KapStone Paper and Packaging 2016 Incentive Plan, the KapStone Paper and Packaging 2014 Incentive Plan, and the KapStone Paper and Packaging Amended and Restated 2006 Incentive Plan, |
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(7) |
Registration Statement (Form S-8 No. 333-211608) pertaining to the KapStone Paper and Packaging 2016 Incentive Plan, |
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(8) |
Registration Statement (Form S-8 No. 333-196330) pertaining to the KapStone Paper and Packaging 2014 Incentive Plan, |
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(9) |
Registration Statement (Form S-8 No. 333-167181) pertaining to the KapStone Paper and Packaging Amended and Restated 2006 Incentive Plan, |
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(10) |
Registration Statement (Form S-8 No. 333-163667) pertaining to the KapStone Paper and Packaging 2009 Employee Stock Purchase Plan, |
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(11) |
Registration Statement (Form S-8 No. 333-141916) pertaining to the KapStone Paper and Packaging 2006 Incentive Plan, |
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(12) |
Registration Statement (Form S-4 No. 333-22974) pertaining to the registration of notes, and |
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(13) |
Registration Statement (Form S-3 No. 333-231456) pertaining to the registration of WestRock Company securities (and guarantees thereof) and WRKCo Inc. securities (and guarantees thereof); |
of our reports dated November 15, 2019, with respect to the consolidated financial statements of WestRock Company and the effectiveness of internal control over financial reporting of WestRock Company included in this Annual Report (Form 10-K) of WestRock Company for the year ended September 30, 2019.
/s/ Ernst & Young LLP
Atlanta, Georgia
November 15, 2019
CERTIFICATION ACCOMPANYING PERIODIC REPORT
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Steven C. Voorhees, Chief Executive Officer and President, certify that:
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I have reviewed this Annual Report on Form 10-K of WestRock Company; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Date: |
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November 15, 2019 |
/s/ Steven C. Voorhees |
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Steven C. Voorhees |
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Chief Executive Officer and President |
A signed original of this written statement required by Section 302, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 302, has been provided to WestRock Company and will be retained by WestRock Company and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION ACCOMPANYING PERIODIC REPORT
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Ward H. Dickson, Executive Vice President and Chief Financial Officer, certify that:
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I have reviewed this Annual Report on Form 10-K of WestRock Company; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Date: |
November 15, 2019 |
/s/ Ward H. Dickson |
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Ward H. Dickson |
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Executive Vice President and Chief Financial Officer |
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A signed original of this written statement required by Section 302, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 302, has been provided to WestRock Company and will be retained by WestRock Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of WestRock Company (the “ Corporation ”), for the year ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “ Report ”), the undersigned, Steven C. Voorhees, Chief Executive Officer and President of the Corporation, and Ward H. Dickson, Executive Vice President and Chief Financial Officer of the Corporation, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. |
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/s/ Steven C. Voorhees |
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Steven C. Voorhees |
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Chief Executive Officer and President |
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November 15, 2019 |
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/s/ Ward H. Dickson |
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Ward H. Dickson |
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Executive Vice President and Chief Financial Officer |
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November 15, 2019 |