Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a multinational provider of sustainable fiber-based paper and packaging solutions. We partner with our customers to provide differentiated, sustainable paper and packaging solutions that help them win in the marketplace. Our team members support customers around the world from our operating and business locations in North America, South America, Europe, Asia and Australia.
Presentation
We report our financial results of operations in four reportable segments: Corrugated Packaging, Consumer Packaging, Global Paper and Distribution. Adjusted EBITDA (as defined below) is our measure of segment profitability in accordance with ASC 280, because it is the measure used by our chief operating decision maker (“ CODM ") to make decisions regarding allocation of resources and to assess segment performance.
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: multiemployer pension withdrawal (income) expense, restructuring and other costs, net, impairment of goodwill and mineral rights, non-allocated expenses, interest expense, net, gain (loss) on extinguishment of debt, other (expense) income, net, Gain on Sale of RTS and Chattanooga (as hereinafter defined) and other adjustments (" Adjusted EBITDA ") — each as outlined in “ Note 8. Segment Information ” of the Notes to Consolidated Financial Statements.
A detailed discussion of the fiscal 2023 year-over-year changes can be found below and a detailed discussion of fiscal 2022 year-over-year changes can be found in Item 7. “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes as well as the risk factors included in Item 1A.
Strategic 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. Subject to restrictions in the Transaction Agreement, we expect to continue to evaluate potential transactions in the future, although their size may vary.
On December 1, 2022, we completed the Mexico Acquisition for $969.8 million in cash and the assumption of debt. We accounted for this acquisition as a business combination resulting in its consolidation. The acquiree is a leading integrated producer of fiber-based sustainable packaging solutions that operates four paper mills, nine corrugated packaging plants and six high graphic plants throughout Mexico, producing sustainable packaging for a wide range of end markets in the region. This acquisition is expected to provide us with further geographic and end market diversification as well as position us to continue to grow in the Latin American market. We have included the operations acquired in the Mexico Acquisition in our Corrugated Packaging segment. In conjunction with our Mexico Acquisition, we also moved certain existing consumer converting operations in Latin America into our Corrugated Packaging segment in line with how we are managing the business effective January 1, 2023. We did not recast prior year results related to these operations as they were not material. However, we have disclosed those impacts in the respective results of operations section below. See “ Note 3. Acquisitions ” of the Notes to Consolidated Financial Statements for additional information.
In addition, in fiscal 2023, we divested our interior partitions converting operations and sold our Chattanooga, TN uncoated recycled paperboard mill (the resulting gain referred to as the " Gain on Sale of RTS and Chattanooga "), sold our ownership interest in an unconsolidated displays joint venture, sold our Seven Hills mill joint venture in Lynchburg, VA, and sold our Eaton, IN, and Aurora, IL uncoated recycled paperboard mills. These divestitures align with our commitment to optimize our portfolio and focus our strategy on key end markets. See
Note 1. Description of Business and Summary of Significant Accounting Policies — Description of Business ” of the Notes to Consolidated Financial Statements for additional information.
In fiscal 2023, we announced our plan to permanently cease operating our Tacoma, WA and North Charleston, SC containerboard mills and recorded various impairment and other charges associated with the closures. These mills ceased production in September 2023 and June 2023, respectively. In fiscal 2022, we recorded charges associated with our decision to permanently cease operations at our Panama City, FL mill and to permanently close the corrugated medium manufacturing operations at our St. Paul, MN mill. These mills ceased production in June 2022 and October 2022, respectively. By closing these mills, significant capital that would have been required to keep the mills competitive in the future is expected to be deployed to improve key assets. See “ Note 5. Restructuring and Other Costs, Net ” of the Notes to Consolidated Financial Statements for additional information.
Transaction Agreement with Smurfit Kappa
On September 12, 2023, we entered into Transaction Agreement with Smurfit Kappa. As a result of the proposed Transaction, each share of Common Stock, with certain exceptions, will be converted into the right to receive one ListCo Share and $5.00 in cash. The Transaction is expected to close in the second calendar quarter of 2024, conditional upon regulatory approvals, shareholder approvals and satisfaction of other closing conditions. See Note 1. Description of Business and Summary of Significant Accounting Policies — Description of Business ” of the Notes to Consolidated Financial Statements for additional information.
Business Systems Transformation
In the fourth quarter of fiscal 2022, we launched a multi-year phased business systems transformation project that is expected to cost approximately $0.5 to $0.6 billion. The investment will replace much of our existing disparate systems and transition them to a standardized ERP system on a cloud-based platform, as well as a suite of other complementing technologies, across over an estimated 80% of our footprint based on net sales. Approximately 90% of the project spend is expected to be related to the implementation of the ERP, including process definition, standardization and simplification, with the remaining costs primarily related to the implementation of complementing technologies.
The new systems are intended to transform areas such as manufacturing, supply chain, procurement, quote to cash, financials and analytics, and position us to better leverage automation and process efficiency and enable productivity enhancements. An implementation of this scale is a major financial undertaking and will require substantial time and attention of management and key employees. Project completion dates and anticipated costs may also change. As the systems are phased in, they will become a significant component of our internal control over financial reporting.
Due to the nature, scope and magnitude of this investment, management believes these incremental transformation costs are above the normal, recurring level of spend for information technology to support operations. These strategic investments are not expected to recur in the foreseeable future, and are not considered representative of our underlying operating performance. As such, management believes presenting these costs as an adjustment in the non-GAAP results provides additional information to investors about trends in our operations and is useful for period-over-period comparisons. This presentation also allows investors to view our underlying operating results in the same manner as they are viewed by management.
The expenses expected to be adjusted from Net income attributable to common stockholders (" Net Income ") are expensed as incurred during the implementation of software applications and other enabling technologies, and do not include deferred or capitalized costs, depreciation and/or amortization, and costs to support or maintain these software applications or systems once they are in productive use. During the investment period, the normal level of spend associated with non-transformative programs is expected to be maintained and these expenses will not be adjusted in our non-GAAP measures. The items adjusted from Net Income will also be adjusted in our presentation of Consolidated Adjusted EBITDA.
We expect approximately half of the estimated $0.5 to $0.6 billion investment will represent incremental operating costs to be adjusted in our Consolidated Adjusted EBITDA and Adjusted Earnings Per Diluted Share non-GAAP measures over the course of the project, with substantially all such costs being recorded within selling, general and administrative (" SG&A ") expense in the consolidated statements of operations. These non-GAAP
adjustments would not include any cash operating costs that are expected to continue to recur after the business systems transformation project is completed.
In fiscal 2023, we invested $138 million in our business systems transformation; $91 million of this amount was expensed as incurred within SG&A, including amortization, and $47 million was deferred or capitalized. Of the amount expensed, $79 million, or 87%, were adjusted from Net Income for our non-GAAP measures. The deferred and capitalized costs are being amortized as the project is deployed.
In fiscal 2024, we expect the aggregate investment in our business systems transformation to be approximately $220 million. We expect approximately $90 million to be expensed when incurred, of which approximately 80% would be adjusted from Net Income for our non-GAAP financial measures. Approximately $130 million is expected to be deferred or capitalized and amortized over future periods as the project is deployed.
EXECUTIVE SUMMARY
Net sales of $20.3 billion for fiscal 2023 decreased $946.5 million, or 4.5%, compared to $21.3 billion in fiscal 2022. This decrease was primarily due to lower volumes and the unfavorable impact of foreign currency which were partially offset by increased sales due to the Mexico Acquisition and higher selling price/mix.
Net loss attributable to common stockholders of $1.6 billion in fiscal 2023 was not comparable to the Net income attributable to common stockholders of $944.6 million in fiscal 2022 primarily due to the $1.9 billion pre-tax, non-cash goodwill impairment recorded in the second quarter of fiscal 2023. See " Note 1. Description of Business and Summary of Significant Accounting Policies — Goodwill ” of the Notes to Consolidated Financial Statements for additional information. In addition, the decrease was primarily driven by lower volumes excluding the Mexico Acquisition, the impact of increased economic downtime and prior year mill closures, higher restructuring costs, estimated increased cost inflation, increased non-cash pension costs, higher net interest expense, business systems transformation costs and the loss recorded in connection with the Mexico Acquisition. These items were partially offset by the impact of higher selling price/mix, cost savings, the Gain on Sale of RTS and Chattanooga, the contribution from the Mexico Acquisition, and the gain on sale of unconsolidated entities. Consolidated Adjusted EBITDA of $3.0 billion in fiscal 2023 decreased $480.8 million, or 13.9%, compared to fiscal 2022. A detailed review of our performance appears below under “ Results of Operations ”.
Earnings per diluted share was a loss of $6.44 in fiscal 2023 compared to income of $3.61 in fiscal 2022. Adjusted Earnings Per Diluted Share were $3.02 and $4.76 in fiscal 2023 and 2022, respectively. See the discussion and tables under " Definitions and Non-GAAP Financial Measures " below with respect to Consolidated Adjusted EBITDA and Adjusted Earnings Per Diluted Share.
We generated $1.8 billion of net cash provided by operating activities in fiscal 2023, compared to $2.0 billion in fiscal 2022. The $192.5 million decline was primarily due to lower earnings, partially offset by $668.0 million of reduced working capital usage compared to the prior year period. We invested $1,142.1 million in capital expenditures in fiscal 2023 while returning $281.3 million in dividends to our stockholders. We believe our strong balance sheet and cash flow provide us the flexibility to continue to invest to sustain and improve our operating performance. See “ Liquidity and Capital Resources ” for additional information.
A detailed review of our performance appears below under “ Results of Operations ”.
Expectations for the First Quarter of Fiscal 2024 and Fiscal 2024
In the first quarter of fiscal 2024, we expect a decline in net sales and earnings from the fourth quarter of fiscal 2023, reflecting the normal seasonal sequential volume declines in many of our businesses, continued realization of published price declines and scheduled mill maintenance outages. We plan to continue balancing our supply with our customers’ demand. We expect sequentially higher recycled fiber costs, lower chemical costs and relatively flat energy, virgin fiber and freight costs. We also expect increased health insurance costs prior to the annual reset of employee deductibles.
In fiscal 2024, we expect financial results to be favorably weighted to the back half of the year due to seasonality and the expected improvement in demand trends. We expect continued realization of published price declines, continued balancing of our supply with our customers’ demand, higher costs driven by higher recycled fiber, freight and wages and other costs, and lower energy, virgin fiber and chemical costs. We also expect our results to be negatively impacted by scheduled mill maintenance outages. We expect approximately 550,000 tons of maintenance downtime compared to approximately 507,000 tons in fiscal 2023. We expect to further progress on cost savings initiatives and are targeting $300 to $400 million in cost savings in fiscal 2024. We expect to incur significant costs, expenses and fees for professional services and other costs in connection with the proposed Transaction. As noted above, in fiscal 2024, we also expect the aggregate investment in our business systems transformation to be approximately $220 million, approximately $90 million of which we expect to expense as incurred. We expect fiscal 2024 capital expenditures to be approximately $1.2 billion to $1.5 billion. We expect our fiscal 2024 cash tax rate will be higher than our expected income tax rate. See Item 7. “ Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Cash Flow Activity” for additional information.
RANSOMWARE INCIDENT
As previously disclosed, on January 23, 2021, we detected a ransomware incident impacting certain of our systems. Promptly upon our detection of this incident, we initiated response and containment protocols and our security teams, supplemented by leading cyber defense firms, worked to remediate this incident. These actions included taking preventative measures, such as shutting down certain systems out of an abundance of caution, as well as taking steps to supplement existing security monitoring, scanning and protective measures. In our Form 10-Q for the second quarter of fiscal 2021, we announced that all systems were back in service.
In fiscal 2022 and 2023, we realized incremental progress against our resiliency objectives. We improved our mean-time-to-resolve security incidents, optimized our endpoint detection and response technology deployments across all of our workstation and server population, transitioned all of our local drives to cloud-based storage, and progressed against key goals to modernize the security and infrastructure of our operating locations. In fiscal 2024, we expect to further advance the maturity of our resiliency posture by continuing to execute against our multi-year roadmap. Quarterly progress, as well as key risks and issues, are reported to the Audit Committee for oversight and monitoring.
In fiscal 2023, we received $10 million of business interruption insurance recoveries related to the ransomware incident, which we recorded as a reduction of Cost of goods sold and presented in net cash provided by operating activities on our consolidated statements of cash flows. Our recoveries related to the ransomware incident are now complete. In fiscal 2022, we recorded a $57.2 million credit for ransomware insurance recoveries, recording $50.6 million of business interruption recoveries as a reduction of Cost of goods sold and $6.6 million of direct cost recoveries as a reduction of SG&A expense excluding intangible amortization. We present ransomware recoveries received as Net cash provided by operating activities in our consolidated statements of cash flows.
For more information on the ransomware incident, see “ Note 1. Description of Business and Summary of Significant Accounting Policies — Ransomware Incident ” of the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table summarizes our consolidated results for the two years ended September 30, 2023 (in millions):
Year Ended September 30,
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expense excluding
intangible amortization
Selling, general and administrative intangible amortization
expense
Multiemployer pension withdrawal (income) expense
Restructuring and other costs, net
Impairment of goodwill and mineral rights
Operating (loss) profit
Interest expense, net
Gain (loss) on extinguishment of debt
Pension and other postretirement non-service (cost) income
Other (expense) income, net
Equity in income of unconsolidated entities
Gain on sale of RTS and Chattanooga
(Loss) income before income taxes
Income tax benefit (expense)
Consolidated net (loss) income
Less: Net income attributable to noncontrolling interests
Net (loss) income attributable to common stockholders
Net Sales (Unaffiliated Customers)
Net sales in fiscal 2023 of $20.3 billion decreased $946.5 million, or 4.5%, compared to fiscal 2022 primarily due to lower volumes and unfavorable foreign exchange rates, which were largely offset by increased sales due to the Mexico Acquisition and higher selling price/mix.
See “ Segment Information ” below for detailed information regarding the change in net sales before intersegment eliminations by segment.
Cost of Goods Sold
Cost of goods sold decreased to $16.7 billion in fiscal 2023 compared to $17.2 billion in fiscal 2022. Cost of goods sold as a percentage of net sales was 82.4% in fiscal 2023 compared to 81.1% in fiscal 2022. The dollar decrease in cost of goods sold was primarily due to lower volumes and the impact of cost savings which were partially offset by the impact of estimated increased net cost inflation. Net cost inflation consisted primarily of higher wage and benefit costs, chemical costs, freight costs and virgin fiber costs which were partially offset by lower recycled fiber costs and energy costs including hedges.
Selling, General and Administrative Expense Excluding Intangible Amortization
SG&A expense excluding intangible amortization increased $81.8 million to $2.0 billion in fiscal 2023 compared to $1.9 billion in fiscal 2022. SG&A expense excluding intangible amortization as a percentage of net sales increased in fiscal 2023 to 9.9% from 9.1% in fiscal 2022. The increase was primarily due to $93.2 million related to the Mexico Acquisition and $90.5 million of business systems transformation costs. Travel and entertainment expense also increased by $19.4 million. Excluding these items, compensation and benefit costs were $117.3 million lower, reflecting cost savings and achievement of lower performance goals compared to the prior year period.
Selling, General and Administrative Intangible Amortization Expense
SG&A intangible amortization expense was $341.5 million and $350.4 million in fiscal 2023 and 2022, respectively. The expense primarily represents the amortization of customer relationship intangibles acquired in business combinations.
Multiemployer Pension Withdrawal (Income) Expense
In fiscal 2023 we recorded multiemployer pension withdrawal income of $12.1 million related to non-PIUMPF arbitrations. In fiscal 2022, we recorded multiemployer pension withdrawal expense of $0.2 million. See “ Note 6. Retirement Plans — MEPPs ” of the Notes to Consolidated Financial Statements for additional information.
Restructuring and Other Costs, Net
We recorded pre-tax restructuring and other costs, net of $859.2 million and $383.0 million for fiscal 2023 and 2022, respectively. Of these costs, $604.6 million and $334.1 million for fiscal 2023 and 2022, respectively, were non-cash. The charges in fiscal 2023 were primarily associated with our decision to permanently cease operations at our Tacoma, WA and North Charleston, SC containerboard mills, and the charges in fiscal 2022 were primarily associated with our decision to permanently cease operations at our Panama City, FL mill and the permanent closure of the corrugated medium manufacturing operations at our St. Paul, MN mill. In addition, in both years we incurred charges for other facility closure activities, reduction in workforce actions and charges associated with acquisition, integration or divestiture activities.
These amounts are not comparable since the timing and scope of the individual actions associated with a given restructuring, acquisition, integration or divestiture vary. We generally expect the integration of a closed facility’s assets and production with other facilities to enable the receiving facilities to better leverage their fixed costs while eliminating fixed costs from the closed facility. While restructuring costs are not charged to our segments and, therefore, do not reduce each segment's Adjusted EBITDA, we highlight the segment to which the charges relate. See “ Note 5. Restructuring and Other Costs, Net ” 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, have current restructuring initiatives taking place, and it is likely that we will engage in future restructuring activities.
Impairment of Goodwill and Mineral Rights
In fiscal 2023, we recorded a pre-tax, non-cash goodwill impairment of $1.9 billion, with $1.4 billion and $0.5 billion in the Global Paper and Corrugated Packaging reportable segments, respectively. The impairment is not included in Adjusted EBITDA of our segments. See “ Note 8. Segment Information ” of the Notes to Consolidated Financial Statements for additional information.
In fiscal 2022, we recorded a $26.0 million pre-tax non-cash impairment of certain mineral rights driven by a lack of new leasing or development activity on the related properties for an extended period of time. With the impairment, we had no value assigned to our remaining mineral rights.
Interest Expense, net
Interest expense, net was $417.9 million and $318.8 million for fiscal 2023 and 2022, respectively. Interest expense increased $159.5 million and was partially offset by increased interest income of $60.4 million. The net increase in interest expense was primarily due to higher interest rates on debt in the current year period and increased debt associated with the Mexico Acquisition. These increases were partially offset by higher interest income on our cash in fiscal 2023. Additionally, fiscal 2022 included a $36.2 million reduction in interest expense associated with the remeasurement of our multiemployer pension liabilities for the change in interest rates.
Gain (Loss) on Extinguishment of Debt
In fiscal 2023, gain on extinguishment of debt was $10.5 million and in fiscal 2022, loss on extinguishment of debt was $8.5 million. In fiscal 2023, we discharged $500 million aggregate principal amount of our 3.00% senior notes due September 2024 using cash and cash equivalents and borrowings under our commercial paper program.
The loss in fiscal 2022 was primarily related to the redemption of $350 million aggregate principal amount of our 4.00% senior notes due March 2023 primarily using borrowings under our Receivables Securitization Facility (as hereinafter defined).
Pension and Other Postretirement Non-Service (Cost) Income
Pension and other postretirement non-service cost in fiscal 2023 was $21.8 million compared to income of $157.4 million in fiscal 2022. The higher costs in fiscal 2023 were primarily due to lower plan assets at September 30, 2022 compared to the prior year, partially offset by an increase in the expected return on plan assets at September 30, 2022 compared to the prior year. These costs were also increased due to higher interest rates during fiscal 2023 compared to fiscal 2022. Customary pension and other postretirement cost (income) are included in our segment results. See “ Note 6. Retirement Plans ” of the Notes to Consolidated Financial Statements for additional information.
Other (Expense) Income, net
Other (expense) income, net was expense of $6.1 million and expense of $11.0 million in fiscal 2023 and 2022, respectively. The lower net expense in fiscal 2023 primarily included a favorable $13.7 million impact of foreign currency, a favorable $12.0 million of other non-operating costs and a favorable $7.3 million on the sale of businesses, each as compared to fiscal 2022. These items were partially offset by $27.9 million of increased expense in connection with the sale of receivables. The favorable other non-operating costs included a $19.7 million gain on foreign currency exchange contract derivatives entered into in anticipation of the Mexico Acquisition, and the favorable sale of businesses included an $11.2 million gain on the sale of our Eaton, IN and Aurora, IL uncoated recycled paperboard mills.
Equity in Income of Unconsolidated Entities
Equity in income of unconsolidated entities in fiscal 2023 was income of $3.4 million compared to income of $72.9 million in fiscal 2022. The decline in income in fiscal 2023 was driven by a $46.8 million non-cash, pre-tax loss to recognize the write-off of historical foreign currency translation adjustments recorded in Accumulated other comprehensive loss, as well as the difference between the fair value of the consideration paid for the Mexico Acquisition and the carrying value of our prior ownership interest. That loss was partially offset by the $19.3 million pre-tax gain on sale of our displays joint venture and a $7.6 million pre-tax gain on sale of our Seven Hills mill joint venture. Additionally, the change year-over-year was impacted by no longer recording equity income after the purchase of our remaining interest in the operations acquired in the Mexico Acquisition and stronger performance by the displays joint venture in the prior year period. See “ Note 3. Acquisitions ” of the Notes to Consolidated Financial Statements for additional information.
Gain on Sale of RTS and Chattanooga
In fiscal 2023, we completed the sale of our interior partitions converting operations and the sale of our Chattanooga, TN uncoated recycled paperboard mill to our joint venture partner and recorded a pre-tax gain on sale of $238.8 million, excluding divestiture costs. Divestiture costs are expensed as incurred and recorded within Restructuring and other costs, net. See “ Note 1. Description of Business and Summary of Significant Accounting Policies — Description of Business ” of the Notes to Consolidated Financial Statements for additional information.
Provision for Income Taxes
We recorded an income tax benefit of $60.4 million for fiscal 2023 at an effective tax rate benefit of 3.5%, compared to income tax expense of $269.6 million at an effective tax rate of 22.1% in fiscal 2022. The low tax rate in fiscal 2023 was primarily due to the tax effects related to the goodwill impairment. See “ Note 7. 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.
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 disclose North American Corrugated Packaging shipments in billion square feet (“ BSF ”) and millions of square feet (" MMSF ”) per shipping day. In the industry, the term “North American Corrugated Packaging” commonly refers to U.S. and Canadian operations only. We have presented this shipment data 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
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal
Year
Fiscal 2022 (1)
Corrugated Packaging Shipments -
thousands of tons
North American Corrugated Packaging
Shipments - BSF
North American Corrugated Packaging Per
Shipping Day - MMSF
Fiscal 2023 (1)
Corrugated Packaging Shipments -
thousands of tons (2)
North American Corrugated Packaging
Shipments - BSF
North American Corrugated Packaging Per
Shipping Day - MMSF
In the fourth quarter of fiscal 2023, the fiscal 2022 and fiscal 2023 Corrugated Packaging Shipments were revised by an immaterial amount.
In the second quarter of fiscal 2023, we finalized our segment reporting assessment and included the results of the operations acquired in the Mexico Acquisition in our Corrugated Packaging segment. Accordingly, we updated the Corrugated Packaging shipments beginning in the first quarter of fiscal 2023 to include the acquired operations.
Corrugated Packaging Segment – Net Sales and Adjusted EBITDA
(In millions, except percentages)
Net Sales (1)
Adjusted EBITDA
Adjusted EBITDA Margin
Fiscal 2022
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
Fiscal 2023
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
Net Sales before intersegment eliminations, also referred to as segment sales.
Net Sales (Aggregate) — Corrugated Packaging Segment
Net sales before intersegment eliminations for the Corrugated Packaging segment increased $747.3 million in fiscal 2023 compared to fiscal 2022. The increase primarily consisted of $1.1 billion of sales from the operations acquired in the Mexico Acquisition, $281.7 million of higher selling price/mix and $111.6 million associated with the converting operations formerly in the Consumer Packaging segment, which were partially offset by $762.4 million of lower volumes excluding the Mexico Acquisition. Volumes were impacted by lower demand for certain of our products, as well as certain inventory rebalancing throughout the supply chain.
Adjusted EBITDA — Corrugated Packaging Segment
Corrugated Packaging segment Adjusted EBITDA in fiscal 2023 increased $213.7 million compared to fiscal 2022, primarily due to an estimated $281.9 million margin impact from higher selling price/mix and $162.1 million of cost savings. These items were partially offset by an estimated $220.6 million impact of economic downtime and prior year mill closures, and $145.2 million of lower volumes. Additionally, we had $131.7 million of other net favorable items that consisted primarily of $161.0 million from the operations acquired in the Mexico Acquisition and $14.9 million associated with converting operations formerly in the Consumer Packaging segment that were partially offset by $33.3 million of higher non-cash pension costs and $28.3 million of lower equity in income of unconsolidated entities excluding our former joint venture in Mexico and $22.4 million of lower net ransomware recoveries in fiscal 2023 as compared to fiscal 2022. Estimated net cost deflation ended the year essentially flat at $3.8 million as cost deflation in the last half of the year more than offset cost inflation in the first half of the fiscal year, each as compared to fiscal 2022.
Consumer Packaging Segment
Consumer Packaging Shipments
Consumer Packaging shipments are expressed as a tons equivalent in thousands of tons, which includes external and intersegment shipments from our consumer converting operations, principally for the sale of folding cartons, interior partitions (before divestiture in September 2023) and other consumer products. We have presented the Consumer 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
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal
Year
Fiscal 2022
Consumer Packaging Shipments - thousands
of tons
Fiscal 2023
Consumer Packaging Shipments - thousands
of tons
Consumer Packaging Segment – Net Sales and Adjusted EBITDA
(In millions, except percentages)
Net Sales (1)
Adjusted EBITDA
Adjusted EBITDA Margin
Fiscal 2022
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
Fiscal 2023
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
Net Sales before intersegment eliminations, also referred to as segment sales.
Net Sales (Aggregate) — Consumer Packaging Segment
Net sales before intersegment eliminations for the Consumer Packaging segment decreased $23.4 million in fiscal 2023 compared to fiscal 2022 primarily due to $431.1 million of higher selling price/mix that was partially offset by $273.1 million of lower volumes and $73.4 million of unfavorable foreign exchange rates. In addition, the prior year period included $103.7 million of net sales for converting operations now included in the Corrugated Packaging segment. Volumes were impacted by lower demand for certain of our products, as well as certain inventory rebalancing throughout the supply chain.
Adjusted EBITDA — Consumer Packaging Segment
Consumer Packaging segment Adjusted EBITDA in fiscal 2023 increased $6.5 million compared to the prior year. Adjusted EBITDA in the period increased primarily due to an estimated $413.8 million margin impact from higher selling price/mix and $58.2 million of cost savings which were partially offset by an estimated $184.8 million of increased net cost inflation, $151.7 million of lower volumes and an estimated $44.0 million impact of economic downtime. Additionally, we had $85.0 million of other net unfavorable items that consisted primarily of $45.2 million of higher non-cash pension costs, $18.7 million of Adjusted EBITDA from the prior year period associated with the converting operations now included in the Corrugated Packaging segment and $12.0 million of unfavorable foreign exchange rates.
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 our Seven Hills mill joint venture in Lynchburg, VA (prior to its September 2023 sale) since it was 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
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal
Year
Fiscal 2022
Global Paper Shipments - thousands
of tons
Fiscal 2023
Global Paper Shipments - thousands
of tons
Global Paper Segment – Net Sales and Adjusted EBITDA
(In millions, except percentages)
Net Sales (1)
Adjusted EBITDA
Adjusted EBITDA Margin
Fiscal 2022
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
Fiscal 2023
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
Net Sales before intersegment eliminations, also referred to as segment sales.
Net Sales (Aggregate) — Global Paper Segment
Net sales before intersegment eliminations for the Global Paper segment decreased $1.6 billion in fiscal 2023 compared to fiscal 2022 primarily due to $1.4 billion of lower volumes and $34.6 million of lower selling price/mix. Additionally, net sales are $108.3 million lower than the prior year period as sales to the operations acquired in the Mexico Acquisition are now eliminated. Volumes were impacted by lower demand for certain of our products, as well as certain inventory rebalancing throughout the supply chain.
Adjusted EBITDA — Global Paper Segment
Global Paper segment Adjusted EBITDA in fiscal 2023 decreased $591.4 million compared to the prior year. Adjusted EBITDA in the period decreased primarily due to $429.2 million of lower volumes, an estimated $223.6 million impact of economic downtime and prior year mill closures, and an estimated $19.2 million of increased net cost inflation. These items were partially offset by $121.8 million of cost savings and $22.6 million of margin impact from higher selling price/mix. Additionally, we had $63.8 million of other net unfavorable items that consisted primarily of $22.3 million of higher non-cash pension costs, $12.4 million of lower net ransomware recoveries and $9.3 million of lower net weather recoveries in fiscal 2023 as compared to fiscal 2022.
Distribution Segment
Distribution Shipments
Distribution shipments are expressed as a tons equivalent in thousands of tons, which includes external and intersegment shipments from our distribution and display assembly operations. We have presented the Distribution shipments in this manner because we believe investors, potential investors, securities analysts and others find this breakout useful when evaluating our operating performance. Quantities in the table may not sum across due to trailing decimals.
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal
Year
Fiscal 2022
Distribution Shipments - thousands of tons
Fiscal 2023
Distribution Shipments - thousands of tons
Distribution Segment – Net Sales and Adjusted EBITDA
(In millions, except percentages)
Net Sales (1)
Adjusted EBITDA
Adjusted EBITDA Margin
Fiscal 2022
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
Fiscal 2023
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
Net Sales before intersegment eliminations, also referred to as segment sales.
Net Sales (Aggregate) — Distribution Segment
Net sales before intersegment eliminations for the Distribution segment decreased $158.2 million in fiscal 2023 compared to fiscal 2022 primarily due to $173.7 million of lower volumes that was partially offset by $12.9 million of higher selling price/mix. The lower volumes were primarily due to lower moving and storage business volumes in fiscal 2023 and large healthcare orders in the prior year period.
In April 2023, one of our larger Distribution segment customers notified us that they were transitioning their business to a third party. We do not expect the impact on our consolidated operations to be material, although we expect the segment’s net sales and Adjusted EBITDA to be reduced until the sales are replaced.
Adjusted EBITDA — Distribution Segment
Distribution segment Adjusted EBITDA in fiscal 2023 decreased $42.7 million compared to the prior year primarily due to $48.9 million of lower volumes and an estimated $23.4 million of increased net cost inflation that were partially offset by $15.5 million of cost savings and an estimated $12.9 million of margin impact from higher selling price/mix.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our working capital requirements, capital expenditures, mergers, acquisitions and investments, restructuring activities, dividends and stock repurchases from net cash provided by operating activities, borrowings under our credit facilities, proceeds from the sale of receivables under our accounts receivable monetization 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 14. Debt ” of the Notes to Consolidated Financial Statements for detailed information regarding our debt.
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 of September 30, 2023,
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 $393.4 million at September 30, 2023 and $260.2 million at September 30, 2022. Approximately half of the cash and cash equivalents at September 30, 2023 were held outside of the U.S. The proportion of cash and cash equivalents held outside of the U.S. generally varies from period to period. At September 30, 2023, total debt was $8.6 billion, $533.0 million of which was current. At September 30, 2022, total debt was $7.8 billion, $212.2 million of which was current. Included in our total debt at September 30, 2023 was $157.0 million of non-cash acquisition related step-up. During fiscal 2023, debt increased $0.8 billion primarily due to the Mexico Acquisition, net of debt repayments. See “ Note 3. Acquisitions ” of the Notes to Consolidated Financial Statements for additional information. Funding for our domestic operations in the foreseeable future is expected to come from sources of liquidity within our domestic operations, including cash and cash equivalents, and available borrowings under our credit facilities. As such, our foreign cash and cash equivalents are not expected to be a key source of liquidity to our domestic operations.
At September 30, 2023, we had approximately $3.4 billion of available liquidity under our long-term committed credit facilities and cash and cash equivalents . Our primary availability is under our revolving credit facilities and Receivables Securitization Facility, the majority of which matures July 2027. This liquidity may be used to provide for ongoing working capital needs and for other general corporate purposes, including acquisitions and dividends.
On Sept ember 22, 2023, we discharged $500 million aggregate principal amount of our 3.00% senior notes due September 2024 using cash and cash equivalents and borrowings under our commercial paper program and recorded a $10.5 million gain on extinguishment of debt. On March 22, 2022, we redeemed $350 million aggregate principal amount of our 4.00% senior notes due March 2023 primarily using borrowings under our Receivables Securitization Facility and recorded an $8.2 million loss on extinguishment of debt.
Our credit facilities contain certain restrictive covenants, including a covenant to satisfy a debt to capitalization ratio. We test and report our compliance with these covenants as required by these facilities and were in compliance with them as of September 30, 2023.
At September 30, 2023, we had $77.6 million of outstanding letters of credit not drawn upon.
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 13. Fair Value — Accounts Receivable Monetization Agreements ” for a discussion of our monetization facilities.
Our working capital management strategy includes working with our suppliers to revisit terms and conditions, including the extension of payment terms. Our current payment terms with the majority of our suppliers generally range from payable upon receipt to 120 days and vary for items such as the availability of cash discounts. We do not believe our payment terms will be shortened significantly in the near future, and we do not expect our net cash provided by operating activities to be significantly impacted by additional extensions of payment terms. Certain financial institutions offer voluntary SCF programs that enable our suppliers, at their sole discretion, to sell their receivables from us to the financial institutions on a non-recourse basis at a rate that leverages our credit rating and thus might be more beneficial to our suppliers. We and our suppliers agree on commercial terms for the goods
and services we procure, including prices, quantities and payment terms, regardless of whether the supplier elects to participate in SCF programs. The suppliers sell us goods or services and issue the associated invoices to us based on the agreed-upon contractual terms. The due dates of the invoices are not extended due to the supplier’s participation in SCF programs. Our suppliers, at their sole discretion if they choose to participate in a SCF program, determine which invoices, if any, they want to sell to the financial institutions. No guarantees are provided by us under SCF programs and we have no economic interest in a supplier’s decision to participate in the SCF program. Therefore, amounts due to our suppliers that elect to participate in SCF programs are included in the line items Accounts payable and Other current liabilities in our consolidated balance sheets and the activity is reflected in net cash provided by operating activities in our consolidated statements of cash flows. Based on correspondence with the financial institutions that are involved with our two primary SCF programs, while the amount suppliers elect to sell to the financial institutions varies from period to period, the amount generally averages approximately 19% to 21% of our accounts payable balance.
We also participate in certain vendor financing and commercial card programs to support our travel and entertainment expenses and smaller vendor purchases. Amounts outstanding under these programs are classified as debt primarily because we receive the benefit of extended payment terms and a rebate from the financial institution that we would not have otherwise received without the financial institution's involvement. We also have the Receivables Securitization Facility that allows for borrowing availability based on underlying accounts receivable eligibility and compliance with certain covenants. See “ Note 14 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)
Net cash provided by operating activities
Net cash used for investing activities
Net cash used for financing activities
Net cash provided by operating activities during fiscal 2023 decreased $192.5 million from fiscal 2022 primarily due to lower earnings partially offset by $668.0 million of reduced working capital usage compared to the prior year period. The changes in working capital in fiscal 2023 and 2022 included a use of cash of $32.5 million and a source of cash of $58.8 million, respectively, resulting from the sale of accounts receivables in connection with the Monetization Agreement (as defined in Note 13. Fair Value ).
Net cash used for investing activities of $1,507.2 million in fiscal 2023 consisted primarily of $1,142.1 million for capital expenditures and $853.5 million of cash paid for the purchase of businesses, net of cash acquired which were partially offset by $318.2 million of net cash proceeds from the sale of our interior partitions converting operations and Chattanooga, TN uncoated recycled paperboard mill, $53.4 million of proceeds from the sale of two joint ventures, $42.2 million of proceeds from corporate owned life insurance, $27.6 million of proceeds from the sale of two uncoated recycled paperboard mills, $23.2 million of proceeds from currency forward contracts and $26.8 million of proceeds from the sale of property, plant and equipment. 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.
We invested $1,142.1 million in capital expenditures in fiscal 2023, which was in line with the $1.0 to $1.1 billion we expected to invest. We expect capital expenditures of approximately $1.2 to $1.5 billion in fiscal 2024. We expect this level of capital investment will allow us to continue to invest in safety, environmental and maintenance projects, while also making investments to support productivity and growth in our business and complete certain asset recapitalization and to initiate strategic investments. 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 laws and regulations.
In fiscal 2023, net cash used for financing activities of $193.5 million consisted primarily of cash dividends paid to stockholders of $281.3 million that was partially offset by a net additions to debt of $101.1 million due to the Mexico Acquisition, net of debt repayments. In fiscal 2022, net cash used for financing activities of $1.3 billion 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.
We estimate that we will invest approximately $103 million for capital expenditures during fiscal 2024 in connection with matters relating to environmental compliance. We were obligated to purchase approximately $353 million of fixed assets at September 30, 2023 for various capital projects.
At September 30, 2023, the U.S. federal, state and foreign net operating losses and other U.S. federal and state tax credits available to us aggregated approximately $41 million in future potential reductions of U.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 2024 and 2042. 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 2024 cash tax rate will be approximately 13 percentage points higher than our expected income tax rate. The higher cash tax rate expected in fiscal 2024 is primarily due to the timing of depreciation on our qualifying capital investments as allowed under the Tax Cuts and Jobs Act, new legislation requiring amortization of research and experimental costs instead of a full deduction in the year incurred and cash taxes due as a result of a deferred payment on the sale of RTS and Chattanooga. We expect our fiscal 2025 and 2026 cash tax rate to be approximately 5 percentage points higher than our income tax rate primarily due to the timing of depreciation on our qualifying capital investments as allowed under the Tax Cuts and Jobs Act and legislation requiring amortization of research and experimental costs instead of a full deduction in the year incurred. These rates are subject to change for a variety of reasons, including as a result of consummation of the proposed Transaction.
During fiscal 2023 and 2022, we made contributions of $28.2 million and $21.2 million, respectively, to our U.S. and non-U.S. pension plans. Based on current facts and assumptions, we expect to contribute approximately $25 million to our U.S. and non-U.S. pension plans in fiscal 2024. Based on current assumptions, including future interest rates, we estimate that minimum pension contributions to our U.S. and non-U.S. pension plans will be approximately $22 million to $23 million annually in fiscal 2025 through 2028. 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 our U.S. and non-U.S. pension plans at September 30, 2023 was $408.3 million. See “ Note 6. Retirement Plans ” of the Notes to Consolidated Financial Statements for additional information.
In the normal course of business, we evaluate our potential exposure to MEPPs, including with respect to potential withdrawal liabilities. In fiscal 2018, we submitted formal notification to withdraw from certain MEPPs, including PIUMPF, and recorded estimated withdrawal liabilities for each. We also have liabilities associated with other MEPPs from which we, or legacy companies, have withdrawn in the past. In fiscal 2024, we expect to pay approximately $11 million 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. At September 30, 2023 and September 30, 2022, we had recorded withdrawal liabilities of $203.2 million and $214.7 million, respectively, including liabilities associated with PIUMPF’s accumulated funding deficiency demands. The liability reduction in fiscal 2023 was primarily the result of non-PIUMPF arbitrations, the impact of which is reflected in Multiemployer pension withdrawal (income) expense on our consolidated statements of operations. See “ Note 6. Retirement Plans — Multiemployer Plans ” of the Notes to Consolidated Financial Statements for additional information.
In October 2023, our board of directors declared a quarterly dividend of $0.3025 per share, representing a $1.21 per share annualized dividend or an increase of 10%. In fiscal 2023, 2022 and 2021 we paid an annual dividend of $1.10 per share, $1.00 per share and $0.88 per share, respectively. Our capital allocation strategy includes reducing debt and leverage and returning capital to stockholders through a sustainable and growing dividend.
In July 2015, our board of directors authorized a repurchase program of up to 40.0 million shares of our Common Stock, representing approximately 15% of our outstanding Common Stock as of July 1, 2015. On May 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 the July 2015 authorization. The 25.0 million shares represented 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. In fiscal 2023, we had no share repurchases. 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. The amount reflected as repurchased in the consolidated statements of cash flows varies due to the timing of share settlement. As of September 30, 2023, we had approximately 29.0 million shares of Common Stock available for repurchase under the program, although we have indefinitely suspended the program in light of the proposed Transaction (and related restrictions imposed by the Transaction Agreement).
The Transaction Agreement provides that we will generally continue to conduct our business in the ordinary course and consistent with past practice in all material respects. It also contains covenants that restrict our ability to undertake certain actions without consent from Smurfit Kappa, including incurrence of debt or modification of existing debt arrangements under certain circumstances. Subject to these restrictions, we anticipate funding our capital expenditures, debt service obligations, dividends, pension payments, working capital needs, restructuring activities and other corporate actions for the foreseeable future from cash generated from operations, borrowings under our credit facilities, proceeds from our accounts receivable monetization agreements, proceeds from the issuance of debt securities and other debt financing. In addition, we regularly 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, and subject to restrictions imposed in the Transaction Agreement, we may seek to refinance existing indebtedness to extend maturities, reduce borrowing costs or otherwise improve the terms and composition of our indebtedness.
Contractual Obligations
We summarize our enforceable and legally binding contractual obligations at September 30, 2023, 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
Total
Fiscal 2024
Fiscal 2025
and 2026
Fiscal 2027
and 2028
Thereafter
Long-Term Debt, including current portion,
excluding finance lease obligations (1)
Lease obligations (2)
Purchase obligations and other (3) (4) (5)
Total
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 $123.6 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 14. Debt ” of the Notes to Consolidated Financial Statements for information on the interest rates that apply to our various debt instruments.
See “ Note 15. Leases ” of the Notes to Consolidated Financial Statements for additional information.
Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provision; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.
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 $94.7 million of MEPP withdrawal liabilities recorded as of September 30, 2023, including our estimate of the accumulated funding deficiency, due to lack of definite payout terms for certain of the obligations. See “ Note 6. Retirement Plans – Multiemployer Plans ” of the Notes to Consolidated Financial Statements for additional information.
We have not included the following items in the table:
An item labeled “other noncurrent liabilities” reflected on our consolidated balance sheet because these liabilities do not have a defined pay-out schedule.
$476.9 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.
$1,106.9 million of non-recourse liabilities held by special purpose entities (" SPEs ") that have $1,244.8 million of related restricted assets. See “ Note 17. Special Purpose Entities ” of the Notes to Consolidated Financial Statements for additional information.
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.
Guarantor Summarized Financial Information
WRKCo, Inc. (" WRKCo " and the “ Issuer ”), a wholly owned subsidiary of WestRock Company (" Parent "), has issued the following debt securities pursuant to offerings registered under the Securities Act of 1933, as amended (collectively for purposes of this subsection, the “ Notes ”)(in millions, except percentages):
Aggregate Principal Amount
Stated Coupon Rate
Maturity Date
March 2025
March 2026
September 2027
March 2028
June 2028
March 2029
June 2032
June 2033
Upon issuance, the Notes maturing in 2025, 2027 and March 2028 were fully and unconditionally guaranteed by two other wholly owned subsidiaries of Parent: WestRock RKT, LLC (“ RKT ”) and WestRock MWV, LLC (“ MWV ”, and together with RKT, the “ Guarantor Subsidiaries ”). Parent has also fully and unconditionally guaranteed these Notes. The remaining Notes were issued by the Issuer subsequent to the consummation of the acquisition of KapStone Paper and Packaging Corporation in November 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 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 under certain circumstances. 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 the Obligor Group on a combined basis after the elimination of intercompany balances and transactions among the Obligor 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).
SUMMARIZED STATEMENT OF OPERATIONS
Year Ended
September 30,
Net sales to unrelated parties
Net sales to non-Guarantor Subsidiaries
Gross profit
Interest expense, net with non-Guarantor Subsidiaries
Net loss and net loss attributable to the Obligor Group (1)
Includes a pre-tax goodwill impairment charge of $107.8 million.
SUMMARIZED BALANCE SHEETS
September 30,
ASSETS
Total current assets
Noncurrent amounts due from non-
Guarantor Subsidiaries
Other noncurrent assets (1)
Total noncurrent assets
LIABILITIES
Current amounts due to non-
Guarantor Subsidiaries
Other current liabilities
Total current liabilities
Noncurrent amounts due to non-
Guarantor Subsidiaries
Other noncurrent liabilities
Total noncurrent liabilities
Other noncurrent assets include aggregate goodwill and intangibles, net of $1,395.5 million and $1,601.2 million as of September 30, 2023 and September 30, 2022, respectively.
DEFINITIONS AND NON-GAAP FINANCIAL MEASURES
Definitions
We calculate cost savings as the year-over-year change in certain costs incurred for manufacturing, procurement, logistics, and SG&A, in each case excluding the impact of economic downtime and inflation. Cost savings achieved to date may not recur in future periods, and estimates of future savings are subject to change.
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 additional meaningful financial information that may be relevant when assessing our ongoing performance. Non-GAAP financial measures should be viewed in addition to, and not as an alternative to, 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, net, impairment of goodwill and mineral rights, 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 when making financial, operating and planning decisions and when evaluating our performance relative to other periods. We believe that the most directly comparable GAAP measures to Adjusted Net Income and Adjusted Earnings Per Diluted Share are Net (loss) income attributable to common stockholders and (Loss) earnings per diluted share, respectively. See Item 7. “ Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Business Systems Transformation” for additional information regarding our business systems transformation.
Set forth below is a reconciliation of the non-GAAP financial measure Adjusted Earnings Per Diluted Share to (Loss) earnings per diluted share, the most directly comparable GAAP measure (in dollars per share) for the periods indicated.
Years Ended September 30,
(Loss) earnings per diluted share
Goodwill impairment
Restructuring and other costs, net
Work stoppage costs
Business systems transformation costs
Losses at closed facilities
Loss on consolidation of previously held equity
method investment net of deferred taxes
Acquisition accounting inventory related
adjustments
Mineral rights impairment
Accelerated depreciation on certain facility closures
Gain on sale of RTS and Chattanooga
Gain on sale of unconsolidated entities, net
Multiemployer pension withdrawal (income) expense
(Gain) loss on extinguishment of debt
Brazil indirect tax claim
Gain on sale of two uncoated recycled
paperboard mills
MEPP liability adjustment due to interest rates
Ransomware recovery costs, net of insurance proceeds
Adjustment to reflect adjusted earnings on a fully diluted
basis
Adjusted Earnings Per Diluted Share
The as reported results in the table below for Pre-Tax, Tax and Net of Tax are equivalent to the line items “(Loss) income before income taxes”, “Income tax benefit (expense)” and “Consolidated net (loss) income”, 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 (loss) income attributable to common stockholders (represented in the table below as the GAAP Results for Consolidated net (loss) income (i.e., Net of Tax) less Net income attributable to noncontrolling interests), for the periods indicated (in millions):
Year ended September 30, 2023
Pre-Tax
Tax
Net of Tax
As reported
Goodwill impairment
Restructuring and other costs, net
Work stoppage costs (1)
Business systems transformation costs (1)
Losses at closed facilities (1)
Loss on consolidation of previously held equity
method investment net of deferred taxes (1)
Acquisition accounting inventory related
adjustments (1)
Accelerated depreciation on certain facility
closures
Gain on sale of RTS and Chattanooga
Gain on sale of unconsolidated entities, net (1)
Multiemployer pension withdrawal income
Gain on extinguishment of debt
Brazil indirect tax claim (1)
Gain on sale of two uncoated recycled
paperboard mills
Other (1)
Adjusted Results
Noncontrolling interests
Adjusted Net Income
These footnoted items represent the "Other adjustments" reported in the additional segment information table in our segment footnote. The “Losses at closed facilities” line for the year ended September 30, 2023, includes $2.0 million of depreciation and amortization and the Brazil indirect tax claim includes $4.7 million of interest income. See “ Note 8. Segment Information ” for additional information.
Year ended September 30, 2022
Pre-Tax
Tax
Net of Tax
As reported
Restructuring and other costs, net
Mineral rights impairment
Loss on extinguishment of debt
Accelerated depreciation on certain facility
closures
Business systems transformation costs (1)
Multiemployer pension withdrawal expense
Losses at closed facilities (1)
MEPP liability adjustment due to interest rates
Ransomware recovery costs insurance proceeds (1)
Other (1)
Adjusted Results
Noncontrolling interests
Adjusted Net Income
These footnoted items represent the "Other adjustments" reported in the additional segment information table in our segment footnote, except the "Other" line includes adjustments of $1.4 million. The “Losses at closed facilities” line for the year ended September 30, 2022, includes $1.2 million of depreciation and amortization.
We discuss certain of these charges in more detail in “ Note 5. Restructuring and Other Costs, Net ”, “ Note 8. Segment Information ” and “ Note 19. 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 ”.
We also use the non-GAAP financial measure “Consolidated Adjusted EBITDA”, along with other measures such as Adjusted EBITDA (a GAAP measure of segment performance our CODM uses to evaluate our segment results), to evaluate our overall performance. The composition of Adjusted EBITDA is not addressed or prescribed by GAAP.
Management believes that the most directly comparable GAAP measure to Consolidated Adjusted EBITDA is "Net (loss) income 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, net, impairment of goodwill and mineral rights, Gain on sale of RTS and Chattanooga, 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 in making financial, operating and planning decisions and when evaluating our performance relative to other periods.
Set forth below is a reconciliation of the non-GAAP financial measure Consolidated Adjusted EBITDA to Net (loss) income attributable to common stockholders periods indicated (in millions).
Year Ended September 30,
Net (loss) income attributable to common stockholders
Adjustments: (1)
Less: Net income attributable to noncontrolling interests
Income tax (benefit) expense
Other expense (income), net
(Gain) loss on extinguishment of debt
Interest expense, net
Restructuring and other costs, net
Impairment of goodwill and mineral rights
Multiemployer pension withdrawal (income) expense
Gain on sale of RTS and Chattanooga
Depreciation, depletion and amortization
Other adjustments
Consolidated Adjusted EBITDA
The table above adds back expense or subtracts income for certain financial statement and segment footnote items to compute 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 8. Segment Information ” of the Notes to Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have prepared our accompanying consolidated financial statements in conformity with GAAP, which requires management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. Certain significant accounting policies are described in “ Note 1. Description of Business and Summary of Significant Accounting Policies ” of the Notes to Consolidated Financial Statements.
These critical accounting policies are both important to the portrayal of our financial condition and results of operations and require some of management’s most subjective and complex judgments. The accounting for these
matters involves the making of estimates based on current facts, circumstances and assumptions that, in management’s judgment, could change in a manner that would materially affect management’s future estimates with respect to such matters and, accordingly, could cause our future reported financial condition and results of operations to differ materially from those that we are currently reporting based on management’s current estimates.
Goodwill
We review the carrying value of our goodwill annually at the beginning of the fourth quarter of each fiscal year, or more often if events or changes in circumstances indicate that the carrying amount may exceed fair value 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. Factors that management must estimate when performing this step in the process include, among other items, sales volume, prices, EBITDA margins, capital expenditures and discount rates. The assumptions we use to estimate future cash flows are consistent with the assumptions that the reporting units use for internal planning purposes, which we believe would be generally consistent with that of a market participant. If we determine that the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If we determine that the carrying amount of the reporting unit exceeds its estimated fair value, we measure the goodwill impairment charge based on the excess of a reporting unit’s carrying amount over its fair value, but not in excess of the total amount of goodwill allocated to the respective reporting unit, as required under Accounting Standards Update (“ ASU ”) 2017-04 , “ Simplifying the Test for Goodwill ”. We describe our accounting policy for goodwill further in “ Note 1. Description of Business and Summary of Significant Accounting Policies — Goodwill ” of the Notes to Consolidated Financial Statements.
In fiscal 2023, we recorded a pre-tax, non-cash impairment charge of $1,893.0 million ($1,821.8 million after-tax) associated with our interim goodwill impairment analysis completed in the second quarter. See “ Note 8. Segment Information ” of the Notes to Consolidated Financial Statements for additional information.
During the fourth quarter of fiscal 2023, we completed our annual goodwill impairment testing. We considered factors such as, but not limited to, our expectations for 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 14.5%. 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. The fair value of our Consumer Packaging reporting unit exceeded its carrying value by 30%. However, our Corrugated Packaging and Distribution reporting units had fair values that exceeded their respective carrying values by less than 10%. Our Corrugated Packaging reporting unit had a narrow fair value cushion due to the goodwill impairment charge recorded for the reporting unit in the second quarter of fiscal 2023 and the fair value accounting related to the Mexico Acquisition.
If we had concluded that it was appropriate to increase the discount rate we used by 100 basis points, the fair value of only our Consumer Packaging reporting unit would have continued to exceed its carrying value. In our fiscal 2023 annual goodwill impairment analysis, projected future cash flows for the Corrugated Packaging and Distribution reporting units were discounted at 9.5% and 14.5%, respectively. Based on the discounted cash flow model and holding other valuation assumptions constant, the discount rates for Corrugated Packaging and Distribution reporting units would have to be increased to 9.9% and 15.4%, respectively, in order for the estimated fair value of the reporting units to fall below their carrying values.
At September 30, 2023, the Corrugated Packaging, Consumer Packaging and Distribution reporting units had $2,603.7 million, $1,506.6 million and $138.4 million of goodwill, respectively. Our Global Paper reporting unit had no goodwill. Because the fair values of the Corrugated Packaging and Distribution reporting units are not substantially more than their carrying values, these reporting units have greater risk of future impairments should
we experience adverse changes in our assumptions, estimates, or market factors. If the assumptions, estimates, and market factors underlying our fair value determinations change adversely, we may be exposed to additional impairment charges, which could be material. Additionally, there are certain risks inherent to our operations as described in Item 1A. “ Risk Factors ”.
Subsequent to our annual test, we monitored industry economic trends through the end of fiscal 2023 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.
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 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 impairment indicators are based on legal factors, market conditions and operational performance. Future events could cause us to conclude that impairment indicators exist and that assets associated with a particular operation are impaired. Evaluating impairment also requires us to estimate future operating results and cash flows, which also require judgment by management.
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 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 effect on our cash flows or materially our results of operations in future periods depending upon their ultimate resolution. A 1% change in our tax rate would have increased or decreased tax expense by approximately $17 million for fiscal 2023. A 1% change in our tax rate used to compute deferred tax liabilities and assets, as recorded on the September 30, 2023 consolidated balance sheet, would have increased or decreased tax expense by approximately $100 million for fiscal 2023.
Pension
The funded status of our qualified and non-qualified U.S. and non-U.S. pension plans increased $170.5 million in fiscal 2023. Our U.S. qualified and non-qualified pension plans were overfunded by $450.0 million as of September 30, 2023. Our non-U.S. pension plans were under funded by $41.7 million as of September 30, 2023. Our U.S. pension plan benefit obligations were positively impacted in fiscal 2023 primarily by a 61-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 2023 by a 73-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 2023 pension expense (amounts in the table in parentheses reflect additional income, in millions):
Pension Plans
25 Basis
Point
Increase
25 Basis
Point
Decrease
Discount rate
Compensation level
Expected long-term rate of return on plan assets
Interest crediting rate
New Accounting Standards
See “ Note 1. Description of Business and Summary of Significant Accounting Policies ” of the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective expected dates of adoption and expected effects on our results of operations and financial condition.
Item 7A. QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in, among other things, interest rates, foreign currencies and commodity prices. See Item 1A. “ Risk Factors ” for additional information. We aim to identify and understand these risks and then implement strategies to manage them. When evaluating these strategies, we evaluate the fundamentals of each market, our sensitivity to movements in pricing, and underlying accounting and business implications. Our chief executive officer or chief financial officer must approve the execution of all transactions contemplated in accordance with our Financial and Commodity Risk Management Corporate Policy. The sensitivity analyses we present below do not consider the effect of possible adverse changes in the general economy, nor do they consider additional actions we may take to mitigate our exposure to such changes. We may not be successful in managing these risks.
Containerboard and Paperboard Shipments
We are exposed to market risk related to our sales of containerboard and paperboard. We sell a significant portion of our mill production and converted products pursuant to contracts that provide that prices are either fixed for specified terms or provide for price adjustments based on negotiated terms, including changes in specified index prices. We have the capacity to annually ship approximately 10.6 million tons from our containerboard mills and approximately 4.0 million tons from our paperboard mills, although our mill system operating rates may vary from year to year due to changes in market and other factors. Including a partial year adjustment to capacity to reflect footprint actions, where appropriate, our simple average mill system operating rates for the last three fiscal years averaged 88%. A hypothetical $10 per ton change in the price of containerboard and paperboard throughout the year based on our capacity would impact our sales by approximately $106 million and $40 million, respectively.
Energy
Energy is one of the most significant costs of our mill operations. The cost of natural gas (typically measured in one million British Thermal Units (" MMBtu ")), coal, oil, electricity and purchased biomass fuel at times has fluctuated significantly. Energy is one of the most significant costs of our mill operations. In our recycled paperboard mills, we
use primarily natural gas and electricity, supplemented at certain mills with fuel oil, to generate steam used in the paper making process. In our virgin fiber mills, we use biomass, natural gas, fuel oil and coal to generate steam used in the pulping and paper making processes and to generate some or all the electricity used on site. We primarily use purchased electricity and natural gas to operate our converting facilities. We generally purchase these products from suppliers at market or tariff rates. Our energy costs decreased in fiscal 2023 compared to fiscal 2022. From time to time, we use commodity contracts to hedge energy exposures, as discussed in more detail below.
We spent approximately $1,164 million and $1,263 million on all energy sources in fiscal 2023 and 2022, respectively to operate our facilities. Natural gas and electricity each account for approximately 30% to 50% of our energy purchases depending upon pricing. We consumed approximately 87 million MMBtu of natural gas in fiscal 2023, although the amount of energy we consume may vary from year to year due to production levels and other factors. A hypothetical 10% change in the price of energy throughout the year would impact our cost of energy by approximately $116 million based on fiscal 2023 pricing and consumption.
Recycled Fiber
Recycled fiber is the principal raw material we use in the production of recycled paperboard and a portion of our containerboard. In fiscal 2023 and 2022, we consumed approximately 6.4 million and 5.7 million tons of recycled fiber, respectively. The increase in fiscal 2023 was primarily associated with the operations acquired in the Mexico Acquisition. Our purchases of old corrugated containers and double-lined kraft clippings account for our largest recycled fiber costs and made up approximately 85% to 90% of our recycled fiber purchases in fiscal 2023. The remaining 10% to 15% of our recycled fiber purchases consisted of a number of other grades of recycled paper. The mix of recycled fiber may vary due to factors such as market demand, availability and pricing. Recycled fiber prices can fluctuate significantly and were lower in fiscal 2023 compared to fiscal 2022. While the amount of recycled fiber we consume may vary from year to year due to production levels and other factors, based on fiscal 2023 recycled fiber usage, adjusted for a full year of the operations acquired in the Mexico Acquisition, we would expect to consume approximately 6.5 million tons of recycled fiber. A hypothetical $10 per ton change in recycled fiber prices for a fiscal year would impact our costs by approximately $65 million.
Virgin Fiber
Virgin fiber is the principal raw material we use in the production of a portion of our containerboard, bleached paperboard and market pulp. While virgin fiber prices have generally been more stable than recycled fiber prices, they also fluctuate, particularly due to significant changes in weather, such as during prolonged periods of heavy rain or drought, or during housing construction slowdowns or accelerations. Virgin fiber prices were relatively flat in fiscal 2023 compared to fiscal 2022. A hypothetical 10% change in virgin fiber prices in our mills for a fiscal year would impact our costs by approximately $130 million.
Freight
Inbound and outbound freight is a significant expenditure for us. Factors that influence our freight expense include distance between our shipping and delivery locations, distance from customers and suppliers, mode of transportation (rail, truck, intermodal and ocean) and freight rates, which are influenced by supply and demand and fuel costs, primarily diesel. We experienced higher freight costs and some distribution delays in both fiscal 2023 and 2022. A hypothetical 10% change in freight costs for fiscal 2023 and 2022 would have impacted our costs by approximately $188 million and $220 million, respectively.
Interest Rates
We are exposed to changes in interest rates, primarily as a result of our short-term and long-term debt. As discussed below, we may from time to time use interest rate swap agreements to manage the interest rate characteristics of a portion of our outstanding debt. Based on the amounts and mix of our fixed and floating rate debt at September 30, 2023 and 2022, if market interest rates change an average of 100 basis points, our annual interest expense would be impacted by approximately $21 million and $10 million, respectively. We determined these amounts by considering the impact of the hypothetical interest rates on our borrowing costs. This analysis does not consider the effects of changes in the level of overall economic activity that could exist in such an environment.
Derivative Instruments / Forward Contracts
In fiscal 2023 and 2022, we entered into various natural gas commodity derivatives that were designated as cash flow hedges for accounting purposes. Therefore, the entire change in fair value of the financial derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction, and in the same period or periods during which the forecasted transaction affects earnings. At September 30, 2023 and September 30, 2022, the notional amount of our natural gas commodity derivatives was 22.0 million and 18.3 million MMBtu, respectively. Based on our open contracts as of September 30, 2023 and September 30, 2022, the effect of a 10% change in the price per MMBtu, other than for the first period which was already priced, would impact Cost of goods sold by approximately $6 million and $10 million, respectively.
We periodically may issue and settle foreign currency denominated debt, exposing us to the effect of changes in spot exchange rates between loan issue and loan repayment dates and changes in spot exchange rates on open balances at each balance sheet date. From time to time, we may use foreign exchange contracts to hedge these exposures with terms of generally one to three months. At September 30, 2023, there were no foreign exchange contract derivatives outstanding. At September 30, 2022, the notional amount of our foreign currency exchange contract derivative was 8.0 billion Mexican pesos ($389.9 million). Based on the open foreign exchange contracts as of September 30, 2022, the effect of a 1% change in exchange rates would impact Other (expense) income, net by approximately $4 million. Although foreign currency sensitive instruments expose us to market risk, fluctuations in the value of these instruments are mitigated by expected offsetting fluctuations in the foreign currency denominated debt exposures.
We periodically may also enter into interest rate swaps to manage the interest rate risk associated with a portion of our outstanding debt but currently have no active interest rate swaps. Interest rate swaps are either designated for accounting purposes as cash flow hedges of forecasted floating interest payments on variable rate debt or fair value hedges of fixed rate debt, or we may elect not to treat them as accounting hedges. We may enter into swaps or forward contracts on certain commodities to manage the price risk associated with forecasted purchases or sales of those commodities.
See “ Note 16. Derivatives ” and “ Note 20. Accumulated Other Comprehensive Loss and Other Comprehensive Income (Loss) ” of the Notes to Consolidated Financial Statements for additional information regarding our derivative instruments.
Pension Plans
Our pension plans are influenced by trends in the financial markets and the regulatory environment, among other factors. Adverse general stock market trends and falling interest rates increase plan costs and liabilities. During fiscal 2023 and 2022, factoring in our corridor as appropriate, the effect of a 0.25% decrease in the discount rate would have reduced pre-tax income by approximately $8 million and $8 million, respectively. During fiscal 2023 and 2022, the effect of a 0.25% increase in the discount rate would have increased pre-tax income by $8 million and decreased pre-tax income by $5 million, respectively. Similarly, MEPPs in which we participate could experience similar circumstances which could impact our funding requirements and therefore expenses. See “ Note 6. Retirement Plans — Multiemployer Plans ” of the Notes to Consolidated Financial Statements for additional information.
Foreign Currency
We predominately operate in markets in the U.S. but derived 24.4% of our net sales in fiscal 2023 from outside the U.S. through international operations, some of which were transacted in U.S. dollars. In addition, certain of our domestic operations have sales to foreign customers. Although we are impacted by the exchange rates of a number of currencies, our largest exposures are generally to the Brazilian Real, British Pound, Canadian dollar, Euro and Mexican Peso. In fiscal 2023, our largest exposures included the Mexican Peso, Brazilian Real and British Pound.
In conducting our foreign operations, we also make intercompany sales and receive royalties and dividends denominated in different currencies. These activities expose us to the effect of changes in foreign currency exchange rates. Flows of foreign currencies into and out of our operations are generally stable and regularly occurring and are recorded at fair market value in our financial statements.
At times, certain of our foreign subsidiaries have U.S. dollar-denominated external debt. In these instances, we may hedge the non-functional currency exposure with derivatives. We issue intercompany loans to and receive foreign cash deposits from our foreign subsidiaries in their local currencies, exposing us to the effect of changes in spot exchange rates between loan issue and loan repayment dates and changes in spot exchange rates from deposits. From time to time, we may use foreign-exchange hedge contracts with terms of generally less than one year to hedge these exposures. Although our derivative and other foreign currency sensitive instruments expose us to market risk, fluctuations in the value of these instruments are mitigated by expected offsetting fluctuations in the matched exposures.
During fiscal 2023 and 2022, the effect of a hypothetical 10% change in foreign currencies to which we have exposure compared to the U.S. dollar would have impacted our income before income taxes by approximately $12 million and $36 million, respectively.
During fiscal 2023 and 2022, the effect of a hypothetical 1% change in exchange rates would have impacted accumulated other comprehensive income by approximately $50 million and $32 million, respectively. This impact does not consider the effects of a stronger or weaker U.S. dollar on our ability to compete for export business or the overall economic activity that could exist in such an environment. Changes in foreign exchange rates could impact the price and the demand for our products; for instance, a strengthening U.S. dollar may cause exports to become more expensive to foreign customers that have to pay for them in other currencies.
Item 8. FINANCIAL STATEMEN TS AND SUPPLEMENTARY DATA
Index to Financial Statements
Description
Page
Reference
Consolidated Statements of Operations
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Balance Sheets
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Note 1. Description of Business and Summary of Significant Accounting Policies
Note 2. Revenue Recognition
Note 3. Acquisitions
Note 4. Held For Sale
Note 5. Restructuring and Other Costs, Net
Note 6. Retirement Plans
Note 7. Income Taxes
Note 8. Segment Information
Note 9. Interest
Note 10. Inventories
Note 11. Property, Plant and Equipment
Note 12. Other Intangible Assets
Note 13. Fair Value
Note 14. Debt
Note 15. Leases
Note 16. Derivatives
Note 17. Special Purpose Entities
Note 18. Related Party Transactions
Note 19. Commitments and Contingencies
Note 20. Accumulated Other Comprehensive Loss and Other Comprehensive Income (Loss)
Note 21. Stockholders’ Equity
Note 22. Share-Based Compensation
Note 23. Earnings Per Share
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 )
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting
Management’s Annual Report on Internal Control Over Financial Reporting
WESTROCK COMPANY
CONSOLIDATED STATEM ENTS OF OPERATIONS
Year Ended September 30,
(In millions, except per share data)
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expense excluding
intangible amortization
Selling, general and administrative intangible amortization
expense
Multiemployer pension withdrawal (income) expense
Restructuring and other costs, net
Impairment of goodwill and mineral rights
Operating (loss) profit
Interest expense, net
Gain (loss) on extinguishment of debt
Pension and other postretirement non-service (cost) income
Other (expense) income, net
Equity in income of unconsolidated entities
Gain on sale of RTS and Chattanooga
(Loss) income before income taxes
Income tax benefit (expense)
Consolidated net (loss) income
Less: Net income attributable to noncontrolling interests
Net (loss) income attributable to common stockholders
Basic (loss) earnings per share attributable to common
stockholders
Diluted (loss) earnings per share attributable to common
stockholders
See Accompanying Notes
WESTROCK COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Year Ended September 30,
(In millions)
Consolidated net (loss) income
Other comprehensive income (loss), net of tax:
Foreign currency:
Foreign currency translation gain (loss)
Reclassification of previously unrealized net foreign
currency loss upon consolidation of equity investment
Reclassification of previously unrealized net foreign
currency gain upon sale of RTS
Derivatives:
Deferred loss on cash flow hedges
Reclassification adjustment of net loss on cash
flow hedges included in earnings
Defined benefit pension and other postretirement benefit
plans:
Net actuarial gain (loss) arising during period
Amortization and settlement recognition of net actuarial
loss, included in pension and postretirement cost
Prior service cost arising during period
Amortization and curtailment recognition of prior service
cost, included in pension and postretirement cost
Reclassification of net pension adjustment upon sale of RTS
Other comprehensive income (loss), net of tax
Comprehensive (loss) income
Less: Comprehensive income attributable to
noncontrolling interests
Comprehensive (loss) income attributable to common
stockholders
See Accompanying Notes
WESTROCK COMPANY
CONSOLIDATED B ALANCE SHEETS
September 30,
(In millions, except per share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable (net of allowances of $ 60.2 and $ 66.3 )
Inventories
Other current assets (amount related to SPEs of $ 862.1 and $ 0 )
Assets held for sale
Total current assets
Property, plant and equipment, net
Goodwill
Intangibles, net
Prepaid pension asset
Other noncurrent assets (amount related to SPEs of $ 382.7 and $ 1,253.0 )
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt
Accounts payable
Accrued compensation and benefits
Other current liabilities (amount related to SPEs of $ 776.7 and $ 0 )
Total current liabilities
Long-term debt due after one year
Pension liabilities, net of current portion
Postretirement benefit liabilities, net of current portion
Deferred income taxes
Other noncurrent liabilities (amount related to SPEs of $ 330.2 and $ 1,117.8 )
Commitments and contingencies (Note 19)
Redeemable noncontrolling interests
Equity:
Preferred stock, $ 0.01 par value; 30.0 million shares authorized; no
shares outstanding
Common stock, $ 0.01 par value; 600.0 million shares authorized;
256.4 million and 254.4 million shares outstanding at
September 30, 2023 and September 30, 2022, respectively
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
See Accompanying Notes
WESTROCK COMPANY
CONSOLIDATED STAT EMENTS OF EQUITY
Year Ended September 30,
(In millions, except per share data)
Number of Shares of Common Stock Outstanding:
Balance at beginning of fiscal year
Issuance of common stock, net of stock received for tax
withholdings
Purchases of common stock (1)
Balance at end of fiscal year
Common Stock:
Balance at beginning of fiscal year
Issuance of common stock, net of stock received for tax
withholdings
Purchases of common stock (1)
Balance at end of fiscal year
Capital in Excess of Par Value:
Balance at beginning of fiscal year
Compensation expense under share-based plans
Issuance of common stock, net of stock received for tax
withholdings
Purchases of common stock (1)
Other
Balance at end of fiscal year
Retained Earnings:
Balance at beginning of fiscal year
Adoption of accounting standards (2)
Net (loss) income attributable to common stockholders
Dividends declared (per share - $ 1.10 , $ 1.00 and $ 0.88 ) (3)
Issuance of common stock, net of stock received for tax
withholdings
Purchases of common stock (1)
Balance at end of fiscal year
Accumulated Other Comprehensive Loss:
Balance at beginning of fiscal year
Other comprehensive income (loss), net of tax
Balance at end of fiscal year
Total Stockholders’ equity
Noncontrolling Interests: (4)
Balance at beginning of fiscal year
Net (loss) income
Distributions and adjustments to noncontrolling interests
Balance at end of fiscal year
Total Equity
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 (a portion of which settled after September 30, 2021).
For fiscal 2021, the amount relates to the adoption of ASU 2016-13, “ Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments ”.
Includes cash dividends and dividend equivalent units declared on certain restricted stock units and restricted stock.
Excludes amounts related to contingently redeemable noncontrolling interests, which are separately classified outside of permanent equity in the consolidated balance sheets.
See Accompanying Notes
WESTROCK COMPANY
CONSOLIDATED STATEM ENTS OF CASH FLOWS
Year Ended September 30,
(In millions)
Operating activities:
Consolidated net (loss) income
Adjustments to reconcile consolidated net (loss) income to net
cash provided by operating activities:
Depreciation, depletion and amortization
Deferred income tax benefit
Share-based compensation expense
401(k) match and company contribution in common stock
Pension and other postretirement funding (more) less than cost (income)
Cash surrender value increase in excess of premiums paid
Equity in income of unconsolidated entities
Gain on sale of RTS and Chattanooga
Gain on sale of other businesses
Gain on sale of investment
Impairment of goodwill and mineral rights
Other impairment adjustments
(Gain) loss on disposal of plant, equipment and other, net
Other
Change in operating assets and liabilities, net of acquisitions and
divestitures:
Accounts receivable
Inventories
Other assets
Accounts payable
Income taxes
Accrued liabilities and other
Net cash provided by operating activities
Investing activities:
Capital expenditures
Cash paid for purchase of businesses, net of cash acquired
Proceeds from corporate owned life insurance
Proceeds from sale of RTS and Chattanooga, net
Proceeds from sale of other businesses
Proceeds from currency forward contracts
Proceeds from the sale of unconsolidated entities
Proceeds from sale of investment
Proceeds from sale of property, plant and equipment
Proceeds from property, plant and equipment insurance settlement
Other
Net cash used for investing activities
Financing activities:
Additions to revolving credit facilities
Repayments of revolving credit facilities
Additions to debt
Repayments of debt
Changes in commercial paper, net
Other debt (repayments) additions, net
Purchases of common stock
Cash dividends paid to stockholders
Other
Net cash used for financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
See Accompanying Notes
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Su mmary of Significant Accounting Policies
Description of Business
Unless the context otherwise requires, “ we ” , “ us ” , “ our ” , “ WestRock ” and “the Company ” refer to WestRock Company, its wholly-owned subsidiaries and its partially-owned consolidated subsidiaries.
WestRock is a multinational provider of sustainable fiber-based paper and packaging solutions. We partner with our customers to provide differentiated, sustainable paper and packaging solutions that help them win in the marketplace. Our team members support customers around the world from our operating and business locations in North America, South America, Europe, Asia and Australia.
On September 29, 2023, we completed the sale of our Seven Hills mill joint venture in Lynchburg, VA and received $ 11.0 m illion of cash proceeds, subject to certain customary adjustments, and recorded an aggregate pre-tax net gain on sale of $ 4.3 million; $ 7.6 million was recorded in the Equity in income of unconsolidated entities line item in our consolidated statements of operations that was partially offset by a $ 3.3 million loss on sale of property, plant and equipment that was recorded in cost of goods sold.
On September 8, 2023, we sold our interior partitions converting operations (our ownership interest in RTS Packaging, LLC) and our Chattanooga, TN uncoated recycled paperboard mill to our joint venture partner and received $ 318.2 million of net cash proceeds, including a preliminary working capital adjustment and other customary adjustments. We recorded a pre-tax gain on sale of $ 238.8 million which is recorded in "Gain on sale of RTS and Chattanooga" in our consolidated statements of operations, excluding divestiture costs. Divestiture costs are expensed as incurred and recorded within Restructuring and other costs, net. See “ Note 5. Restructuring and Other Costs, Net ” for additional information.
On June 16, 2023, we sold our ownership interest in an unconsolidated displays joint venture for $ 43.8 million in cash and recorded a pre-tax gain on sale of $ 19.3 million recorded in the Equity in income of unconsolidated entities line item in our consolidated statements of operations including a de minimis adjustment in the fourth quarter.
On December 1, 2022 , we completed our acquisition of the remaining 67.7 % interest in Grupo Gondi for $ 969.8 million in cash and the assumption of debt. We accounted for this acquisition as a business combination resulting in its consolidation. See “ Note 3. Acquisitions ” for additional information.
On December 1, 2022, we sold our Eaton, IN, and Aurora, IL uncoated recycled paperboard mills for $ 50 million, subject to a working capital adjustment. We received proceeds of $ 25 million, a preliminary working capital settlement of $ 0.9 million and are financing the remaining $ 25 million. During the third quarter of fiscal 2023, we recorded a de minimis final working capital adjustment. Pursuant to the terms of the sale agreement, we transferred control of these mills to the buyer and recorded a pre-tax gain on sale of $ 11.2 million in Other (expense) income, net in our consolidated statements of operations.
Transaction Agreement with Smurfit Kappa
On September 12, 2023, we entered into a Transaction Agreement with Smurfit Kappa, Cepheidway Limited (to be renamed Smurfit WestRock plc), ListCo and Merger Sub. The Transaction Agreement provides, among other things, and subject to the satisfaction or waiver of the conditions set forth therein, that (a) pursuant to the Scheme each issued ordinary share of Smurfit Kappa will be exchanged for one ListCo Share, as a result of which Smurfit Kappa will become a wholly owned subsidiary of ListCo, and (b) following the implementation of the Scheme, Merger Sub will merge with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of ListCo. As a result of the Merger, each share of our Common Stock, with certain exceptions, will be converted into the right to receive one ListCo Share and $ 5.00 in cash. All shares owned by the Company, any Company subsidiary, Smurfit Kappa, Merger Sub or any of their respective subsidiaries will be cancelled and will cease to exist, and no consideration will be delivered in exchange therefor. The Transaction Agreement also provides a mechanism for converting outstanding Company equity awards to ListCo awards. The Transaction is
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
expected to close in the second calendar quarter of 2024, conditional upon regulatory approvals, shareholder approvals and satisfaction of other closing conditions. We expect that the ListCo shares will be (i) registered under the Securities Exchange Act of 1934, as amended, and listed on the NYSE and (ii) listed on the FCA and admitted to trading on the main market for listed securities of LSE. Shares of our Common Stock will be delisted from the NYSE and deregistered under the Exchange Act.
The Transaction is subject to certain conditions set forth in the Transaction Agreement, including, but not limited to: certain regulatory clearances, approval by the shareholders and stockholders of both companies (75% or more for Smurfit Kappa shareholders and a majority for our stockholders), the registration statement for the offer of ListCo Shares being declared effective by the SEC and the approval of the ListCo Shares for listing on the NYSE.
The Transaction Agreement contains certain termination rights for both parties. Upon termination of the Transaction Agreement under specified circumstances, including if our board changes or withdraws its recommendation to our stockholders or willfully breaches its non-solicitation covenant, we will be required to make a payment to Smurfit Kappa equal to $ 147 million in cash. If the Transaction Agreement is terminated in connection with the failure to obtain our stockholders’ approval, we will be required to make a payment to Smurfit Kappa equal to $ 57 million in cash. Smurfit Kappa will be required to make payments to us in connection with the termination of the Transaction Agreement under specified circumstances.
The foregoing summary of the Transaction Agreement does not purport to be complete and is subject to and qualified in its entirety by the full text of the Transaction Agreement.
Basis of Presentation and Principles of Consolidation
The preparation of financial statements in accordance with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. Actual results may differ from these estimates.
The consolidated financial statements include the accounts of WestRock and our partially owned subsidiaries for which we have a controlling financial interest, including variable interest entities for which we are the primary beneficiary.
Equity investments in which we exercise significant influence but do not control and are not the primary beneficiary are accounted for as equity method investments. Investments without a readily determinable value in which we are not able to exercise significant influence over the investee are accounted for under the measurement alternative (i.e., cost less impairment, adjusted for any qualifying observable price changes). Our investments accounted for under the equity method or the measurement alternative method are not material either individually or in the aggregate. We have eliminated all significant intercompany accounts and transactions. See “ Note 8. Segment Information ” for additional information on our equity method investments.
Reclassifications and Adjustments
Certain amounts in prior periods have been reclassified to conform with the current year presentation.
Immaterial Presentation Correction
In the third quarter of fiscal 2023, we evaluated our financing facilities, determined that the borrowings and repayments for certain facilities should be presented gross instead of net within financing cash flow activities on our consolidated statements of cash flows, and corrected the presentation of relevant prior period amounts. The correction increased both Additions to debt and Repayments of debt by $ 385.0 million and increased both Additions to revolving credit facilities and Repayments of revolving credit facilities by $ 5.0 million in fiscal 2022, resulting in Additions to debt of $ 888.2 million, Repayments of debt of $ 1,376.5 million, Additions to revolving credit facilities of $ 382.4 million and Repayments of revolving credit facilities of $ 378.3 million, with no change to Net cash used for financing activities. The correction has no effect on the previously reported net cash flows from operating or investing activities. Additionally, the correction did not impact cash flows reported for fiscal 2021. Management does not believe the correction to be material to our current or previously filed financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Ransomware Incident
As previously disclosed, on January 23, 2021, we detected a ransomware incident impacting certain of our systems. Promptly upon our detection of this incident, we initiated response and containment protocols and our security teams, supplemented by leading cyber defense firms, worked to remediate this incident. These actions included taking preventative measures, such as shutting down certain systems out of an abundance of caution, as well as taking steps to supplement existing security monitoring, scanning and protective measures. In our Form 10-Q for the second quarter of fiscal 2021, we announced that all systems were back in service.
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 of 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 in March 2021 or earlier. Our mill system production was approximately 115,000 tons lower than planned for the quarter ended March 31, 2021 as a result of this incident. While shipments from some of our facilities initially lagged behind production levels, this gap closed as systems were restored during the second quarter of fiscal 2021. In locations where technology issues were identified, we used alternative methods, in many cases manual methods, to process and ship orders. We systematically brought our information systems back online in a controlled, phased approach.
We estimated the pre-tax income impact of the lost sales and operational disruption of this incident on our operations in the second quarter of fiscal 2021 was approximately $ 50 million, as well as approximately $ 20 million of ransomware recovery costs, primarily professional fees. In addition, we incurred approximately $ 9 million of ransomware recovery costs in the third quarter of fiscal 2021. In the fourth quarter of fiscal 2021, we recorded a $ 15 million credit for preliminary recoveries – approximately $ 10 million as a reduction of SG&A expense excluding intangible amortization and approximately $ 5 million as a reduction of Cost of goods sold. I n fiscal 2022, we recorded a $ 57.2 million credit for ransomware insurance recoveries, recording $ 50.6 million of business interruption recoveries as a reduction of Cost of goods sold and $ 6.6 million of direct cost recoveries as a reduction of SG&A expense excluding intangible amortization. In fiscal 2023, we recorded a $ 10.0 million credit for ransomware insurance recoveries as a reduction of Cost of goods sold. We present ransomware recoveries received as Net cash provided by operating activities in our consolidated statements of cash flows. Our recoveries related to the ransomware incident are now complete.
In order to contain and remediate the cybersecurity incident, we engaged a leading cybersecurity defense firm to complete a forensics investigation and performed short-term mitigation actions in the latter half of 2021. Mitigations performed included the execution of a company-wide password reset and the deployment of security tooling across all our servers and workstations. Additionally, to address longer term security objectives, we developed a multi-year security and resiliency roadmap, aimed to strengthen the company’s ability to detect, respond, and recover from security incidents. This roadmap included initiatives to bolster our information security posture across the enterprise, and to deploy technology and process improvements to allow for faster and more effective incident response and recovery. More specifically, key areas of focus for the resiliency roadmap included: strengthening security monitoring controls, improving security at our operating locations, automating identity and access management, expanding third-party security, modernizing the network and file and print infrastructure, and updating backup capabilities.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates, and the differences could be material.
We base our estimates on the current information available, our experiences and various other assumptions believed to be reasonable under the circumstances. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, pricing
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
cycles relating to industry capacity, product mix, and in some cases, actuarial techniques. We regularly evaluate these significant factors and make adjustments where facts and circumstances dictate.
Revenue Recognition
We generally recognize revenue on a point-in-time basis when the customer takes title to the goods and assumes the risks and rewards for the goods, which coincide with the transfer of control of our goods to the customer. Additionally, we manufacture certain customized products that have no alternative use to us (since they are made to specific customer specifications), and we believe that for certain customers we have a legally enforceable right to payment for performance completed to date on these products, including a reasonable profit. For products that meet these two criteria, we recognize revenue “over time”. This results in revenue recognition prior to the date of shipment or title transfer for these products and results in the recognition of a contract asset (unbilled receivables) with a corresponding reduction in finished goods inventory on our balance sheet.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Our revenues are primarily derived from fixed consideration. However, we net provisions for discounts, returns, allowances, customer rebates and other adjustments against our gross sales. Such adjustments are based on historical experience which is consistent with the most likely method as provided in ASC 606 “ Revenue from Contracts with Customers ” (“ ASC 606 ”).
As permitted by ASC 606, we have elected to treat costs associated with obtaining new contracts as expenses when incurred if the amortization period of the asset we would recognize is one year or less. We do not record interest income when the difference in timing of control transfer and customer payment is one year or less. We also account for sales and other taxes that are imposed on and concurrent with individual revenue-producing transactions between a customer and us on a net basis which excludes the taxes from our net sales.
Shipping and Handling Costs
We classify shipping and handling costs, such as freight to our customers’ destinations, as a component of cost of goods sold. When shipping and handling costs are included in the sales price charged for our products, they are recognized in net sales since we treat shipping and handling as fulfilment activities.
Cash Equivalents
We consider all highly liquid investments that mature three months or less from the date of purchase to be cash equivalents. The carrying amounts of our cash and cash equivalents approximate fair market values. We place our cash and cash equivalents primarily with large credit-worthy banks, which limits the amount of our credit exposure.
Accounts Receivable and Allowances
We derive our accounts receivable from revenue earned from customers located primarily in North America, South America, Europe, Asia and Australia. Given our diverse customer base, we have limited exposure to credit loss from any particular customer or industry segment, and hence we generally do not require collateral. We perform an evaluation of lifetime expected credit losses inherent in our accounts receivable at each balance sheet date. Such an evaluation includes consideration of historical loss experience, trends in customer payment frequency, present economic conditions, and judgment about the future financial health of our customers and industry sector. The average of our receivables collection is within 30 to 60 days . We are a party to accounts receivable monetization agreements to sell to third-party financial institutions all of the short-term receivables generated from certain customer trade accounts. See “ Note 13. Fair Value — Accounts Receivable Monetization Agreements ” for additional information.
We state accounts receivable at the amount owed by the customer, net of an allowance for estimated credit impairment losses, returns and allowances, cash discounts and other adjustments. We do not discount accounts receivable because we generally collect accounts receivable over a relatively short time. We charge off receivables when they are determined to be no longer collectible. We recorded credit impairment losses of $ 5.9 million and $ 4.6 million in fiscal 2023 and 2022, respectively, and income of $ 9.4 million in fiscal 2021.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table represents a summary of the changes in the reserve for allowance for estimated credit impairment losses, returns and allowances, and cash discounts for fiscal 2023, 2022 and 2021 (in millions):
Balance at beginning of fiscal year
Reduction in sales and charges to costs and expenses
Deductions
Balance at end of fiscal year
Inventories
We value our U.S. inventories at the lower of cost or market, with cost for the majority of our U.S. inventories determined on the last-in first-out (“ LIFO ”) basis. We value all other inventories at the lower of cost and net realizable value, with cost determined using methods that approximate cost computed on a first-in first-out inventory valuation method (“ FIFO ”) basis. These other inventories are primarily foreign inventories, distribution business inventories, spare parts inventories and certain inventoried supplies and aggregate to approximately 43 % and 35 % of FIFO cost of all inventory at September 30, 2023 and 2022, respectively. The increase in fiscal 2023 is primarily due to the Mexico Acquisition. See “ Note 10. Inventories ” for additional information.
Prior to the application of the LIFO method, our U.S. operating divisions use a variety of methods to estimate the FIFO cost of their finished goods inventories. Such methods include standard costs, or average costs computed by dividing the actual cost of goods manufactured by the tons produced and multiplying this amount by the tons of inventory on hand. Variances and other unusual items are analyzed to determine whether it is appropriate to include those items in the value of inventory. Examples of variances and unusual items that are considered to be current period charges include, but are not limited to, production levels, freight, handling costs, and wasted materials (spoilage) that are determined to be abnormal. Costs include raw materials and supplies, direct labor, indirect labor related to the manufacturing process, and depreciation and other factory overheads. Our inventoried spare parts are measured at average cost.
Leased Assets
When adopting the provisions of ASC 842, “Leases” we elected the package of three practical expedients permitted within the standard pursuant to which we did not reassess initial direct costs, lease classification or whether our contracts contain or are leases. We lease various real estate, including certain operating facilities, warehouses, office space and land. We also lease material handling equipment, vehicles and certain other equipment. We record our operating lease right-of-use (“ ROU ”) assets and liabilities at the commencement date of the lease based on the present value of lease payments over the lease term.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Our leases may include options to extend or terminate the lease. These options to extend are included in the lease term when it is reasonably certain that we will exercise that option. While some leases provide for variable payments, they are not included in the ROU assets and liabilities because they are not based on an index or rate. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Variable payments for equipment, vehicles and leases within supply agreements primarily relate to usage, repairs, and maintenance. As the implicit rate is not readily determinable for our leases, we apply a portfolio approach using an estimated incremental borrowing rate to determine the initial present value of lease payments over the lease terms on a collateralized basis over a similar term, which is based on market and company specific information. We use the unsecured borrowing rate and risk-adjust that rate to approximate a collateralized rate, and apply the rate based on the currency of the lease, which is updated on a monthly basis for measurement of new lease liabilities.
We have made an accounting policy election to not recognize an ROU asset and liability for leases with a term of 12 months or less unless the lease includes an option to renew or purchase the underlying asset that we are reasonably certain to exercise. In addition, the Company has applied the practical expedient to account for the lease and non-lease components as a single lease component for all of the Company's leases. See “ Note 15. Leases ” for additional information.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property, Plant and Equipment
We record property, plant and equipment at cost less accumulated depreciation. Cost includes major expenditures for improvements and replacements that extend useful lives, increase capacity, increase revenues or reduce costs, while normal maintenance and repairs are expensed as incurred. For financial reporting purposes, we provide depreciation and amortization primarily on a straight-line method generally over the estimated useful lives of the assets as follows:
Buildings and building improvements
15 - 40 years
Machinery and equipment
3 - 25 years
Transportation equipment
3 - 8 years
Generally, our machinery and equipment have estimated useful lives between 3 and 25 years ; however, select portions of machinery and equipment primarily at our mills have estimated useful lives up to 44 years. Greater than 90 % of the cost of our mill assets have useful lives of 25 years or less. Leasehold improvements are depreciated over the shorter of the asset life or the lease term, generally between 3 and 10 years .
Goodwill
In accordance with ASC 350, we review the carrying value of our goodwill annually at the beginning of the fourth quarter of each fiscal year, or more often if events or changes in circumstances indicate that the carrying amount may exceed fair value. We test goodwill for impairment at the reporting unit level, which is an operating segment or one level below an operating segment, referred to as a component. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. However, two or more components of an operating segment are aggregated and deemed a single reporting unit if the components have similar economic characteristics. The amount of goodwill acquired in a business combination that is assigned to one or more reporting units as of the acquisition date is the excess of the purchase price of the acquired businesses (or portion thereof) included in the reporting unit, over the fair value assigned to the individual assets acquired or liabilities assumed from a market participant perspective. Goodwill is assigned to the reporting unit(s) expected to benefit from the synergies of the combination even though other assets or liabilities of the acquired entity may not be assigned to that reporting unit. We determine recoverability by comparing the estimated fair value of the reporting unit to which the goodwill applies to the carrying value, including goodwill, of that reporting unit. We determine the fair value of each reporting unit using the present value of expected cash flows (“ Income Approach ”) or, as appropriate, a combination of the Income Approach and the guideline public company method (“ Market Approach ”).
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. Factors that management must estimate when performing this step in the process include, among other items, sales volume, prices, EBITDA margins, capital expenditures and discount rates. 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. Under the guideline public company method, we estimate the fair value of the reporting unit based on published EBITDA multiples of comparable public companies with similar operations and economic characteristics. The fair values determined by the discounted cash flow and guideline public company methods are weighted to arrive at the concluded fair value of the reporting unit. However, in instances where comparisons to our peers is less meaningful, no weight is placed on the guideline public company method to arrive at the concluded fair value of the reporting unit. If we determine that the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not . If we determine that the carrying amount of the reporting unit exceeds its estimated fair value, we measure the goodwill charge based on the excess of a reporting
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
unit’s carrying amount over its fair value, but not in excess of the total amount of goodwill allocated to the respective reporting unit, as required under ASU 2017-04 “ Simplifying the Test for Goodwill Impairment ”.
In the second quarter of fiscal 2023, due to the sustained decrease in our market capitalization and the further deterioration of macroeconomic conditions, including the impact of soft demand, pricing pressure and elevated inflation, which negatively affected our long-term forecasts in certain segments, we concluded that impairment indicators existed. As a result, we completed an interim quantitative goodwill impairment test in conjunction with our normal quarterly reporting process. Consistent with past practice, the estimated fair value of our reporting units was determined using a combination of Income Approach and the Market Approach. These fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors.
In fiscal 2023, we recorded a pre-tax, non-cash impairment charge of $ 1,893.0 million ($ 1,821.8 million after-tax) associated with our interim goodwill impairment analysis completed in the second quarter. See “ Note 8. Segment Information ” of the Notes to Consolidated Financial Statements for additional information.
During the fourth quarter of fiscal 2023, we completed our annual goodwill impairment testing. We considered factors such as, but not limited to, our expectations for 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 fro m 9.5 % to 14.5 %. We used perpetual growth rates ranging from 0.0 % to 1.0 %. All reporting units that have goodwill wer e noted to have a fair value that exceeded their carrying values. The fair value of our Consumer Packaging reporting unit exceeded its carrying value by 30 %. However, our Corrugated Packaging and Distribution reporting units had fair values that exceeded their respective carrying values by less than 10 %. Our Corrugated Packaging reporting unit had a narrow fair value cushion due to the goodwill impairment charge recorded for the reporting unit in the second quarter of fiscal 2023 and the fair value accounting related to the Mexico Acquisit ion.
If we had concluded that it was appropriate to increase the discount rate we used by 100 basis points, the fair value of only our Consumer Packaging reporting unit would have continued to exceed its carrying value. In our fiscal 2023 annual goodwill impairment analysis, projected future cash flows for the Corrugated Packaging and Distribution reporting units were discounted at 9.5 % and 14.5 %, respectively. Based on the discounted cash flow model and holding other valuation assumptions constant, the discount rates for Corrugated Packaging and Distribution reporting units would have to be increased to 9.9 % and 15.4 %, respectively, in order for the estimated fair value of the reporting units to fall below their carrying values.
At September 30, 2023, the Corrugated Packaging, Consumer Packaging and Distribution reporting units had $ 2,603.7 million, $ 1,506.6 million and $ 138.4 millio n of goodwill, respectively. Our Global Paper reporting unit had no goodwill. Because the fair values of the Corrugated Packaging and Distribution reporting units are not substantially more than their carrying values, these reporting units have greater risk of future impairments should we experience adverse changes in our assumptions, estimates, or market factors. If the assumptions, estimates, and market factors underlying our fair value determinations change adversely, we may be exposed to additional impairment charges, which could be material. Additionally, there are certain risks inherent to our operations as described in Item 1A. “ Risk Factors ”.
Subsequent to our annual test, we monitored industry economic trends through the end of fiscal 2023 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.
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 amortizable intangibles other than goodwill, is impaired. The ASC 360 test is a three-step test for assets that are “held and used” as that term is defined by ASC 360. We determine whether indicators of impairment are present. We review long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the long-lived asset might not be recoverable. If we determine that indicators of impairment are present, we determine whether the estimated undiscounted cash
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
flows for the potentially impaired assets are less than the carrying value. This requires management to estimate future cash flows through operations over the remaining useful life of the asset and its ultimate disposition. The assumptions we use to estimate future cash flows are consistent with the assumptions we use for internal planning purposes, updated to reflect current expectations. If our estimated undiscounted cash flows do not exceed the carrying value, we estimate the fair value of the asset and record an impairment charge if the carrying value is greater than the fair value of the asset. We estimate fair value using discounted cash flows, observable prices for similar assets, or other valuation techniques. We record assets classified as “held for sale” at the lower of their carrying value or estimated fair value less anticipated costs to sell. See “ Note 5. Restructuring and Other Costs, Net ” for additional information on long-lived asset write-offs included in restructuring charges recorded in conjunction with our decision to permanently cease operations at our Tacoma, WA and North Charleston, SC containerboard mills. Our long-lived assets, including intangible assets, remain recoverable.
Included in our long-lived assets are certain identifiable intangible assets. These intangible assets are amortized based on the approximate pattern in which the economic benefits are consumed or straight-line if the pattern was not reliably determinable. Estimated useful lives range from 2 to 40 years and have a weighted average life of approximately 15.9 years.
Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance. Future events could cause us to conclude that impairment indicators exist and that assets associated with a particular operation are impaired. Evaluating impairment also requires us to estimate future operating results and cash flows, which also require judgment by management. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
Cloud Computing Arrangements
We utilize cloud computing arrangements such as hosting arrangements which are service contracts, whereby we gain remote access to use software hosted by the vendor or another third party on an as-needed basis for a period of time in exchange for a subscription fee. Subscription fees are usually prepaid and recorded in operating expense over the related subscription period. Implementation costs for cloud computing arrangements are capitalized within Other current assets or Other noncurrent assets if certain criteria are met and consist of internal and external costs directly attributable to developing and configuring cloud computing software for its intended use. Amortization of capitalized implementation costs is recorded as operating expense on a straight-line basis over the term of the cloud computing arrangement, which is the non-cancellable period of the agreement, together with periods covered by renewal options which we are reasonably certain to exercise. The unamortized implementation costs related to our cloud computing arrangements were $ 51.7 million, $ 4.1 million and $ 1.1 million at September 30, 2023, 2022 and 2021, respectively. The increase in fiscal 2023 was related to our business systems transformation project.
Restructuring and Other Costs, Net
Our restructuring and other costs, net include primarily items such as restructuring portions of our operations, acquisition costs, integration costs and divestiture costs. We have restructured portions of our operations from time to time, have current restructuring initiatives taking place, and it is likely that we will engage in future restructuring activities.
When we close a facility, if necessary, we recognize a write-down to reduce the carrying value of related property, plant and equipment and lease ROU assets to their fair value and record charges for severance and other employee-related costs. We reduce the carrying value of the assets classified as held for sale to their estimated fair value less cost to sell. Any subsequent change in fair value less cost to sell prior to disposition is recognized as it is identified; however, no gain is recognized in excess of the cumulative loss previously recorded unless the actual selling price exceeds the original carrying value upon its ultimate sale. For facility closures, we also generally expect to record costs for equipment relocation, facility carrying costs and costs to terminate a lease or contract before the end of its term.
Although specific circumstances vary, our strategy has generally been to consolidate our sales and operations into large well-equipped facilities that operate at high utilization rates and take advantage of available capacity
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
created by operational excellence initiatives and/or further optimize our system following mergers and acquisitions or a changing business environment. Therefore, we generally transfer a substantial portion of each closed facility's production to our other facilities. We believe these actions have allowed us to more effectively manage our business.
Identifying and calculating the cost to exit operations requires certain assumptions to be made, the most significant of which are anticipated future liabilities, including severance costs, contractual obligations, and the adjustments of property, plant and equipment and lease ROU assets to their fair value. We believe our estimates are reasonable, considering our knowledge of the industries we operate in, previous experience in exiting activities and valuations we may obtain from independent third parties. Although our estimates have been reasonably accurate in the past, significant judgment is required, and these estimates and assumptions may change as additional information becomes available and facts or circumstances change. See “ Note 5. Restructuring and Other Costs, Net ” for additional information, including a description of the type of costs incurred.
Business Combinations
From time to time, we may enter into business combinations. In accordance with ASC 805, “ Business Combinations ”, we generally recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values as of the date of acquisition. We measure goodwill as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities including those related to debt, pensions and other postretirement plans, uncertain tax positions, contingent consideration and contingencies. Significant estimates and assumptions include subjective and/or complex judgments regarding items such as discount rates, customer attrition rates, economic lives and other factors, including estimating future cash flows that we expect to generate from the acquired assets.
The acquisition method of accounting also requires us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on our financial condition and results of operations. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record future impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be increased or decreased, or the acquired asset could be impaired.
Fair Value Measurements
We estimate fair values in accordance with ASC 820 “Fair Value Measurement”. ASC 820 provides a framework for measuring fair value and expands disclosures required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and a hierarchy prioritizing the inputs to valuation techniques. ASC 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Additionally, ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels:
Level 1 – Quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to level 1 inputs.
Level 2 – Observable inputs other than quoted prices in active markets.
Level 3 – Unobservable inputs for which there is little or no market data available. The fair value hierarchy gives the lowest priority to level 3 inputs.
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We incorporate credit valuation adjustments to reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in our fair value measurements.
Financial instruments not recognized at fair value on a recurring or nonrecurring basis include cash and cash equivalents, accounts receivables, certain other current assets, short-term debt, accounts payable, certain other current liabilities and long-term debt. With the exception of long-term debt, the carrying amounts of these financial instruments approximate their fair values due to their short maturities. The fair values of our long-term debt are estimated using quoted market prices or are based on the discounted value of future cash flows. We disclose the fair value of long-term debt in “ Note 14. Debt ” and our pension and postretirement assets and liabilities in “ Note 6. Retirement Plans ” . We have, or from time to time may have, financial instruments recognized at fair value including supplemental retirement savings plans (“ Supplemental Plans ”) that are nonqualified deferred compensation plans pursuant to which assets are invested primarily in mutual funds, interest rate derivatives, commodity derivatives or other similar class of assets or liabilities, the fair value of which are not significant. We measure the fair value of our mutual fund investments based on quoted prices in active markets. Additionally, we measure our derivative contracts, if any, based on observable inputs such as interest rates, yield curves, spot and future commodity prices, and spot and future exchange rates.
We measure certain assets and liabilities at fair value on a nonrecurring basis. These assets and liabilities include equity method investments when they are deemed to be other-than-temporarily impaired, investments for which the fair value measurement alternative is elected, assets acquired and liabilities assumed when they are deemed to be other-than-temporarily impaired, assets acquired and liabilities assumed in a merger or an acquisition or in a nonmonetary exchange, property, plant and equipment, ROU assets related to operating leases, goodwill and other intangible assets that are written down to fair value when they are held for sale or determined to be impaired. See “ Note 5. Restructuring and Other Costs, Net ” for impairments associated with restructuring activities. Given the nature of such assets and liabilities, evaluating their fair value from the perspective of a market participant is inherently complex. Assumptions and estimates about future values can be affected by a variety of internal and external factors. Changes in these factors may require us to revise our estimates and could result in future impairment charges for goodwill and acquired intangible assets, or retroactively adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with business combinations. These adjustments could have a material impact on our financial condition and results of operations. We discuss fair values in more detail in “ Note 13. Fair Value ”.
Derivatives
We are exposed to interest rate risk, commodity price risk and foreign currency exchange risk. To manage these risks, from time to time and to varying degrees, we may enter into a variety of financial derivative transactions and certain physical commodity transactions that are determined to be derivatives. Interest rate swaps may be entered into to manage the interest rate risk associated with a portion of our outstanding debt. Interest rate swaps are either designated for accounting purposes as cash flow hedges of forecasted floating interest payments on variable rate debt or fair value hedges of fixed rate debt, or we may elect not to treat them as accounting hedges. Swaps or forward contracts on certain commodities may be entered into to manage the price risk associated with forecasted purchases or sales of those commodities. In addition, certain commodity financial derivative contracts and physical commodity contracts that are determined to be derivatives may not be designated as accounting hedges because either they do not meet the criteria for treatment as accounting hedges under ASC 815, “ Derivatives and Hedging ” (“ ASC815 ” ), or we elect not to treat them as accounting hedges under ASC 815. Generally, we elect the normal purchase, normal sale scope exception for physical commodity contracts that are determined to be derivatives. We may also enter into forward contracts to manage our exposure to fluctuations in foreign currency rates with respect to transactions denominated in foreign currencies. These also can either be designated for accounting purposes as cash flow hedges or not so designated. Derivative financial instruments are not used for trading or other speculative purposes.
Outstanding financial derivative instruments expose us to credit loss in the event of nonperformance by the counterparties to the derivative agreements. Our credit exposure related to these financial instruments is represented by the fair value of contracts reported as assets. We manage our exposure to counterparty credit risk through minimum credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk. We may enter into financial derivative contracts that may contain credit-risk-related contingent features
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which could result in a counterparty requesting immediate payment or demanding immediate and ongoing full overnight collateralization on derivative instruments in net liability positions.
For financial derivative instruments that are designated as a cash flow hedge for accounting purposes, the entire change in fair value of the financial derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction, and in the same period or periods during which the forecasted transaction affects earnings. For financial derivative instruments that are not designated as accounting hedges, the entire change in fair value of the financial instrument is reported immediately in current period earnings.
We have at times entered into interest rate swap agreements that effectively modified our exposure to interest rate risk by converting a portion of our interest payments on floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. These agreements typically involved the receipt of floating rate amounts in exchange for fixed interest rate payments over the life of the agreements without an exchange of the underlying principal amount.
See “ Note 16. Derivatives ” for additional information regarding our foreign currency and natural gas commodity derivatives.
Health Insurance
We are self-insured for the majority of our group health insurance costs. However, we seek to limit our health insurance costs by entering into certain stop loss insurance coverage. Due to mergers, acquisitions and other factors, we may have plans that do not include stop loss insurance. We calculate our group health insurance reserve on an undiscounted basis based on estimated reserve rates. We utilize claims lag data provided by our claims administrators to compute the required estimated reserve rate. We calculate our average monthly claims paid using the actual monthly payments during the trailing 12-month period. At that time, we also calculate our required reserve using the reserve rates discussed above. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our group health insurance costs.
Workers’ Compensation
We purchase large risk deductible workers’ compensation policies for the majority of our workers’ compensation liabilities that are subject to various deductibles to limit our exposure. We calculate our workers’ compensation reserves on an undiscounted basis based on estimated actuarially calculated development factors. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our workers' compensation costs.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amount and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. All deferred tax assets and liabilities are classified as noncurrent in our consolidated balance sheet .
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, recent financial operations and their associated valuation allowances, if any. In the event we were to determine that we would be able to realize or not realize our deferred income tax assets in the future in their net recorded amount, we would make an adjustment to the valuation allowance, which would reduce or increase the provision for income taxes, respectively.
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Certain provisions of ASC 740, “Income Taxes ” provide that a tax benefit from an uncertain tax position may be recognized when it is “more likely than not” that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. We use significant judgment in (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 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 our results of operations in future periods depending upon their ultimate resolution.
On December 22, 2017, the U.S. enacted comprehensive tax legislation, commonly referred to as the Tax Act. As part of the enacted Tax Act, Global Intangible Low Taxed Income (“ GILTI ”) provisions were introduced that would impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. We have elected to treat any potential GILTI inclusions as a period cost during the year incurred.
On August 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 repurcha ses. While we are still evaluating the impact that provisions of the Inflation Reduction Act becoming effective in fiscal 2024 will have on our financial results, we do not believe the impact will be material.
Pension and Other Postretirement Benefits
We account for pension and other postretirement benefits in accordance with ASC 715, “ Compensation – Retirement Benefits ”. Accordingly, we recognize the funded status of our pension plans as assets or liabilities in our consolidated balance sheets. The funded status is the difference between our projected benefit obligations and fair value of plan assets. The determination of our obligation and expense for pension and other postretirement benefits is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. We describe these assumptions in “ Note 6. Retirement Plans ”, which include, among others, the discount rate, expected long-term rates of return on plan assets and rates of increase in compensation levels. We defer actual results that differ from our assumptions, i.e., actuarial gains and losses, and amortize the difference over future periods. Therefore, these differences generally affect our recognized expense and funding requirements in future periods. Actuarial gains and losses occur when actual experience differs from the estimates used to determine the components of net periodic pension cost and when certain assumptions used to determine the fair value of the plan assets or projected benefit obligation are updated, such as but not limited to, changes in the discount rate, plan amendments, differences between actual and expected returns on plan assets, mortality assumptions and plan remeasurement.
The amount of unrecognized actuarial gains and losses recognized in the current year’s operations is based on amortizing the unrecognized gains or losses for each plan that exceed the larger of 10% of the projected benefit obligation or the fair value of plan assets, also known as “the corridor”. The amount of unrecognized gain or loss that exceeds the corridor is amortized over the average future service of the plan participants or the average life expectancy of inactive plan participants for plans where all or almost all of the plan participants are inactive. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension and other postretirement benefit obligations and our future expense.
Share-Based Compensation
We recognize expense for share-based compensation plans based on the estimated fair value of the related awards in accordance with ASC 718, “ Compensation – Stock Compensation ”. Pursuant to our incentive stock plans, we can grant options, restricted stock, restricted stock units and stock appreciation rights (“ SAR ” or “ SARs ”) to employees and non-employee directors. The grants generally vest over a period of up to three years depending on the nature of the award, except for non-employee director grants, which typically vest over a period of up to one year . The majority of our awards are restricted stock units granted to employees and generally contain performance
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
or market conditions that must be met in conjunction with a service requirement for the shares to vest, others contain only a service requirement. We charge compensation expense under the plan to earnings over each award’s individual vesting period. Forfeitures are estimated based on historical experience. See “ Note 22. Share-Based Compensation ” for additional information.
Asset Retirement Obligations
We account for asset retirement obligations in accordance with ASC 410, “ Asset Retirement and Environmental Obligations ”. A liability and an asset are recorded equal to the present value of the estimated costs associated with the retirement of long-lived assets where a legal or contractual obligation exists and the liability can be reasonably estimated. The liability is accreted over time and the asset is depreciated over the remaining life of the related asset. Upon settlement of the liability, we recognize a gain or loss for any difference between the settlement amount and the liability recorded. We record our asset retirement obligations in Other current liabilities and Other noncurrent liabilities.
Our asset retirement obligations consist primarily of costs related to the closure of manufacturing facilities, and includes captive, non-hazardous solid waste landfills owned and operated by certain of our paper mills. The following table sets forth changes to the asset retirement obligations (in millions):
Balance at beginning of fiscal year
Accretion expense
Liabilities incurred
Payments
Revisions in estimated cash flows
Foreign currency rate changes
Balance at end of fiscal year
Liabilities incurred for our asset retirement obligations in fiscal 2023 and fiscal 2022 were primarily related to certain manufacturing facility closures for items such as oil and process chemical removal that were previously determined to have an indeterminate settlement date and adjustment to anticipated landfill obligations. See “ Note 5. Restructuring and Other Costs, Net ” for additional information on mill closures.
Asset retirement obligations with indeterminate settlement dates are not recorded until such time that a reasonable estimate may be made. In the event of future closures, redesigns, or renovations of certain production facilities, it is possible that we may be required to take steps to remove certain materials from these facilities including asbestos and chemicals. Currently, any such obligations have an indeterminate settlement date, and we believe that adequate information does not exist to apply an expected-present-value technique to estimate any such potential obligations. Accordingly, we will recognize a liability for such items in the period in which sufficient information becomes available to reasonably estimate the fair value of these obligations.
Repair and Maintenance Costs
We expense routine repair and maintenance costs as we incur them. We defer certain expenses we incur during planned major maintenance activities and recognize the expenses ratably over the shorter of the estimated interval until the next major maintenance activity or the life of the deferred item. This maintenance is generally performed every 12 to 24 months and has a significant impact on our results of operations in the period performed primarily due to lost production during the maintenance period. Planned major maintenance costs deferred at September 30, 2023 and 2022 were $ 140.9 million and $ 121.8 million, respectively. The assets are recorded as Other noncurrent assets on the consolidated balance sheets.
Foreign Currency
We translate the assets and liabilities of our foreign operations from their functional currency into U.S. dollars at the rate of exchange in effect as of the balance sheet date. We reflect the resulting translation adjustments in
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
equity. We translate the revenues and expenses of our foreign operations at a daily average rate prevailing for each month during the fiscal year. We include gains or losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables, in the consolidated statements of operations within Other (expense) income, net. We recorded a gain on foreign currency transactions of $ 10.8 million in fiscal 2023, while we recorded a loss on foreign currency transactions of $ 5.0 million and $ 0.7 million in fiscal 2022 and 2021, respectively.
Environmental Remediation Costs
We accrue for losses associated with our environmental remediation obligations when it is probable that we have incurred a liability and the amount of the loss can be reasonably estimated. We generally recognize accruals for estimated losses from our environmental remediation obligations no later than completion of a remedial feasibility study and clear indication of remedial options. We adjust such accruals as further information develops or circumstances change. We recognize recoveries of our environmental remediation costs from other parties as assets when we deem their receipt probable. See “ Note 19. Commitments and Contingencies — Environmental. ”
New Accounting Standards — Adopted in Fiscal 2023
In November 2021, the FASB issued ASU 2021-10, “ Government Assistance (Topic 832) – Disclosures by Business Entities about Government Assistance ”. This ASU aims to increase the transparency of government assistance through the annual disclosure of the types of assistance, an entity’s accounting for the assistance and the effect of the assistance on an entity’s financial statements. This ASU is effective for annual periods beginning after December 15, 2021 (fiscal 2023 for us), with early adoption permitted. We adopted the provisions of ASU 2021-10 beginning October 1, 2022 . The adoption of this ASU did not have a material impact on our consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, “ Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” . This ASU requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606. This ASU aims to reduce diversity in practice and increase comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. This ASU is effective for fiscal years beginning after December 15, 2022 (fiscal 2024 for us), including interim periods therein, with early adoption permitted. We early adopted the provisions of ASU 2021-08 beginning October 1, 2022 . The adoption of this ASU did not have a material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “ Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ”. This ASU provides temporary optional expedients and exceptions for applying GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. In January 2021, the FASB issued ASU 2021-01, which adds implementation guidance to clarify certain optional expedients in Topic 848. The ASUs could be adopted after their respective issuance dates through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, “ Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 ”, which extends the period of time entities can utilize the reference rate reform relief guidance under ASU 2020-04 from December 31, 2022 to December 31, 2024. See “ Note 14. Debt ” for information regarding the amendments to our credit facilities. We adopted the provisions of this optional guidance beginning October 1, 2022 . The adoption of these ASUs did not have a material impact on our consolidated financial statements.
New Accounting Standards — Pending Adoption in Fiscal 2024
In September 2022, the FASB issued ASU 2022-04, “ Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations ”. This ASU requires that all entities that use supplier finance programs in connection with the purchase of goods and services disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. This ASU is effective for fiscal years beginning after December 15, 2022 (fiscal 2024 for us), except for the amendment on roll forward information, which is effective for fiscal years
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
beginning after December 15, 2023 (fiscal 2025 for us), each with early adoption permitted. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
In March 2022, the FASB issued ASU 2022-01, “ Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method ”. This ASU expands and clarifies the portfolio layer method for fair value hedges of interest rate risk. This ASU is effective for fiscal years beginning after December 15, 2022 (fiscal 2024 for us), including interim periods therein, with early adoption permitted. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
New Accounting Standards — Recently Issued
In March 2023, the FASB issued ASU 2023-01, “ Leases (Topic 842): Common Control Arrangements ”. This ASU requires all lessees to amortize leasehold improvements associated with common control leases over their useful life to the common control group and account for them as a transfer of assets between entities under common control at the end of the lease. This update is effective for fiscal years beginning after December 15, 2023 (fiscal 2025 for us), including interim periods therein, with early adoption permitted in any annual or interim period as of the beginning of the related fiscal year. We are evaluating the impact of this ASU.
In June 2022, the FASB issued ASU 2022-03, “ Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions ”. This ASU clarifies that contractual sale restrictions should not be considered in measuring the fair value of equity securities. This ASU is effective for fiscal years beginning after December 15, 2023 (fiscal 2025 for us), including interim periods therein, with early adoption permitted. We are evaluating the impact of this ASU.
Note 2. Revenue Recognition
Disaggregated Revenue
ASC 606 requires that we disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The tables below disaggregate our revenue by geographical market and product type (segment). Net sales are attributed to geographical markets based on our selling location.
The following tables summarize our disaggregated revenue by primary geographical markets for fiscal 2023, 2022 and 2021 (in millions):
Year Ended September 30, 2023
Corrugated Packaging
Consumer Packaging
Global Paper
Distribution
Intersegment Sales
Total
Canada
Latin America
EMEA
Asia Pacific
Total
Year Ended September 30, 2022
Corrugated Packaging
Consumer Packaging
Global Paper
Distribution
Intersegment Sales
Total
Canada
Latin America
EMEA
Asia Pacific
Total
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Year Ended September 30, 2021
Corrugated Packaging
Consumer Packaging
Global Paper
Distribution
Intersegment Sales
Total
Canada
Latin America
EMEA
Asia Pacific
Total
Revenue Contract Balances
Contract assets are rights to consideration in exchange for goods that we have transferred to a customer when that right is conditional on something other than the passage of time. Contract assets are reduced when the control of the goods passes to the customer. Contract liabilities represent obligations to transfer goods or services to a customer for which we have received consideration. Contract liabilities are reduced once control of the goods is transferred to the customer.
The opening and closing balances of our contract assets and contract liabilities are as follows. Contract assets and contract liabilities are reported within Other current assets and Other current liabilities, respectively, on the consolidated balance sheets (in millions).
Contract Assets
(Short-Term)
Contract Liabilities
(Short-Term)
Beginning balance - October 1, 2022
Decrease
Ending balance - September 30, 2023
Performance Obligations and Significant Judgments
We primarily derive revenue from fixed consideration. Certain contracts may also include variable consideration, typically in the form of cash discounts and volume rebates. If a contract with a customer includes variable consideration, we estimate the expected cash discounts and other customer refunds based on historical experience. We concluded this method is consistent with the most likely amount method under ASC 606 and allows us to make the best estimate of the consideration we will be entitled to from customers.
Contracts or purchase orders with customers could include a single type of product or multiple types and grades of products. Regardless, the contract price with the customer is agreed to at the individual product level outlined in the customer contracts or purchase orders. Management has concluded that the prices negotiated with each individual customer are representative of the stand-alone selling price of the product.
Note 3. Acquisiti ons
When we obtain control of a business by acquiring its assets, or some or all of its equity interest, we account for those acquisitions in accordance with ASC 805, “Business Combinations”. The estimated fair values of all assets acquired and liabilities assumed in acquisitions are provisional and may be revised as a result of additional information obtained during the measurement period of up to one year from the acquisition date.
Mexico Acquisition
On December 1, 2022 , we completed the Mexico Acquisition. The acquiree is a leading integrated producer of fiber-based sustainable packaging solutions that operates four paper mills, nine corrugated packaging plants and six high graphic plants throughout Mexico, producing sustainable packaging for a wide range of end markets in the region. This acquisition provides us with further geographic and end market diversification as well as positions us to continue to grow in the attractive Latin American market.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
See below for a summary of the purchase consideration transferred as defined under ASC 805 (in millions):
Purchase
Consideration
Cash consideration transferred for 67.7 % interest
Fair value of the previously held interest
Settlement of preexisting relationships (net receivable
from joint venture)
Purchase consideration transferred
In connection with the transaction, in the first quarter of fiscal 2023 we recognized a $ 46.8 million non-cash, pre-tax loss (or $ 24.6 million after release of a related deferred tax liability) on our original 32.3 % investment. The loss is reflected in the Equity in income of unconsolidated entities line item in our consolidated statements of operations and included the write-off of historical foreign currency translation adjustments previously recorded in Accumulated other comprehensive loss in our consolidated balance sheet , as well as the difference between the fair value of the consideration paid and the carrying value of our prior ownership interest. The fair value of our previously held interest in the joint venture was estimated to be $ 403.7 million at the acquisition date based on the cash consideration exchanged for acquiring the 67.7 % equity interest adjusted for the deemed payment of a control premium. This step-acquisition provided us with 100 % control and we met the other requirements under ASC 805 for the transaction to be accounted for using the acquisition method of accoun ting. We have included the financial results of the acquired operations in our Corrugated Packaging segment. Post-acquisition, sales to the operations acquired in the Mexico Acquisition are eliminated from our Global Paper segment results.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed in the Mexico Acquisition by major class of assets and liabilities as of the acquisition date, as well as adjustments made during fiscal 2023 (referred to as “measurement period adjustments”) (in millions):
Amounts Recognized as of the Acquisition Date
Measurement Period
Adjustments (1) (2)
Amounts Recognized as of Acquisition Date
(as Adjusted)
Cash and cash equivalents
Current assets, excluding cash and cash equivalents
Property, plant and equipment
Goodwill
Other noncurrent assets
Total assets acquired
Current portion of debt (3)
Current liabilities, excluding debt
Long-term debt due after one year (3)
Pension liabilities, net of current portion
Deferred income taxes
Other noncurrent liabilities
Total liabilities assumed
Net assets acquired
The measurement period adjustments recorded in fiscal 2023 did not have a significant impact on our consolidated statements of operations for the year ended September 30, 2023 .
The measurement period adjustments were primarily due to refinements to the carrying amounts of certain assets and liabilities. The net impact of the measurement period adjustments resulted in a net increase in goodwill.
Includes $ 494.8 million of debt that we assumed and repa id in connection with th e closing of the Mexico Acquisition. The remaining balance relates to current and long-term portions of finance leases .
We continue to analyze the estimated values of all assets acquired and liabilities assumed including, among other things, finalizing third-party valuations; therefore, the allocation of the purchase price remains preliminary and subject to revision.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced reach of the combined organization and other synergies), the assembled work force, and the establishment of deferred tax liabilities for the difference between book and tax basis of the assets and liabilities acquired. The goodwill is not amortizable for income tax purposes.
Transaction costs related to the Mexico Acquisition are expensed as incurred and recorded within Restructuring and other costs, net. See “ Note 5. Restructuring and Other Costs, Net ” for additional information.
Note 4. Held F or Sale
Assets held for sale at September 30, 2023 and September 30, 2022 were $ 91.5 million and $ 34.4 million, respectively. Assets held for sale for these periods were primarily related to closed facilities we are in the process of divest ing.
Note 5. Restructur ing and Other Costs, Net
Summary of Restructuring and Other Initiatives
We recorded pre-tax restructuring and other costs, net of $ 859.2 million, $ 383.0 million and $ 30.6 million for fiscal 2023, 2022 and 2021 , respectively. Of these costs, $ 604.6 million, $ 334.1 million and $ 13.4 million were non-cash for fiscal 2023, 2022 and 2021, respectively. These amounts are not comparable since the timing and scope of the individual actions associated with each restructuring, acquisition, integration or divestiture can vary. We present our restructuring and other costs, net in more detail below.
The following table summarizes our Restructuring and other costs, net for fiscal 2023, 2022 and 2021 (in millions):
Restructuring
Other
Restructuring and other costs, net
Restructuring
Our restructuring charges are primarily associated with restructuring portions of our operations (i.e., partial or complete facility closures). A partial facility closure may consist of shutting down a machine and/or a workforce reduction. We have previously incurred reduction in workforce actions, facility closure activities, impairment costs and certain lease terminations from time to time.
We are committed to improving our return on invested capital as well as maximizing the performance of our assets. In fiscal 2023, we announced our plan to permanently cease operating our Tacoma, WA and North Charleston, SC containerboard mills. These mills ceased production in September 2023 and June 2023, respectively. The combination of high operating costs and the need for significant capital investment were the determining factors in the decision to cease operations at these mills. The Tacoma and North Charleston mills' annual production capacity was 510,000 tons and 550,000 tons, respectively, of which approximately three-fifths and two-thirds, respectively, was shipped to external customers of the Global Paper segment.
In fiscal 2022, we recorded various impairments and other charges associated with our decision to permanently cease operations at our Panama City, FL mill and to permanently close the corrugated medium manufacturing operations at our St. Paul, MN mill, as reflected in the table below in the Global Paper segment. These operations ceased production in June 2022 and October 2022, respectively. Both operations were expected to require significant capital investment to maintain and improve going forward, and the production of fluff pulp (at Panama City) was not a priority in our strategy to focus on higher value markets. The Panama City, FL mill had produced containerboard, primarily heavyweight kraft and fluff pulp, with a combined annual capacity of 645,000 tons of which
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
approximately two-thirds was shipped to external customers. The corrugated medium manufacturing operations at St. Paul, MN had an annual capacity of 200,000 tons of which approximately two-fifths was shipped to external customers.
By closing these mills and the corrugated medium manufacturing operations at St. Paul, significant capital that would have been required to keep the mills competitive in the future is expected to be deployed to improve key assets. Charges recognized are reflected in the table below in the Global Paper segment. We expect to record future restructuring charges, primarily associated with carrying costs. We expect these costs to be partially offset in a future period by proceeds from the sale of these facilities.
In fiscal 2021, our restructuring charges included an impairment of assets and a gain on lease termination associated with our Richmond, VA regional office (in Corporate). Due to market factors in fiscal 2021, we decided to delay the previously announced shutdown of a bleached paperboard machine at our Evadale, TX mill, and in fiscal 2022, we decided to cancel our plans to shut down the machine and reversed certain employee and other accrued restructuring charges. The machine is capable of swinging between selected grades (e.g., linerboard, bleached paperboard and pulp), and we intend to utilize the machine to produce selected grades based on demand.
While restructuring costs are not charged to our segments and, therefore, do not reduce each segment's Adjusted EBITDA, we highlight the segment to which the charges relate. Since we do not allocate restructuring costs to our segments, charges incurred in the Global Paper segment will represent all charges associated with our vertically integrated mills and recycling operations. These operations manufacture for the benefit of each reportable segment that ultimately sells the associated paper and packaging products to our external customers.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents a summary of restructuring charges related to active restructuring initiatives that we incurred during the last three fiscal years, the cumulative recorded amount since we started the initiatives and our estimates of the total charges we expect to incur (in millions). These estimates are subject to a number of assumptions, and actual results may differ.
Cumulative
Total
Expected
Corrugated Packaging
PP&E and related costs
Severance and other employee costs
Other restructuring costs
Restructuring total
Consumer Packaging
PP&E and related costs
Severance and other employee costs
Other restructuring costs
Restructuring total
Global Paper
PP&E and related costs
Severance and other employee costs
Other restructuring costs
Restructuring total
Distribution
Severance and other employee costs
Other restructuring costs
Restructuring total
Corporate
PP&E and related costs
Severance and other employee costs
Other restructuring costs
Restructuring total
Total
PP&E and related costs
Severance and other employee costs
Other restructuring costs
Restructuring total
We have defined “PP&E and related costs ” as used in this Note 5 primarily as property, plant and equipment write-downs, subsequent adjustments to fair value for assets classified as held for sale, subsequent (gains) or losses on sales of property, plant and equipment, related parts and supplies on such assets, and deferred major maintenance costs, if any. We define " Other restructuring costs " as lease or other contract termination costs, facility carrying costs, equipment and inventory relocation costs, and other items, including impaired intangibles attributable to our restructuring actions.
Other Costs
Our other costs consist of acquisition, integration and divestiture costs. We incur costs when we acquire or divest businesses. Acquisition costs include costs associated with transactions, whether consummated or not, such as advisory, legal, accounting, valuation and other professional or consulting fees, as well as potential litigation costs associated with those activities. We incur integration costs pre- and post-acquisition that reflect work performed to facilitate merger and acquisition integration, such as work associated with information systems and
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
other projects including spending to support future acquisitions, and primarily consist of professional services and labor. Divestiture costs consist primarily of similar professional fees. We consider acquisition, integration and divestiture costs to be corporate costs regardless of the segment or segments involved in the transaction.
The following table presents acquisition, integration and divestiture costs that we incurred during the last three fiscal years (in millions):
Acquisition costs
Integration costs
Divestiture costs
Other total
Acquisition costs for fiscal 2023 in the table above primarily include transaction costs related to the Mexico Acquisition and the Transaction.
The following table summarizes the changes in the restructuring accrual, which is primarily composed of accrued severance and other employee costs, and a reconciliation of the restructuring accrual charges to the line item “ Restructuring and other costs, net ” on our consolidated statements of operations for the last three fiscal years (in millions):
Accrual at beginning of fiscal year
Additional accruals
Payments
Adjustment to accruals
Foreign currency rate changes and other
Accrual at end of fiscal year
Reconciliation of accruals and charges to restructuring and other costs, net (in millions):
Additional accruals and adjustments to accruals
(see table above)
PP&E and related costs
Severance and other employee costs
Acquisition costs
Integration costs
Divestiture costs
Other restructuring costs
Total restructuring and other costs, net
Other restructuring costs for fiscal 2023 in the previous table primarily include $ 70.3 million of lease or other contract termination costs, $ 33.3 million of facility carrying costs and $ 22.5 million of impaired intangibles attributable to our restructuring actions.
Note 6. Ret irement Plans
We have defined benefit pension plans and other postretirement benefit plans for certain U.S. and non-U.S. employees. We use a September 30 measurement date for our plans. Certain plans were frozen for salaried and non-union hourly employees at various times in the past, and nearly all of our remaining U.S. salaried and U.S. non-union hourly employees accruing benefits ceased accruing benefits as of December 31, 2020. In addition, we participate in several MEPPs that provide retirement benefits to certain union employees in accordance with various CBAs and have participated in other MEPPs in the past. We also have supplemental executive retirement plans and other non-qualified defined benefit pension plans that provide unfunded supplemental retirement benefits to
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
certain of our current and former executives. The supplemental executive retirement plans provide for incremental pension benefits in excess of those offered in the plan. The other postretirement benefit plans provide certain health care and life insurance benefits for certain salaried and hourly employees who meet specified age and service requirements as defined by the plans.
The benefits under our defined benefit pension plans are based on either compensation or a combination of years of service and negotiated benefit levels, depending upon the plan. We allocate our pension assets to several investment management firms across a variety of investment styles. Our defined benefit Investment Committee meets at least four times a year with our investment advisors to review each management firm’s performance and monitors its compliance with its stated goals, our investment policy and applicable regulatory requirements in the U.S., Canada, and other jurisdictions.
Investment returns vary. We believe that, by investing in a variety of asset classes and utilizing multiple investment management firms, we can create a portfolio that yields adequate returns with reduced volatility. Our qualified U.S. plans employ a liability matching strategy augmented with Treasury futures to materially hedge against interest rate risk. After consultation with our actuary and investment advisors, we adopted the target allocations in the table below for our pension plans in an effort to produce the desired performance. These target allocations are guidelines, not limitations, and occasionally plan fiduciaries will approve allocations above or below target ranges or modify the allocations.
Our target asset allocations by asset category at September 30 were as follows:
Pension Plans
U.S. Plans
Non-U.S.
Plans
U.S. Plans
Non-U.S.
Plans
Equity investments
Fixed income investments
Short-term investments
Other investments
Total
Our asset allocations by asset category at September 30 were as follows:
Pension Plans
U.S. Plans
Non-U.S.
Plans
U.S. Plans
Non-U.S.
Plans
Equity investments
Fixed income investments
Short-term investments
Other investments
Total
We manage our retirement plans in accordance with the provisions of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations thereunder as well as applicable legislation in Canada and other foreign countries. Our investment policy objectives include maximizing long-term returns at acceptable risk levels, diversifying among asset classes, as applicable, and among investment managers, as well as establishing certain risk parameters within asset classes. We have allocated our investments within the equity and fixed income asset classes to sub-asset classes designed to meet these objectives. In addition, our other investments support multi-strategy objectives.
In developing our weighted average expected rate of return on plan assets, we consulted with our investment advisors and evaluated criteria based on historical returns by asset class and long-term return expectations by asset class. We expect to contribute approximately $ 25 million to our U.S. and non-U.S. pension plans in fiscal
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2024. However, it is possible that our assumptions or legislation may change, actual market performance may vary or we may decide to contribute a different amount. Therefore, the amount we contribute may vary materially. The expense for MEPPs for collective bargaining employees generally equals the contributions for these plans, excluding estimated accruals for withdrawal liabilities or adjustments to those accruals.
The weighted average assumptions used to measure the benefit plan obligations at September 30 were:
Pension Plans
U.S. Plans
Non-U.S.
Plans
U.S. Plans
Non-U.S.
Plans
Discount rate
Interest crediting rate
Rate of compensation increase
At September 30, 2023, the discount rate for the U.S. pension plans was determined based on the yield on a theoretical portfolio of high-grade corporate bonds, and the discount rate for the non-U.S. plans was determined based on a yield curve developed by our actuary. The theoretical portfolio of high-grade corporate bonds used to select the September 30, 2023 discount rate for the U.S. pension plans includes bonds generally rated Aa- or better with at least $ 100 million outstanding par value and bonds that are non-callable (unless the bonds possess a “make whole” feature). The theoretical portfolio of bonds has cash flows that generally match our expected benefit payments in future years.
Our assumption regarding the future rate of compensation increases is reviewed periodically and is based on both our internal planning projections and recent history of actual compensation increases.
We typically review our expected long-term rate of return on plan assets periodically through an asset allocation study with either our actuary or investment advisor. In fiscal 2024, our expected rate of return used to determine net periodic benefit cost is 6.75 % for our U.S. plans and 5.33 % for our non-U.S. plans. Our expected rates of return in fiscal 2024 are based on an analysis of our long-term expected rate of return and our current asset allocation.
In December 2019, the USW ratified a new master agreement that applies to substantially all of our U.S. facilities represented by the USW. The agreement has a four-year term and covers a number of specific items, including wages, medical coverage and certain other benefit programs, substance abuse testing, and safety. Individual facilities will continue to have local agreements for subjects not covered by the master agreement and those agreements will continue to have staggered terms. The master agreement permits us to apply its terms to USW employees who work at facilities we acquire during the term of the agreement. Negotiations towards a new master agreement commenced in November 2023, and a tentative agreement has been reached. It remains subject to approval of the requisite union membership.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table shows the changes in benefit obligation, plan assets and funded status for the years ended September 30 (in millions):
Pension Plans
U.S. Plans
Non-U.S.
Plans
U.S. Plans
Non-U.S.
Plans
Change in projected benefit obligation:
Benefit obligation at beginning of fiscal year
Service cost
Interest cost
Amendments
Actuarial gain
Plan participant contributions
Benefits paid
Curtailments
Settlements
Business (divestitures) and acquisitions
Foreign currency rate changes
Benefit obligation at end of fiscal year
Change in plan assets:
Fair value of plan assets at beginning of fiscal year
Actual gain (loss) on plan assets
Employer contributions
Plan participant contributions
Benefits paid
Settlements
Business divestitures
Foreign currency rate changes
Fair value of plan assets at end of fiscal year
Funded (unfunded) status
Amounts recognized in the Consolidated Balance
Sheets:
Prepaid pension asset
Other current liabilities
Pension liabilities, net of current portion
Over (under) funded status at end of fiscal year
The actuarial (gain) loss in benefit obligation for the U.S. Plans and Non-U.S. Plans is generally driven by a change in discount rates and to a lesser degree the rate of compensation change in the Non-U.S. Plans.
Certain U.S. plans have benefit obligations in excess of plan assets. These plans, which consist of non-qualified plans, had aggregate projected benefit obligations of $ 110.8 million, aggregate accumulated benefit obligations of $ 110.8 million, and no plan assets at September 30, 2023. Our qualified U.S. plan was in a net overfunded position at September 30, 2023. We also have certain non-U.S. plans that have benefit obligations in excess of plan assets. These plans, which consist of non-qualified plans, had aggregate projected benefit obligations of $ 252.3 million, aggregate accumulated benefit obligations of $ 236.1 million, and $ 153.2 million of plan assets at September 30, 2023.
The accumulated benefit obligation of U.S. and non-U.S. pension plans was $ 4,459.4 million and $ 4,779.1 million at September 30, 2023 and 2022, respectively.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The pre-tax amounts in accumulated other comprehensive loss at September 30 not yet recognized as components of net periodic pension cost, including noncontrolling interest, consist of (in millions):
Pension Plans
U.S. Plans
Non-U.S.
Plans
U.S. Plans
Non-U.S.
Plans
Net actuarial loss
Prior service cost
Total accumulated other comprehensive loss
The pre-tax amounts recognized in other comprehensive (income) loss, including noncontrolling interest, are as follows at September 30 (in millions):
Pension Plans
Net actuarial (gain) loss arising during period
Amortization and settlement recognition of net actuarial loss
Prior service cost arising during period
Amortization of prior service cost
Net other comprehensive (income) loss recognized
The net periodic pension cost (income) recognized in the consolidated statements of operations is comprised of the following for fiscal years ended (in millions):
Pension Plans
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Amortization of prior service cost
Curtailment loss
Settlement loss
Company defined benefit plan cost (income)
Multiemployer and other plans
Net pension cost (income)
The Multiemployer and other plans line in the table above excludes the estimated withdrawal liabilities recorded. See “ Note 6. Retirement Plans — Multiemployer Plans ” for additional information.
The consolidated statements of operations line item “Pension and other postretirement non-service (cost) income” is equal to the non-service elements of our “Company defined benefit plan cost (income)” and our “Net postretirement cost” outlined in this note.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Weighted-average assumptions used in the calculation of benefit plan expense for fiscal years ended:
Pension Plans
Plans
Non-U.S.
Plans
Plans
Non-U.S.
Plans
Plans
Non-U.S.
Plans
Discount rate
Interest crediting rate
Rate of compensation increase
Expected long-term rate of return on
plan assets
For our U.S. pension and postretirement plans, we considered the mortality tables and improvement scales published by the Society of Actuaries and evaluated our specific mortality experience to establish mortality assumptions. Based on our experience and in consultation with our actuaries, for fiscal 2023, 2022 and 2021 we utilized the base Pri-2012 mortality tables with specific gender and job classification increases applied for fiscal 2023 ranging from 6 % to 16 %, fiscal 2022 ranging from 7 % to 14 % and for fiscal 2021 ranging from 6 % to 13 %.
For our Canadian pension and postretirement plans, we utilized the 2014 Private Sector Canadian Pensioners Mortality Table adjusted to reflect industry and our mortality experience for fiscal 2023, 2022 and 2021. As of September 30, 2023, these adjustment factors were updated to reflect the most recent mortality experience.
Our projected estimated benefit payments (unaudited), which reflect expected future service, as appropriate, are as follows (in millions):
Pension Plans
U.S. Plans
Non-U.S. Plans
Fiscal 2024
Fiscal 2025
Fiscal 2026
Fiscal 2027
Fiscal 2028
Fiscal Years 2029 – 2033
The following table summarizes our pension plan assets measured at fair value on a recurring basis (at least annually) as of September 30, 2023 (in millions):
Total
Quoted Prices
in Active
Markets for
Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Equity securities:
U.S. equities (1)
Non-U.S. equities (1)
Fixed income securities:
U.S. government securities (2)
Non-U.S. government securities (3)
U.S. corporate bonds (3)
Non-U.S. corporate bonds (3)
Other fixed income (4)
Short-term investments (5)
Benefit plan assets measured in the fair value hierarchy
Assets measured at NAV (6)
Total benefit plan assets
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes our pension plan assets measured at fair value on a recurring basis (at least annually) as of September 30, 2022 (in millions):
Total
Quoted Prices
in Active
Markets for
Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Equity securities:
U.S. equities (1)
Non-U.S. equities (1)
Fixed income securities:
U.S. government securities (2)
Non-U.S. government securities (3)
U.S. corporate bonds (3)
Non-U.S. corporate bonds (3)
Other fixed income (4)
Short-term investments (5)
Benefit plan assets measured in the fair value hierarchy
Assets measured at NAV (6)
Total benefit plan assets
Equity securities are comprised of the following investment types: (i) common stock, (ii) preferred stock, and (iii) equity exchange traded funds. Level 1 investments in common and preferred stocks and exchange traded funds are valued using quoted market prices multiplied by the number of shares owned.
U.S. government securities include treasury and agency debt. These investments are valued using broker quotes in an active market.
The level 1 non-U.S. government securities investment is an exchange cleared swap valued using quoted market prices. The level 1 U.S. corporate bonds category is primarily comprised of U.S. dollar denominated investment grade securities and valued using quoted market prices. Level 2 investments are valued utilizing a market approach that includes various valuation techniques and sources such as value generation models, broker quotes in active and non-active markets, benchmark yields and securities, reported trades, issuer spreads, and/or other applicable reference data.
Other fixed income is comprised of municipal and asset-backed securities. Investments are valued utilizing a market approach that includes various valuation techniques and sources, such as broker quotes in active and non-active markets, benchmark yields and securities, reported trades, issuer spreads and/or other applicable reference data.
Short-term investments are valued at $ 1.00 /unit, which approximates fair value. Amounts are generally invested in interest-bearing accounts.
Investments that are measured at net asset value (“ NAV ”) (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes assets measured at fair value based on NAV per share as a practical expedient as of September 30, 2023 and 2022 (in millions):
Fair value
Redemption
Frequency
Redemption
Notice Period
Unfunded
Commitments
September 30, 2023
Hedge funds (1)
Monthly
Up to 30 days
Commingled funds, private equity, private real
estate investments, and equity related
investments (2)
Various
Fixed income and fixed income related
instruments (3)
Monthly
Up to 10 days
September 30, 2022
Hedge funds (1)
Monthly
Up to 30 days
Commingled funds, private equity, private real
estate investments, and equity related
investments (2)
Various
Up to 60 days
Fixed income and fixed income related
instruments (3)
Monthly
Up to 10 days
Hedge fund investments are primarily made through shares of limited partnerships or similar structures. Hedge funds are typically valued monthly by third-party administrators that have been appointed by the funds’ general partners.
Commingled fund investments are valued at the NAV per share multiplied by the number of shares held. The determination of NAV for the commingled funds includes market pricing of the underlying assets as well as broker quotes and other valuation techniques. The redemption frequency is reflected as various and the redemption notice period at September 30, 2023 is not applicable because certain investments do not allow redemptions until the investments are terminated or closed.
Fixed income and fixed income related instruments consist of commingled debt funds, which are valued at their NAV per share multiplied by the number of shares held. The determination of NAV for the commingled funds includes market pricing of the underlying assets as well as broker quotes and other valuation techniques.
We maintain holdings in certain private equity partnerships and private real estate investments for which a liquid secondary market does not exist. The private equity partnerships are commingled investments. Valuation techniques, such as discounted cash flow and market based comparable analyses, are used to determine fair value of the private equity investments. Unobservable inputs used for the discounted cash flow technique include projected future cash flows and the discount rate used to calculate present value. Unobservable inputs used for the market-based comparisons technique include earnings before interest, taxes, depreciation and amortization multiples in other comparable third-party transactions, price to earnings ratios, liquidity, current operating results, as well as input from general partners and other pertinent information. Private equity investments have been valued using NAV as a practical expedient.
Private real estate investments are commingled investments. Valuation techniques, such as discounted cash flow and market based comparable analyses, are used to determine fair value of the private equity investments. Unobservable inputs used for the discounted cash flow technique include projected future cash flows and the discount rate used to calculate present value. Unobservable inputs used for the market-based comparison technique include a combination of third-party appraisals, replacement cost, and comparable market prices. Private real estate investments have been valued using NAV as a practical expedient.
Equity-related investments are hedged equity investments in a commingled fund that consist primarily of equity indexed investments which are hedged by options and also hold collateral in the form of short-term treasury securities. Equity related investments have been valued using NAV as a practical expedient.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Postretirement Plans
The postretirement benefit plans provide certain health care and life insurance benefits for certain salaried and hourly employees who meet specified age and service requirements as defined by the plans.
The weighted average assumptions used to measure the benefit plan obligations at September 30 were:
Postretirement plans
U.S. Plans
Non-U.S.
Plans
U.S. Plans
Non-U.S.
Plans
Discount rate
The following table shows the changes in benefit obligation, plan assets and funded status for the fiscal years ended September 30 (in millions):
Postretirement Plans
U.S. Plans
Non-U.S. Plans
U.S. Plans
Non-U.S. Plans
Change in projected benefit obligation:
Benefit obligation at beginning of fiscal year
Service cost
Interest cost
Actuarial gain
Benefits paid
Curtailments
Foreign currency rate changes
Benefit obligation at end of fiscal year
Change in plan assets:
Fair value of plan assets at beginning of fiscal year
Employer contributions
Benefits paid
Fair value of plan assets at end of fiscal year
Underfunded Status
Amounts recognized in the Consolidated Balance
Sheets:
Other current liabilities
Postretirement benefit liabilities, net of current portion
Underfunded status at end of fiscal year
The pre-tax amounts in accumulated other comprehensive loss at September 30 not yet recognized as components of net periodic postretirement cost, including noncontrolling interest, consist of (in millions):
Postretirement Plans
U.S. Plans
Non-U.S. Plans
U.S. Plans
Non-U.S. Plans
Net actuarial gain
Prior service (credit) cost
Total accumulated other comprehensive income
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The pre-tax amounts recognized in other comprehensive (income) loss, including noncontrolling interest, are as follows at September 30 (in millions):
Postretirement Plans
Net actuarial gain arising during period
Amortization and settlement recognition of net actuarial gain
Amortization or curtailment recognition of prior service credit
Net other comprehensive income recognized
The net periodic postretirement cost recognized in the consolidated statements of operations is comprised of the following for fiscal years ended (in millions):
Postretirement Plans
Service cost
Interest cost
Amortization of net actuarial gain
Amortization of prior service credit
Curtailment gain
Net postretirement cost
The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation are as follows at September 30, 2023:
U.S. Plans
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline (the ultimate
trend rate)
Year the rate reaches the ultimate trend rate
Non-U.S. Plans
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline (the ultimate
trend rate)
Year the rate reaches the ultimate trend rate
Weighted-average assumptions used in the calculation of benefit plan expense for fiscal years ended:
Postretirement Plans
Plans
Non-U.S.
Plans
Plans
Non-U.S.
Plans
Plans
Non-U.S.
Plans
Discount rate
Rate of compensation increase
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our projected estimated benefit payments (unaudited), which reflect expected future service, as appropriate, are as follows (in millions):
Postretirement Plans
U.S. Plans
Non-U.S. Plans
Fiscal 2024
Fiscal 2025
Fiscal 2026
Fiscal 2027
Fiscal 2028
Fiscal Years 2029 – 2033
Multiemployer Plans
We participate in several MEPPs that provide retirement benefits to certain union employees in accordance with various CBAs. The risks of participating in MEPPs are different from the risks of participating in single-employer pension plans. These risks include (i) assets contributed to a MEPP by one employer are used to provide benefits to employees of all participating employers, (ii) if a participating employer withdraws from a MEPP, the unfunded obligations of the MEPP allocable to such withdrawing employer may be borne by the remaining participating employers, and (iii) if we withdraw from a MEPP, we may be required to pay that plan an amount based on our allocable share of the unfunded vested benefits of the plan, referred to as a withdrawal liability, as well as a share of the MEPP’s accumulated funding deficiency.
Contributions to MEPPs are established by the applicable CBAs; however, our required contributions may increase based on the funded status of a MEPP and legal requirements, such as those set forth in the Pension Act, which requires substantially underfunded MEPPs to implement a FIP or a RP to improve their funded status. Contributions to MEPPs are individually and in the aggregate not material.
In the normal course of business, we evaluate our potential exposure to MEPPs, including with respect to potential withdrawal liabilities. In fiscal 2018, we submitted formal notification to withdraw from certain MEPPs, including PIUMPF, and recorded estimated withdrawal liabilities for each. The PIUMPF estimated withdrawal liability assumed both a payment for withdrawal liability and for our proportionate share of PIUMPF’s accumulated funding deficiency. The estimated withdrawal liability excludes the potential impact of a future mass withdrawal of other employers from PIUMPF, which was not considered probable or reasonably estimable and was discounted at a credit adjusted risk-free rate.
In September 2019, we received a demand from PIUMPF asserting that we owe $ 170.3 million on an undiscounted basis (approximately $ 0.7 million per month for the next 20 years) with respect to our withdrawal liability. The initial demand did not address any assertion of liability for PIUMPF’s accumulated funding deficiency. We began making monthly payments for the withdrawal liability in fiscal 2020. In February 2020, we received a demand letter from PIUMPF asserting that we owe $ 51.2 million for our pro-rata share of PIUMPF’s accumulated funding deficiency, including interest. We dispute the PIUMPF accumulated funding deficiency demands. Similarly, in April 2020, we received an updated demand letter related to a subsidiary of ours asserting that we owe $ 1.3 million of additional accumulated funding deficiency, including interest. We assessed our liability following receipt of the demand letters, the impact of which was not significant. The subsidiary for which we received the updated demand letter was sold in September 2023. We also have liabilities associated with other MEPPs from which we, or legacy companies, have withdrawn in the past.
In July 2021, PIUMPF filed suit against us in the U.S. District Court for the Northern District of Georgia claiming the right to recover our pro rata share of the pension fund’s accumulated funding deficiency, along with interest, liquidated damages and attorney’s fees. We believe we are adequately reserved for this matter.
At September 30, 2023 and September 30, 2022, we had recorded withdrawal liabilities of $ 203.2 million and $ 214.7 million, respectively including liabilities associated with PIUMPF’s accumulated funding deficiency demands.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The liability reduction in fiscal 2023 was primarily the result of non-PIUMPF arbitrations, the impact of which is reflected in Multiemployer pension withdrawal (income) expense on our consolidated statements of operations.
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 liabilities, both individually and in the aggregate, are not material for the remaining plans in which we participate.
Approximately 54 % of our hourly employees in the U.S. and Canada are covered by CBAs, of which approximately 25 % of those employees covered under CBAs are operating under local agreements that expire within one year and approximately 11 % of those employees are governed under expired local contracts.
Defined Contribution Plans
We have 401(k) and other defined contribution plans that cover certain of our U.S., Canadian and other non-U.S. salaried union and nonunion hourly employees, generally subject to an initial waiting period. The 401(k) and other defined contribution plans permit participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code, or the taxing authority in the jurisdiction in which they operate. Due primarily to acquisitions, CBAs, and other non-U.S. defined contribution programs, we have plans with varied terms. At September 30, 2023, our contributions may be up to 7.5 % for U.S. salaried and non-union hourly employees, consisting of a match of up to 5 % and an automatic employer contribution of 2.5 %. Certain other employees who receive accruals under a defined benefit pension plan, as well as certain employees covered by CBAs and non-U.S. defined contribution programs generally receive up to a 3.0 % to 4.0 % contribution to their 401(k) plan or defined contribution plan. During fiscal 2023, 2022 and 2021, we recorded expense of $ 163.7 million, $ 169.5 million and $ 164.7 million, respectively, related to employer contributions to the 401(k) plans and other defined contribution plans, including the automatic employer contribution. We funded our matching contributions to the WestRock Company 401(k) Retirement Savings Plan in Common Stock effective July 1, 2020 and ending September 30, 2021 (final period funded in October 2021) .
Supplemental Retirement Plans
We have Supplemental Plans that are nonqualified deferred compensation plans. We intend to provide participants with an opportunity to supplement their retirement income through deferral of current compensation. Amounts deferred and payable under the Supplemental Plans are our unsecured obligations and rank equally with our other unsecured and unsubordinated indebtedness outstanding. Participants’ accounts are credited with investment gains and losses under the Supplemental Plans in accordance with the participant’s investment election or elections (or default election or elections) as in effect from time to time. At September 30, 2023, the Supplemental Plans had assets totaling $ 152.4 million that are recorded at market value, and liabilities of $ 146.4 million. The investment alternatives available under the Supplemental Plans are generally similar to investment alternatives available under 401(k) plans. The amount of expense we recorded for the current fiscal year and the preceding two fiscal years was not significant.
Note 7. Inco me Taxes
The components of (loss) income before income taxes are as follows (in millions):
Year Ended September 30,
United States
Foreign
(Loss) income before income taxes
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income tax (benefit) expense consists of the following components (in millions):
Year Ended September 30,
Current income taxes:
Federal
State
Foreign
Total current expense
Deferred income taxes:
Federal
State
Foreign
Total deferred benefit
Total income tax (benefit) expense
During fiscal 2023, 2022 and 2021 , cash paid for income taxes, net of refunds, was $ 321.6 million, $ 335.2 million and $ 271.9 million, respectively.
The differences between the statutory federal income tax rate and our effective income tax rate are as follows:
Year Ended September 30,
Statutory federal tax rate
Foreign rate differential
Adjustment and resolution of federal, state and foreign tax
uncertainties
State taxes, net of federal benefit
Excess tax benefit related to stock compensation
Research and development and other tax credits, net of
reserves
Income (loss) attributable to noncontrolling interest
Change in valuation allowance
Goodwill impairment
Nontaxable increased cash surrender value
Withholding taxes
Foreign derived intangible income
Deferred rate change
Brazilian net worth deduction
Other, net
Effective tax rate
Certain signs within the table in fiscal 2023 are the opposite compared to fiscal 2022 and 2021 as a result of applying each line’s total income tax benefit or expense to the loss before income taxes.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The tax effects of temporary differences that give rise to deferred income tax assets and liabilities consist of the following (in millions):
September 30,
Deferred income tax assets:
Accruals and allowances
Employee related accruals and allowances
State net operating loss carryforwards, net of federal benefit
State credit carryforwards, net of federal benefit
Federal and foreign net operating loss carryforwards
Restricted stock and options
Lease liabilities
Capitalized research and experimental costs
Other
Total
Deferred income tax liabilities:
Accruals and allowances
Property, plant and equipment
Deductible intangibles and goodwill
Inventory reserves
Deferred gain
Basis difference in joint ventures
Pension
Right-of-use assets
Total
Valuation allowances
Net deferred income tax liability
Deferred taxes are recorded as follows in the consolidated balance sheets (in millions):
September 30,
Long-term deferred tax asset (1)
Long-term deferred tax liability
Net deferred income tax liability
The long-term deferred tax asset is presented in Other noncurrent assets on the consolidated balance sheets.
At September 30, 2023 and 2022 , we had gross U.S. federal net operating losses of approximately $ 1.8 million and $ 1.2 million, respectively. These loss carryforwards expire in fiscal 2031 .
At September 30, 2023 and 2022 , we had gross state and local net operating losses, of approximately $ 861 million and $ 969 million, respectively. These loss carryforwards generally expire between fiscal 2024 and 2042 . The tax effected values of these net operating losses are $ 36.6 million and $ 43.6 million at September 30, 2023 and 2022 , respectively, exclusive of valuation allowances of $ 17.8 million and $ 17.7 million at September 30, 2023 and 2022, respectively.
At September 30, 2023 and 2022 , gross net operating losses for foreign reporting purposes of approximately $ 760.6 million and $ 667.2 million, respectively, were available for carryforward. A majority of these loss carryforwards generally expire between fiscal 2024 and 2042 , while a portion have an indefinite carryforward. The tax effected values of these net operating losses are $ 189.8 million and $ 165.5 million at September 30, 2023 and 2022 , respectively, exclusive of valuation allowances of $ 156.6 million and $ 143.8 million at September 30, 2023 and 2022, respectively.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At September 30, 2023 and 2022 , we had state tax credit carryforwards of $ 89.3 million and $ 89.7 million, respectively. These state tax credit carryforwards generally expire within 5 to 10 years; however, certain state credits can be carried forward indefinitely. Valuation allowances of $ 81.0 million and $ 81.1 million at September 30, 2023 and 2022, respectively, have been provided on these assets. These valuation allowances have been recorded due to uncertainty regarding our ability to generate sufficient taxable income in the appropriate taxing jurisdiction.
The following table represents a summary of the valuation allowances against deferred tax assets for fiscal 2023, 2022 and 2021 (in millions):
Balance at beginning of fiscal year
Increases
Reductions
Balance at end of fiscal year
Consistent with prior years, we consider a portion of our earnings from certain foreign subsidiaries as subject to repatriation and we provide for taxes accordingly. However, we consider the unremitted earnings and all other outside basis differences from all other foreign subsidiaries to be indefinitely reinvested. Accordingly, we have not provided for any taxes that would be due.
As of September 30, 2023, we estimate our outside basis difference in foreign subsidiaries that are considered indefinitely reinvested to be approximately $ 1.3 billion. The components of the outside basis difference are comprised of acquisition accounting adjustments, undistributed earnings, and equity components. In the event of a distribution in the form of dividends or dispositions of the subsidiaries, we may be subject to incremental U.S. income taxes, subject to an adjustment for foreign tax credits, and withholding taxes or income taxes payable to the foreign jurisdictions. As of September 30, 2023, the determination of the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis differences is not practicable.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in millions):
Balance at beginning of fiscal year
Additions for tax positions taken in current year
Additions for tax positions taken in prior fiscal years
Reclassification to unrecognized tax benefit (1)
Reductions for tax positions taken in prior fiscal years
Reductions due to settlement
Additions (reductions) for currency translation adjustments
Reductions as a result of a lapse of the applicable statute of
limitations
Balance at end of fiscal year
During the fourth quarter of fiscal 2023, we undertook certain internal transactions to bring the legal entity that acquired Grupo Gondi into the affiliated group of companies electing to file a U.S. consolidated federal income tax return. As a result of those transactions and in accordance with the requirements of ASC 740, we recorded an addition for gross unrecognized tax benefits of $ 221.9 million related to the deferred gain on Timber Notes (as hereinafter defined). See “ Note 17. Special Purpose Entities ” for additional information.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of September 30, 2023 and 2022 , the total amount of unrecognized tax benefits was approximately $ 405.1 million and $ 195.5 million, respectively, exclusive of interest and penalties. Of these balances, as of September 30, 2023 and 2022 , if we were to prevail on all unrecognized tax benefits recorded, approximately $ 400.6 million and $ 188.1 million, respectively, would benefit the effective tax rate. We regularly evaluate, assess and adjust the related liabilities in light of changing facts and circumstances, which could cause the effective tax rate to fluctuate from period to period. Resolution of the uncertain tax positions could have a material adverse effect on our cash flows or materially benefit our results of operations in future periods depending upon their ultimate resolution. See “ Note 19. Commitments and Contingencie s — Brazil Tax Liability ” for additional information.
As of September 30, 2023 and 2022 , we had liabilities of $ 100.2 million and $ 85.0 million, respectively, related to estimated interest and penalties for unrecognized tax benefits. Our results of operations for fiscal 2023, 2022 and 2021 include expense of $ 8.0 million, $ 3.8 million and $ 4.4 million, respectively, net of indirect benefits, related to estimated interest and penalties with respect to the liability for unrecognized tax benefits. As of September 30, 2023 , it is reasonably possible that our unrecognized tax benefits will decrease by up to $ 0.5 million in the next 12 months due to expiration of various statutes of limitations and settlement of issues.
We file federal, state and local income tax returns in the U.S. and various foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal income tax examinations by tax authorities for years prior to fiscal 2018 and state and local income tax examinations by tax authorities for years prior to fiscal 2012. We are no longer subject to non-U.S. income tax examinations by tax authorities for years prior to fiscal 2009, except for Brazil for which we are not subject to tax examinations for years prior to 2006. While we believe our tax positions are appropriate, they are subject to audit or other modifications, and any modifications could materially and adversely affect our results of operations, financial condition or cash flows.
Note 8. Segmen t Information
We report our financial results of operations in the following four reportable segments:
Corrugated Packaging, which substantially consists of our integrated corrugated converting operations and generates its revenues primarily from the sale of corrugated containers and other corrugated products, including the operations acquired in the Mexico Acquisition;
Consumer Packaging, which consists of our integrated consumer converting operations and generates its revenues primarily from the sale of consumer packaging products such as folding cartons, interior partitions (before divestiture in September 2023) and other consumer products;
Global Paper, which consists of our commercial paper operations and generates its revenues primarily from the sale of containerboard and paperboard to external customers; and
Distribution, which consists of our distribution and display assembly operations and generates its revenues primarily from the distribution of packaging products and assembly of display products.
We determined our operating segments based on the products and services we offer. Our operating segments are consistent with our internal management structure, and we do not aggregate operating segments. We report the benefit of vertical integration with our mills in each reportable segment that ultimately sells the associated paper and packaging products to our external customers. We account for intersegment sales at prices that approximate market prices.
We have included the operations acquired in the Mexico Acquisition in our Corrugated Packaging segment, which is consistent with our internal operational structure and how our CODM allocates resources and assesses financial performance. See “ Note 3. Acquisitions ” for additional information. As part of this assessment, we also moved certain existing consumer converting operations in Latin America into our Corrugated Packaging segment in line with how we are managing the business effective January 1, 2023. We did not recast prior year results related to these operations as they were not material.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Adjusted EBITDA 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. 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. Management believes excluding these items is useful in the evaluation of operating performance from period to period because these items are not representative of our ongoing operations or are items our CODM does not consider part of our reportable segments.
Some of our operations are in locations such as Canada, Latin America, EMEA and Asia Pacific. The table below reflects financial data of our foreign operations for each of the past three fiscal years, some of which were transacted in U.S. dollars (in millions):
Years Ended September 30,
Net sales (unaffiliated customers):
Canada
Latin America
EMEA
Asia Pacific
Total
Years Ended September 30,
Long-lived assets:
Canada
Latin America (1)
EMEA
Asia Pacific
Total
Includes operations in Mexico that are approximately 13.4 % of total long-lived assets in fiscal 2023 following the Mexico Acquisition.
The accounting policies of the reportable segments are the same as those described in “ Note 1. Description of Business and Summary of Significant Accounting Policies ”. We account for intersegment sales at prices that approximate market prices. For segment reporting purposes, we include our equity in income of unconsolidated entities in Adjusted EBITDA, as well as the related investments in segment identifiable assets. These amounts are included in the segment tables that follow.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables show selected financial data for our segments (in millions):
Years Ended September 30,
Net sales (aggregate):
Corrugated Packaging
Consumer Packaging
Global Paper
Distribution
Total
Less net sales (intersegment):
Corrugated Packaging
Consumer Packaging
Distribution
Total
Net sales (unaffiliated customers):
Corrugated Packaging
Consumer Packaging
Global Paper
Distribution
Total
Adjusted EBITDA:
Corrugated Packaging
Consumer Packaging
Global Paper
Distribution
Total
Depreciation, depletion and amortization
Multiemployer pension withdrawal income (expense)
Restructuring and other costs, net
Impairment of goodwill and other assets
Non-allocated expenses
Interest expense, net
Gain (loss) on extinguishment of debt
Other (expense) income, net
Gain on sale of RTS and Chattanooga
Other adjustments
(Loss) income before income taxes
See “ Note 5. Restructuring and Other Costs, Net” for additional information on how the Restructuring and other costs, net relate to our reportable segments. See below for information on the goodwill impairment recorded in fiscal 2023. See “ Note 1. Description of Business and Summary of Significant Accounting Policies — Description of Business ” for additional information regarding the Gain on Sale of RTS and Chattanooga. See below for additional information on Other adjustments in fiscal 2023 and 2021.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Years Ended September 30,
Depreciation, depletion and amortization:
Corrugated Packaging
Consumer Packaging
Global Paper
Distribution
Corporate
Total
Other adjustments:
Corrugated Packaging
Consumer Packaging
Global Paper
Distribution
Corporate
Total
Equity in income of unconsolidated entities:
Corrugated Packaging
Consumer Packaging
Global Paper
Total
The decrease in Equity in income of unconsolidated entities in fiscal 2023 was primarily related to a $ 46.8 million non-cash, pre-tax loss associated with the Mexico Acquisition that was partially offset by a $ 19.3 million gain on sale of our displays joint venture and a $ 7.6 mi llion gain on sale of our Seven Hills mill joint venture. Additionally, the change year-over-year was impacted by no longer recording equity income after those transactions as well as stronger performance by the displays joint venture in the prior year period. See “ Note 1. Description of Business and Summary of Significant Accounting Policies — Description of Business ” for additional information.
Other adjustments in the table above for the year ended September 30, 2023 consist primarily of:
work stoppage costs of $ 80.4 million primarily at our Mahrt mill; $ 58.5 million in our Consumer Packaging segment, $ 19.3 million in our Global Paper segment and $ 2.6 million of other costs in our Corrugated Packaging segment,
business systems transformation costs in Corporate of $ 79.1 million,
a $ 46.8 million non-cash, pre-tax loss in the Corrugated Packaging segment related to the Mexico Acquisition as discussed in “ Note 3. Acquisitions ,” partially offset by a $ 19.3 million gain on the sale our former displays joint venture in our Corrugated Packaging segment and a $ 4.3 million gain on the sale of our Seven Hills mill joint venture in Lynchburg, VA in our Global Paper segment,
losses at facilities in the process of being closed of $ 40.6 million (excluding depreciation and amortization), primarily $ 32.6 million in our Global Paper segment and $ 5.3 million in our Corrugated Packaging segment, and
acquisition accounting inventory-related adjustments of $ 7.6 million and $ 5.5 million in the Corrugated Packaging and Global Paper segments, respectively.
Other adjustments in the table above for the year ended September 30, 2021 consist primarily of:
COVID employee payments of $ 22.0 million, primarily $ 10.1 million in Corrugated Packaging and $ 8.7 million in Consumer Packaging,
ransomware direct costs, net of insurance of $ 18.9 million, primarily $ 13.0 million in Corporate, and
accelerated compensation for our former CEO of $ 11.7 million in Corporate.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We allocate the assets and capital expenditures of our mill system across our reportable segments because the benefits of vertical integration are reflected in the reportable segment that ultimately sells the associated paper and packaging products to external customers. The following tables reflect such allocation (in millions):
Years Ended September 30,
Assets:
Corrugated Packaging
Consumer Packaging
Global Paper
Distribution
Assets held for sale
Corporate
Total
Intangibles, net:
Corrugated Packaging
Consumer Packaging
Global Paper
Distribution
Total
Capital expenditures:
Corrugated Packaging
Consumer Packaging
Global Paper
Distribution
Corporate
Total
Equity method investments:
Corrugated Packaging
Consumer Packaging
Global Paper
Corporate
Total
The decrease in equity method investments compared to September 30, 2022, was due to the Mexico Acquisition, the sale of an unconsolidated displays joint venture and the sale of our Seven Hills mill joint venture. See “ Note 3. Acquisitions ” and “ Note 1. Description of Business and Summary of Significant Accounting Policies — Description of Business ” for additional information. Equity method investments are included in the consolidated balance sheets in Other noncurrent assets. The prior investment in Grupo Gondi, in the Corrugated Packaging segment, exceeded our proportionate share of the underlying equity in net assets by approximately $ 101.8 mill ion in fiscal 2022.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The changes in the carrying amount of goodwill for the fiscal years ended September 30, 2023, 2022 and 2021 are as follows (in millions):
Legacy Reportable Segments
New Reportable Segments
Corrugated
Packaging
Consumer
Packaging
Corrugated
Packaging
Consumer
Packaging
Global Paper
Distribution
Total
Balance as of Sep. 30, 2020
Goodwill
Accumulated impairment
losses
Goodwill disposed of
Translation adjustments
Balance as of Sep. 30, 2021
Goodwill
Accumulated impairment
losses
Segment recasting (1)
Goodwill acquired
Translation adjustments
Balance as of Sep. 30, 2022
Goodwill
Accumulated impairment
losses
Goodwill impairment
Goodwill acquired
Divestitures
Translation and other
adjustments
Balance as of Sep. 30, 2023
Goodwill
Accumulated impairment
losses
Represents the reallocation of goodwill as a result of our October 1, 2021 segment change.
Interim Goodwill Impairment Analysis
We review the carrying value of our goodwill annually as of 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. In the second quarter of fiscal 2023, due to the sustained decrease in our market capitalization and the further deterioration of macroeconomic conditions, including the impact of soft demand, pricing pressure and elevated inflation, which negatively affected our long-term forecasts in certain segments, we concluded that impairment indicators existed. As a result, we completed an interim quantitative goodwill impairment test in conjunction with our normal quarterly reporting process. Consistent with past practice, the estimated fair value of our reporting units was determined using a combination of the Income Approach and Market Approach. These fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors.
In fiscal 2023, we recorded a pre-tax, non-cash impairment charge of $ 1,893.0 m illion ($ 1,821.8 m illion after-tax) associated with our interim goodwill impairment analysis completed in the second quarter; $ 1,378.7 million in the Global Paper r eportable segment and $ 514.3 million in the Corrugated Packaging reportable segment. Goodwill associated with the Global Paper reporting unit was written off in its entirety as of March 31, 2023.
Annual Goodwill Impairment Analysis
During the fourth quarter of fiscal 2023, we completed our annual goodwill impairment testing. All reporting units that have goodwill were noted to have a fair value that exceeded their carrying values. See “ Note 1. Description
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of Business and Summary of Significant Accounting Policies — Goodwill ” for a discussion of our fiscal 2023 annual impairment test.
Note 9. Intere st
The components of interest expense, net is as follows (in millions):
Years Ended September 30,
Interest expense
Interest income
Interest expense, net
Cash paid for interest, net of amounts capitalized, of $ 452.2 million, $ 363.9 million and $ 384.7 million were made during fiscal 2023, 2022 and 2021, respectively.
During fiscal 2023, 2022 and 2021 , we capitalized interest of $ 27.2 million, $ 11.1 million and $ 14.0 million, respectively.
Note 10. I nventories
Inventories are as follows (in millions):
September 30,
Finished goods and work in process
Raw materials
Supplies and spare parts
Inventories at FIFO cost
LIFO reserve
Net inventories
It is impracticable to segregate the LIFO reserve between raw materials, finished goods and work in process. In fiscal 2023, 2022 and 2021, we reduced inventory quantities in some of our LIFO pools. These reductions result in liquidations of LIFO inventory quantities generally carried at lower costs prevailing in prior years as compared with the cost of the purchases in the respective fiscal years, the effect of which typically decreases cost of goods sold. Alternatively, higher costs prevailing in prior years increase costs of goods sold. The impact of the liquidations in fiscal 2023, 2022 and 2021 was not significant.
In fiscal 2023, we experienced lower inventory costs primarily due to deflation in the last half of the year, the effect of which decreased cost of goods sold and our LIFO reserve by $ 104.4 million.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 11. Property, Plant and Equipment
Property, plant and equipment consists of the following (in millions):
September 30,
Property, plant and equipment at cost:
Land and buildings
Machinery and equipment
Forestlands
Transportation equipment
Leasehold improvements
Construction in progress
Less: accumulated depreciation, depletion and amortization
Property, plant and equipment, net
Depreciation expense for fiscal 2023, 2022 and 2021 was $ 1,163.4 m illion, $ 1,108.1 million and $ 1,069.7 million, respectively. Accrued additions to property, plant and equipment at September 30, 2023, 2022 and 2021 were $ 165.2 million, $ 223.2 million and $ 108.5 million, respectively.
Note 12. Other Intangible Assets
The gross carrying amount and accumulated amortization relating to intangible assets, excluding goodwill, are as follows and reflect the removal of fully amortized intangible assets in the period fully amortized (in millions, except weighted avg. life):
September 30,
Weighted
Avg. Life
(in years)
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
Customer relationships
Trademarks and tradenames
Technology and patents
License costs
Non-compete agreements
Other
Total
Estimated intangible asset amortization expense for the succeeding five fiscal years is as follows (in millions):
Fiscal 2024
Fiscal 2025
Fiscal 2026
Fiscal 2027
Fiscal 2028
Intangible amortization expense was $ 342.2 million, $ 351.1 million and $ 360.6 million during fiscal 2023, 2022 and 2021 , respectively. We had additional amortization expense, primarily for packaging equipment leased to customers of $ 30.2 million, $ 29.4 million and $ 29.7 million during fiscal 2023, 2022 and 2021 , respectively.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 13. Fair Value
Assets and Liabilities Measured or Disclosed at Fair Value
We estimate fair values in accordance with ASC 820, “Fair Value Measurement”. We have not changed the valuation techniques for measuring the fair value of any financial assets or liabilities during the fiscal year. We disclose the fair value of our long-term debt in “ Note 14. Debt ” and the fair value of our pension and postretirement assets and liabilities in “ Note 6. Retirement Plans ”. We disclose the fair value of our derivative instruments in “ Note 16. Derivatives ” and our restricted assets and non-recourse liabilities held by SPEs in Note 17. Special Purpose Entities ”. See “ Note 1 — Description of Business and Summary of Significant Accounting Policies — Fair Value Measurements ” for additional information.
Fiscal 2021 reflected a charge of $ 22.5 million associated with not exercising an option to purchase an additional equity interest in Grupo Gondi that was recorded in Othe r (expense) income, net.
Financial Instruments Not Recognized at Fair Value
Financial instruments not recognized at fair value on a recurring or nonrecurring basis include cash and cash equivalents, accounts receivable, certain other current assets, short-term debt, accounts payable, certain other current liabilities and long-term debt. With the exception of long-term debt, the carrying amounts of these financial instruments approximate their fair values due to their short maturities.
Nonrecurring Fair Value Measurements
As discussed in “ Note 1. Description of Business and Summary of Significant Accounting Policies ”, we measure certain assets and liabilities at fair value on a nonrecurring basis. In fiscal 2023, we recorded a pre-tax, non-cash impairment charge of $ 1,893.0 m illion associated with our interim goodwill impairment analysis completed in the second quarter. See “ Note 8. Segment Information ” for additional information. See “ Note 5. Restructuring and Other Costs, Net ” for impairments associated with restructuring activities labeled as “PP&E and related costs” including the impairment of our Tacoma, WA and North Charleston, SC containerboard mills in fiscal 2023. In fiscal 2022, we recorded impairments associated with the closure of our Panama City, FL mill and the permanent closure of the corrugated medium manufacturing operations at our St. Paul, MN mill. Fair value of the remaining land, building and improvements of these facilities was determined based on third-party appraisals. During fiscal 2023, 2022 and 2021, we did not have any significant non-goodwill or non- nonfinancial assets or nonfinancial liabilities that were measured at fair value on a nonrecurring basis in periods subsequent to initial recognition other than the $ 26.0 m illion pre-tax non-cash of certain mineral rights in fiscal 2022 that was driven by a of new leasing or development activity on our properties for an extended period of time, including pipeline . With the , we had no value assigned to our remaining mineral rights.
Accounts Receivable Monetization Agreements
On September 11, 2023, we terminated our existing $ 700.0 million accounts receivable monetization facility to sell to a third-party financial institution all of the short-term receivables generated from certain customer trade accounts. On the same date, we entered into a new replacement $ 700.0 million facility (the “ Monetization Agreement ”) with Coöperatieve Rabobank U.A., New York Branch, as purchaser, (“ Rabo ”) on substantially the same terms as the former agreement. The Monetization Agreement provides for, among other things, (i) an extension of the scheduled amortization termination date until September 13, 2024, and (ii) the ability to effectuate the Transaction without any additional consent from Rabo or the triggering of a notification event under the Monetization Agreement. The terms of the Monetization Agreement limit the balance of receivables sold to the amount available to fund such receivables sold, thereby eliminating the receivable for proceeds from the financial institution at any transfer date. Transfers under the Monetization Agreement meet the requirements to be accounted for as sales in accordance with guidance in ASC 860. We will pay a monthly yield on investment to Rabo at a rate equal to adjusted Term SOFR plus a margin on the outstanding amount of Rabo’s investment.
We also have a similar $ 110.0 million facility that was amended on December 2, 2021 to address the transition from LIBOR to SOFR. The facility was again amended on December 2, 2022 to extend the term through December
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4, 2023 and to include certain fee and other general revisions. The facility purchase limit was unchanged and the facility remains committed.
The customers from these facilities are not included in the Receivables Securitization Facility that is discussed in “ Note 14. Debt ”.
The following table represents a summary of these accounts receivable monetization agreements for fiscal 2023 and 2022 (in millions):
Receivable from financial institutions at beginning of fiscal year
Receivables sold to the financial institutions and derecognized
Receivables collected by financial institutions
Cash (payments to) proceeds from financial institutions
Receivable from financial institutions at September 30,
Receivables sold under these accounts receivable monetization agreements as of the respective balance sheet dates were approximately $ 692.2 million and $ 724.7 million as of September 30, 2023 and September 30, 2022, respectively.
Cash proceeds related to the receivables sold are included in Net cash provided by operating activities in the consolidated statements of cash flow in the accounts receivable line item. While the expense recorded in connection with the sale of receivables may vary based on current rates and levels of receivables sold, the expense recorded in connection with the sale of receivables was $ 48.3 million, $ 20.4 million and $ 11.1 million in fiscal 2023, 2022 and 2021, respectively, and is recorded in Other (expense) income, net in the consolidated statements of operations. Although the sales are made without recourse, we maintain continuing involvement with the sold receivables as we provide collections services related to the transferred assets. The associated servicing liability is not material given the high credit quality of the customers underlying the receivables and the anticipated short collection period.
Note 1 4 . Debt
Our outstanding indebtedness consists primarily of public bonds and borrowings under credit facilities. The public bonds issued by WRKCo and MWV are guaranteed by WestRock and certain WestRock subsidiaries. The public bonds are unsecured, unsubordinated obligations that rank equally in right of payment with all of our existing and future unsecured, unsubordinated obligations. The bonds are effectively subordinated to any of our existing and future secured debt to the extent of the value of the assets securing such debt and to the obligations of our non-debtor/guarantor subsidiaries. The industrial development bonds associated with the finance lease obligations of MWV are guaranteed by the Company and certain of its subsidiaries. At September 30, 2023, all of our debt was unsecured with the exception of our Receivables Securitization Facility (as defined below) and finance lease obligations.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following were individual components of debt (in millions, except percentages):
September 30, 2023
September 30, 2022
Carrying
Value
Weighted Avg
Interest Rate
Carrying
Value
Weighted Avg
Interest Rate
Public bonds due fiscal 2024 to 2028
Public bonds due fiscal 2029 to 2033
Public bonds due fiscal 2037 to 2047
Revolving credit and swing facilities
Term loan facilities
Receivables securitization
Commercial paper
International and other debt
Finance lease obligations
Vendor financing and commercial card
programs
Total debt
Less: current portion of debt
Long-term debt due after one year
A portion of the debt classified as long-term may be paid down earlier than scheduled at our discretion without penalty. Our credit facilities contain certain restrictive covenants, including a covenant to satisfy a debt to capitalization ratio. We test and report our compliance with these covenants as required by these facilities and were in compliance with them at September 30, 2023. The carrying value of our debt includes the fair value step-up of debt acquired in mergers and acquisitions, and the weighted average interest rate includes the fair value step up. At September 30, 2023 , excluding the step-up, the weighted average interest rate on total debt was 5.2 %. At September 30, 2023 , the unamortized fair market value step-up was $ 157.0 million, which will be amortized over a weighted average remaining life of 9.1 years. At September 30, 2023 , we had $ 77.6 million of outstanding letters of credit not drawn upon. At September 30, 2023, we had approximately $ 3.4 billion of available liquidity under long-term committed credit facilities and cash and cash equivalents. This liquidity may be used to provide for ongoing working capital needs and for other general corporate purposes including acquisitions and dividends.
The estimated fair value of our debt was approximately $ 8.1 billion and $ 7.3 billion as of September 30, 2023 and September 30, 2022, respectively. The fair value of our long-term debt is categorized as level 2 within the fair value hierarchy and is primarily either based on quoted prices for those or similar instruments, or approximate their carrying amount, as the variable interest rates reprice frequently at observable current market rates.
During fiscal 2023, 2022 and 2021 , amortization of debt issuance costs charged to interest expense were $ 7.1 million, $ 7.3 million and $ 8.3 million, respectively.
Public Bonds
On September 26, 2023, following completion of consent solicitations, we entered into supplemental indentures governing our outstanding: (i) $ 600 million aggregate principal amount of 3.750 % senior notes due March 2025 ; (ii) $ 750 million aggregate principal amount of 4.650 % senior notes due March 2026 ; (iii) $ 500 million aggregate principal amount of 3.375 % senior notes due September 2027 ; (iv) $ 600 million aggregate principal amount of 4.000 % senior notes due March 2028 and (v) $ 750 million aggregate principal amount of 4.900 % senior notes due March 2029 to, among other things, amend the definition of “Change of Control” to add an exception for the proposed Transaction.
On Sept ember 22, 2023, we discharged $ 500 million aggregate principal amount of our 3.00 % senior notes due September 2024 using cash and cash equivalents and borrowings under our commercial paper program and recorded a $ 10.5 million gain on extinguishment of debt.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On March 22, 2022, we redeemed $ 350 million aggregate principal amount of our 4.00 % senior notes due March 2023 primarily using borrowings under our Receivables Securitization Facility (as hereinafter defined) and recorded an $ 8.2 million loss on extinguishment of debt.
On Sept ember 10, 2021, we redeemed $ 400 million aggregate principal amount of our 4.90 % senior notes due March 2022 using cash and cash equivalents and recorded a $ 8.6 million loss on extinguishment of debt.
At September 30, 2023 and September 30, 2022, the face value of our public bond obligations outstanding was $ 5.7 billio n and $ 6.2 billion, respectively.
Revolving Credit Facilities
Revolving Credit Facility
On July 7, 2022, we entered into a credit agreement (the " Revolving Credit Agreement ") that included a five-year senior unsecured revolving credit facility in an aggregate amount of $ 2.3 billion, consisting of a $ 1.8 billion U.S. revolving facility and a $ 500 million multicurrency revolving facility (collectively, the “ Revolving Credit Facility ”) with Wells Fargo Bank, National Association, as administrative agent and multicurrency agent. The Revolving Credit Facility is guaranteed by WestRock Company and certain of its subsidiaries as set forth in the Revolving Credit Agreement. We amended the Revolving Credit Agreement on September 27, 2023, to provide that the proposed Transaction would not constitute a “Change in Control” thereunder. At September 30, 2023 and 2022, we had no amounts o utstanding under the facility, respectively.
Loans under the Revolving Credit Facility may be drawn in U.S. dollars, Canadian dollars, Euro and Pounds Sterling. At our option, l oans under the Revolving Credit Facility will bear interest at (a) in the case of loans denominated in U.S. dollars, either Term SOFR or an alternate base rate, (b) in the case of loans denominated in Canadian dollars, one of CDOR, the U.S. Base Rate or the Canadian Prime Rate, (c) in the case of loans denominated in Euro, EURIBOR and (d) in the case of loans denominated in Pounds Sterling, SONIA, in each case plus an applicable interest rate margin that will fluctuate between 0.875 % per annum and 1.500 % per annum (for Term SOFR loans, CDOR loans, EURIBOR loans and SONIA loans) or between 0.000 % per annum and 0.500 % per annum (for alternate base rate loans, U.S. Base Rate loans and Canadian Prime Rate loans), based upon the Company’s corporate credit ratings or the Leverage Ratio (as each of these terms is defined in the Revolving Credit Agreement) whichever yields a lower applicable interest rate margin at such time. Term SOFR loans will be subject to a credit spread adjustment equal to 0.100 % per annum. In addition, unused revolving commitments under the Revolving Credit Facility will accrue a commitment fee that will fluctuate between 0.080 % per annum and 0.225 % per annum, based upon the Company’s corporate credit ratings or the Leverage Ratio (whichever yields a lower applicable commitment fee rate) at such time.
European Revolving Credit Facilities
On July 7, 2022, we entered into a credit agreement (the " European Revolving Credit Agreement ") with Rabo, as administrative agent. The European Revolving Credit Agreement provides for a three-year senior unsecured revolving credit facility in an aggregate amount of € 700.0 million and includes an incremental € 100.0 million accordion feature (the “ European Revolving Credit Facility ”). The European Revolving Credit Facility is guaranteed by WestRock Company and certain of its subsidiaries as set forth in the European Revolving Credit Agreement. We amended the European Revolving Credit Agreement on September 27, 2023, to provide that the proposed Transaction would not constitute a “Change in Control” thereunder. At September 30, 2023 we had no amounts outstanding under the facility. At September 30, 2022, we had borrowed $ 265.0 million under the facility.
Loans under the European Revolving Credit Facility may be drawn in U.S. dollars, Euro and Pounds Sterling. At our option, loans under the European Revolving Credit Facility will bear interest at (a) in the case of loans denominated in U.S. dollars, either Term SOFR or an alternate base rate, (b) in the case of loans denominated in Euro, EURIBOR and (c) in the case of loans denominated in Pounds Sterling, SONIA, in each case plus an applicable interest rate margin that will fluctuate between 0.875 % per annum and 1.625 % per annum (for Term SOFR loans, EURIBOR loans and SONIA loans) or between 0.000 % per annum and 0.625 % per annum (for alternate base rate loans), based upon the Company’s corporate credit ratings at such time. Term SOFR loans will
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
be subject to a credit spread adjustment equal to 0.100 % per annum. In addition, unused revolving commitments under the European Revolving Credit Facility will accrue a commitment fee that will fluctuate between 0.100 % per annum and 0.275 % per annum, based upon the Company’s corporate credit ratings at such time. Loans under the European Revolving Credit Facility may be prepaid at any time without premium.
Term Loan Facilities
Farm Loan Credit Facilities
On July 7, 2022, we amended and restated the prior credit agreement (the “ Farm Credit Facility Agreement ”) with CoBank, ACB, as administrative agent. The Farm Credit Facility Agreement provides for a seven-year senior unsecured term loan facility in an aggregate principal amount of $ 600 million (the “ Farm Credit Facility ”). At any time, we have the ability to request an increase in the principal amount by up to $ 400 million by written notice. The Farm Credit Facility is guaranteed by WestRock Company and certain of its subsidiaries as set forth in the Farm Credit Facility Agreement. We amended the Farm Credit Facility Agreement on September 27, 2023, to provide that the proposed Transaction would not constitute a “Change in Control” thereunder. The carrying value of this facility at September 30, 2023 and 2022 was $ 598.4 million and $ 598.2 million, respectively.
At our option, loans issued under the Farm Credit Facility will bear interest at either Term SOFR or an alternate bas e rate, in each case plus an applicable interest rate margin that will fluctuate between 1.650 % per annum and 2.275 % per annum (for Term SOFR loans) or between 0.650 % per annum and 1.275 % per annum (for alternate base rate loans), based upon the Company’s corporate credit ratings or the Leverage Ratio (as each of these terms is defined in the Farm Credit Facility Agreement) whichever yields a lower applicable interest rate margin at such time. In addition, Term SOFR loans will be subject to a credit spread adjustment equal to 0.100 % per annum.
Delayed Draw Term Facility
On August 18, 2022, we amended the Revolving Credit Agreement (the " Amended Credit Agreement ") to add a three-year unsecured delayed draw term loan facility with an aggregate principal amount of up to $ 1.0 billion (the " Delayed Draw Term Facility ") that could be borrowed in a single draw through May 31, 2023. On November 28, 2022, in connection with the Mexico Acquisition, we drew upon the facility in full. The Delayed Draw Term Facility is guaranteed by WestRock Company and certain of its subsidiaries as set forth in the Amended Credit Agreement. We have the option to extend the maturity date by one year with full lender consent. The one-year maturity extension would cost a fee of 20 basis points. We amended the Amended Credit Agreement on September 27, 2023, to provide that the proposed Transaction would not constitute a “Change in Control” thereunder. At September 30, 2023 , the carrying value of this facility was $ 749.0 million.
At our option, a loan under the Delayed Draw Term Facility will bear interest at either Term SOFR or an alternate base rate, in each case plus an applicable interest rate margin that will fluctuate between 0.875 % per annum and 1.500 % per annum for a Term SOFR loan or between 0.000 % per annum and 0.500 % per annum for an alternate base rate loan based upon the Company’s corporate credit ratings or the Leverage Ratio (as defined in the Amended Credit Agreement), whichever yields a lower applicable interest rate margin, at such time. A Term SOFR loan will be subject to a credit spread adjustment equal to 0.100 % per annum. Any loan under the Delayed Draw Term Facility may be prepaid at any time without premium, and it may not be reborrowed.
Receivables Securitization Facility
On February 28, 2023, we amended our existing $ 700.0 million receivables securitization agreement (the “ Receivables Securitization Facility ”), primarily to extend the maturity to February 27, 2026 , and to complete the transition from LIBOR to Term SOFR. Term SOFR loans are subject to a credit spread adjustment equal to 0.10 % per annum. The commitment fee w as 0.25 % and 0.35 % as of September 30, 2023 and September 30, 2022, respectively. At September 30, 2023 and September 30, 2022 , maximum available borrowings, excluding amounts outstanding under the Receivables Securitization Facility, were $ 700.0 mil lion and $ 700.0 million, respectively. The carrying amount of accounts receivable collateralizing the maximum available borrowings at September 30, 2023 and September 30, 2022 were approximatel y $ 1,177.6 million and $ 1,390.5 million, respectively. We have continuing involvement with the underlying receivables as we provide credit and collections services pursuant to
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Receivables Securitization Facility. We amended the Receivables Securitization Facility on September 29, 2023, to provide that the proposed Transaction would not be deemed to constitute a “Change in Control” thereunder. At September 30, 2023 we had borrowed $ 425.0 million under this facility. At September 30, 2022 there were no amounts outstanding under this facility.
Borrowing availability under this facility is based on the eligible underlying accounts receivable and compliance with certain covenants. The agreement governing the Receivables Securitization Facility contains restrictions, including, among others, on the creation of certain liens on the underlying collateral. We test and report our compliance with these covenants monthly; we were in compliance with these covenants at September 30, 2023 . The Receivables Securitization Facility includes certain restrictions on receivables eligibility under the facility and allows for the exclusion of eligible receivables of specific obligors each calendar year subject to the following restrictions: (i) the aggregate of excluded receivables may not exceed 7.5 % of eligible receivables under the Receivables Securitization Facility and (ii) the excluded receivables of each obligor may not exceed 2.5 % of the aggregate outstanding balance.
Commercial Paper Program
On December 7, 2018, we established an unsecured commercial paper program with WRKCo as the issuer. Under the program, we may issue short-term unsecured commercial paper notes in an aggregate principal amount at any time not to exceed $ 1.0 billion with up to 397-day maturities. The program has no expiration date and can be terminated by either the agent or us with not less than 30 days’ notice. Our Revolving Credit Facility is (and, prior to July 7, 2022, the prior revolving credit facility was) intended to backstop the commercial paper program. Amounts available under the program may be borrowed, repaid and re-borrowed from time to time. At September 30, 2023 there was $ 283.9 million outstanding. At September 30, 2022, there were no am ounts outstanding.
International and Other Debt
Brazil Export Credit Note
On January 18, 2021, we entered into a credit agreement to provide for R$ 500.0 million of a senior unsecured term loan of WestRock Celulose, Papel E Embalagens Ltda. (a subsidiary of the Company), as borrower, and the Company, as guarantor. The agreement provides for the outstanding amount of the principal to be repaid in equal, semiannual installments beginning on January 19, 2023 until the facility matures on January 19, 2026 . The proceeds borrowed are to be used to support the production of goods or acquisition of inputs that are essential or ancillary to export activities. Loans issued under the facility will bear interest at a floating rate based on Brazil’s Certificate of Interbank Deposit rate plus a spread of 2.50 %. At September 30, 2023 and 2022, there w as R$ 147.1 million ($ 29.4 million) outstanding and R$ 500.0 million ($ 92.7 million) outstanding, respectively.
Brazil Delayed Draw Credit Facilities
On April 10, 2019, we entered into a credit agreement to provide for R$ 750.0 million of senior unsecured term loans with an incremental R$ 250.0 million accordion feature to be repaid in equal, semiannual installments beginning on April 10, 2021 until maturity on April 10, 2024 (the “ Brazil Delayed Draw Credit Facilities ”). The proceeds of the Brazil Delayed Draw Credit Facilities were used to support the production of goods or acquisition of inputs essential or ancillary to export activities. On September 16, 2022, we repaid the facility in full, which resulted in termination of the facility. The Brazil Delayed Draw Credit Facilities were senior unsecured obligations of Rigesa Celulose, Papel E Embalagens Ltda. (a subsidiary of the Company), as borrower, and the Company, as guarantor. Loans issued under the Brazil Delayed Draw Credit Facilities bore interest at a floating rate based on Brazil’s Certificate of Interbank Deposit rate plus a spread of 1.50 %.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Aggregate Maturities of Debt
As of September 30, 2023 , the aggregate maturities of debt, excluding finance lease obligations, for the succeeding five fiscal years and thereafter are as follows (in millions):
Fiscal 2024
Fiscal 2025
Fiscal 2026
Fiscal 2027
Fiscal 2028
Thereafter
Fair value of debt step-up, deferred financing costs and unamortized
bond discounts
Total
See “ Note 15. Leases ” of the Notes to Consolidated Financial Statements for the aggregate maturities of finance lease obligations for the succeeding five fiscal years and thereafter.
Note 15 . Leases
Components of Lease Costs
The following table presents certain information related to the lease costs for finance and operating leases (in millions):
Years Ended September 30,
Operating lease costs
Variable and short-term lease costs
Sublease income
Finance lease cost:
Amortization of lease assets
Interest on lease liabilities
Total lease cost, net
Supplemental Balance Sheet Information Related to Leases
The table below presents the lease-related assets and liabilities recorded on the balance sheet (in millions):
September 30,
Consolidated Balance Sheet Caption
Operating leases:
Operating lease right-of-use asset
Other noncurrent assets
Current operating lease liabilities
Other current liabilities
Noncurrent operating lease liabilities
Other noncurrent liabilities
Total operating lease liabilities
Finance leases:
Property, plant and equipment
Accumulated depreciation
Property, plant and equipment, net
Current finance lease liabilities
Current portion of debt
Noncurrent finance lease liabilities
Long-term debt due after one year
Total finance lease liabilities
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our finance lease portfolio includes certain assets that are either fully depreciated or transferred for which the lease arrangement requires a one-time principal repayment on the maturity date of the lease obligation.
Lease Term and Discount Rate
September 30,
Weighted average remaining lease term:
Operating leases
4.5 years
5.0 years
Finance leases
9.3 years
7.3 years
Weighted average discount rate:
Operating leases
Finance leases
Supplemental Cash Flow Information Related to Leases
The table below presents supplemental cash flow information related to leases (in millions):
Years Ended September 30,
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows related to operating leases
Operating cash flows related to finance leases
Financing cash flows related to finance leases
ROU assets obtained in exchange for lease liabilities:
Operating leases
Finance leases
Maturity of Lease Liabilities
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities and finance lease liabilities recorded on the balance sheet (in millions):
September 30, 2023
Operating Leases
Finance Leases
Total
Fiscal 2024
Fiscal 2025
Fiscal 2026
Fiscal 2027
Fiscal 2028
Thereafter
Total lease payments
Less: Interest (1)
Present value of future lease payments
Calculated using the interest rate for each lease.
Note 16. Deriv atives
We are exposed to risks from changes in, among other things, commodity price risk, foreign currency exchange risk and interest rate risk. To manage these risks, from time to time and to varying degrees, we may enter into a
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
variety of financial derivative transactions and certain physical commodity transactions that are determined to be derivatives.
We have designated certain natural gas commodity contracts as cash flow hedges for accounting purposes. Therefore, the entire change in fair value of the financial derivative instrument is reported as a component of other comprehensive loss and reclassified into earnings in the same line item associated with the forecasted transaction, and in the same period or periods during which the forecasted transaction affects earnings. Fair value measurements for our natural gas commodity derivatives are classified under level 2 because such measurements are estimated based on observable inputs such as commodity future prices. Approximately three-fourths of our natural gas purchases for our U.S. and Canadian mill operations are tied to NYMEX. Our natural gas hedging positions are entered in layers over multiple months and up to 12 months in advance to achieve a targeted hedging volume of up to 80% of our anticipated NYMEX-based natural gas purchases. However, we may modify our strategy based on, among other things, our assessment of market conditions.
For financial derivative instruments that are not designated as accounting hedges, the entire change in fair value of the financial instrument is reported immediately in current period earnings.
The following table sets forth the outstanding notional amounts related to our derivative instruments (in millions):
September 30,
Metric
Designated cash flow hedges:
Natural gas commodity contracts
MMBtu
Undesignated derivatives:
Foreign currency contracts (1)
Mexican pesos
At September 30, 2022, the outstanding foreign currency exchange contract was related to the purchase of 8.0 billion Mexican pesos ($ 389.9 million) for refinancing the external debt acquired in the Mexico Acquisition on December 1, 2022 .
The following table sets forth the l ocation and fair values of our derivative instruments (in millions):
September 30,
Consolidated Balance
Sheet Caption
Designated cash flow hedges:
Natural gas commodity contracts
Other current liabilities (1)
Undesignated derivatives:
Foreign currency contracts
Other current assets
At September 30, 2023 and September 30, 2022, liability positions by counterparty were partially offset by $ 0.2 million and $ 2.3 million, respectively, of asset positions where we had an enforceable right of netting.
The following table sets forth gains (losses) recognized in accumulated other comprehensive loss, net of tax for cash flow hedges (in millions):
Years Ended September 30,
Natural gas commodity contracts
Interest rate swap contracts
The following table sets forth amounts of gains (losses) recognized in the consolidated statements of operations for cash flow hedges reclassified from accumulated other comprehensive loss (in millions):
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Years Ended September 30,
Consolidated Statement
of Operations Caption
Natural gas commodity contracts
Cost of goods sold
Interest rate swap contracts
Interest expense, net
The following table sets forth amounts of gains (losses) recognized in the consolidated statements of operations for derivatives not designated as hedges (in millions):
Years Ended September 30,
Consolidated Statement
of Operations Caption
Foreign currency contracts
Other income (expense), net
Note 17. Special Purpose Entities
Pursuant to a sale of certain large-tract forestlands in 2007, a special purpose entity MeadWestvaco Timber Notes Holding, LLC (“ MWV TN ”) received, and WestRock assumed upon the strategic combination of Rock-Tenn Company and MeadWestvaco Corporation’s respective businesses (the “ Combination ”), an installment note receivable in the amount of $ 398.0 million (“ Timber Note I ”). Timber Note I does not require any principal payments until its maturity in October 2027 and bore interest at a rate approximating LIBOR prior to its amendment and transition to Term SOFR in June 2023. In addition, Timber Note I is supported by a bank-issued irrevocable letter of credit obtained by the buyer of the forestlands. Timber Note I is not subject to prepayment in whole or in part prior to maturity. The bank’s credit rating as of October 2023 was investment grade.
Using Timber Note I as collateral, MWV TN received $ 338.3 million in proceeds under a secured financing agreement with a bank. Under the terms of the agreement, the liability from this transaction is non-recourse to the Company and is payable from Timber Note I proceeds upon its maturity in October 2027. As a result, Timber Note I is not available to satisfy any obligations of WestRock. MWV TN can elect to prepay at any time the liability in whole or in part, however, given that Timber Note I is not prepayable, MWV TN expects to repay the liability at maturity from Timber Note I proceeds. Timber Note I and the secured financing liability were fair valued on the opening balance sheet in connection with the Combination.
Pursuant to the sale of MeadWestvaco Corporation’s remaining U.S. forestlands, which occurred on December 6, 2013, another special purpose entity MeadWestvaco Timber Notes Holding Company II, LLC (“ MWV TN II ”) received, and WestRock assumed upon the Combination, an installment note receivable in the amount of $ 860.0 million (“ Timber Note II ” and together with Timber Note I, the “ Timber Notes ” ). Timber Note II does not require any principal payments until its maturity in December 2023 and bears interest at a fixed rate of 5.207 %. As of September 30, 2023, no event had occurred that would allow for the prepayment of Timber Note II. Timber Note II became prepayable at the borrower’s discretion on October 1, 2023. We expect it to be repaid at or close to maturity. We monitor the credit quality of the borrower and receive quarterly compliance certificates. The borrower’s credit rating as of October 2023 was investment grade.
Using Timber Note II as collateral, MWV TN II received $ 774.0 million in proceeds under a secured financing agreement with a bank (together with the borrowing collateralized by Timber Note I, the “ Timber Loans ”). Under the terms of the agreement, the liability from this transaction is non-recourse to WestRock and is payable from Timber Note II proceeds upon its maturity in December 2023. As a result, Timber Note II is not available to satisfy any obligations of WestRock. MWV TN II can elect to prepay, at any time, the liability in whole or in part, with sufficient notice, but would avail itself of this provision only in the event Timber Note II was prepaid in whole or in part. The secured financing agreement, however, requires a mandatory repayment, up to the amount of cash received, if Timber Note II is prepaid in whole or in part. Timber Note II and the secured financing liability were fair valued on the opening balance sheet in connection with the Combination.
The restricted assets and non-recourse liabilities held by SPEs, which we consolidate as variable interest entities, are included in the consolidated balance sheets in the following (in millions):
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
September 30,
Other current assets
Other noncurrent assets
Other current liabilities
Other noncurrent liabilities
The decrease in Other noncurrent assets and Other noncurrent liabilities subsequent to September 30, 2022 reflects one of the Timber Notes becoming current in December 2022.
As of September 30, 2023 and September 30, 2022, the aggregate fair value of the Timber Notes was $ 1,257.2 million and $ 1,278.3 million, respectively. As of September 30, 2023 and September 30, 2022, the fair value of the Non-recourse Liabilities was $ 1,112.4 million and $ 1,132.3 million, respectively. Fair values of the Timber Notes and Non-recourse Liabilities are classified as level 2 within the fair value hierarchy.
The restricted assets and non-recourse liabilities have the following activity (in millions):
September 30,
Interest income on Timber Notes (1)
Interest expense on Timber Loans (1)
Cash receipts on Timber Notes (2)
Cash payments on Timber Loans (2)
Presented in Interest expense, net on the accompanying Consolidated Statements of Operations.
Included as part of operating cash flows on the accompanying Consolidated Statements of Cash Flows.
Note 18. Related Party Transactions
We sell products to affiliated companies. Net sales to the affiliated companies for the fiscal years ended September 30, 2023, 2022 and 2021 were approximately $ 139.6 million, $ 238.5 million and $ 237.7 million, respectively. Accounts receivable due from affiliated companies at September 30, 2023 and 2022 were $ 23.0 million and $ 27.2 million, respectively, and were included in Accounts receivable on our consolidated balance sheets. The decline in net sales to affiliated companies in fiscal 2023 was primarily due to the Mexico Acquisition and the sale of an unconsolidated displays joint venture.
Note 19. Commitmen ts and Contingencies
Capital Additions
Estimated costs for future purchases of fixed assets that we are obligated to purchase as of September 30, 2023 total approximately $ 353 million.
Environmental
Environmental compliance requirements are a significant factor affecting our business. Our manufacturing processes involve the use of natural resources, such as virgin wood fiber and fresh water, discharges to water, air emissions and waste handling and disposal activities. These processes are subject to numerous federal, state, local and international environmental laws and regulations, as well as the requirements of environmental permits and similar authorizations issued by various governmental authorities. Complex and lengthy processes may be required to obtain and renew approvals, permits, and licenses for new, existing or modified facilities. Additionally, the use and handling of various chemicals or hazardous materials require release prevention plans and emergency
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
response procedures. Our integrated chemical pulping mills in the U.S. and Brazil are subject to numerous and more complex environmental programs and regulations, but all of WestRock’s manufacturing facilities have environmental compliance obligations. We have incurred, and expect that we will continue to incur, significant capital, operating and other expenditures complying with applicable environmental laws and regulations including, for example, projects to replace and/or upgrade our air pollution control devices, wastewater treatment systems, and other environmental infrastructure. Changes in these laws, as well as litigation relating to these laws, could result in more stringent or additional environmental compliance obligations for the Company that may require additional capital investments or increase our operating costs.
We are involved in various administrative and other proceedings relating to environmental matters that arise in the normal course of business, and we may become involved in similar matters in the future. Although the ultimate outcome of these proceedings cannot be predicted and we cannot at this time estimate any reasonably possible losses based on available information, we do not believe that the currently expected outcome of any environmental proceedings and claims that are pending or threatened against us will have a material adverse effect on our results of operations, financial condition or cash flows.
Environmental regulations in the U.S. and Canada will require our power boilers at certain WestRock mills to meet more stringent nitrogen oxide (“ NOx ”) emission standards beginning in 2026. In the U.S., the EPA recently finalized a regulation, known as the “Good Neighbor” Plan, that is intended to reduce ozone-forming emissions of nitrogen oxides from industrial facilities in 20 states during the ozone season (May through September). In Canada, the government is implementing the Multi-Sector Air Pollutants Regulation, which establishes tighter NOx limits for boilers and heaters in several industries, including pulp and paper. Our preliminary analysis indicates that to meet these new requirements, we need to reduce NOx emissions from nine power boilers at four mills in the U.S. and one in Canada. Our environmental and engineering teams are working on strategies for meeting these new limits. Based on our initial assessment, we do not believe the costs of compliance will be material; however, litigation has been filed in several jurisdictions challenging the “Good Neighbor” Plan, and it is currently unclear how these ongoing legal proceedings may impact future obligations under this regulatory program.
We face potential liability under federal, state, local and international laws as a result of releases, or threatened releases, of hazardous substances into the environment from various sites owned and operated by third parties at which Company-generated wastes have allegedly been deposited. Generators of hazardous substances sent to off-site disposal locations at which environmental contamination exists, as well as the owners of those sites and certain other classes of persons, are liable for response costs for the investigation and remediation of such sites under Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“ CERCLA ”) and analogous laws. While joint and several liability is authorized under CERCLA, liability is typically shared with other potentially responsible or liable parties and costs are commonly allocated according to relative amounts of waste deposited and other factors.
In addition, certain of our current or former locations are being investigated or remediated under various environmental laws, including CERCLA. Based on information known to us and assumptions, we do not believe that the costs of these investigation and remediation projects will have a material adverse effect on our results of operations, financial condition or cash flows. However, the discovery of contamination or the imposition of additional obligations, including natural resources damages at these or other sites in the future, could impact our results of operations, financial condition or cash flows.
We believe that we can assert claims for indemnification pursuant to existing rights we have under certain purchase and other agreements in connection with certain remediation sites. In addition, we believe that we have insurance coverage, subject to applicable deductibles or retentions, policy limits and other conditions, for certain environmental matters. However, we may not be successful with respect to any claim regarding these insurance or indemnification rights and, if we are successful, any amounts paid pursuant to the insurance or indemnification rights may not be sufficient to cover all our costs and expenses. We also cannot predict whether we will be required to perform remediation projects at other locations, and it is possible that our remediation requirements and costs could increase materially in the future and exceed current reserves. In addition, we cannot currently determine the impact that future changes in cleanup standards or federal, state or other environmental laws, regulations or enforcement practices will have on our results of operations, financial condition or cash flows.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of September 30, 2023 , we had $ 9.6 million reserved for environmental liabilities on an undiscounted basis, of which $ 3.3 million is included in Other noncurrent liabilities and $ 6.3 million is included in Other current liabilities on the consolidated balance sheets, including amounts accrued in connection with environmental obligations relating to manufacturing facilities that we have closed. We believe the liability for these matters was adequately reserved at September 30, 2023.
Climate Change
Climate change presents risks and uncertainties for us. With respect to physical risks, our physical assets and infrastructure, including our manufacturing operations, have been, and may be in future periods impacted by weather-related events such as hurricanes and floods, potentially resulting in items such as physical damage to our facilities and lost production. Unpredictable weather patterns or extended periods of severe weather also may result in supply chain disruptions and increased material costs, such as through impacts to virgin fiber supplies and prices, which may fluctuate during prolonged periods of heavy rain or drought, during tree disease or insect epidemics or other environmental conditions that may be caused by variations in climate conditions. To the extent that severe weather or other climate-related risks materialize, and we are unprepared for them, we may incur unexpected costs, which could have a material effect on our results of operations, cash flows and financial condition, and the trading price of our Common Stock may be impacted.
Responses to climate change may result in regulatory risks as new laws and regulations aimed at reducing GHG emissions come into effect. These rules and regulations could take the form of cap-and-trade, carbon taxes, or GHG reductions mandates for utilities that could increase the cost of purchased electricity. New climate rules and regulations also may result in higher fossil fuel prices or fuel efficiency standards that could increase transportation costs. Certain jurisdictions in which we have manufacturing facilities or other investments have already taken actions to address climate change. In addition to national efforts, some U.S. states in which we have manufacturing operations, including Washington, New York and Virginia, are taking measures to reduce GHG emissions, such as requiring GHG emissions reporting or developing regional cap-and-trade programs.
Several of our international facilities are located in countries that have already adopted GHG emissions trading programs. Other countries in which we conduct business, including China, European Union member states and India, have set GHG reduction targets in accordance with the agreement among over 170 countries that established the Paris Agreement, which became effective in November 2016 and which the United States formally rejoined in February 2021.
We have systems in place for tracking the GHG emissions from our energy-intensive facilities, and we monitor developments in climate-related laws, regulations and policies to assess the potential impact of such developments on our results of operations, financial condition, cash flows and disclosure obligations. Compliance with climate programs may require future expenditures to meet GHG emission reduction obligations in future years. These obligations may include carbon taxes, the requirement to purchase GHG credits, or the need to acquire carbon offsets. Also, we may be required to make capital and other investments to displace traditional fossil fuels, such as fuel oil and coal, with lower carbon alternatives, such as biomass and natural gas.
Brazil Tax Liability
We are challenging claims by the Brazil Federal Revenue Department that we underpaid tax, penalties and interest associated with a claim that a subsidiary of MeadWestvaco Corporation (the predecessor of WestRock MWV, LLC) had reduced its tax liability related to the goodwill generated by the 2002 merger of two of its Brazilian subsidiaries. The matter has proceeded through the Brazil Administrative Council of Tax Appeals (“ CARF ”) principally in two proceedings, covering tax years 2003 to 2008 and 2009 to 2012. The tax and interest claim relating to tax years 2009 to 2012 was finalized and is now the subject of an annulment action we filed in the Brazil federal court. CARF notified us of its final decision regarding the tax, penalties and interest claims relating to tax years 2003 to 2008 on June 3, 2020. We have filed an annulment action in Brazil federal court with respect to that decision as
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
well. The dispute related to fraud penalties for tax years 2009 to 2012 was resolved by CARF in favor of WestRock effective January 23, 2023.
We assert that we have no liability in these matters. The total amount in dispute before CARF and in the annulment actions relating to the claimed tax deficiency was R$ 714 million ($ 143 million) as of September 30, 2023, including various penalties and interest. The U.S. dollar equivalent has fluctuated significantly due to changes in exchange rates. The amount of our uncertain tax position reserve for this matter, which excludes certain penalties, is included in the unrecognized tax benefits table. See “ Note 7. Income Taxes ”. Resolution of the uncertain tax positions could have a material adverse effect on our cash flows and results of operations or materially benefit our results of operations in future periods depending upon their ultimate resolution.
Other Litigation
During fiscal 2018, we submitted formal notification to withdraw from the PIUMPF and recorded a liability associated with the withdrawal. Subsequently, in fiscal 2019 and 2020, we received demand letters from PIUMPF, including a demand for withdrawal liabilities and for our proportionate share of PIUMPF’s accumulated funding deficiency, and we refined our liability, the impact of which was not significant. We began making monthly payments for the PIUMPF withdrawal liabilities in fiscal 2020, excluding the accumulated funding deficiency demands. We dispute the PIUMPF accumulated funding deficiency demands. In February 2020, we received a demand letter from PIUMPF asserting that we owe $ 51.2 million for our pro-rata share of PIUMPF’s accumulated funding deficiency, including interest. Similarly, in April 2020, we received an updated demand letter related to a subsidiary of ours asserting that we owe $ 1.3 million of additional accumulated funding deficiency, including interest. The subsidiary for which we received the updated demand letter was sold in September 2023. In July 2021, the PIUMPF filed suit against us in the U.S. District Court for the Northern District of Georgia claiming the right to recover our pro rata share of the pension fund’s accumulated funding , along with interest, and attorney’s fees. We believe we are reserved for this matter. See “ Note 6. Retirement Plans — Multiemployer Plans ” of the Notes to Consolidated Financial Statements for additional information regarding our withdrawal liabilities.
We have been named a defendant in asbestos-related personal injury litigation. To date, the costs resulting from the litigation, including settlement costs, have not been significant. As of September 30, 2023 , there were approximately 600 such lawsuits. We believe that we have substantial insurance coverage, subject to applicable deductibles and policy limits, with respect to asbestos claims. We also have valid defenses to these asbestos-related personal injury claims and intend to continue to defend them vigorously. Should the volume of litigation grow substantially, it is possible that we could incur significant costs resolving these cases. We do not expect the resolution of pending asbestos litigation and proceedings to have a material adverse effect on our results of operations, financial condition or cash flows. In any given period or periods, however, it is possible such proceedings or matters could have an effect on our results of operations, financial condition or cash flows. At September 30, 2023 , we had $ 13.7 million reserved for these matters.
We are a defendant in a number of other lawsuits and claims arising out of the conduct of our business. While the ultimate results of such suits or other proceedings against us cannot be predicted, we believe the resolution of these other matters will not have a material adverse effect on our results of operations, financial condition or cash flows.
Indirect Tax Claim
In March 2017, the Supreme Court of Brazil issued a decision concluding that certain state value added tax should not be included in the calculation of federal gross receipts taxes. Subsequently, in fiscal 2019 and 2020, the Supreme Court of Brazil rendered favorable decisions on eight of our cases granting us the right to recover certain state value added tax. The tax authorities in Brazil filed a Motion of Clarification with the Supreme Court of Brazil. Based on our evaluation and the opinion of our tax and legal advisors, we believe the decision reduced our gross receipts tax in Brazil prospectively and retrospectively, and will allow us to recover tax amounts collected by the government. Due to the volume of invoices being reviewed (January 2002 to September 2019), we recorded the estimated recoveries across several periods beginning in the fourth quarter of fiscal 2019 as we reviewed the documents and the amount became estimable. In May 2021, the Supreme Court of Brazil judged the Motion of
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Clarification and concluded on the gross methodology, w hich was consistent with our evaluation and that of our tax and legal advisors. In fiscal 2021, we recorded a receivable for our expected recovery and interest that consisted primarily of a $ 0.6 million reduction of Cost of goods sold and $ 0.3 million reduction of Interest expense, net. In fiscal 2023, we recorded a receivable for our expected recovery and interest that consisted of a $ 4.4 million reduction of Cost of goods sold and $ 4.7 million reduction of Interest expense, net. We are monitoring the status of our remaining cases, and subject to the resolution in the courts, we may record additional amounts in future periods.
Guarantees
We make certain guarantees in the normal course of conducting our operations for compliance with certain laws and regulations, or in connection with certain business transactions. The guarantees include items such as funding of net losses in proportion to our ownership share of certain joint ventures, debt guarantees related to certain unconsolidated entities acquired in acquisitions, indemnifications of lessors in certain facilities and equipment operating leases for items such as additional taxes being assessed due to a change in tax law and certain other agreements. We estimate our exposure to these matters to be less than $ 50 million. As of September 30, 2023 and 2022 , we had recorded $ 0.8 million and $ 0.8 million, respectively, for the estimated fair value of these guarantees. We are unable to estimate our maximum exposure under operating leases because it is dependent on potential changes in the tax laws; however, we believe our exposure related to guarantees would not have a material impact on our results of operations, financial condition or cash flows.
Note 20. Accumulated Other Comprehen sive Loss and Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive loss by component for the fiscal years ended September 30, 2023 and 2022 (in millions):
Deferred
(Loss) Income on Cash
Flow Hedges
Defined Benefit
Pension and
Postretirement
Plans
Foreign
Currency
Items
Total (1)
Balance at September 30, 2021
Other comprehensive loss before
reclassifications
Amounts reclassified from accumulated
other comprehensive loss
Net current period other comprehensive loss
Balance at September 30, 2022
Other comprehensive (loss) income before
reclassifications
Amounts reclassified from accumulated
other comprehensive loss
Net current period other comprehensive income
Balance at September 30, 2023
All amounts are net of tax and noncontrolling interest.
The n et of tax amounts were determined using the jurisdictional statutory rates, and reflect effective tax rates averaging 25 % to 26 %, 25 % to 26 % and 25 % to 26 % for fiscal 2023, 2022 and 2021, respectively. Although we are impacted by the exchange rates of a number of currencies to varying degrees by period, our foreign currency translation adjustments recorded in accumulated other comprehensive loss primarily relate to the Mexican Peso, Brazilian Real and British Pound, each against the U.S. dollar.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the reclassifications out of accumulated other comprehensive loss by component for the fiscal years ended September 30, 2023 and 2022 (in millions):
Years Ended September 30,
Pre-Tax
Tax
Net of Tax
Pre-Tax
Tax
Net of Tax
Amortization of defined benefit pension and
postretirement items: (1)
Actuarial losses (2)
Prior service costs (2)
Reclassification of net pension
adjustment upon sale of RTS (3)
Subtotal defined benefit plans
Foreign currency translation adjustments: (1)
Reclassification of previously unrealized
net foreign currency loss upon
consolidation of equity investment (4)
Reclassification of previously unrealized
net foreign currency gain upon sale of
RTS (3)
Subtotal foreign currency translation
adjustments
Derivative Instruments: (1)
Natural gas commodity hedge loss (5)
Total reclassifications for the period
Amounts in parentheses indicate charges to earnings. Amounts pertaining to noncontrolling interests are excluded.
These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See “ Note 6. Retirement Plans ” for additional information.
Amount reflected in Gain on sale of RTS and Chattanooga in the consolidated statements of operations.
Amount reflected in Equity in income of unconsolidated entities in the consolidated statements of operations.
These accumulated other comprehensive income components are included in Cost of goods sold.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the components of other comprehensive income (loss), including noncontrolling interest, for the years ended September 30, 2023, 2022 and 2021, is as follows (in millions):
Fiscal 2023
Pre-Tax
Tax
Net of Tax
Foreign currency translation gain
Reclassification of previously unrealized net foreign
currency loss upon consolidation of equity investment
Reclassification of previously unrealized net foreign currency
gain upon sale of RTS
Deferred loss on cash flow hedges
Reclassification adjustment of net loss on cash flow hedges
included in earnings
Net actuarial gain arising during period
Amortization and settlement recognition of net actuarial loss
Prior service cost arising during the period
Amortization of prior service cost
Reclassification of net pension adjustment upon sale of RTS
Consolidated other comprehensive income
Less: Other comprehensive income attributable to
noncontrolling interests
Other comprehensive income attributable to common
stockholders
Fiscal 2022
Pre-Tax
Tax
Net of Tax
Foreign currency translation loss
Deferred loss on cash flow hedges
Reclassification adjustment of net loss on cash flow hedges
included in earnings
Net actuarial loss arising during period
Amortization and settlement recognition of net actuarial loss
Prior service cost arising during the period
Amortization of prior service cost
Consolidated other comprehensive loss
Less: Other comprehensive income attributable to noncontrolling
interests
Other comprehensive loss attributable to common
stockholders
Fiscal 2021
Pre-Tax
Tax
Net of Tax
Foreign currency translation gain
Deferred loss on cash flow hedges
Reclassification adjustment of net loss on cash flow hedges
included in earnings
Net actuarial gain arising during period
Amortization and settlement recognition of net actuarial loss
Prior service cost arising during the period
Amortization of prior service cost
Consolidated other comprehensive income
Less: Other comprehensive income attributable to noncontrolling
interests
Other comprehensive income attributable to common
stockholders
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 21. Stock holders’ Equity
Capitalization
Our capital stock consists solely of Common Stock. Holders of our Common Stock are entitled to one vote per share. Our amended and restated certificate of incorporation also authorizes preferred stock, of which no shares have been issued. The terms and provisions of such shares will be determined by our board of directors upon any issuance of such shares in accordance with our certificate of incorporation.
Stock Repurchase Plan
In July 2015, our board of directors authorized a repurchase program of up to 40.0 million shares of our Common Stock, representing approximately 15 % of our outstanding Common Stock as of July 1, 2015. On May 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 the July 2015 authorization. The 25.0 million shares represented an additional authorization of approximately 10 % of our outstanding Common Stock. The shares of our Common Stock may be repurchased over an indefinite period of time at the discretion of management. In fiscal 2023, we repurchased no shares of our Common Stock. In fiscal 2022, we repurchased approximate ly 12.6 million shares of our Common Stock for an aggregate cost of $ 597.5 m illion. In fiscal 2021, we repurchased approximately 2.5 million shares of our Common Stock for an aggregate cost of $ 125.1 million. The amount reflected as purchased in the consolidated statements of cash flows varies due to the timing of share settlement. As of September 30, 2023, we had approximatel y 29.0 million s hares of Common Stock available for repurchase under the program, although we have indefinitely suspended the program in light of the proposed Transaction (and related restrictions imposed by the Transaction Agreement).
Note 22. Share-B ased Compensation
Share-based Compensation Plans
At our Annual Meeting of Stockholders held on January 29, 2021, our stockholders approved the WestRock Company 2020 Incentive Stock Plan. The 2020 Incentive Stock Plan, as approved by our stockholders on January 28, 2022 , allows for the granting of 8.4 million shares of options, restricted stock, r estricted stock units and SARs to employees and our non-employee directors. As of September 30, 2023, there were 0.6 million shares available to be granted under this plan, assuming the performance stock units previously granted vest at maximum. At our Annual Meeting of Stockholders held on February 2, 2016, our stockholders approved the WestRock Company 2016 Incentive Stock Plan. The 2016 Incentive Stock Plan was amended and restated on February 2, 2018 (the “ Amended and Restated 2016 Incentive Stock Plan ”). The Amended and Restated 2016 Incentive Stock Plan, adjusted for a prior corporate action , allows for the granting of 12.8 million shares of options, restricted stock, restricted stock units and SARs to employees and our non-employee directors. As of September 30, 2023, there were 0.4 million shares available to be granted under this plan, assuming the performance stock units previously granted vest at maximum. In addition, there were 12.7 million shares available for grant under prior plans approved by stockholders and plans assumed upon mergers and acquisitions and we do not expect to make any new awards under those plans.
Our results of operations for the fiscal years ended September 30, 2023, 2022 and 2021 include share-based compensation expense of $ 64.2 million, $ 93.3 million and $ 88.6 million, respectively. The total income tax benefit in the results of operations in connection with share-based compensation was $ 16.0 million, $ 23.3 million and $ 22.3 million, for the fiscal years ended September 30, 2023, 2022 and 2021, respectively.
Cash received from share-based payment arrangements for the fiscal years ended September 30, 2023, 2022 and 2021 was $ 13.7 million, $ 28.9 million and $ 57.5 million, respectively.
Restricted Stock and Restricted Stock Units
In fiscal 2023, we granted restricted stock units to non-employee directors and certain of our employees. These grants represent the right to receive one share of Common Stock upon satisfaction of specified conditions. The
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
vesting provisions for our employee awards may vary from grant to grant; however, vesting generally is contingent upon meeting various service and/or performance or market goals including, but not limited to, achievement of various financial targets such as, with respect to fiscal 2023, Return on Invested Capital, Adjusted Earnings Per Share and relative Total Shareholder Return (each as defined in the award documents). Subject to the level of performance attained, the target award for our grants with a performance or market condition generally may increase up to 200 % of target or decrease to zero depending upon the terms of the individual grant. The employee grants with only a service condition generally vest over three years in one-third increments subsequent to fiscal 2021. The employee grants with only a service condition in fiscal 2021 and employee grants with a performance or market condition generally vest in three years . Present ly, other than circumstances such as death, disability and retirement, the grants to employees generally include a provision requiring both a change of control and termination of employment to accelerate vesting. The grantee is entitled to receive dividend equivalent units but will generally forfeit the restricted stock unit award and the dividend equivalents if the employee separates from us during the vesting period or if the predetermined goals are not . Our non-employee director awards generally vest over a period of up to one year and carry a service condition. Prior to fiscal 2022, our non-employee directors received their equity awards in the form of restricted stock, which carried dividend and voting rights prior to vesting.
The table below summarizes the changes in restricted stock units during the fiscal year ended September 30, 2023:
Units
Weighted
Average
Grant Date Fair
Value
Outstanding at September 30, 2022 (1)
Granted
Vested and released
Forfeited
Outstanding at September 30, 2023 (1)
Target awards granted with a performance condition, net of subsequent forfeitures, may be increased up to 200 % of the target or decreased to zero , subject to the level of performance attained. The awards are reflected in the table at the target award amount of 100 %. Based on current facts and assumptions, we are forecasting the performance of the aggregate outstanding grants to be attained at levels below target. However, actual performance may vary.
There was approximately $ 89.5 million of unrecognized compensation cost related to all unvested restricted stock units as of September 30, 2023 to be recognized over a weighted average remaining vesting period of 1.5 years.
The following table represents a summary of restricted stock units and restricted stock granted in fiscal 2023, 2022 and 2021 with terms defined in the applicable grant letters (in units/shares).
Granted to employees:
Granted with a service condition
Granted with a service condition and a Return on
Invested Capital performance condition at target
Granted with a service condition and a Cash Flow Per
Share performance condition at target
Granted with a service condition and an Adjusted Earnings
Per Share performance condition at target
Granted with a service condition and a relative Total
Shareholder Return market condition at target
Granted for attainment of a performance condition at
an amount in excess of target (1)
Granted for annual bonus (2)
Granted to non-employee directors
Total grants
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Grants include shares issued for the level of performance attained in excess of target. Shares issued in fiscal 2023 for the fiscal 2020 Cash Flow Per Share measure were at 151.8 % of target. Shares issued in fiscal 2022 for the fiscal 2019 Cash Flow Per Share measure were at 151.3 % of target. Shares issued in fiscal 2021 for the fiscal 2018 Cash Flow Per Share measure were at 89.3 % of target, therefore, the remainder of the grant was forfeited.
Reflects shares issued at 105 % of target in fiscal 2021 relating to fiscal 2020 restricted stock units granted for the annual bonus.
The employee grants with a relative Total Shareholder Return market condition in fiscal 2023 were valued using a Monte Carlo simulation at $ 39.72 per unit. The significant assumptions used in valuing these grants included: an expected term of 3.0 years, an expected volatility of 47.2 % and a risk-free interest rate of 4.0 %.
The employee grants with a relative Total Shareholder Return market condition in fiscal 2022 were valued using a Monte Carlo simulation at $ 60.83 per unit. The significant assumptions used in valuing these grants included: an expected term of 3.0 years, an expected volatility of 46.7 % and a risk-free interest rate of 1.5 %.
The employee grants with a relative Total Shareholder Return market condition in fiscal 2021 were valued using a Monte Carlo simulation at $ 53.69 per unit. The significant assumptions used in valuing these grants included: an expected term of 3.0 years, an expected volatility of 46.2 % and a risk-free interest rate of 0.2 %. In addition, we had a subsequent grant for an individual valued using a Monte Carlo simulation at $ 70.80 per unit, using an expected term of 2.9 years, an expected volatility of 47.0 % and a risk-free rate of 0.3 %.
Expense is recognized on restricted stock units and restricted stock on a straight-line basis over the explicit service period or for performance-based grants over the explicit service period when we estimate that it is probable the performance conditions will be satisfied. Expense recognized on grants with a performance condition that affects how many units are ultimately awarded is based on the number of units expected to be awarded.
The following table represents a summary of restricted stock units and restricted stock vested and released as well as the corresponding aggregate fair value in fiscal 2023, 2022 and 2021 (in millions, except units/shares):
Vested and released
Aggregate fair value
Stock Options and Stock Appreciation Rights
We did no t grant any stock options or SARs in fiscal 2023, 2022 and 2021 . Outstanding stock options granted under our plans generally have an exercise price equal to the closing market price on the date of the grant, generally vested in three years , in either one tranche or in approximately one-third increments, and have 10 -year contractual terms. However, a portion of our grants are subject to earlier expense recognition due to retirement eligibility rules. Presently, other than circumstances such as death, disability and retirement, grants will include a provision requiring both a change of control and termination of employment to accelerate vesting.
When options are granted, we estimate the fair value of stock options granted using a Black-Scholes option pricing model. We use historical data to estimate option exercises and employee terminations in determining the expected term in years for stock options. Expected volatility is calculated based on the historical volatility of our stock. The risk-free interest rate is based on U.S. Treasury securities in effect at the date of the grant of the stock options. The dividend yield is estimated based on our historical annual dividend payments and current expectations for the future.
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below summarizes the changes in stock options during the fiscal year ended September 30, 2023:
Stock
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
(in millions)
Outstanding at September 30, 2022
Exercised
Expired
Outstanding at September 30, 2023
Exercisable at September 30, 2023
The aggregate intrinsic value of options exercised during the years ended September 30, 2023, 2022 and 2021 was $ 0.8 million, $ 8.6 million and $ 29.1 million, respectively.
As of September 30, 2023 , there was no remaining unrecognized compensation cost related to unvested stock options.
As part of the Combination, we issued SARs to replace outstanding MWV SARs. The SARs were valued using the Black-Scholes option pricing model. We measured compensation expense related to the SAR awards at the end of each period. There were no SARs outstanding during the year ended September 30, 2023, and we do not expect to issue additional SARs. The aggregate intrinsic value of SARs exercised during the years ended September 30, 2022 and 2021 was $ 0.1 million and $ 0.2 million, respectively.
Employee Stock Purchase Plan
At our Annual Meeting of Stockholders held on February 2, 2016, our stockholders approved the WestRock Company Employee Stock Purchase Plan (“ ESPP ”). Under the ESPP, shares of Common Stock are reserved for purchase by our qualifying employees. The ESPP allowed for the purchase of a total of approximately 2.5 million shares of Common Stock. During fiscal 2023, 2022 and 2021 , employees purchased approximately 0.4 million, 0.3 million and 0.3 million shares, respectively, under the ESPP. We recognized $ 1.7 million, $ 1.8 million and $ 1.9 million of expense for fiscal 2023, 2022 and 2021 , respectively, related to the 15 % discount on the purchase price allowed to employees. As of September 30, 2023 , approximately 0.6 million shares of Common Stock remained available for purchase under the ESPP, although the ESPP will be suspended following the November 2023 purchase period in light of the proposed Transaction (and related obligations imposed by the Transaction Agreement).
WESTROCK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 23. Earn ings Per Share
The following table sets forth the computation of basic and diluted earnings per share under the two-class method (in millions, except per share data):
September 30,
Numerator:
Net (loss) income attributable to common stockholders
Less: Distributed and undistributed income available to
participating securities
Distributed and undistributed (loss) income available to
common stockholders
Denominator:
Basic weighted average shares outstanding
Effect of dilutive stock options and non-participating securities
Diluted weighted average shares outstanding
Basic (loss) earnings per share attributable to common
stockholders
Diluted (loss) earnings per share attributable to common
stockholders
Beginning in fiscal 2022, non-employee directors began receiving equity grants in the form of restricted stock units, which are not considered participating securities as the rights to dividends accrued during the vesting period are forfeitable. The restricted stock grants to non-employee directors prior to fiscal 2022 were considered participating securities as they received non-forfeitable rights to dividends at the same rate as our Common Stock. As participating securities, we included these instruments in the earnings allocation in computing earnings per share under the two-class method described in ASC 260, “ Earnings per Share ”.
Approximately 2.5 million, 0.5 million and 0.5 million shares underlying awards in fiscal 2023, 2022 and 2021 , respectively, were not included in computing diluted earnings per share because the effect would have been antidilutive.
Report of Independent Regist ered Public Accounting Firm
To the Stockholders and Board of Directors of
WestRock Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of WestRock Company (the Company) as of September 30, 2023 and 2022, the related consolidated statements of operations, comprehensive (loss) income, equity and cash flows for each of the three years in the period ended September 30, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated November 17, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment of the Corrugated Packaging Reporting Unit
Description of the Matter
As discussed in Note 1 of the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level on July 1 or more frequently if events or change in circumstances indicate that it is more likely than not to be impaired. This requires management to estimate the fair value of the reporting units based on the discounted cash flow method or, as appropriate, a combination of the discounted cash flow method and guideline public-company method. The Company performed an interim impairment test as of March 1, 2023, and recorded an impairment charge of $1,893.0 million, of which $514.3 million related to the Corrugated Packaging reporting unit. As of September 30, 2023, the Company’s goodwill balance totaled $4,248.7 million, of which $2,603.7 million related to the Corrugated Packaging reporting unit.
Auditing management’s goodwill impairment tests for the Corrugated Packaging reporting unit involved especially subjective judgments due to the significant estimation required in determining the fair value of the reporting unit. In particular, the estimates of the fair value for the Company’s Corrugated Packaging reporting unit are sensitive to assumptions such as the discount rate, earnings before interest, tax, depreciation and amortization (EBITDA) multiples for comparable guideline companies and expected future net cash flows, including projected revenue and EBITDA margins, which are affected by expectations about future market and economic conditions.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment review process. For example, we tested controls over the estimation of the fair values of the reporting unit, including the Company’s controls over the valuation model, the mathematical accuracy of the valuation models, the development of underlying assumptions used to estimate such fair values of the reporting unit and the clerical accuracy of the interim impairment charge. We also tested management’s review of the reconciliation of the aggregate estimated fair values of the reporting units to the market capitalization of the Company.
To test the estimated fair values of the Company’s Corrugated Packaging reporting unit, our audit procedures included, among others, assessing the valuation methodology, determination of the guideline public companies, and the underlying data used by the Company in its analysis, including testing the significant assumptions discussed above. We compared the significant assumptions used by management to current industry and economic trends, changes to the Company’s business model and other relevant factors. We assessed the historical accuracy of management’s assumptions of future expected net cash flows and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair values of the reporting unit that would result from changes in the assumptions. We involved valuation specialists to assist in our evaluation of the valuation methodology and the significant assumptions, including the discount rate used in determining the fair values of the reporting unit.
Uncertain Tax Positions
Description of the Matter
As discussed in Note 7 to the consolidated financial statements, the Company has unrecognized income tax benefits of $405.1 million related to its uncertain tax positions at September 30, 2023. The Company uses significant judgment in (1) determining whether a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination, and (2) in measuring the tax benefit as the largest amount of benefit which is more likely than not to be realized upon ultimate settlement. The Company does not record any benefit for tax positions that do not meet the more-likely-than-not initial recognition threshold.
Auditing management’s analysis of its uncertain tax positions and resulting unrecognized income tax benefits involved especially subjective and complex judgments because each tax position carries unique facts and circumstances that require interpretation of laws, regulations and legal rulings, and other factors.
How We Addressed the Matter in Our Audit
We tested the Company’s controls that address the risks of material misstatement relating to uncertain tax positions. For example, we tested controls over management’s application of the two-step recognition and measurement principles, including management’s review of the inputs and resulting calculations of unrecognized income tax benefits.
To test the Company’s measurement and recording of its uncertain tax positions, our audit procedures included, among others, inspecting the Company’s analysis and related tax opinions to evaluate the assumptions the Company used to develop its uncertain tax positions and related unrecognized income tax benefit amounts by jurisdiction. We also tested the completeness and accuracy of the underlying data used by the Company to calculate its uncertain tax positions. For example, we compared the recorded unrecognized income tax benefits to similar positions in prior periods and assessed management’s consideration of current tax controversy and litigation trends in similar positions challenged by tax authorities. In addition, we involved tax subject matter resources to evaluate the application of relevant tax laws in the Company’s recognition determination. We also evaluated the Company’s income tax disclosures in relation to these matters included in Note 7 to the consolidated financial statements.
/s/ Ernst & Young LLP
We have served as the Company’s or its predecessor’s auditor since at least 1975, but we are unable to determine the specific year.
Atlanta, Georgia
November 17, 2023
Report of Independent Regist ered Public Accounting Firm
To the Stockholders and the Board of Directors of
WestRock Company
Opinion on Internal Control Over Financial Reporting
We have audited WestRock Company’s internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, WestRock Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2023, based on the COSO criteria.
As indicated in the accompanying Management’s Annual Report On Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Gondi S.A. de C.V. (“Gondi”), which is included in the 2023 consolidated financial statements of the Company and constituted $2.7 billion of total assets as of September 30, 2023 and $1.1 billion of revenues for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Gondi.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2023 and 2022, and the related consolidated statements of operations, comprehensive (loss) income, equity and cash flows for each of the three years in the period ended September 30, 2023, and the related notes and our report dated November 17, 2023, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Atlanta, Georgia
November 17, 2023
WESTROCK COMPANY
MANAGEMENT’S ANNUAL REPORT ON INTERN AL CONTROL OVER FINANCIAL REPORTING
Management’s Responsibility for the Financial Statements
The management of WestRock Company is responsible for the preparation and integrity of the consolidated financial statements appearing in our Annual Report on Form 10-K. The financial statements were prepared in conformity with GAAP appropriate in the circumstances and, accordingly, include certain amounts based on our best judgments and estimates. Financial information in this Annual Report on Form 10-K is consistent with that in the financial statements.
Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements. Our internal control over financial reporting is supported by a program of internal audits and appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel and a written code(s) of conduct adopted by our board of directors that is applicable to all officers and employees of our Company and subsidiaries, as well as a code of conduct that is applicable to all of our directors.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2023. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 framework). The scope of our efforts to comply with Section 404 of the Sarbanes-Oxley Act with respect to fiscal 2023 included all of our operations other than those we acquired in fiscal 2023 related to the Mexico Acquisition. In accordance with the SEC's published guidance, we excluded these operations from our assessment of internal control over financial reporting as of September 30, 2023, because we acquired these operations during the fiscal year. Total assets as of September 30, 2023 and total revenues for the year ending September 30, 2023 for the operations acquired in the Mexico Acquisition were $2.7 billion and $1.1 billion, respectively. The SEC's published guidance specifies that the period in which management may omit an assessment of an acquired business's internal control over financial reporting from its assessment of the Company's internal control may not extend beyond one year from the date of acquisition. Based on our assessment, which as discussed herein excluded the operations acquired in the Mexico Acquisition, management believes that we maintained effective internal control over financial reporting as of September 30, 2023. Our independent auditors, Ernst & Young LLP, an independent registered public accounting firm, are appointed by the Audit Committee of our board of directors. Ernst & Young LLP has audited and reported on the consolidated financial statements of WestRock Company, and has issued an attestation report on the effectiveness of our internal control over financial reporting. The report of the independent registered public accounting firm is contained in this Annual Report.
Audit Committee Responsibility
The Audit Committee of our board of directors, composed solely of directors who are independent in accordance with the requirements of the NYSE listing standards, the Exchange Act and our Corporate Governance Guidelines, meets with the independent auditors, management and internal auditors periodically to discuss internal control over financial reporting and auditing and financial reporting matters. The Audit Committee reviews with the independent auditors the scope and results of the audit effort. The Audit Committee also meets periodically with the independent auditors and the chief internal auditor without management present to ensure that the independent auditors and the chief internal auditor have full access to the Audit Committee. Our Audit Committee’s Report will be contained in our definitive proxy statement issued in connection with our 2024 annual meeting of stockholders and is incorporated herein by reference.
D AVID B. S EWELL ,
Chief Executive Officer and President
A LEXANDER W. P EASE ,
Executive Vice President and Chief Financial Officer
November 17, 2023
