WESTROCK CO MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
OVERVIEW
We are a multinational provider of sustainable fiber-based paper and packaging solutions. We partner with our customers to provide differentiated, sustainable paper and packaging solutions that help our customers win in the marketplace. Our team members support customers around the world from our operating and business locations inNorth America ,South America ,Europe ,Asia andAustralia .
Presentation
EffectiveOctober 1, 2021 , we reorganized our segment reporting to four reportable segments:Corrugated Packaging ,Consumer Packaging , Global Paper and Distribution. We reorganized our reportable segments due to changes in our organizational structure and how our CODM makes key operating decisions, allocates resources and assesses the performance of our business. EffectiveOctober 1, 2021 , Adjusted EBITDA (as hereinafter defined) is our measure of segment profitability in accordance with ASC 280, "Segment Reporting" because it is used by our CODM to make decisions regarding allocation of resources and to assess segment performance. Prior period amounts have been recast to conform to the new segment structure. These changes did not impact our consolidated financial statements. See "Note 7. Segment Information" of the Notes to Consolidated Financial Statements for additional information. During fiscal 2020, we completed the monetization of the various real estate holdings that we owned that were concentrated in theCharleston, SC region. Following completion of the monetization of these assets, we ceased reporting the results of the Land and Development segment as a separate segment. Certain items are not allocated to our operating segments and, thus, the information that our CODM uses to make operating decisions and assess performance does not reflect such amounts. Adjusted EBITDA is defined as pre-tax earnings of a reportable segment before depreciation, depletion and amortization, and excludes the following items our CODM does not consider part of our segment performance: gain on sale of certain closed facilities, multiemployer pension withdrawal expense (income), mineral rights impairment, restructuring and other costs, goodwill impairment, non-allocated expenses, interest expense, net, loss on extinguishment of debt, other (expense) income, net, and other adjustments ("Adjusted EBITDA") - each as outlined in "Note 7. Segment Information" of the Notes to Consolidated Financial Statements. A detailed discussion of the fiscal 2022 year-over-year changes can be found below, as well as a detailed discussion of fiscal 2021 year-over-year changes due to the segment reorganization noted above.
Strategic acquisitions and other portfolio actions
We are committed to improving our return on invested capital as well as maximizing the performance of our assets. From time to time, we have completed acquisitions that have expanded our product and geographic scope, allowed us to increase our integration levels and impacted our comparative financials. We expect to continue to evaluate potential acquisitions in the future, although the size of individual acquisitions may vary. There were no significant acquisitions in the last three years. See also Item 1A. "Risk Factors - We May Be Unsuccessful in Making and Integrating Mergers, Acquisitions and Investments, and Completing Divestitures".
On
In fiscal 2022, we completed the following portfolio actions: (i) we permanently ceased operations at ourPanama City, FL mill, and (ii) we permanently closed the corrugated medium manufacturing operations at ourSt. Paul, MN mill. Both operations were expected to require significant capital investment to maintain and improve going forward, and the production of fluff pulp (atPanama City ) was not a priority in our strategy to focus on higher value markets. Closing these operations allows us to redirect significant capital that would have been required to keep them competitive in the future to improve other key assets. In connection with these actions, we recorded various impairments and other charges, and we expect to record future restructuring charges, primarily associated 31 --------------------------------------------------------------------------------
with future carrying costs. See “Note 4. Restructuring and other costs” in the notes to the consolidated financial statements for additional information.
InNovember 2022 , we announced the planned sale of our interior partitions converting operations and three uncoated recycled paperboard mills (Chattanooga, TN ,Eaton, IN , andAurora, IL ) in two transactions for a combined$380 million , subject to working capital adjustments. These divestitures align with our commitment to optimize our portfolio and focus our strategy on key end markets. See "Note 22. Subsequent Events" of the Notes to Consolidated Financial Statements for additional information.
Enterprise Systems Transformation
In the fourth quarter of fiscal 2022, we launched a multi-year phased business
systems transformation project. The investment will replace much of our existing
disparate systems and transition them to a standardized ERP system on a
cloud-based platform, as well as a suite of other complementing technologies,
across approximately 90% of our footprint based on net sales.
The new systems are intended to transform areas such as manufacturing, supply
chain, procurement, quote to cash, financials and analytics, and position us to
better leverage automation and process efficiency and enable productivity
enhancements. An implementation of this scale is a major financial undertaking
and will require substantial time and attention of management and key employees.
Project completion dates and anticipated costs may also change. As the systems
are phased in, they will become a significant component of our internal control
over financial reporting. See also Item 1A. "Risk Factors - We May Not Be Able
To Successfully Implement Our Strategic Transformation Initiatives, Including
Our New Business Systems Transformation".
Due to the nature, scope and magnitude of this investment, management believes
these incremental transformation costs are above the normal, recurring level of
spending for information technology to support operations. These strategic
investments are not expected to recur in the foreseeable future, and are not
considered representative of our underlying operating performance. As such,
management believes presenting these costs as an adjustment in the non-GAAP
results provides additional information to investors about trends in our
operations and is useful for period-over-period comparisons. This presentation
also allows investors to view our underlying operating results in the same
manner as they are viewed by management.
The expenses expected to be adjusted from Net income (loss) attributable to
common stockholders ("Net Income") are expensed as incurred during the
implementation of software applications and other enabling technologies, and do
not include deferred or capitalized costs, depreciation and/or amortization, and
costs to support or maintain these software applications or systems once they
are in productive use. During the investment period, the normal level of spend
associated with non-transformative programs is expected to be maintained and
these expenses will not be adjusted in our non-GAAP measures. The items adjusted
from Net Income will also be adjusted in our presentation of Consolidated
Adjusted EBITDA.
EXECUTIVE SUMMARY
Net sales of $21,256.5 million for fiscal 2022 increased $2,510.4 million , or
13.4%, compared to fiscal 2021 primarily due to higher selling price/mix that
was partially offset by lower volumes and the unfavorable impact of foreign
currency. In the second quarter of fiscal 2021, we experienced lost sales
associated with the Ransomware Incident and winter weather events (the "Events")
and we estimate these Events decreased net sales by approximately $189.1
million .
Net income attributable to common stockholders of $944.6 million in fiscal 2022
increased 12.7%, compared to fiscal 2021. The impact of higher selling price/mix
and ransomware recoveries was largely offset by increased cost inflation, higher
operating costs and lower volumes. Consolidated Adjusted EBITDA of $3,459.4
million in fiscal 2022 increased $460.2 million , or 15.3%. A detailed review of
our performance appears below under "Results of Operations".
Earnings per diluted share was $3.61 in fiscal 2022 compared to $3.13 in fiscal
2021. Adjusted Earnings Per Diluted Share were $4.76 and $3.39 in fiscal 2022
and 2021, respectively. See the discussion and tables under "Non-GAAP Financial
Measures" below with respect to Consolidated Adjusted EBITDA and Adjusted
Earnings Per Diluted Share.
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We generated $2,020.4 million of net cash provided by operating activities in
fiscal 2022, compared to $2,279.9 million in fiscal 2021. The decline was
primarily due to $511.3 million of greater working capital usage compared to the
prior year period that was partially offset by higher earnings excluding
non-cash impairments primarily associated with restructuring activities. The
greater working capital usage in fiscal 2022 was primarily due to actions taken
in the prior year to preserve cash due to uncertainty during the COVID pandemic,
such as the payment of certain bonuses and 401(k) match in stock in fiscal 2021,
that were paid in cash in fiscal 2022, and the payment in fiscal 2022 of certain
previously deferred payroll taxes that relate to relief offered under the
Coronavirus Aid, Relief and Economic Security Act ("CARES Act") from prior
years. See "WestRock Pandemic Action Plan" for more information. We invested
$862.6 million in capital expenditures in fiscal 2022 while returning $259.5
million in dividends to our stockholders and repurchasing $600.0 million of
Common Stock. We believe our strong balance sheet and cash flow provide us the
flexibility to continue to invest to sustain and improve our operating
performance. See "Liquidity and Capital Resources" for more information.
A detailed review of our performance for fiscal years 2022, 2021 and 2020 appears below under “Operating Results”.
Expectations for the first quarter of fiscal 2023 and fiscal 2023
In the first quarter of fiscal 2023, we expect a sequential decline in net sales and earnings from the fourth quarter of fiscal 2022, reflecting the normal seasonal sequential volume declines in many of our businesses and scheduled mill maintenance outages, resulting in approximately 150,000 tons of maintenance downtime, along with customer inventory rebalancing and macroeconomic uncertainty. We expect lower volume with four fewer shipping days during the first quarter of fiscal 2023, and one fewer shipping day than in the first quarter of fiscal 2022. We expect unfavorable non-cash pension expense of approximately$40 million driven by higher interest rates and market volatility and sequential natural gas and recycled fiber deflation, down approximately 20% and 70%, respectively. We also expect increased health insurance costs prior to the annual reset of employee deductibles. We further expect the continued flow through of previously published price increases and to continue balancing our supply with our customers' demand. We plan to draw upon our$1.0 billion Delayed Draw Term Loan to acquire the remaining 67.7% interest in Grupo Gondi, and our results will include the corresponding increased interest expense. In fiscal 2023, we expect our results to be significantly impacted by planned portfolio actions, non-cash pension expense and currency headwinds. We also expect our results to be negatively impacted by customer inventory rebalancing, primarily in our first fiscal quarter, and macroeconomic uncertainty as well as scheduled mill maintenance outages. We further expect the continued flow through of previously published price increases and to continue balancing our supply with our customers' demand. We expect the planned portfolio actions (Grupo Gondi and announced divestitures) to add an estimated net$85 million of Adjusted EBITDA. We expect unfavorable non-cash pension expense of approximately$160 million driven by higher interest rates and market volatility and an estimated$50 million unfavorable impact from foreign exchange rates. We expect approximately 465,000 tons of maintenance downtime compared to approximately 409,000 tons in fiscal 2022. We are also targeting over$250 million in net cost savings in fiscal 2023 related to execution on our transformation initiatives, including items such as increased mill and converting network efficiencies, indirect spend savings and selling, general and administrative ("SG&A") expense reductions. For additional information on our planned portfolio actions see "Note 3. Acquisitions and Investments" and "Note 22. Subsequent Events" of the Notes to Consolidated Financial Statements. For more information on our business systems transformation, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Systems Transformation".
WestRock Pandemic Action Plan
InMay 2020 , given the uncertainties associated with the severity and duration of the pandemic, we announced, and began implementing, the WestRock Pandemic Action Plan. We focused and continue to focus on the protection, safety and well-being of our team members and continuing to match our supply with our customers' demand. We modified the WestRock Pandemic Action Plan as the impact of COVID evolved. The actions that we took pursuant to the plan targeted approximately$1 billion in additional cash through the end of calendar 2021, which was available for use to reduce our outstanding indebtedness. In fiscal 2020, we achieved more than$350 million of the approximately$1 billion goal set forth in the WestRock Pandemic Action Plan, as modified. As ofSeptember 30, 2021 , we had achieved more than$975 million of the approximately$1 billion goal and discontinued measurement. 33 -------------------------------------------------------------------------------- We committed to (i) reducing discretionary expenses, (ii) using Common Stock to make Company funded 401(k) match and annual contribution (i.e. up to 5% and 2.5%, respectively) fromJuly 1, 2020 throughSeptember 30, 2021 (final period funded inOctober 2021 ), (iii) targeting a reduction of fiscal 2021 capital investments to a range of$800 million to$900 million , up from an initial range of$600 to$800 million (we invested$815.5 million in fiscal 2021), and (iv) resetting our quarterly dividend to$0.20 per share for an annual rate of$0.80 per share, which we did inMay 2020 . See "Liquidity and Capital Resources - Cash Flow Activity" for information regarding subsequent increases to our dividend. In addition to the items addressed above, we (i) decreased the salaries of our senior executive team by up to 25% fromMay 1, 2020 throughDecember 31, 2020 and decreased the retainer for members of our board of directors by 25% for the third and fourth calendar quarters of 2020, (ii) used Common Stock to pay our annual incentive for fiscal 2020 for nearly all participants and set the payout level at 50% of the target opportunity subject to a safety modifier, as well as for Company funded 401(k) match and our annual contribution as noted above, and (iii) postponed$116.5 million of employment taxes incurred through the end of calendar year 2020, pursuant to relief offered under the CARES Act. We also reduced fiscal 2020 capital investments to$978.1 million after targeting to reduce them by approximately$150 million to approximately$950 million . We paid the first 50% of employment taxes deferred under the CARES Act as required inDecember 2021 and expect to pay the remaining 50% byDecember 2022 . We began tracking the impact of costs associated with safety, cleaning and other items related to COVID in the third quarter of fiscal 2020 and discontinued doing so during fiscal 2022 due to their continuing nature at relatively consistent levels. We expect to continue to incur expenses for these items as needed in the future. During fiscal 2021, we recorded$38.4 million of expense related to COVID, including$22.0 million of relief payments to employees in the first quarter of fiscal 2021. The balance was for increased costs for safety, cleaning and other items related to COVID. During fiscal 2020, we provided one-time COVID recognition awards to our team members who work in manufacturing and operations and recognized expense of$31.6 million for those awards. During fiscal 2020, we also incurred an additional expense of$32.4 million for cleaning, safety supplies and equipment, screening resources and other items. We did not have any relief payments paid to employees in fiscal 2022. RANSOMWARE INCIDENT As previously disclosed, onJanuary 23, 2021 , we detected a ransomware incident impacting certain of our systems. Promptly upon our detection of this incident, we initiated response and containment protocols and our security teams, supplemented by leading cyber defense firms, worked to remediate this incident. We undertook extensive efforts to identify, contain and recover from this incident quickly and securely. Our teams worked to maintain our business operations and minimize the impact on our customers and team members. In our Form 10-Q for the second quarter fiscal 2021, we announced that all systems were back in service. All of our mills and converting locations began producing and shipping paper and packaging at pre-ransomware levels inMarch 2021 or earlier. For more information on the ransomware incident, including the financial impact, see "Note 1. Description of Business and Summary of Significant Accounting Policies - Ransomware Incident" of the Notes to Consolidated Financial Statements. See Item 1A. "Risk Factors - We are Subject to Cyber-Security Risks, Including Related to Customer, Employee, Vendor or Other Company Data". 34 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS
The following table summarizes our consolidated results for the three years ended
Year Ended September 30,
2022 2021 2020
Net sales $ 21,256.5 $ 18,746.1 $ 17,578.8
Cost of goods sold 17,235.8 15,315.8 14,381.6
Gross profit 4,020.7 3,430.3 3,197.2
Selling, general and administrative excluding
intangible
amortization 1,932.6 1,759.3
1,624.4
Selling, general and administrative intangible amortization 350.4 357.1
400.5
(Gain) loss on disposal of assets (16.9 ) 4.1 (16.3 ) Multiemployer pension withdrawal expense (income) 0.2 (2.9 ) (1.1 ) Mineral rights impairment 26.0 - - Restructuring and other costs 401.6 31.5 112.7 Goodwill impairment - - 1,333.2 Operating profit (loss) 1,326.8 1,281.2 (256.2 ) Interest expense, net (318.8 ) (372.3 ) (393.5 ) Loss on extinguishment of debt (8.5 ) (9.7 ) (1.5 ) Pension and other postretirement non-service income 157.4 134.9
103.3
Other (expense) income, net (11.0 ) 10.9
9.5
Equity in income of unconsolidated entities 72.9 40.9
15.8
Income (loss) before income taxes 1,218.8 1,085.9 (522.6 ) Income tax expense (269.6 ) (243.4 ) (163.5 ) Consolidated net income (loss) 949.2 842.5 (686.1 ) Less: Net income attributable to noncontrolling interests (4.6 ) (4.2 ) (4.8 ) Net income (loss) attributable to common stockholders$ 944.6 $ 838.3
Fiscal 2022 net sales increased
Net sales in fiscal 2021 increased$1,167.3 million , or 6.6%, compared to fiscal 2020 primarily due to higher selling price/mix and higher volumes, partially offset by lost sales associated with the Events. Additionally, we experienced a net favorable impact of foreign currency across our segments. Volumes in fiscal 2020 were negatively impacted by COVID, primarily in the last half of the fiscal year.
See “Segment Information” below for the change in net sales before intersegment eliminations by segment.
Cost of Goods Sold Cost of goods sold increased to$17,235.8 million in fiscal 2022 compared to$15,315.8 million in fiscal 2021. Cost of goods sold as a percentage of net sales was 81.1% in fiscal 2022 compared to 81.7% in fiscal 2021. The decrease was primarily due to higher selling prices and ransomware recoveries in fiscal 2022, which were largely offset by increased cost inflation, higher operating costs and increased planned downtime including maintenance outages. Fiscal 2021 included the negative impact of the Events versus insurance recoveries in fiscal 2022. In fiscal 2022 we received$50.6 million of business interruption recoveries recorded as a reduction of Cost of goods sold. See "Note 1. Description of Business and Summary of Significant Accounting Policies - Ransomware Incident" for additional information. Cost inflation consisted primarily of higher energy, wage and benefit costs, recycled fiber, freight, virgin fiber and chemical costs. In fiscal 2021, we recorded$19.7 million of one-time recognition awards to our team members who work in manufacturing and operations. While costs increased in fiscal 2022 compared to fiscal 2021, driven by the factors noted above, we sought to mitigate their impact. Our mitigation strategies, such as through price increases and productivity and other cost control efforts, provided us some 35 -------------------------------------------------------------------------------- flexibility to respond to these circumstances, but we may be unsuccessful in doing so in future periods. In fiscal 2022, we entered into various natural gas commodity derivatives that were designated as cash flow hedges for accounting purposes and are scheduled to be settled over the next twelve months. These positions were entered into to help us mitigate commodity pricing risk. See "Note 18. Accumulated Other Comprehensive Loss and Other Comprehensive Income (Loss)" of the Notes to Consolidated Financial Statements for additional information regarding our natural gas commodity derivatives. Cost of goods sold increased to$15,315.8 million in fiscal 2021 compared to$14,381.6 million in fiscal 2020. Cost of goods sold as a percentage of net sales was 81.7% in fiscal 2021 compared to 81.8% in fiscal 2020. The increase in cost of goods sold in fiscal 2021 compared to fiscal 2020 was primarily due to higher volumes, increased cost inflation and other items, including operational disruption associated with the Events. These items were partially offset by productivity improvements and other items. In fiscal 2020, we incurred approximately$4.5 million of direct costs and property damage associated with Hurricane Michael and received Hurricane Michael-related insurance proceeds of$32.3 million and recorded a reduction of cost of goods sold of$32.1 million in connection with an indirect tax claim inBrazil . The Hurricane Michael-related insurance proceeds were for$20.6 million of direct costs and property damage and for$11.7 million for business interruption recoveries. In fiscal 2021, we recorded costs of goods sold of$35.4 million related to COVID primarily for relief payments to employees and increased costs for safety, cleaning and other items related to COVID. Fiscal 2020 includes costs of goods sold of$56.5 million associated with COVID, including one-time recognition awards to our team members who work in manufacturing and operations, increased costs for safety, cleaning and other items related to COVID. We began to track and report the impact of COVID on fiscal 2020 in the third fiscal quarter. Cost inflation consisted primarily of higher recycled fiber, wage and benefit costs, energy, freight, chemical and virgin fiber costs.
Sales, general and administrative excluding intangible amortization
SG&A excluding intangible amortization increased$173.3 million to$1,932.6 million in fiscal 2022 compared to fiscal 2021. SG&A excluding intangible amortization as a percentage of net sales decreased in fiscal 2022 to 9.1% from 9.4% in fiscal 2021, primarily due to higher selling prices. The SG&A increase in fiscal 2022 was primarily due to$76.3 million of increased compensation and benefits. In addition, we incurred$22.7 million of increased travel and entertainment costs,$19.1 million of increased software/computer expenses,$14.0 million of increased bad debt expense and$10.6 million of higher consulting, professional and legal fees. The increased travel and entertainment costs are still well below pre-pandemic levels. In fiscal 2022, we recorded$6.6 million of ransomware recoveries of direct costs compared to expense, net of initial recoveries of approximately$19 million in fiscal 2021. SG&A excluding intangible amortization increased$134.9 million to$1,759.3 million in fiscal 2021 compared to fiscal 2020 primarily due to a$119.8 million increase in bonus and stock-based compensation expense, including a$9.6 million acceleration of stock-based compensation in connection with the departure of our former CEO in the second quarter of fiscal 2021. In addition, we incurred increased aggregate costs for consulting, professional and legal fees of$21.2 million compared to the prior year period, primarily associated with the Ransomware Incident. These increases were partially offset by a$29.4 million decrease in bad debt expense compared to the prior year period, as well as a$18.4 million reduction in travel and entertainment associated with prolonged shelter-in-place orders in response to the ongoing effects of COVID. SG&A excluding intangible amortization as a percentage of net sales increased in fiscal 2021 to 9.4% from 9.2% in fiscal 2020.
Amortization of sales, general and administrative intangible assets
SG&A intangible amortization was$350.4 million ,$357.1 million and$400.5 million in fiscal 2022, 2021 and 2020, respectively. The expense primarily represents the amortization of customer relationship intangibles acquired in business combinations. The decline in fiscal 2021 was primarily attributable to certain intangibles from prior acquisitions reaching full amortization.
Infringement of mining rights
In fiscal 2022, we recorded a$26.0 million pre-tax non-cash impairment of certain mineral rights as a result of the lack of new leasing or development activity on the related properties for an extended period of time. With the impairment in the third quarter of fiscal 2022, we have no remaining mineral rights. 36 --------------------------------------------------------------------------------
Restructuring and other costs
We recorded pre-tax restructuring and other costs of$401.6 million ,$31.5 million and$112.7 million for fiscal 2022, 2021 and 2020, respectively. These amounts are not comparable since the timing and scope of the individual actions associated with each restructuring, acquisition, integration or divestiture vary. The increase in fiscal 2022 was primarily driven by the closure of ourPanama City, FL mill and the permanent closure of the corrugated medium manufacturing operations at theSt. Paul, MN mill. We generally expect the integration of a closed facility's production with other facilities to enable the receiving facilities to better leverage their fixed costs while eliminating fixed costs from the closed facility. See "Note 4. Restructuring and Other Costs" of the Notes to Consolidated Financial Statements for additional information, including a description of the type of costs incurred. We have restructured portions of our operations from time to time and it is likely that we will engage in additional restructuring initiatives in the future. See also Item 1A. "Risk Factors - We May Incur Additional Restructuring Costs and May Not Realize Expected Benefits from Restructuring".
Impairment of goodwill
No goodwill impairments were recorded in fiscal 2022 or 2021. In fiscal 2020, we recorded a pre-tax non-cash goodwill impairment of$1,333.2 million in our legacyConsumer Packaging reportable segment. The impairment was primarily the result of expected lower volumes and cash flows related to certain external bleached paperboard end markets, including commercial print, tobacco and plate and cup stock markets. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates -Goodwill " for more information on our goodwill impairment testing.
Interest expense, net
Interest expense, net was$318.8 million and$372.3 million for fiscal 2022 and 2021, respectively. The decrease was primarily due to a net$35.8 million reduction in interest expense associated with the remeasurement of our multiemployer pension liabilities for the increase in interest rates in fiscal 2022 compared to fiscal 2021. In addition, interest expense, net declined due to lower debt levels compared to the prior year period. These declines were partially offset by higher interest rates on debt in the fiscal year endedSeptember 30, 2022 . Interest expense, net was$372.3 million and$393.5 million for fiscal 2021 and 2020, respectively. The decrease was primarily due to lower debt levels that was partially offset by higher interest rates in fiscal 2021 compared to fiscal 2020. Additionally, fiscal 2020 was impacted by$20.5 million of interest income recorded in connection with an indirect tax claim inBrazil partially offset by a$15.0 million increase in interest expense associated with the remeasurement of our multiemployer pension liabilities. See "Note 17. Commitments and Contingencies - Indirect Tax Claim" of the Notes to Consolidated Financial Statements for additional information. See Item 1A. "Risk Factors - We Have Had Significant Levels of Indebtedness in the Past and May Incur Significant Levels of Indebtedness in the Future, Which Could Adversely Affect Our Financial Condition and Impair Our Ability to Operate Our Business".
Pension and other income not related to post-retirement service
Pension and other postretirement non-service income was$157.4 million and$134.9 million in fiscal 2022 and 2021, respectively. The increase was primarily due to the increase in plan asset balances used to determine the expected return on plan assets for fiscal 2022. Customary pension and other postretirement (income) costs are included in our segment results. Pension and other postretirement non-service income was$134.9 million and$103.3 million in fiscal 2021 and 2020, respectively. The increase was primarily due to the increase in plan asset balances used to determine the expected return on plan assets for fiscal 2021. See "Note 5. Retirement Plans" of the Notes to Consolidated Financial Statements for more information. 37 --------------------------------------------------------------------------------
Other (expenses) income, net
Other (expense) income, net was expense of$11.0 million and income of$10.9 million and$9.5 million in fiscal 2022, 2021 and 2020, respectively. The increase in expense in fiscal 2022 was primarily due to a$9.3 million increase in fees associated with the sale of receivables and a$5.7 million less favorable impact of exchange rates compared to fiscal 2021. Fiscal 2021 primarily included a$16.5 million gain on sale of theSummerville, SC sawmill and a$16.0 million gain on sale of our Rosenbloom legacy cost method investment, which were partially offset by a$22.5 million charge associated with not exercising an option to purchase an additional equity interest in Grupo Gondi at that time.
Income equity of unconsolidated entities
We recorded equity in income of unconsolidated entities of$72.9 million in fiscal 2022 compared to$40.9 million in fiscal 2021. The increase was driven by earnings improvement across the portfolio, most notably, in a displays joint venture and our joint venture with Grupo Gondi. OnJuly 27, 2022 , we announced our entry into an agreement to acquire the remaining 67.7% interest in Grupo Gondi. See "Note 3. Acquisitions and Investments" of the Notes to Consolidated Financial Statements for more information regarding the announcement. We recorded equity in income of unconsolidated entities of$40.9 million in fiscal 2021 compared to$15.8 million in fiscal 2020. The increase was driven by earnings improvement across the portfolio, most notably, our joint venture with Grupo Gondi. Provision for Income Taxes We recorded income tax expense of$269.6 million for fiscal 2022 at an effective tax rate of 22.1%, compared to an income tax expense of$243.4 million at an effective tax rate of 22.4% in fiscal 2021 and income tax expense of$163.5 million at an effective tax rate of (31.3)% in fiscal 2020, due to the loss before income tax. See "Note 6. Income Taxes" of the Notes to Consolidated Financial Statements for additional information, including a table reconciling the statutory federal tax rate to our effective tax rate. Excluding the effect of the goodwill impairment, which was largely not tax deductible, our effective tax rate was 22.5% in fiscal 2020. OnAugust 16, 2022 , the Inflation Reduction Act was signed into law, with tax provisions primarily focused on implementing a 15% minimum tax on global adjusted financial statement income and a 1% excise tax on share repurchases. While we are still evaluating the impact that the Inflation Reduction Act will have on our financial results, we do not believe the impact will be material.
Hurricane Michael
In fiscal 2020, we received the remaining$32.3 million of insurance proceeds related to the extensive damage sustained at our containerboard and pulp mill located inPanama City, FL , inOctober 2018 due to Hurricane Michael. The insurance proceeds received in fiscal 2020 consisted of$11.7 million of business interruption recoveries and$20.6 million for direct costs and property damage. The insurance proceeds were recorded as a reduction of cost of goods sold -$20.0 million in ourCorrugated Packaging segment and$12.3 million in our Global Paper segment. See Item 1A. "Risk Factors - We Face Physical, Operational, Financial and Reputational Risks Associated with Climate Change". SEGMENT INFORMATION Corrugated Packaging Segment
Corrugated packaging shipments
Corrugated Packaging shipments are expressed as a tons equivalent in thousands of tons, which includes external and intersegment shipments from our corrugated converting operations, principally for the sale of corrugated containers and other corrugated products. Tons sold from period to period may be impacted by customer conversions to lower basis weight products. In addition, we discloseNorth American Corrugated Packaging 38 -------------------------------------------------------------------------------- shipments in billion square feet ("BSF") and millions of square feet ("MMSF") per shipping day. We have presented theCorrugated Packaging shipments in this manner because we believe investors, potential investors, securities analysts and others find this breakout useful when evaluating our operating performance. Quantities in the table may not sum across due to trailing decimals. First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter Year Fiscal 2020 Corrugated Packaging Shipments - thousands of tons 1,600.2 1,642.0 1,591.8 1,697.3 6,531.3North American Corrugated Packaging Shipments - BSF 23.9 23.7 23.2 24.8 95.7 North American Corrugated Packaging Per Shipping Day - MMSF 385.4 370.9
369.0 387.7 378.3
Fiscal 2021 Corrugated Packaging Shipments - thousands of tons 1,729.4 1,662.7 1,709.6 1,678.7 6,780.4North American Corrugated Packaging Shipments - BSF 25.3 24.6 25.3 24.5 99.8 North American Corrugated Packaging Per Shipping Day - MMSF 415.3 391.2
401.7 383.2 397.6
Fiscal 2022 Corrugated Packaging Shipments - thousands of tons 1,634.5 1,662.1 1,648.7 1,580.5 6,525.8North American Corrugated Packaging Shipments - BSF 24.5 24.7 24.5 23.4 97.1 North American Corrugated Packaging Per Shipping Day - MMSF 401.0 385.8 389.3 365.5 385.2
Corrugated Packaging Segment –
Adjusted EBITDA
(In millions, except percentages) Net Sales (1) Adjusted EBITDA Margin
Fiscal 2020
First Quarter $ 1,979.3 $ 358.5 18.1 %
Second Quarter 1,973.0 392.3 19.9
Third Quarter 1,850.2 361.0 19.5
Fourth Quarter 1,987.7 362.4 18.2
Total $ 7,790.2 $ 1,474.2 18.9 %
Fiscal 2021
First Quarter $ 2,019.5 $ 347.6 17.2 %
Second Quarter 2,022.4 321.1 15.9
Third Quarter 2,154.7 363.9 16.9
Fourth Quarter 2,203.9 361.4 16.4
Total $ 8,400.5 $ 1,394.0 16.6 %
Fiscal 2022
First Quarter $ 2,220.0 $ 288.9 13.0 %
Second Quarter 2,319.0 328.7 14.2
Third Quarter 2,382.5 385.2 16.2
Fourth Quarter 2,386.1 383.9 16.1
Total $ 9,307.6 $ 1,386.7 14.9 %
(1)
39 --------------------------------------------------------------------------------
Net sales before intersegment eliminations for theCorrugated Packaging segment increased$907.1 million in fiscal 2022 compared to fiscal 2021. The increase primarily consisted of$1,137.0 million of higher selling price/mix that was partially offset by$265.7 million of lower volumes. The lower volumes were largely due to market softness and customer inventory rebalancing in the fourth quarter of fiscal 2022. The volume comparison in fiscal 2022 reflects the$39.2 million negative impact in the prior year period from the Events, with an estimated$16.2 million and$23.0 million due to the Ransomware Incident and winter weather, respectively. Net sales before intersegment eliminations for theCorrugated Packaging segment increased$610.3 million in fiscal 2021 compared to fiscal 2020 primarily due to$375.7 million of higher selling price/mix and$241.0 million of higher volumes. Volumes in fiscal 2021 were negatively impacted by an estimated$39.2 million from the Events. Volumes in fiscal 2020 were negatively impacted by COVID, primarily in the last half of the fiscal year.
Adjusted EBITDA – Corrugated Packaging Segment
Corrugated Packaging segment Adjusted EBITDA in fiscal 2022 decreased$7.3 million compared to fiscal 2021, primarily due to an estimated$815.6 million of increased cost inflation,$249.1 million higher operating costs, including an estimated$29.8 million from economic downtime in the fourth quarter of fiscal 2022,$111.3 million of lower volumes excluding the Events in the prior year period and a$12.9 million increase from planned downtime including maintenance outages. These items were largely offset by a$1,136.0 million margin impact from higher selling price/mix and the$46.0 million favorable impact on the current period of the Events due to recoveries in the current year period compared to the expense from the Events in the prior year period. Productivity was negatively impacted by higher supply chain costs and labor shortages, in part due to the impacts of COVID and higher rates of attrition, as well as heavy planned mill maintenance in the first half of fiscal 2022 and COVID-related absenteeism primarily in the second quarter of fiscal 2022.Corrugated Packaging segment Adjusted EBITDA in fiscal 2021 decreased$80.2 million compared to fiscal 2020, primarily due to an estimated$358.6 million of increased cost inflation,$181.9 million higher operating costs,$18.1 million of impact from the Events and$7.2 million of Hurricane Michael insurance recoveries in fiscal 2020. These items were largely offset by a$378.8 million margin impact from higher selling price/mix,$95.1 million of higher volumes excluding the Events and an estimated$11.7 million from lower economic downtime. Consumer Packaging Segment Consumer Packaging ShipmentsConsumer Packaging shipments are expressed as a tons equivalent in thousands of tons, which includes external and intersegment shipments from our consumer converting operations, principally for the sale of folding cartons, interior partitions and other consumer products. We have presented theConsumer Packaging shipments in this manner because we believe investors, potential investors, securities analysts and others find this breakout useful when evaluating our operating performance. Quantities in the table may not sum across due to trailing decimals. First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter Year Fiscal 2020 Consumer Packaging Shipments - thousands of tons 366.0 384.1
391.1 401.7 1,542.8
Fiscal 2021 Consumer Packaging Shipments - thousands of tons 374.9 379.1
386.4 389.5 1,529.9
Fiscal 2022
Consumer Packaging Shipments - thousands
of tons 374.2 401.3 399.3 391.4 1,566.2
40
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Consumer packaging segment –
Adjusted EBITDA
(In millions, except percentages) Net Sales (1) Adjusted EBITDA Margin
Fiscal 2020
First Quarter $ 1,015.4 $ 133.2 13.1 %
Second Quarter 1,049.8 159.7 15.2
Third Quarter 1,024.1 186.0 18.2
Fourth Quarter 1,101.1 181.8 16.5
Total $ 4,190.4 $ 660.7 15.8 %
Fiscal 2021
First Quarter $ 1,062.5 $ 175.3 16.5 %
Second Quarter 1,080.6 164.1 15.2
Third Quarter 1,132.2 183.3 16.2
Fourth Quarter 1,158.6 198.1 17.1
Total $ 4,433.9 $ 720.8 16.3 %
Fiscal 2022
First Quarter $ 1,138.7 $ 169.3 14.9 %
Second Quarter 1,250.6 205.8 16.5
Third Quarter 1,270.2 234.9 18.5
Fourth Quarter 1,305.7 219.2 16.8
Total $ 4,965.2 $ 829.2 16.7 %
(1)
Net sales before intersegment eliminations for theConsumer Packaging segment increased$531.3 million in fiscal 2022 compared to fiscal 2021 primarily due to$425.7 million of higher selling price/mix and$258.7 million impact of higher volumes, including the$12.1 million negative impact from the Events in the prior year period. These increases were partially offset by$149.6 million of unfavorable foreign currency impacts. The$243.5 million increase in net sales before intersegment eliminations for theConsumer Packaging segment in fiscal 2021 compared to fiscal 2020 was primarily due to$101.5 million of higher volumes,$88.5 million of favorable foreign currency impacts and$53.4 million of higher selling price/mix. Volumes were negatively impacted by an estimated$12.1 million from the Events. Volumes in fiscal 2020 were negatively impacted by COVID, primarily in the last half of the fiscal year.
Adjusted EBITDA – Consumer Packaging Segment
Consumer Packaging segment Adjusted EBITDA in fiscal 2022 increased$108.4 million compared to the prior year. Adjusted EBITDA in the period increased primarily due to an estimated$409.0 million margin impact from higher selling price/mix,$59.2 million of higher volumes excluding the Events and a$9.9 million favorable impact from the Events due to recoveries in the current year period compared to the expense from the Events in the prior year period. These items were partially offset by an estimated$329.4 million of increased cost inflation,$25.6 million of unfavorable foreign currency impacts,$8.0 million of higher operating costs and a$6.4 million increase from planned downtime including maintenance outages.Consumer Packaging segment Adjusted EBITDA in fiscal 2021 increased$60.1 million compared to the prior year primarily due to$138.0 million of increased productivity and other operational items, an estimated$29.9 million margin impact from higher selling price/mix, an estimated$20.9 million from lower economic downtime and$11.1 million of higher volumes excluding the Events. These items were partially offset by an estimated$136.6 million of increased cost inflation. 41
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Global paper segment
Global paper shipments
Global Paper shipments in thousands of tons include the sale of containerboard, paperboard, market pulp and specialty papers (including kraft papers and saturating kraft) to external customers. The shipment data table excludes gypsum paperboard liner tons produced by ourSeven Hills Paperboard LLC joint venture inLynchburg, VA since it is not consolidated. We have presented the Global Paper shipments in this manner because we believe investors, potential investors, securities analysts and others find this breakout useful when evaluating our operating performance. Quantities in the table may not sum across due to trailing decimals. First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter Year Fiscal 2020 Global Paper Shipments - thousands of tons 1,619.0 1,719.6 1,651.2
1,528.0 6,517.8
Fiscal 2021 Global Paper Shipments - thousands of tons 1,461.7 1,482.7 1,588.6
1,738.7 6,271.6
Fiscal 2022 Global Paper Shipments - thousands of tons 1,515.9 1,658.2 1,632.7 1,377.4 6,184.3
Global paper segment –
Adjusted EBITDA
(In millions, except percentages) Net Sales (1) Adjusted EBITDA Margin
Fiscal 2020
First Quarter $ 1,206.9 $ 190.3 15.8 %
Second Quarter 1,246.5 173.6 13.9
Third Quarter 1,166.2 167.1 14.3
Fourth Quarter 1,130.0 170.9 15.1
Total $ 4,749.6 $ 701.9 14.8 %
Fiscal 2021
First Quarter $ 1,090.9 $ 151.7 13.9 %
Second Quarter 1,130.6 159.6 14.1
Third Quarter 1,299.2 265.2 20.4
Fourth Quarter 1,462.3 307.2 21.0
Total $ 4,983.0 $ 883.7 17.7 %
Fiscal 2022
First Quarter $ 1,352.6 $ 232.4 17.2 %
Second Quarter 1,538.1 308.6 20.1
Third Quarter 1,610.3 399.0 24.8
Fourth Quarter 1,429.2 306.4 21.4
Total $ 5,930.2 $ 1,246.4 21.0 %
(1)
Net sales before intersegment eliminations for the Global Paper segment increased$947.2 million in fiscal 2022 compared to fiscal 2021 primarily due to$1,101.8 million of higher selling price/mix that was partially offset by$63.0 million of lower volumes including the$134.8 million negative impact on volumes in fiscal 2021 from the Events. 42 -------------------------------------------------------------------------------- The lower volumes were due to market softness in the fourth quarter of fiscal 2022. This aggregate increase was also partially offset by the absence of$33.7 million of sales from the sawmill we sold in the second quarter fiscal 2021. The$233.4 million increase in net sales before intersegment eliminations for the Global Paper segment in fiscal 2021 compared to fiscal 2020 was primarily due to$438.3 million of higher selling price/mix that was partially offset by$160.7 million of lower volumes,$21.0 million of lower sales due to the second quarter of fiscal 2021 sawmill sale, and$18.9 million of unfavorable foreign currency impacts. Volumes were negatively impacted by an estimated$91.7 million and$43.1 million due to the Ransomware Incident and winter weather, respectively. Volumes in fiscal 2020 were negatively impacted by COVID, primarily in the last half of the fiscal year.
Adjusted EBITDA – Global Paper Segment
Global Paper segment Adjusted EBITDA in fiscal 2022 increased$362.7 million compared to the prior year. Adjusted EBITDA in the period increased primarily due to a$1,101.8 million margin impact from higher selling price/mix and a$79.4 million favorable impact from the Events due to recoveries in the current year period and expense from the Events in the prior year period. These items were partially offset by an estimated$659.4 million of increased cost inflation,$72.8 million of lower volumes excluding the Events,$72.1 million higher operating costs including an estimated$15.7 million from economic downtime in the fourth quarter of fiscal 2022, and a$16.1 million increase from planned downtime including maintenance outages. Global Paper segment Adjusted EBITDA in fiscal 2021 increased$181.8 million compared to fiscal 2020 primarily due to an estimated$436.2 million of margin impact from higher selling price/mix,$64.1 million of increased productivity and other operational items and an estimated$18.3 million from lower economic downtime. These items were partially offset by an estimated$273.2 million of increased cost inflation,$53.1 million of impact from the Events,$4.5 million of Hurricane Michael insurance recoveries in fiscal 2020 and$6.0 million of lower volumes excluding the Events.
Retail Sector
Distribution shipments
Distribution shipments are expressed as a tons equivalent in thousands of tons,
which includes external and intersegment shipments from our distribution and
display assembly operations. We have presented the Distribution shipments in
this manner because we believe investors, potential investors, securities
analysts and others find this breakout useful when evaluating our operating
performance. Quantities in the table may not sum across due to trailing
decimals.
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
Fiscal 2020
Distribution Shipments - thousands
of tons 43.9 44.7 47.4
56.8 192.7
Fiscal 2021 Distribution Shipments - thousands of tons 56.4 53.6 64.5
53.1 227.6
Fiscal 2022
Distribution Shipments - thousands
of tons 48.5 50.8 59.8 46.8 205.9
43
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Distribution Segment –
Adjusted EBITDA
(In millions, except percentages) Net Sales (1) Adjusted EBITDA Margin
Fiscal 2020
First Quarter $ 265.0 $ 11.4 4.3 %
Second Quarter 245.4 6.8 2.8
Third Quarter 261.9 8.3 3.2
Fourth Quarter 330.1 22.2 6.7
Total $ 1,102.4 $ 48.7 4.4 %
Fiscal 2021
First Quarter $ 303.8 $ 16.4 5.4 %
Second Quarter 280.3 11.0 3.9
Third Quarter 322.3 18.0 5.6
Fourth Quarter 348.4 23.4 6.7
Total $ 1,254.8 $ 68.8 5.5 %
Fiscal 2022
First Quarter $ 324.8 $ 6.5 2.0 %
Second Quarter 362.3 28.0 7.7
Third Quarter 357.7 19.2 5.4
Fourth Quarter 374.1 26.0 7.0
Total $ 1,418.9 $ 79.7 5.6 %
(1)
Net sales before intersegment eliminations for the Distribution segment increased$164.1 million in fiscal 2022 compared to fiscal 2021 primarily due to$139.9 million of higher selling price/mix and$19.5 million of higher volumes, primarily related to fulfillment of a large healthcare order in the second quarter of fiscal 2022 that was partially offset by market softness in the fourth quarter of fiscal 2022. The$152.4 million increase in net sales before intersegment eliminations for the Distribution segment in fiscal 2021 compared to fiscal 2020 was primarily due to$139.5 million of higher volumes and$10.7 million of higher selling price/mix.
Adjusted EBITDA – Distribution Segment
Distribution segment Adjusted EBITDA in fiscal 2022 increased$10.9 million compared to the prior year primarily due to a$139.9 million margin impact from higher selling price/mix,$15.5 million from higher volumes and$5.2 million of increased productivity and other operational items. These items were largely offset by an estimated$149.5 million of increased cost inflation. Distribution segment Adjusted EBITDA in fiscal 2021 increased$20.1 million compared to fiscal 2020 primarily due to$28.5 million of higher volumes and an estimated$13.7 million margin impact from higher selling price/mix. These increases were partially offset by$11.2 million of higher operating costs and an estimated$10.2 million of increased cost inflation. 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 accounts receivable sales agreements, proceeds from the sale of property, plant and equipment removed from service and proceeds received in connection with the issuance of debt and equity securities. See "Note 13. Debt" of the Notes to Consolidated Financial Statements for detailed information regarding our debt. Funding for our domestic operations in the foreseeable future is expected to come 44 -------------------------------------------------------------------------------- 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. We are a party to enforceable and legally binding contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the consolidated balance sheet as ofSeptember 30, 2022 , while others are considered future obligations. Our contractual obligations primarily consist of items such as long-term debt, including current portion, lease obligations, purchase obligations and other obligations. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations", for additional information. Cash and cash equivalents were$260.2 million atSeptember 30, 2022 and$290.9 million atSeptember 30, 2021 . Approximately two-thirds of the cash and cash equivalents atSeptember 30, 2022 were held outside of theU.S. The proportion of cash and cash equivalents held outside of theU.S. generally varies from period to period. AtSeptember 30, 2022 , total debt was$7,787.2 million ,$212.2 million of which was current. AtSeptember 30, 2021 , total debt was$8,194.1 million ,$168.8 million of which was current. Included in our total debt atSeptember 30, 2022 was$175.1 million of non-cash acquisition related step-up. During fiscal 2022, debt decreased$406.9 million due to repayments primarily using net cash provided by operating activities that exceeded aggregate capital expenditures and capital returned to stockholders in the form of dividends and share repurchases. AtSeptember 30, 2022 , we had approximately$3.7 billion of availability under our long-term committed credit facilities and cash and cash equivalents, excluding the$1.0 billion Delayed Draw Term Loan that we plan to use to acquire the remaining 67.7% interest in Grupo Gondi. Our primary availability is under our revolving credit facilities and receivables securitization facility, the majority of which matures onJuly 7, 2027 . This liquidity may be used to provide for ongoing working capital needs and for other general corporate purposes, including acquisitions, dividends and stock repurchases. OnMarch 22, 2022 , we redeemed$350 million aggregate principal amount of our 4.00% senior notes dueMarch 2023 primarily using borrowings under our receivables securitization facility and recorded an$8.2 million loss on extinguishment of debt. OnSeptember 10, 2021 , we redeemed$400 million aggregate principal amount of our 4.900% senior notes dueMarch 2022 using cash and cash equivalents and recorded a loss on extinguishment of debt of$8.6 million .
Our credit facilities contain certain covenants, including a covenant to meet an indebtedness ratio. We test and declare our compliance with all of these clauses as required by these facilities and we comply with them at
To
We use a variety of working capital management strategies including supply chain
financing ("SCF") programs, vendor financing and commercial card programs,
monetization facilities where we sell short-term receivables to a group of
third-party financial institutions and receivables securitization facilities. We
describe these programs below.
We engage in certain customer-based SCF programs to accelerate the receipt of
payment for outstanding accounts receivables from certain customers. Certain
costs of these programs are borne by the customer or us. Receivables transferred
under these customer-based SCF programs generally meet the requirements to be
accounted for as sales in accordance with guidance under Financial Accounting
Standards Board's ("FASB") Accounting Standards Codification ("ASC") 860,
"Transfers and Servicing" ("ASC 860"), resulting in derecognition of such
receivables from our consolidated balance sheets. Receivables involved with
these customer-based SCF programs constitute approximately 2% of our annual net
sales. In addition, we have monetization facilities that sell to third-party
financial institutions all of the short-term receivables generated from certain
customer trade accounts. See "Note 12. Fair Value - Accounts Receivable Sales
Agreements" for a discussion of our monetization facilities.
Our working capital management strategy includes working with our suppliers to
revisit terms and conditions, including the extension of payment terms. Our
current payment terms with the majority of our suppliers generally range from
payable upon receipt to 120 days and vary for items such as the availability of
cash discounts. We do not believe our payment terms will be shortened
significantly in the near future, and we do not expect our net cash provided by
operating activities to be significantly impacted by additional extensions of
payment terms. Certain
45
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financial institutions offer voluntary SCF programs that enable our suppliers,
at their sole discretion, to sell their receivables from us to the financial
institutions on a non-recourse basis at a rate that leverages our credit rating
and thus might be more beneficial to our suppliers. We and our suppliers agree
on commercial terms for the goods and services we procure, including prices,
quantities and payment terms, regardless of whether the supplier elects to
participate in SCF programs. The suppliers sell us goods or services and issue
the associated invoices to us based on the agreed-upon contractual terms. The
due dates of the invoices are not extended due to the supplier's participation
in SCF programs. Our suppliers, at their sole discretion if they choose to
participate in a SCF program, determine which invoices, if any, they want to
sell to the financial institutions. No guarantees are provided by us under SCF
programs and we have no economic interest in a supplier's decision to
participate in the SCF program. Therefore, amounts due to our suppliers that
elect to participate in SCF programs are included in the line items Accounts
payable and Other current liabilities in our consolidated balance sheets and the
activity is reflected in net cash provided by operating activities in our
consolidated statements of cash flows. Based on correspondence with the
financial institutions that are involved with our two primary SCF programs,
while the amount suppliers elect to sell to the financial institutions varies
from period to period, the amount generally averages approximately 17% to 19% of
our Accounts payable balance on our consolidated balance sheets.
We also participate in certain vendor financing and commercial card programs to
support our travel and entertainment expenses and smaller vendor purchases.
Amounts outstanding under these programs are classified as debt primarily
because we receive the benefit of extended payment terms and a rebate from the
financial institution that we would not have otherwise received without the
financial institutions' involvement. We also have a receivables securitization
facility that allows for borrowing availability based on the eligible underlying
accounts receivable and compliance with certain covenants. See "Note 13. Debt"
of the Notes to Consolidated Financial Statements for a discussion of our
receivables securitization facility and the amount outstanding under our vendor
financing and commercial card programs.
Cash Flow Activity
Year Ended September 30,
(In millions) 2022 2021 2020
Net cash flow generated by operating activities
2,070.7
Net cash used for investing activities
(921.5 ) Net cash used for financing activities
Net cash provided by operating activities during fiscal 2022 decreased$259.5 million from fiscal 2021 primarily due to$511.3 million of greater working capital usage compared to the prior year period that was partially offset by higher earnings excluding non-cash impairments primarily associated with restructuring activities. The greater working capital usage in fiscal 2022 was primarily due to actions taken in the prior year to preserve cash due to uncertainty during the COVID pandemic, such as the payment of certain bonuses and 401(k) match in stock in fiscal 2021, that were paid in cash in fiscal 2022, and the payment in fiscal 2022 of certain previously deferred payroll taxes that relate to relief offered under the CARES Act from prior years. Net cash provided by operating activities during fiscal 2021 increased$209.2 million from fiscal 2020 primarily due to higher consolidated net income and a$141.0 million net decrease in the use of working capital compared to the prior year. The changes in working capital in fiscal 2022 and 2021 included a source of cash resulting from the sale of$58.8 million and$76.6 million , respectively, of accounts receivables in connection with the A/R Sales Agreement (as defined in Note 12. Fair Value) as well as a similar use of cash of$3.2 million in fiscal 2020. Net cash used for investing activities of$776.0 million in fiscal 2022 consisted primarily of$862.6 million for capital expenditures that was partially offset by$60.8 million of proceeds from corporate owned life insurance and$28.2 million of proceeds from the sale of property, plant and equipment, primarily for the sale of a previously closed facility. Net cash used for investing activities of$676.0 million in fiscal 2021 consisted primarily of$815.5 million for capital expenditures that were partially offset by$58.5 million of proceeds from the sale of theSummerville, SC sawmill,$44.9 million of proceeds from corporate owned life insurance and$29.5 million of proceeds from the sale of investments. Net cash used for investing activities of$921.5 million in fiscal 2020 consisted primarily of$978.1 million for capital expenditures that were partially offset by$35.0 million of proceeds from the sale of property, plant and equipment and$16.9 million of proceeds from corporate owned life insurance. 46 -------------------------------------------------------------------------------- We invested$862.6 million in capital expenditures in fiscal 2022, which is below the$1.0 billion we expected to invest heading into the year, but in line with our revised guidance due to supply chain and other delays. We expect capital expenditures of approximately$1.0 to$1.1 billion in fiscal 2023. At this level of capital investment, we expect that we will continue to invest in safety, environmental and maintenance projects while also making investments to support productivity and growth in our business. However, our capital expenditure assumptions may change, project completion dates may change, or we may decide to invest a different amount depending upon opportunities we identify, or changes in market conditions or to comply with changes in environmental laws and regulations. In fiscal 2022, net cash used for financing activities of$1,281.3 million consisted primarily of share repurchases of$600.0 million , a net decrease in debt of$452.7 million and cash dividends paid to stockholders of$259.5 million . In fiscal 2021, net cash used for financing activities of$1,580.4 million consisted primarily of a net decrease in debt of$1,241.3 million and cash dividends paid to stockholders of$233.8 million and stock repurchases of$122.4 million . In fiscal 2020, net cash used for financing activities of$1,021.1 million consisted primarily of a net decrease in debt of$673.9 million and cash dividends paid to stockholders of$344.5 million . We estimate that we will invest approximately$36 million for capital expenditures during fiscal 2023 in connection with matters relating to environmental compliance. We were obligated to purchase approximately$371 million of fixed assets atSeptember 30, 2022 for various capital projects. See Item 1A. "Risk Factors - Our Capital Expenditures May Not Achieve the Desired Outcomes or May Be Achieved at a Higher Cost than Anticipated". AtSeptember 30, 2022 , theU.S. federal, state and foreign net operating losses and otherU.S. federal and state tax credits available to us aggregated approximately$51 million in future potential reductions ofU.S. federal, state and foreign cash taxes. These items are primarily for foreign and state net operating losses and credits that generally will be utilized between fiscal 2023 and 2040. Our cash tax rate is highly dependent on our taxable income, utilization of net operating losses and credits, changes in tax laws or tax rates, capital expenditures and other factors. Barring significant changes in our current assumptions, including changes in tax laws or tax rates, forecasted taxable income, levels of capital expenditures and other items, we expect our fiscal 2023, 2024 and 2025 cash tax rate will be at or driven slightly higher than our income tax rate primarily due the timing of depreciation on our qualifying capital investments as allowed under the Tax Cuts and Jobs Act. During fiscal 2022 and 2021, we made contributions of$21.2 million and$23.2 million , respectively, to ourU.S. and non-U.S. pension plans. Based on current facts and assumptions, we expect to contribute approximately$21 million to ourU.S. and non-U.S. pension plans in fiscal 2023. Based on current assumptions, including future interest rates, we estimate that minimum pension contributions to ourU.S. and non-U.S. pension plans will be approximately$21 million to$23 million annually in fiscal 2024 through 2027. We have made contributions and expect to continue to make contributions in the coming years to our pension plans in order to ensure that our funding levels remain adequate in light of projected liabilities and to meet the requirements of the Pension Act and other regulations. The net overfunded status of ourU.S. and non-U.S. pension plans atSeptember 30, 2022 was$237.8 million . See "Note 5. Retirement Plans" of the Notes to Consolidated Financial Statements. In the normal course of business, we evaluate our potential exposure to MEPPs, including with respect to potential withdrawal liabilities. In fiscal 2018, we submitted formal notification to withdraw from PIUMPF and Central States, Southeast and Southwest Areas Pension Plan ("Central States"), and recorded estimated withdrawal liabilities for each. We also have liabilities associated with other MEPPs from which we, or legacy companies, have withdrawn from in the past. In fiscal 2023, we expect to pay approximately$12 million a year in withdrawal liabilities, excluding accumulated funding deficiency demands. With respect to certain other MEPPs, in the event we withdraw from one or more of the MEPPs in the future, it is reasonably possible that we may incur withdrawal liabilities in connection with such withdrawals. Our estimate of any such withdrawal liability, both individually and in the aggregate, is not material for the remaining plans in which we participate. AtSeptember 30, 2022 andSeptember 30, 2021 , we had withdrawal liabilities recorded of$214.7 million and$247.1 million , respectively, including liabilities associated with PIUMPF's accumulated funding deficiency demands. The decrease in withdrawal liabilities in fiscal 2022 as compared to the end of fiscal 2021 was primarily due to an increase in interest rates. See "Note 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 Multiemployer Pension Plans". 47 -------------------------------------------------------------------------------- InOctober 2022 , our board of directors declared a quarterly dividend of$0.275 per share, representing a$1.10 per share annualized dividend or an increase of 10%. In fiscal 2022, 2021 and 2020 we paid an annual dividend of$1.00 per share,$0.88 per share and$1.33 per share, respectively. InMay 2020 , we reduced our dividend given the uncertain market conditions at the time driven by COVID, and we subsequently increased our dividend inMay 2021 andOctober 2021 . Our goal has been to reduce debt and leverage and return capital to stockholders through a competitive annual dividend and share repurchases. Going forward, our capital allocation strategy includes a sustainable and growing dividend. InJuly 2015 , our board of directors authorized a repurchase program of up to 40.0 million shares of our Common Stock, representing approximately 15% of our outstanding Common Stock as ofJuly 1, 2015 . OnMay 4, 2022 , our board of directors authorized a new repurchase program of up to 25.0 million shares of our Common Stock, plus any unutilized shares left from theJuly 2015 authorization. The 25.0 million shares represent an additional authorization of approximately 10% of our outstanding Common Stock. 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 2022, we repurchased approximately 12.6 million shares of our Common Stock for an aggregate cost of$597.5 million . In fiscal 2021, we repurchased approximately 2.5 million shares of our Common Stock for an aggregate cost of$125.1 million . In fiscal 2020, we repurchased no shares of our Common Stock. The amount reflected as purchased in the consolidated statements of cash flows varies due to the timing of share settlement. As ofSeptember 30, 2022 , we had approximately 29.0 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, business acquisitions and other corporate actions for the foreseeable future from cash generated from operations, borrowings under our credit facilities, proceeds from our accounts receivable sales agreements, proceeds from the issuance of debt or equity securities or other additional long-term debt financing, including new or amended facilities. In addition, we continually review our capital structure and conditions in the private and public debt markets in order to optimize our mix of indebtedness. In connection with these reviews, we may seek to refinance existing indebtedness to extend maturities, reduce borrowing costs or otherwise improve the terms and composition of our indebtedness.
Contractual obligations
We summarize our enforceable and legally binding contractual obligations atSeptember 30, 2022 , 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 (in millions). Payments Due by Period Fiscal 2024 Fiscal 2026 Total Fiscal 2023 and 2025 and 2027 Thereafter Long-Term Debt, including current portion, excluding finance lease obligations (1)$ 7,366.1 $ 178.6 $ 1,422.8 $ 1,266.2 $ 4,498.5 Lease obligations (2) 1,162.1 230.6 349.7 286.2 295.6 Purchase obligations and other (3) (4) (5) 1,919.4 1,155.8 296.2 156.7 310.7 Total$ 10,447.6 $ 1,565.0 $ 2,068.7 $ 1,709.1 $ 5,104.8 (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$133.6 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. 48
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(2)
See “Note 14. Leases” of the Notes to the consolidated financial statements for more information.
(3)
Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and specify all material terms, including: fixed or minimum quantities to be purchased; provision of fixed, minimum or variable prices; and the approximate time of the transaction. Purchase obligations exclude agreements that can be terminated without penalty.
(4)
We have included future estimated minimum pension plan contributions, MEPP withdrawal payments with definite payout terms and estimated benefit payments related to postretirement obligations, supplemental retirement plans and deferred compensation plans. Our estimates are based on various factors, such as discount rates and expected returns on plan assets. Future contributions are subject to changes in our funded 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$89.8 million of MEPP withdrawal liabilities recorded as ofSeptember 30, 2022 , 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.
(5)
We have not included the following items in the table:
•
An item labeled “other long-term liabilities” reflected in our Consolidated Balance Sheet because these liabilities do not have a defined payment schedule.
•
$253.4 million for certain provisions of ASC 740, "Income Taxes" associated with liabilities, primarily for uncertain tax positions due to the uncertainty as to the amount and timing of payment, if any. In addition to the enforceable and legally binding obligations presented in the table above, we have other obligations for goods and services and raw materials entered into in the normal course of business. These contracts, however, are subject to change based on our business decisions. OnJuly 27, 2022 , we announced our entry into an agreement to acquire the remaining 67.7% interest in Grupo Gondi for$970 million , plus the assumption of debt. This purchase agreement is not reflected in the table above.
Summarized financial information of the guarantor
(“Parent”), has issued the following debt securities pursuant to registered offerings under the Securities Act of 1933, as amended (collectively, for purposes of this paragraph, the “Notes”) (in millions, except percentages):
Aggregate Principal Amount Stated Coupon Rate Maturity Date $ 500 3.000 % September 2024 $ 600 3.750 % March 2025 $ 750 4.650 % March 2026 $ 500 3.375 % September 2027 $ 600 4.000 % March 2028 $ 500 3.900 % June 2028 $ 750 4.900 % March 2029 $ 500 4.200 % June 2032 $ 600 3.000 % June 2033 Upon issuance, the Notes maturing in 2024, 2025, 2027 andMarch 2028 were fully and unconditionally guaranteed by two other wholly owned subsidiaries ofWestRock Company :WestRock RKT, LLC ("RKT") andWestRock MWV, LLC ("MWV", and together with RKT, the "Guarantor Subsidiaries").WestRock Company has also fully and unconditionally guaranteed these Notes. The remaining Notes were issued by the Issuer subsequent to the consummation of the acquisition ofKapStone Paper and Packaging Corporation inNovember 2018 and were fully and unconditionally guaranteed at the time of issuance by the Parent and the Guarantor Subsidiaries. Accordingly, each series of the Notes is fully and unconditionally guaranteed on a joint and several basis by the Parent and the Guarantor Subsidiaries (together, the "Guarantors"). Collectively, the Issuer and the Guarantors are the "Obligor Group ". Each series of Notes and the related guarantees constitute unsecured unsubordinated obligations of the applicable obligor. Each series of Notes and the related guarantees ranks equally in right of payment with all of the applicable obligor's existing and future unsecured and unsubordinated debt; ranks senior in right of payment to all of the applicable obligor's existing and future subordinated debt; is effectively junior to the applicable obligor's 49 -------------------------------------------------------------------------------- existing and future secured debt to the extent of the value of the assets securing such debt; and is structurally subordinated to all of the existing and future liabilities of each subsidiary of the applicable obligor (that is not itself an obligor) that does not guarantee such Notes. The indentures governing each series of Notes contain covenants that, among other things, limit our ability and the ability of our subsidiaries to grant liens on our assets and enter into sale and leaseback transactions. In addition, the indentures limit, as applicable, the ability of the Issuer and Guarantors to merge, consolidate or sell, convey, transfer or lease our or their properties and assets substantially as an entirety. The covenants contained in the indentures do not restrict the Company's ability to pay dividends or distributions to stockholders. The guarantee obligations of the Guarantors under the Notes are also subject to certain limitations and terms similar to those applicable to other guarantees of similar instruments, including that (i) the guarantees are subject to fraudulent transfer and conveyance laws and (ii) the obligations of each Guarantor under its guarantee of each series of Notes will be limited to the maximum amount as will result in the obligations of such Guarantor under its guarantee of such Notes not to be deemed to constitute a fraudulent conveyance or fraudulent transfer under federal or state law. Under each indenture governing one or more series of the Notes, a Guarantor Subsidiary will be automatically and unconditionally released from its guarantee upon consummation of any transaction permitted under the applicable indenture resulting in such Guarantor Subsidiary ceasing to be an obligor (either as issuer or guarantor). Under the indentures, the guarantee of the Parent will be automatically released and will terminate upon the merger of the Parent with or into the Issuer or another guarantor, the consolidation of the Parent with the Issuer or another guarantor or the transfer of all or substantially all of the assets of the Parent to the Issuer or a guarantor. In addition, if the Issuer exercises its defeasance or covenant defeasance option with respect to the Notes of a series in accordance with the terms of the applicable indenture, each guarantor will be automatically and unconditionally released from its guarantee of the Notes of such series and all its obligations under the applicable indenture. The Issuer and each Guarantor are holding companies that conduct substantially all of their business through subsidiaries. Accordingly, repayment of the Issuer's indebtedness, including the Notes, is dependent on the generation of cash flow by the Issuer's and each Guarantor's subsidiaries, as applicable, and their ability to make such cash available to the Issuer and the Guarantors, as applicable, by dividend, debt repayment or otherwise. The Issuer's and the Guarantors' subsidiaries may not be able to, or be permitted to, make distributions to enable them to make payments in respect of their obligations, including with respect to the Notes in the case of the Issuer and the guarantees in the case of the Guarantors. Each of the Issuer's and the Guarantors' subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit the Issuer's and the Guarantors' ability to obtain cash from their subsidiaries. In the event that the Issuer and the Guarantors do not receive distributions from their subsidiaries, the Issuer and the Guarantors may be unable to make required principal and interest payments on their obligations, including with respect to the Notes and the guarantees. Pursuant to amended Rule 3-10 of Regulation S-X, the summarized financial information below is presented for theObligor Group on a combined basis after the elimination of intercompany balances and transactions among theObligor Group and equity in earnings from and investments in the non-Guarantor Subsidiaries. The summarized financial information below should be read in conjunction with the Company's consolidated financial statements contained herein, as the summarized financial information may not necessarily be indicative of results of operations or financial position had the subsidiaries operated as independent entities (in millions).
SUMMARY STATEMENT OF OPERATIONS
Year Ended
September
30,
2022
Net sales to unrelated parties $
1,813.4
Net sales to non-Guarantor Subsidiaries $
1,162.8
Gross profit $
949.1
Interest expense, net with non-guarantor subsidiaries $(98.2) Net earnings and net earnings attributable to
50
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SUMMARIZED BALANCE SHEETS
September 30,
2022 2021
ASSETS
Total current assets $ 227.4 $ 310.4
Non-current amounts receivable from non-
Guarantor Subsidiaries$ 370.1 $ 306.1 Other noncurrent assets (1) 1,812.8 1,980.5 Total noncurrent assets$ 2,182.9 $ 2,286.6 LIABILITIES Current amounts due to non- Guarantor Subsidiaries$ 2,253.5 $ 2,281.4 Other current liabilities 144.5 130.4 Total current liabilities$ 2,398.0 $ 2,411.8
Non-current amounts due to non-
Guarantor Subsidiaries$ 3,097.5 $ 3,437.4 Other noncurrent liabilities 6,872.7 7,296.6 Total noncurrent liabilities$ 9,970.2 $ 10,734.0 (1)
Other non-current assets include goodwill and intangible assets, net of
NON-GAAP FINANCIAL MEASURES
We report our financial results in accordance with generally accepted accounting
principles in the U.S. ("GAAP"). However, management believes certain non-GAAP
financial measures provide our management, board of directors, investors,
potential investors, securities analysts and others with additional meaningful
financial information that should be considered when assessing our ongoing
performance. Management also uses these non-GAAP financial measures in making
financial, operating and planning decisions, and in evaluating our performance.
Non-GAAP financial measures should be viewed in addition to, and not as an
alternative for, our GAAP results. The non-GAAP financial measures we present
may differ from similarly captioned measures presented by other companies.
We use the non-GAAP financial measures "Adjusted Net Income" and "Adjusted
Earnings Per Diluted Share". Management believes these measures provide our
management, board of directors, investors, potential investors, securities
analysts and others with useful information to evaluate our performance because
they exclude restructuring and other costs, business systems transformation
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 (loss) attributable to
common stockholders and Earnings (loss) per diluted share, respectively. For
additional information regarding our business systems transformation see Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview - Business Systems Transformation".
51
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Below is a reconciliation of the non-GAAP financial measure of Adjusted earnings per diluted share to earnings (loss) per diluted share, the most directly comparable GAAP measure (in dollars per share) for the periods indicated.
Years Ended September 30,
2022 2021
2020
Earnings (loss) per diluted share$ 3.61 $ 3.13 $ (2.67 ) Restructuring and other costs 1.16 0.09 0.33 Mineral rights impairment 0.08 - - Loss on extinguishment of debt 0.02 0.03 - Accelerated depreciation on major capital projects and certain facility closures 0.02 - 0.05 Business systems transformation costs 0.02 - - Multiemployer pension withdrawal expense 0.01 - - Losses at closed facilities, transition and start-up costs 0.01 0.01 0.07 COVID employee payments - 0.06 0.09 Grupo Gondi option - 0.06 - Accelerated compensation - former CEO - 0.04 - Goodwill impairment - - 5.07
reconfiguration costs - - 0.13 MEPP liability adjustment due to interest rates (0.10 ) - 0.05 Gain on sale of certain closed facilities (0.05 ) - (0.05 ) Ransomware recovery costs, net of insurance proceeds (0.02 ) 0.05 - Gain on sale of investment - (0.05 ) - Gain on sale of sawmill - (0.03 ) - Brazil indirect tax claim - - (0.14 ) Litigation recovery - - (0.07 ) Adjustment related to Tax Cuts and Jobs Act - - (0.06 ) Direct recoveries from Hurricane Michael, net of related costs - - (0.05 ) Other - - 0.02 Adjustment to reflect adjusted earnings on a fully diluted basis - - (0.02 ) Adjusted Earnings Per Diluted Share$ 4.76 $ 3.39 $ 2.75 52
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The GAAP results in the tables below for Pre-Tax, Tax and Net of Tax are
equivalent to the line items "Income (loss) before income taxes", "Income tax
expense" and "Consolidated net income (loss)", respectively, as reported on the
consolidated statements of operations. Set forth below are reconciliations of
Adjusted Net Income to the most directly comparable GAAP measure, Net income
(loss) attributable to common stockholders (represented in the table below as
the GAAP Results for Consolidated net income (loss) (i.e., Net of Tax) less net
income attributable to Noncontrolling interests), for the periods indicated (in
millions):
Year ended September 30, 2022
Pre-Tax Tax Net of Tax
As reported $ 1,218.8 $ (269.6 ) $ 949.2
Restructuring and other costs 401.6 (98.1 ) 303.5
Mineral rights impairment 26.0 (6.4 ) 19.6
Loss on extinguishment of debt 8.5 (2.1 ) 6.4
Accelerated depreciation on certain installations
closures 7.5 (1.9 ) 5.6 Business systems transformation costs 7.4 (1.8 ) 5.6 Multiemployer pension withdrawal expense 3.5 (0.8 ) 2.7
Losses in closed installations, transition and
start-up costs 3.5 (0.9 ) 2.6
Adjustment of RME liability due to interest rates (36.2 ) 8.9
(27.3 ) Gain on sale of certain closed facilities (18.6 ) 5.0 (13.6 ) Ransomware recovery costs insurance proceeds (6.6 ) 1.6 (5.0 ) Other 0.5 (0.1 ) 0.4 Adjusted Results$ 1,615.9 $ (366.2 ) $ 1,249.7 Noncontrolling interests (4.6 ) Adjusted Net Income$ 1,245.1 Year ended September 30, 2021 Pre-Tax Tax Net of Tax As reported$ 1,085.9 $ (243.4 ) $ 842.5 Restructuring and other costs 31.5 (7.7 ) 23.8 COVID employee payments 22.0 (5.4 ) 16.6 Grupo Gondi option 22.5 (6.7 ) 15.8
Ransomware recovery costs, net of insurance
proceeds 18.9 (4.7 ) 14.2 Accelerated compensation - former CEO 11.7 - 11.7 Loss on extinguishment of debt 9.7 (2.4 ) 7.3
Losses in closed installations, transition and
start-up costs 3.0 (0.6 ) 2.4
Accelerated depreciation on certain installations
closures 0.7 (0.2 ) 0.5 Gain on sale of investment (16.0 ) 2.4 (13.6 ) Gain on sale of sawmill (16.5 ) 8.3 (8.2 ) Gain on sale of certain closed facilities (0.9 ) 0.2 (0.7 ) Brazil indirect tax claim (0.9 ) 0.3 (0.6 ) MEPP liability adjustment due to interest rates (0.4 ) 0.1 (0.3 ) Adjusted Results$ 1,171.2 $ (259.8 ) $ 911.4 Noncontrolling interests (4.2 ) Adjusted Net Income$ 907.2 53
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Year ended September 30, 2020
Pre-Tax Tax Net of Tax
As reported $ (522.6 ) $ (163.5 ) $ (686.1 )
Goodwill impairment 1,333.2 (18.9 ) 1,314.3
Restructuring and other costs 112.7 (28.2 ) 84.5
reconfiguration costs 43.4 (10.6 ) 32.8 COVID employee payments 31.6 (7.7 ) 23.9
Losses in closed factories, transition and
start-up costs 21.9 (5.4 ) 16.5
Accelerated amortization on major assets
projects and certain plant closures 17.3 (4.2 ) 13.1
Adjustment to RME liability due to interest rates 15.0 (3.7 )
11.3 Loss on extinguishment of debt 1.5 (0.4 ) 1.1 Multiemployer pension withdrawal expense 0.9 (0.2 ) 0.7 Brazil indirect tax claim (51.9 ) 16.0 (35.9 ) Litigation recovery (23.9 ) 5.9 (18.0 ) Adjustment related to Tax Cuts and Jobs Act - (16.4 ) (16.4 ) Direct recoveries from Hurricane Michael, net of related costs (16.1 ) 4.0 (12.1 ) Gain on sale of certain closed facilities (15.6 ) 3.8 (11.8 ) Land and Development operating results (1.3 ) 0.3 (1.0 ) Other 6.0 (1.5 ) 4.5 Adjusted Results$ 952.1 $ (230.7 ) $ 721.4 Noncontrolling interests (4.8 ) Adjusted Net Income$ 716.6 We discuss certain of these charges in more detail in "Note 4. Restructuring and Other Costs", "Note 7. Segment Information" and "Note 17. Commitments and Contingencies - Indirect Tax Claim". For more information on our business systems transformation see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - Business Systems Transformation". See Item 1A. "Risk Factors - We May Not Be Able To Successfully Implement Our Strategic Transformation Initiatives, Including Our New Business Systems Transformation". We also use the non-GAAP financial measure "Consolidated Adjusted EBITDA", along with other factors such as "Adjusted EBITDA" (a GAAP measure of segment performance our CODM uses to evaluate our segment results), to evaluate our overall performance. Management believes that the most directly comparable GAAP measure to Consolidated Adjusted EBITDA is "Net income (loss) attributable to common stockholders". Management believes this measure provides our management, board of directors, investors, potential investors, securities analysts and others with useful information to evaluate our performance because it excludes restructuring and other costs, business systems transformation 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. 54 --------------------------------------------------------------------------------
Set out below is a reconciliation of the non-GAAP financial measure of Consolidated Adjusted EBITDA and Net income (loss) attributable to common shareholders for the periods indicated (in millions).
Year Ended
2022 2021
2020
Net income (loss) attributable to common stockholders$ 944.6 $ 838.3 $ (690.9 ) Adjustments: (1) Less: Net income attributable to noncontrolling interests 4.6 4.2 4.8 Income tax expense 269.6 243.4 163.5 Other expense (income), net 11.0 (10.9 ) (9.5 ) Loss on extinguishment of debt 8.5 9.7
1.5
Interest expense, net 318.8 372.3
393.5
Restructuring and other costs 401.6 31.5 112.7 Mineral rights impairment 26.0 - - Goodwill impairment - - 1,333.2
Multi-employer pension plan withdrawal expense (income) 0.2 (2.9 ) (1.1 ) Gain on sale of certain closed facilities
(18.6 ) (0.9 ) (15.6 ) Depreciation, depletion and amortization 1,488.6 1,460.0 1,487.0 Other adjustments 4.5 54.5 33.1 Consolidated Adjusted EBITDA$ 3,459.4 $ 2,999.2 $ 2,812.2 (1)
The table above adds expenses or subtracts revenues for certain financial statement and segment footnote items to calculate consolidated Adjusted EBITDA.
The non-GAAP measure Consolidated Adjusted EBITDA can also be derived by adding
together each segment's "Adjusted EBITDA" plus "Non-allocated expenses" from our
segment footnote. See "Note 7. Segment Information" of the Notes to Consolidated
Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have prepared our accompanying consolidated financial statements in accordance with GAAP, which requires management to make estimates that affect the amounts of reported revenues, expenses, assets and liabilities. Certain significant accounting policies are described in “Note 1. Description of activities and summary of significant accounting policies” of the notes to the consolidated financial statements.
These critical accounting policies are both important to the portrayal of our financial condition and results of operations and require some of management's most subjective and complex judgments. The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions that, in management's judgment, could change in a manner that would materially affect management's future estimates with respect to such matters and, accordingly, could cause our future reported financial condition and results of operations to differ materially from those that we are currently reporting based on management's current estimates.
We review the carrying value of our goodwill annually at the beginning of the fourth quarter of each fiscal year, or more often if events or changes in circumstances indicate that the carrying amount may exceed fair value as set forth in ASC 350, "Intangibles -Goodwill and Other" ("ASC 350"). We test goodwill for impairment at the reporting unit level, which is an operating segment or one level below an operating segment, referred to as a component. ASC 350 allows an optional qualitative assessment, prior to a quantitative assessment test, to determine whether it is "more likely than not" that the fair value of a reporting unit exceeds its carrying amount. We generally do not attempt a qualitative assessment and move directly to the quantitative test. As part of the quantitative test, we utilize the present value of expected cash flows or, as appropriate, a combination of the present value of expected cash flows and the guideline public company method to determine the estimated fair value of our reporting units. This present value model requires management to estimate future cash flows, the timing of these cash flows, and a discount rate (based on a weighted average cost of capital), which represents the time value of money and the inherent risk and uncertainty of the future cash flows. The assumptions we use to estimate future cash flows are consistent with the assumptions that the reporting units use for internal planning purposes, which we believe would be generally consistent with that of a market participant. If we determine that the estimated fair value of the 55 -------------------------------------------------------------------------------- reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If we determine that the carrying amount of the reporting unit exceeds its estimated fair value, we measure the goodwill impairment charge based on the excess of a reporting unit's carrying amount over its fair value as required under Accounting Standards Update ("ASU") 2017-04, "Simplifying the Test for Goodwill Impairment", which we early adopted starting with our fiscal 2020 annual goodwill impairment test onJuly 1, 2020 . We describe our accounting policy for goodwill further in "Note 1. Description of Business and Summary of Significant Accounting Policies -Goodwill and Long-Lived Assets" of the Notes to Consolidated Financial Statements. During the fourth quarter of fiscal 2022, we completed our annual goodwill impairment testing. We considered factors such as, but not limited to, our expectations for the short-term and long-term impacts of COVID, macroeconomic conditions, industry and market considerations, and financial performance, including planned revenue, earnings and capital investments of each reporting unit. The discount rate used for each reporting unit ranged from 9.5% to 13.0%. We used perpetual growth rates ranging from 0.0% to 1.0%. All reporting units that have goodwill were noted to have a fair value that exceeded their carrying values by more than 15% each. If we had concluded that it was appropriate to increase the discount rate we used by 100 basis points, the fair value of each of our reporting units would have continued to exceed its carrying value. No reporting unit failed the annual impairment test; however, the fair value of theCorrugated Packaging reporting unit only exceeded its carrying value by 15% atJuly 1, 2022 . In our fiscal 2022 annual goodwill impairment analysis, projected future cash flows for theCorrugated Packaging reporting unit were discounted at 10.0%. Based on the discounted cash flow model and holding other valuation assumptions constant, the discount rate would have to be increased to 11.9%, in order for the estimated fair value of the reporting unit to fall below its carrying value. AtSeptember 30, 2022 , theCorrugated Packaging ,Consumer Packaging , Global Paper and Distribution reporting units had$2,802.8 million ,$1,588.4 million ,$1,366.5 million and$137.5 million of goodwill, respectively. Our long-lived assets, including intangible assets, remain recoverable. Subsequent to our annual test, we 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, we cannot predict or control market factors, including the impact of macroeconomic conditions, and there are certain risks inherent to our operations, as described in Item 1A. "Risk Factors". If actual results are not consistent with our assumptions and estimates, we may be exposed to additional impairment losses that could be material.
See Section 1A. “Risk Factors – We have a significant amount of
Long-lived assets
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 right-of-use assets ("ROU") and amortizable intangibles other than
goodwill, is impaired. 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.
Our judgments regarding the existence of indicators of impairment are based on legal factors, market conditions and operating performance. Future events could cause us to conclude that there are indicators of impairment and that assets associated with a particular transaction are impaired. Impairment assessment also requires us to estimate future operating results and cash flows, which also requires management judgment.
56 --------------------------------------------------------------------------------
Accounting for income taxes
Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits, reflect management's best assessment of estimated current and future taxes to be paid. Significant judgments and estimates are required in determining the consolidated income tax expense. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, recent financial operations and their associated valuation allowances, if any. We use significant judgment in (i) determining whether a tax position, based solely on its technical merits, is "more likely than not" to be sustained upon examination and (ii) measuring the tax benefit as the largest amount of benefit that is "more likely than not" to be realized upon ultimate settlement. We do not record any benefit for the tax positions where we do not meet the "more likely than not" initial recognition threshold. Income tax positions must meet a "more likely than not" recognition threshold at the effective date to be recognized. We generally recognize interest and penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of operations. Resolution of the uncertain tax positions could have a material adverse effect on our cash flows or materially benefit our results of operations in future periods depending upon their ultimate resolution. A 1% change in our effective tax rate would have increased or decreased tax expense by approximately$12 million for fiscal 2022. A 1% change in our effective tax rate used to compute deferred tax liabilities and assets, as recorded on theSeptember 30, 2022 consolidated balance sheet, would have increased or decreased tax expense by approximately$117 million for fiscal 2022. Pension The funded status of our qualified and non-qualifiedU.S. and non-U.S. pension plans decreased$167.3 million in fiscal 2022. OurU.S. qualified and non-qualified pension plans were overfunded by$243.4 million as ofSeptember 30, 2022 . Our non-U.S. pension plans were under funded by$5.6 million as ofSeptember 30, 2022 . OurU.S. pension plan benefit obligations were positively impacted in fiscal 2022 primarily by a 264-basis point increase in the discount rate compared to the prior measurement date. The non-U.S. pension plan obligations were positively impacted in fiscal 2022 by a 249-basis point increase in the discount rate compared to the prior measurement date. The determination of pension obligations and pension expense requires various assumptions that can significantly affect liability and expense amounts, such as the expected long-term rate of return on plan assets, discount rates, projected future compensation increases and mortality rates for each of our plans. These assumptions are determined annually in conjunction with our actuary. The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions that, in management's judgment, could change in a manner that would materially affect management's future estimates with respect to such matters and, accordingly, could cause our future reported financial condition and results of operations to differ materially from those that we are currently reporting based on management's current estimates. A 25-basis point change in the discount rate, compensation level, expected long-term rate of return on plan assets and interest crediting rate, factoring in our corridor (as defined herein) as appropriate, would have had the following effect on fiscal 2022 pension expense (amounts in the table in parentheses reflect additional income, in millions): Pension Plans 25 Basis 25 Basis Point Point Increase Decrease Discount rate$ 4.6 $ 7.6 Compensation level$ 0.1 $ (0.1 ) Expected long-term rate of return on plan assets$ (17.1 ) $ 17.1 Interest crediting rate$ 0.1 $ (0.1 ) New Accounting Standards
See “Note 1. Description of the business and summary of significant accounting policies” in the notes to the consolidated financial statements for a complete description of recent accounting pronouncements, including the respective expected dates of adoption and the expected effects on our results. operations and our financial condition.
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