10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
Form 10-Q
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2016
or
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from              to             
Commission File Number 001-37484
WestRock Company
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
47-3335141
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
501 South 5th Street, Richmond, Virginia
 
23219-0501
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (804) 444-1000

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer x
  
Accelerated filer o
Non-accelerated filer o (Do not check if smaller reporting company)
  
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
 
Outstanding as of April 29, 2016
Common Stock, $0.01 par value
 
252,609,625
 


Table of Contents

WESTROCK COMPANY
INDEX
 
 
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 
 
 


2

Table of Contents

Glossary of Terms

The following terms or acronyms used in this Form 10-Q are defined below:
Term or Acronym
 
Definition
 
 
 
2016 Incentive Stock Plan
 
WestRock Company Incentive Stock Plan
Adjusted Earnings per Diluted Share
 
As defined on p. 50
Adjusted Net Income
 
As defined on p. 50
A/R Sales Agreement
 
As defined on p. 26
Antitrust Litigation
 
As defined on p. 32
ASC
 
FASB’s Accounting Standards Codification
ASU
 
Accounting Standards Update
BSF
 
Billion square feet
Boiler MACT
 
As defined on p. 30
Business Combination Agreement
 
The Second Amended and Restated Business Combination Agreement, dated as of April 17, 2015 and amended as of May 5, 2015 by and among WestRock, RockTenn, MWV, RockTenn Merger Sub, and MWV Merger Sub
CERCLA
 
The Comprehensive Environmental Response, Compensation, and Liability Act of 1980
Clean Power Plan
 
As defined on p. 31
Code
 
The Internal Revenue Code of 1986, as amended
Combination
 
Pursuant to the Business Combination Agreement, (i) RockTenn Merger Sub was merged with and into RockTenn, with RockTenn surviving the merger as a wholly owned subsidiary of WestRock, and (ii) MWV Merger Sub was merged with and into MWV, with MWV surviving the merger as a wholly owned subsidiary of WestRock, which occurred on July 1, 2015
Common Stock
 
WestRock common stock, par value $0.01 per share
containerboard
 
Linerboard and corrugating medium
Credit Agreement
 
As defined on p. 25
Credit Facility
 
As defined on p. 25
EPA
 
U.S. Environmental Protection Agency
ESPP
 
WestRock Company Employee Stock Purchase Plan
FASB
 
Financial Accounting Standards Board
Farm Loan Credit Agreement
 
As defined on p. 25
FIFO
 
First-in first-out inventory valuation method
Fiscal 2015 Form 10-K
 
WestRock’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015
GAAP
 
Generally accepted accounting principles in the U.S.
GHG
 
Greenhouse gases
GPS
 
Green Power Solutions of Georgia, LLC
Grupo Gondi
 
Gondi, S.A. de C.V.
IDBs
 
Industrial Development Bonds
Ingevity
 
Ingevity Corporation, the specialty chemicals business of WestRock Company
LIFO
 
Last-in first-out inventory valuation method
MWV
 
WestRock MWV, LLC, formerly MeadWestvaco Corporation
MWV Merger Sub
 
Milan Merger Sub, LLC
MMSF
 
Millions of square feet

3

Table of Contents

Term or Acronym
 
Definition
 
 
 
 
 
 
Packaging Acquisition
 
The January 19, 2016 acquisition of certain legal entities formerly owned by Cenveo Inc., in a stock purchase
Pension Act
 
Pension Protection Act of 2006
PRPs or PRP
 
Potentially responsible parties
PSD
 
Prevention of Significant Deterioration
Receivables Facility
 
Our $700.0 million receivables-backed financing facility that expires on October 24, 2017
RockTenn
 
WestRock RKT Company, formerly Rock-Tenn Company
RockTenn Merger Sub
 
Rome Merger Sub, Inc.
SEC
 
Securities and Exchange Commission
SG&A
 
Selling, general and administrative expenses
Smurfit-Stone
 
Smurfit-Stone Container Corporation
Smurfit-Stone Acquisition
 
The May 27, 2011 acquisition of Smurfit-Stone by Rock-Tenn Company
SP Fiber
 
SP Fiber Holdings, Inc.
SP Fiber Acquisition
 
The October 1, 2015 acquisition of SP Fiber
Title V permit
 
Operating permits issued under Title V of the Clean Air Act
U.S.
 
United States
WestRock
 
WestRock Company
WestRock MWV, LLC
 
Formerly named MWV
WestRock RKT Company
 
Formerly named RockTenn


4

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1.
FINANCIAL STATEMENTS (UNAUDITED)

WESTROCK COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Millions, Except Per Share Data)
 
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2016
 
2015
 
2016
 
2015
Net sales
$
3,696.6

 
$
2,455.6

 
$
7,377.3

 
$
4,969.8

Cost of goods sold
2,975.8

 
1,998.5

 
5,955.3

 
4,043.2

Gross profit
720.8

 
457.1

 
1,422.0

 
926.6

Selling, general and administrative, excluding intangible amortization
368.0

 
230.5

 
731.7

 
451.8

Selling, general and administrative intangible amortization
64.8

 
22.1

 
129.0

 
44.5

Pension lump sum settlement and retiree medical curtailment, net

 

 

 
11.9

Restructuring and other costs, net
131.2

 
17.2

 
302.3

 
22.6

Impairment of Specialty Chemicals goodwill

 

 
478.3

 

Operating profit (loss)
156.8

 
187.3

 
(219.3
)
 
395.8

Interest expense
(62.9
)
 
(23.0
)
 
(128.1
)
 
(46.3
)
Interest income and other income (expense), net
6.6

 
(0.5
)
 
21.1

 
(0.3
)
Equity in (loss) income of unconsolidated entities
(0.3
)
 
2.4

 
1.0

 
4.6

Income (loss) before income taxes
100.2

 
166.2

 
(325.3
)
 
353.8

Income tax expense
(40.4
)
 
(55.8
)
 
(66.6
)
 
(117.8
)
Consolidated net income (loss)
59.8

 
110.4

 
(391.9
)
 
236.0

Less: Net income attributable to noncontrolling interests
(2.9
)
 
(0.6
)
 
(4.7
)
 
(1.1
)
Net income (loss) attributable to common stockholders
$
56.9

 
$
109.8

 
$
(396.6
)
 
$
234.9

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to common stockholders
$
0.22

 
$
0.78

 
$
(1.55
)
 
$
1.67

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to common stockholders
$
0.22

 
$
0.77

 
$
(1.55
)
 
$
1.65

 
 
 
 
 
 
 
 
Cash dividends paid per share
$
0.375

 
$
0.3205

 
$
0.750

 
$
0.5080


See Accompanying Notes to Condensed Consolidated Financial Statements

5

Table of Contents

WESTROCK COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In Millions)
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2016
 
2015
 
2016
 
2015
Consolidated net income (loss)
$
59.8

 
$
110.4

 
$
(391.9
)
 
$
236.0

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
147.4

 
(29.5
)
 
97.7

 
(47.2
)
Derivatives:
 
 
 
 
 
 
 
Deferred loss on cash flow hedges
(0.6
)
 

 
(0.6
)
 

Reclassification adjustment of net loss on cash flow hedges included in earnings
0.3

 

 
0.6

 

Defined benefit pension plans:
 
 
 
 
 
 
 
Net actuarial gain (loss) arising during the period
1.4

 

 
1.4

 
(2.8
)
Amortization and settlement recognition of net actuarial loss, included in pension cost
1.7

 
5.1

 
3.4

 
22.8

Prior service cost arising during the period

 

 

 
(13.9
)
Amortization and curtailment recognition of prior service cost (credit), included in pension cost
0.3

 
0.3

 
0.6

 
(4.9
)
Other comprehensive income (loss)
150.5

 
(24.1
)
 
103.1

 
(46.0
)
Comprehensive income (loss)
210.3

 
86.3

 
(288.8
)
 
190.0

Less: Comprehensive income attributable to noncontrolling interests
(3.1
)
 
(0.5
)
 
(4.8
)
 
(0.9
)
Comprehensive income (loss) attributable to common stockholders
$
207.2

 
$
85.8

 
$
(293.6
)
 
$
189.1


See Accompanying Notes to Condensed Consolidated Financial Statements



6

Table of Contents

WESTROCK COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions, Except Share Data) 
 
March 31,
2016
 
September 30,
2015
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
367.6

 
$
228.3

Restricted cash
7.3

 
7.3

Accounts receivable (net of allowances of $36.3 and $29.6)
1,662.8

 
1,690.0

Inventories
2,058.9

 
1,963.4

Other current assets
352.6

 
271.4

Total current assets
4,449.2

 
4,160.4

Property, plant and equipment, net
9,787.3

 
9,596.7

Goodwill
5,210.4

 
5,694.5

Intangibles, net
3,449.2

 
3,552.2

Restricted assets held by special purpose entities
1,297.0

 
1,302.1

Prepaid pension asset
543.0

 
532.9

Other assets
532.3

 
518.0

 
$
25,268.4

 
$
25,356.8

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Current portion of debt
$
518.9

 
$
74.1

Accounts payable
1,243.4

 
1,303.8

Accrued compensation and benefits
350.1

 
358.0

Other current liabilities
444.7

 
427.3

Total current liabilities
2,557.1

 
2,163.2

Long-term debt due after one year
5,858.3

 
5,558.3

Pension liabilities, net of current portion
293.8

 
316.0

Postretirement benefit liabilities, net of current portion
144.3

 
143.0

Non-recourse liabilities held by special purpose entities
1,174.5

 
1,179.6

Deferred income taxes
3,513.8

 
3,540.6

Other long-term liabilities
637.4

 
658.0

Commitments and contingencies (Note 14)

 
 
Redeemable noncontrolling interests
14.4

 
14.2

Equity:
 
 
 
Preferred stock, $0.01 par value; 30.0 million shares authorized; no shares outstanding

 

Common Stock, $0.01 par value; 600.0 million shares authorized; 252.4 million and 257.0 million shares outstanding at March 31, 2016 and September 30, 2015, respectively
2.5

 
2.6

Capital in excess of par value
10,549.8

 
10,767.8

Retained earnings
1,060.3

 
1,661.6

Accumulated other comprehensive loss
(677.2
)
 
(780.2
)
Total stockholders’ equity
10,935.4

 
11,651.8

Noncontrolling interests
139.4

 
132.1

Total equity
11,074.8

 
11,783.9

 
$
25,268.4

 
$
25,356.8


See Accompanying Notes to Condensed Consolidated Financial Statements

7

Table of Contents

WESTROCK COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
 
Six Months Ended
 
March 31,
 
2016
 
2015
Operating activities:
 
 
 
Consolidated net (loss) income
$
(391.9
)
 
$
236.0

Adjustments to reconcile consolidated net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
585.5

 
304.5

Cost of real estate sold
23.4

 

Deferred income tax (benefit) expense
(1.7
)
 
87.1

Share-based compensation expense
30.2

 
21.4

(Gain) loss on disposal of plant, equipment and other, net
(0.2
)
 
2.4

Equity in income of unconsolidated entities
(1.0
)
 
(4.6
)
Pension and other postretirement funding (more) than expense (income)
(40.5
)
 
(47.3
)
Cash surrender value increase in excess of premiums paid
(17.5
)
 

Impairment adjustments and other non-cash items
170.2

 
(5.6
)
Impairment of Specialty Chemicals goodwill
478.3

 

Change in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
113.5

 
120.5

Inventories
(80.2
)
 
(22.1
)
Other assets
(63.4
)
 
(90.7
)
Accounts payable
(58.8
)
 
(7.4
)
Income taxes
23.7

 
(30.3
)
Accrued liabilities and other
5.6

 
(13.1
)
Net cash provided by operating activities
775.2

 
550.8

Investing activities:
 
 
 
Capital expenditures
(418.4
)
 
(235.2
)
Cash (paid) received for purchase of businesses, net of cash acquired
(381.0
)
 
3.7

Debt purchased in connection with an acquisition
(36.5
)
 

Investment in unconsolidated entities
(0.4
)
 

Return of capital from unconsolidated entities
0.5

 
0.4

Proceeds from sale of subsidiary and affiliates
10.2

 

Proceeds from sale of property, plant and equipment
9.5

 
8.4

Net cash used for investing activities
(816.1
)
 
(222.7
)
Financing activities:
 
 
 
Additions to revolving credit facilities
592.0

 
148.9

Repayments of revolving credit facilities
(513.7
)
 
(109.0
)
Additions to debt
1,021.1

 
110.9

Repayments of debt
(455.2
)
 
(377.8
)
Commercial card program
0.2

 
(0.6
)
Debt issuance costs

 
(0.1
)
Issuances of common stock, net of related minimum tax withholdings
(10.8
)
 
(26.8
)
Purchases of common stock
(238.8
)
 
(8.7
)
Excess tax benefits from share-based compensation
0.1

 
16.4

Repayments to consolidated entity
(0.2
)
 
(0.4
)
Cash dividends paid to shareholders
(191.6
)
 
(71.4
)
Cash distributions paid to noncontrolling interests
(16.8
)
 
(1.3
)
Net cash provided by (used for) financing activities
186.3

 
(319.9
)
Effect of exchange rate changes on cash and cash equivalents
(6.1
)
 
(1.1
)
Increase in cash and cash equivalents
139.3

 
7.1

Cash and cash equivalents at beginning of period
228.3

 
32.6

Cash and cash equivalents at end of period
$
367.6

 
$
39.7

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net of refunds
$
49.4

 
$
44.6

Interest, net of amounts capitalized
145.3

 
41.6



8

Table of Contents


Supplemental schedule of non-cash investing and financing activities:

Liabilities assumed in the six months ended March 31, 2016 relate to the SP Fiber Acquisition and the Packaging Acquisition. For additional information regarding these acquisitions see Note 5. Merger and Acquisitions.

 
Six Months Ended
March 31, 2016
 
(In millions)
Fair value of assets acquired, including goodwill
$
577.4

Cash consideration for the purchase of businesses, net of cash acquired (1)
$
375.7

Debt purchased in connection with an acquisition
$
36.5

Liabilities assumed
$
165.2

 
 
Included in liabilities assumed is the following item:
 
Debt assumed in acquisitions
$
14.9

(1) Cash consideration for the purchase of businesses, net of cash acquired reflects the cash flow line item cash paid for the purchase of businesses, net of cash acquired less the estimated working capital settlements of $3.2 million for the SP Fiber Acquisition and $2.1 million for the Packaging Acquisition.

See Accompanying Notes to Condensed Consolidated Financial Statements

9

Table of Contents

WESTROCK COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Month Periods Ended March 31, 2016
(Unaudited)
Unless the context otherwise requires, “we”, “us”, “our”, “WestRock” and “the Company” refer to the business of WestRock Company, its wholly-owned subsidiaries and its partially-owned consolidated subsidiaries.

We are one of North America’s leading providers of packaging solutions and manufacturers of containerboard and paperboard. We operate locations in North America, South America, Europe and Asia. We also operate a specialty chemicals business and we develop real estate in Charleston, SC.

Note 1.
Interim Financial Statements

Our independent registered public accounting firm has not audited our accompanying interim financial statements. We derived the Condensed Consolidated Balance Sheet at September 30, 2015 from the audited Consolidated Financial Statements included in our Fiscal 2015 Form 10-K. In the opinion of our management, the Condensed Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of our statements of operations for the three and six months ended March 31, 2016 and March 31, 2015, our comprehensive income (loss) for the three and six months ended March 31, 2016 and March 31, 2015, our financial position at March 31, 2016 and September 30, 2015, and our cash flows for the six months ended March 31, 2016 and March 31, 2015.

We have condensed or omitted certain notes and other information from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these interim statements should be read in conjunction with our Fiscal 2015 Form 10-K. The results for the three and six months ended March 31, 2016 are not necessarily indicative of results that may be expected for the full year.

Note 2.
New Accounting Standards

Recently Adopted Standards

In November 2015, the FASB issued ASU 2015-17 “Balance Sheet Classification of Deferred Taxes”, which amends certain provisions of ASC 740 “Income Taxes”. The ASU requires that all deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. In addition, companies will no longer allocate valuation allowances between current and noncurrent deferred tax assets because those allowances also will be classified as noncurrent. The ASU is effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2016. Early adoption was permitted for all companies in any interim or annual period. The guidance may be adopted on either a prospective or retrospective basis. We adopted these provisions prospectively on December 31, 2015, and prior periods were not retrospectively adjusted. The adoption did not have a material effect on our consolidated financial statements.

Recently Issued Standards

In March 2016, the FASB issued ASU 2016-09 “Compensation—Stock Compensation: Improvements To Employee Share Based Payment Accounting”, which amends certain provisions of ASU 718, “Compensation - Stock Compensation”. The ASU will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The provisions are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We expect to adopt these provisions on October 1, 2017, and based on our current stock compensation awards, the adoption is not expected to have a material effect on our consolidated financial statements.
 
In March 2016, the FASB issued ASU 2016-08 “Revenue from Contracts with Customer, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” to clarify the principal versus agent guidance in its new revenue recognition standard. The amendments clarify how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. These provisions also clarify the indicators to determine when an entity is acting as a principal or an agent. The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods, and can be applied using a full retrospective or modified retrospective approach. We expect to adopt these provisions on October 1, 2018, including interim periods subsequent to the date of adoption. We are evaluating the impact of these provisions.

10


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)




In March 2016, the FASB issued ASU 2016-07 “Investments—Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting”, which amends certain provisions of ASU 323 “Investments-Equity Method and Joint Ventures”. The ASU eliminates the requirement that an investor retrospectively apply equity method accounting when an investment that it had accounted for by another method initially qualifies for the equity method. The guidance will be applied prospectively and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We expect to adopt these provisions on October 1, 2017, and the adoption is not expected to have a material effect on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-05 “Derivatives and Hedging--Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships”, which amends certain provisions of ASU 815 “Derivatives and Hedging”. The ASU clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under ASC 815 does not, in and of itself, require dedesignation of the instrument if all other hedge criteria continue to be met. These provisions are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and can be adopted using a prospective or modified retrospective approach. Early adoption is permitted. We expect to adopt these provisions on October 1, 2017, including interim periods subsequent to the date of adoption, and do not expect that these provisions will have a material effect on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 “Leases”, which is codified in ASC 842 “Leases” and supersedes current lease guidance in ASC 840. These provisions require lessees to put a right-of-use asset and lease liability on their balance sheet for operating and financing leases that have a term of more than one year. Expense will be recognized in the income statement similar to current accounting guidance. For lessors, the ASU modifies the classification criteria and the accounting for sales-type and direct financing leases. Entities will need to disclose qualitative and quantitative information about their leases, including characteristics and amounts recognized in the financial statements. These provisions are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We expect to adopt these provisions on October 1, 2019, including interim periods subsequent to the date of adoption. Entities are required to use a modified retrospective approach upon adoption to recognize and measure leases at the beginning of the earliest comparative period presented in the financial statements. We are evaluating the impact of these provisions.
 
In September 2015, the FASB issued ASU 2015-16 “Simplifying the Accounting for Measurement-Period Adjustments”, which amends certain provisions of ASC 805 “Business Combinations”. The ASU mandates that measurement-period adjustments be recorded by the acquirer in the period these amounts are determined, and eliminates the requirement to record them retrospectively. These provisions are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, applied prospectively to open measurement periods. We expect to adopt these provisions on October 1, 2016, including interim periods subsequent to the date of adoption. We are evaluating the impact of these provisions.

In July 2015, the FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory”, which amends certain provisions of ASC 330 “Inventory”. The ASU requires inventory to be measured at the lower of cost and net realizable value. These provisions do not apply to inventory that is measured using LIFO or the retail inventory method. These provisions apply to all other inventory, which includes inventory that is measured using FIFO or average cost. These provisions are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, applied prospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. We expect to adopt these provisions on October 1, 2017, including interim periods subsequent to the date of adoption, prospectively. Given that the majority of our inventory is measured using LIFO, we do not expect that the adoption of these provisions will have a material effect on our consolidated financial statements.

In May 2015, the FASB issued ASU 2015-07 “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share”. The ASU amends ASC 820 “Fair Value Measurement” and eliminates the requirement to categorize within the fair value hierarchy investments for which fair value is measured using the net asset value (or its equivalent) practical expedient. Investments for which fair value is measured at net asset value per share using the practical expedient should not be categorized in the fair value hierarchy. However, disclosures on investments for which fair value is measured at net asset value as a practical expedient should continue to be disclosed to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value. The ASU is effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2015. We expect to adopt these provisions on October 1, 2016, including interim periods subsequent to the date of adoption, applied retrospectively to all periods presented. We do not expect that the adoption of these provisions will have a material effect on our consolidated financial statements.
 
In April 2015, the FASB issued ASU 2015-05 “Customers Accounting for Fees Paid in a Cloud Computing Arrangement”, which amends ASC 350 “Intangibles-Goodwill and Other Internal-Use Software”. The ASU requires entities to record a software

11


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)


license intangible asset if a hosting arrangement for internal-use software allows the entity to take possession of the software, and it is feasible that the entity can run the software on its own hardware, or contract a vendor to host the software. These provisions are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. We expect to adopt these provisions on October 1, 2016, including interim periods subsequent to the date of adoption. We are evaluating the impact of these provisions.

In April 2015, the FASB issued ASU 2015-04 “Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets”. The ASU amends ASC 715 “Retirement Plans” and allows entities to use a practical expedient to measure defined benefit plan assets and obligations using a month-end that is closest to the entity’s fiscal year end, as well as the option to use the closest date to a significant event when plan assets and obligations are remeasured. These provisions are effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2015. Early application is permitted. We expect to adopt these provisions on October 1, 2016, including interim periods subsequent to the date of adoption. We do not expect that the adoption of these provisions will have a material effect on our consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02 “Consolidation-Amendments to the Consolidation Analysis”, which amends certain provisions of ASC 810 “Consolidation”. The amendment requires the consideration of additional criteria in (i) the analysis and determination of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities and (ii) primary beneficiary determinations. The ASU also eliminates certain fees from the consolidation analysis of reporting entities that are involved with variable interest entities. The ASU is effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2015. We expect to adopt these provisions on October 1, 2016, including interim periods subsequent to the date of adoption. We do not expect that the adoption of these provisions will have a material effect on our consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12 “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The ASU amends ASC 718 “Compensation - Stock Compensation” and clarifies that a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition and impact compensation cost when it is probable the performance target will be achieved. These provisions are effective for annual periods beginning after December 15, 2015. We expect to adopt these provisions on October 1, 2016, and based on our current stock compensation awards, the adoption is not expected to have a material effect on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09 which is codified in ASC 606 “Revenue from Contracts with Customers” and supersedes both the revenue recognition requirement to ASC 605 “Revenue Recognition” and most industry-specific guidance. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the five steps set forth in ASC 606. An entity must also disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date,” which deferred the effective date of ASU 2014-09 by one year. Therefore, these provisions are effective for annual reporting periods beginning after December 15, 2017 (October 1, 2018 for us), including interim periods within that annual period, and can be applied using a full retrospective or modified retrospective approach. We are evaluating the impact of these provisions.


12


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)


Note 3.
Equity and Other Comprehensive (Loss) Income

Equity

The following is a summary of the changes in total equity for the six months ended March 31, 2016 (in millions):
 
WestRock
Company
Stockholders’
Equity
 
Noncontrolling (1)
Interests
 
Total
Equity
Balance at September 30, 2015
$
11,651.8

 
$
132.1

 
$
11,783.9

Net (loss) income
(396.6
)
 
3.9

 
(392.7
)
Other comprehensive income, net of tax
103.0

 

 
103.0

Noncontrolling interests assumed in acquisition

 
10.9

 
10.9

Income tax expense from share-based plans
(11.0
)
 

 
(11.0
)
Compensation expense under share-based plans
31.3

 

 
31.3

Cash dividends declared (per share - $0.75)(2)
(193.2
)
 

 
(193.2
)
Distributions and adjustments to noncontrolling interests

 
(7.3
)
 
(7.3
)
Sale of subsidiary shares from noncontrolling interest

 
(0.2
)
 
(0.2
)
Issuance of common stock, net of stock received for minimum tax withholdings
(11.1
)
 

 
(11.1
)
Purchases of common stock
(238.8
)
 

 
(238.8
)
Balance at March 31, 2016
$
10,935.4

 
$
139.4

 
$
11,074.8


(1) 
Excludes amounts related to contingently redeemable noncontrolling interests which are separately classified outside of permanent equity in the mezzanine section of the Condensed Consolidated Balance Sheets.
(2) 
Includes cash dividends paid, and dividends declared but unpaid, related to the shares reserved but unissued to satisfy Smurfit-Stone bankruptcy claims.

Stock Repurchase Program

In July 2015, our board of directors authorized a repurchase program of up to 40.0 million shares of Common Stock, representing approximately 15 percent of our outstanding Common Stock as of July 1, 2015. The shares of Common Stock may be repurchased over an indefinite period of time at the discretion of management. As of September 30, 2015, the remaining authorization under our repurchase program was approximately 34.6 million shares. Pursuant to that repurchase program, in the six months ended March 31, 2016, we repurchased approximately 5.8 million shares of Common Stock for an aggregate cost of $238.8 million. As of March 31, 2016, we had approximately 28.8 million shares of Common Stock available for repurchase under the program.


13


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)


Accumulated Other Comprehensive Loss

The tables below summarize the changes in accumulated other comprehensive loss, net of tax, by component for the six months ended March 31, 2016 and March 31, 2015 (in millions):

 
Cash Flow Hedges
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Items
 
Total (1)
Balance at September 30, 2015
$
(1.4
)
 
$
(540.7
)
 
$
(238.1
)
 
$
(780.2
)
Other comprehensive income (loss) before reclassifications
(0.5
)
 
1.4

 
97.7

 
98.6

Amounts reclassified from accumulated other comprehensive loss
0.6

 
3.8

 

 
4.4

Net current period other comprehensive income
0.1

 
5.2

 
97.7

 
103.0

Balance at March 31, 2016
$
(1.3
)
 
$
(535.5
)
 
$
(140.4
)
 
$
(677.2
)

(1)     All amounts are net of tax and noncontrolling interest.

 
Cash Flow Hedges
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Items
 
Total (1)
Balance at September 30, 2014
$
(0.2
)
 
$
(498.2
)
 
$
3.1

 
$
(495.3
)
Other comprehensive loss before reclassifications

 
(16.7
)
 
(46.8
)
 
(63.5
)
Amounts reclassified from accumulated other comprehensive loss

 
17.6

 

 
17.6

Net current period other comprehensive income (loss)

 
0.9

 
(46.8
)
 
(45.9
)
Balance at March 31, 2015
$
(0.2
)
 
$
(497.3
)
 
$
(43.7
)
 
$
(541.2
)

(1)     All amounts are net of tax and noncontrolling interest.

The net of tax components were determined using effective tax rates averaging approximately 34% to 35% for the six months ended March 31, 2016 and 38% to 39% for the six months ended March 31, 2015. Foreign currency translation gains recorded in accumulated other comprehensive loss for the six months ended March 31, 2016 were primarily due to the changes in the Brazilian Real/U.S. dollar, Canadian/U.S. dollar and Euro/U.S. dollar exchange rates. Foreign currency translation gains and losses recorded in accumulated other comprehensive loss for the six months ended March 31, 2015 were primarily due to the change in the Canadian/U.S. dollar exchange rates. For the six months ended March 31, 2016, we recorded defined benefit net actuarial gains of $1.4 million, net of tax of $0.8 million, in other comprehensive (loss) income, primarily due to the partial settlement and curtailment of certain defined benefit plans. For the six months ended March 31, 2015, we recorded defined benefit net actuarial losses and prior service costs, net of tax, in other comprehensive (loss) income of $2.8 million and $13.9 million, respectively, primarily due to the partial settlement, plan amendments and curtailment of certain defined benefit plans. The deferred income tax expense associated with the net actuarial losses and prior service costs was $1.7 million and $8.8 million, respectively. The amounts reclassified out of accumulated other comprehensive loss into earnings for these events are summarized in the reclassifications tables below.


14


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)


The following table summarizes the reclassifications out of accumulated other comprehensive loss by component (in millions):
 
Three Months Ended
 
Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
Pretax
 
Tax
 
Net of Tax
 
Pretax
 
Tax
 
Net of Tax
Amortization of defined benefit pension and postretirement items (1)
 
 
 
 
 
 
 
 
 
 
 
      Actuarial losses (2)
$
(2.3
)
 
$
0.6

 
$
(1.7
)
 
$
(8.0
)
 
$
3.1

 
$
(4.9
)
      Prior service (costs) credits (2)
(0.5
)
 
0.1

 
(0.4
)
 
(0.4
)
 
0.1

 
(0.3
)
Subtotal defined benefit plans
(2.8
)
 
0.7

 
(2.1
)
 
(8.4
)
 
3.2

 
(5.2
)
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Instruments (1)

 
 
 
 
 
 
 
 
 
 
 
   Commodity cash flow hedges (3)

(0.4
)
 
0.2

 
(0.2
)
 

 

 

   Foreign currency cash flow hedges (4)

0.1

 

 
0.1

 

 

 

Subtotal derivative instruments


(0.3
)
 
0.2

 
(0.1
)
 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
$
(3.1
)
 
$
0.9

 
$
(2.2
)
 
$
(8.4
)
 
$
3.2

 
$
(5.2
)

(1)  
Amounts in parentheses indicate charges to earnings. Amounts pertaining to noncontrolling interests are excluded.
(2) 
Included in the computation of net periodic pension cost (See “Note 12. Retirement Plans” for additional details).
(3) 
Included in cost of goods sold.
(4) 
Included in net sales.

The following table summarizes the reclassifications out of accumulated other comprehensive loss by component (in millions):      
 
Six Months Ended
 
Six Months Ended
 
March 31, 2016
 
March 31, 2015
 
Pretax
 
Tax
 
Net of Tax
 
Pretax
 
Tax
 
Net of Tax
Amortization of defined benefit pension and postretirement items (1)
 
 
 
 
 
 
 
 
 
 
 
      Actuarial losses (2)
$
(4.6
)
 
$
1.3

 
$
(3.3
)
 
$
(36.3
)
 
$
13.8

 
$
(22.5
)
      Prior service (cost) credits (2)
(0.9
)
 
0.2

 
(0.7
)
 
8.0

 
(3.1
)
 
4.9

Subtotal defined benefit plans
(5.5
)
 
1.5

 
(4.0
)
 
(28.3
)
 
10.7

 
(17.6
)
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Instruments (1)
 
 
 
 
 
 
 
 
 
 
 
    Commodity cash flow hedges (3)
(1.1
)
 
0.5

 
(0.6
)
 

 

 

    Foreign currency cash flow hedges (4)
0.3

 
(0.1
)
 
0.2

 

 

 

Subtotal derivative instruments
(0.8
)
 
0.4

 
(0.4
)
 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
$
(6.3
)
 
$
1.9

 
$
(4.4
)
 
$
(28.3
)
 
$
10.7

 
$
(17.6
)

(1)  
Amounts in parentheses indicate charges to earnings. Amounts pertaining to noncontrolling interests are excluded.
(2) 
Included in the computation of net periodic pension cost (see “Note 12. Retirement Plans” for additional details).
(3) 
Included in cost of goods sold.
(4) 
Included in net sales.


15


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)


Note 4.
Earnings per Share

Our restricted stock awards granted to non-employee directors are considered participating securities as they receive non-forfeitable rights to dividends at the same rate as Common Stock. As participating securities, we include these instruments in the earnings allocation in computing earnings per share under the two-class method described in ASC 260 “Earnings per Share”. The following table sets forth the computation of basic and diluted earnings per share under the two-class method (in millions, except per share data):
 
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2016
 
2015
 
2016
 
2015
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
56.9

 
$
109.8

 
$
(396.6
)
 
$
234.9

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
254.0

 
140.8

 
255.8

 
140.5

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to common stockholders
$
0.22

 
$
0.78

 
$
(1.55
)
 
$
1.67

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
56.9

 
$
109.8

 
$
(396.6
)
 
$
234.9

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
254.0

 
140.8

 
255.8

 
140.5

Effect of dilutive stock options and non-participating securities
3.4

 
1.9

 

 
2.2

Diluted weighted average shares outstanding
257.4

 
142.7

 
255.8

 
142.7

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to common stockholders
$
0.22

 
$
0.77

 
$
(1.55
)
 
$
1.65


During the three and six months ended March 31, 2016 and March 31, 2015 in the table above, the amount of distributed and undistributed income available to participating securities was de minimis and did not impact net income attributable to common stockholders.

Weighted average shares includes approximately 0.3 million of reserved, but unissued shares at each of March 31, 2016 and March 31, 2015. These reserved shares will be distributed as claims are liquidated or resolved in accordance with the Smurfit-Stone Plan of Reorganization and Confirmation Order.

Options and restricted stock in the amount of 2.5 million common shares in the three months ended March 31, 2016 were not included in computing diluted earnings per share because the effect would have been antidilutive. Due to the net loss in the six months ended March 31, 2016, options and restricted stock in the amount of 5.7 million common shares were not included in computing diluted earnings per share because the effect would have been antidilutive. Options and restricted stock in the amount of 0.1 million and 0.5 million common shares in the three and six months ended March 31, 2015, respectively, were not included in computing diluted earnings per share because the effect would have been antidilutive.


16


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)


Note 5.
Merger and Acquisitions

Packaging Acquisition

On January 19, 2016, we completed the stock purchase of certain legal entities formerly owned by Cenveo Inc. The entities acquired provide value-added folding carton and litho-laminated display packaging solutions. The purchase price was $97.2 million, net of cash received of $1.7 million. The transaction is subject to an estimated working capital settlement of $2.1 million and is subject to an election under Section 338(h)(10) of the Code that will increase the U.S. tax basis in the acquired U.S. assets for an as yet to be determined amount. We believe the transaction has provided us with attractive and complementary customers, markets and facilities. We have included the financial results of the acquired entities since the date of the acquisition in our Consumer Packaging segment.

The preliminary purchase price allocation for the acquisition included $9.7 million of customer relationship intangible assets, $9.2 million of goodwill and $26.0 million of liabilities, including $1.2 million of debt. We are amortizing the customer relationship intangibles over estimated useful lives ranging from 9 to 15 years based on a straight-line basis because the amortization pattern was not reliably determinable. The fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced reach of the combined organization and other synergies), and the assembled work force. We expect the goodwill and intangibles of the U.S. entities to be amortizable for income tax purposes. We are in the process of analyzing the estimated values of all assets acquired and liabilities assumed including, among other things, obtaining final third-party valuations of certain tangible and intangible assets as well as the fair value of certain contracts and the determination of certain tax balances; thus, the allocation of the purchase price is preliminary and subject to revision.

SP Fiber

On October 1, 2015, we acquired SP Fiber in a stock purchase. The transaction included the acquisition of mills located in Dublin, GA and Newberg, OR, which produce lightweight recycled containerboard and kraft and bag paper. The Newberg mill also produced newsprint. As part of the transaction, we also acquired SP Fiber's 48 percent interest in GPS. GPS is a renewable energy joint venture providing steam to the Dublin mill and energy to Georgia Power. The purchase price was $281.7 million, net of cash received of $9.5 million. The transaction is subject to an estimated working capital settlement of $3.2 million. In addition, we paid $36.5 million for debt owed by GPS and thereby own the majority of the debt issued by GPS.

We believe the Dublin mill will help balance the fiber mix of our mill system and that the addition of kraft and bag paper will diversify our product offering, including our ability to serve the increasing demand for lighter weight containerboard. Subsequent to the transaction, we announced the permanent closure of the Newberg mill due to the decline in market conditions of the newsprint business and our need to balance supply and demand in our containerboard system. We determined GPS should be consolidated as a variable interest entity under ASC 810 “Consolidation”. Our evaluation concluded that WestRock is the primary beneficiary of GPS as WestRock has both the power and benefits as defined by ASC 810. We have included the financial results of SP Fiber and GPS since the date of the acquisition in our Corrugated Packaging segment.

The preliminary purchase price allocation for the acquisition included $13.5 million of customer relationship intangible assets, $45.1 million of goodwill, including recording an adjustment to deferred taxes in the second quarter of fiscal 2016, and $139.2 million of liabilities, including $13.7 million of debt primarily owed by GPS to third parties. We are amortizing the customer relationship intangibles over 20 years based on a straight-line basis because the amortization pattern was not reliably determinable. The fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced reach of the combined organization and other synergies), the assembled work force of SP Fiber as well as due to establishing deferred taxes for the assets and liabilities acquired. The goodwill and intangibles will not be amortizable for income tax purposes. We are in the process of analyzing the estimated values of all assets acquired and liabilities assumed including, among other things, obtaining final third-party valuations of certain tangible and intangible assets as well as the fair value of certain contracts and the determination of certain tax balances, thus, the allocation of the purchase price is preliminary and subject to revision.

The Combination

On July 1, 2015, pursuant to the Business Combination Agreement, RockTenn and MWV completed a strategic combination of their respective businesses. Pursuant to the Business Combination Agreement, RockTenn and MWV became wholly owned subsidiaries of WestRock. RockTenn is the accounting acquirer.

The consideration for the Combination was $8,286.7 million. In connection with the Combination, RockTenn shareholders received in the aggregate approximately 130.4 million shares of Common Stock and approximately $667.8 million in cash. At the

17


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)


effective time of the Combination, each share of common stock, par value $0.01 per share, of MWV issued and outstanding immediately prior to the effective time of the Combination was converted into the right to receive 0.78 shares of Common Stock. In the aggregate, MWV stockholders received approximately 131.2 million shares of Common Stock (which includes shares issued under certain MWV equity awards that vested as a result of the Combination). Included in the consideration was approximately $210.9 million related to the value of outstanding MWV equity awards that were replaced with WestRock equity awards with identical terms for pre-combination service. The value related to post-combination service will be expensed over the remaining service period of the awards.

We are in the process of analyzing the estimated values of all assets acquired and liabilities assumed including, among other things, obtaining final third-party valuations of certain tangible and intangible assets as well as the fair value of certain contracts and the determination of certain tax balances; thus, the allocation of the purchase price is preliminary and subject to material revision.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed by major class of assets and liabilities as of the acquisition date, as well as adjustments made during fiscal 2016 (referred to as “measurement period adjustments”) (in millions):
 
Amounts Recognized as of the Acquisition Date (1)
 
Measurement Period Adjustments (2)
 
Amounts Recognized as of Acquisition Date (as Adjusted) (3)
Cash and cash equivalents
$
265.7

 
$

 
$
265.7

Current assets, excluding cash and cash equivalents
1,858.8

 

 
1,858.8

Property, plant and equipment
3,991.5

 
3.6

 
3,995.1

Prepaid pension asset
1,407.8

 

 
1,407.8

Goodwill
3,817.3

 
(84.1
)
 
3,733.2

Intangible assets
2,994.2

 

 
2,994.2

Restricted assets held by special purpose entities
1,302.0

 

 
1,302.0

Other long-term assets
363.8

 
2.1

 
365.9

Total assets acquired
16,001.1

 
(78.4
)
 
15,922.7

 
 
 
 
 
 
Current portion of debt
62.3

 
74.8

 
137.1

Current liabilities
1,099.4

 
(61.6
)
 
1,037.8

Long-term debt due after one year
2,090.6

 

 
2,090.6

Non-recourse liabilities held by special purpose entities
1,181.0

 

 
1,181.0

Accrued pension and other long-term benefits
235.1

 

 
235.1

Deferred income tax liabilities
2,366.7

 
(67.5
)
 
2,299.2

Other long-term liabilities
520.0

 
(24.1
)
 
495.9

Noncontrolling interest
159.3

 

 
159.3

Total liabilities and noncontrolling interest assumed
7,714.4

 
(78.4
)
 
7,636.0

 
 
 
 
 
 
Net assets acquired
$
8,286.7

 
$

 
$
8,286.7

(1) 
As previously reported in “Note 6. Merger and Acquisitions” of the Notes to Consolidated Financial Statements section of the Fiscal 2015 Form 10-K.

(2) 
The measurement period adjustments recorded in fiscal 2016 did not have a significant impact on our condensed consolidated statements of operations for the three months ended September 30, 2015 or the three and six months ended March 31, 2016. In addition, these adjustments did not have a significant impact on our consolidated balance sheet as of September 30, 2015. Therefore, we have recorded the cumulative impact in fiscal 2016 and have not retrospectively adjusted the comparative 2015 financial information presented herein.

(3) 
The measurement period adjustments were due primarily to refinements to third party appraisals and carrying amounts of certain assets and liabilities as well as adjustments to certain tax accounts based on, among other things, adjustments to deferred tax liabilities, including any appraisal adjustments, analysis of the tax basis of acquired assets and liabilities,

18


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)


other tax adjustments and the classification of supplier financing arrangements. The net impact of the measurement period adjustments resulted in a net decrease to goodwill.

The preliminary estimated fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced geographic reach of the combined organization and increased vertical integration and synergistic opportunities), the assembled work force of MWV as well as due to establishing deferred tax liabilities for the assets and liabilities acquired. The goodwill and intangibles resulting from the acquisition will not be amortizable for tax purposes.

The following table summarizes the weighted average life and gross carrying amount relating to intangible assets recognized in the Combination, excluding goodwill (in millions):
 
 
Weighted Avg. Life
 
Gross Carrying Amount
Customer relationships
 
19.2
 
$
2,881.7

Patents
 
9.8
 
57.2

Trademarks
 
4.5
 
52.9

Favorable contracts
 
8.2
 
2.4

Total
 
18.8
 
$
2,994.2


None of the intangibles has significant residual value. The intangibles are expected to be amortized over estimated useful lives ranging from 1 to 20 years based on the approximate pattern in which the economic benefits are consumed or straight-line if the pattern was not reliably determinable.

The preliminary allocation of the consideration for the Combination also includes, among other things, $38.5 million of unfavorable contracts that will be amortized over 1 to 9 years and a $346.2 million adjustment to increase the carrying value of the debt assumed to fair value that will be amortized over 1 to 32 years.

The following unaudited pro forma information reflects our condensed consolidated results of operations as if the Combination had taken place on October 1, 2013. The unaudited pro forma information is not necessarily indicative of the results of operations that we would have reported had the transaction actually occurred at the beginning of these periods nor is it necessarily indicative of future results. The unaudited pro forma financial information does not reflect the impact of future events that may occur after the Combination, including, but not limited to, anticipated costs savings from synergies or other operational improvements.
 
Three Months Ended March 31, 2015
 
Six Months Ended March 31, 2015
 
(Unaudited, in millions)
Net sales
$
3,700.9

 
$
7,556.8

Net income attributable to common stockholders
$
138.6

 
$
294.9


The unaudited pro forma financial information presented in the table above has been adjusted to give effect to adjustments that are (1) directly related to the business combination; (2) factually supportable; and (3) expected to have a continuing impact. These adjustments include, but are not limited to, the application of our accounting policies; elimination of related party transactions; depreciation and amortization related to fair value adjustments to property, plant and equipment and intangible assets including contracts assumed; and interest expense on acquisition related debt.

Unaudited pro forma earnings for three and six months ended March 31, 2015 were adjusted to exclude $25.1 million of acquisition costs, which primarily consist of advisory, legal, accounting, valuation and other professional or consulting fees.


19


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)


Note 6.
Restructuring and Other Costs, Net

Summary of Restructuring and Other Initiatives

We recorded pre-tax restructuring and other costs, net, of $131.2 million and $17.2 million for the three months ended March 31, 2016 and March 31, 2015, respectively, and recorded pre-tax restructuring and other costs, net, of $302.3 million and $22.6 million for the six months ended March 31, 2016 and March 31, 2015, respectively. These amounts are not comparable since the timing and scope of the individual actions associated with a restructuring, an acquisition or integration can vary. We discuss these charges in more detail below.

When we close a facility, if necessary, we recognize an impairment charge primarily to reduce the carrying value of equipment or other property to their estimated fair value less cost to sell, and record charges for severance and other employee related costs. Any subsequent change in fair value less cost to sell prior to disposition is recognized as identified; however, no gain is recognized in excess of the cumulative loss previously recorded. At the time of each announced closure, we generally expect to record future charges for equipment relocation, facility carrying costs, costs to terminate a lease or contract before the end of its term and other employee related costs. Although specific circumstances vary, our strategy has generally been to consolidate our sales and operations into large well-equipped plants that operate at high utilization rates and take advantage of available capacity created by operational excellence initiatives. Therefore, we have transferred a substantial portion of each plant’s assets and production to our other plants. We believe these actions have allowed us to more effectively manage our business.


20


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)


While restructuring costs are not charged to our segments and, therefore, do not reduce segment income, we highlight the segment to which the charges relate. The following table presents a summary of restructuring and other charges, net, related to active restructuring and other initiatives that we incurred during the three and six months ended March 31, 2016 and March 31, 2015, the cumulative recorded amount since we started the initiative, and our estimate of the total we expect to incur (in millions):

Summary of Restructuring and Other Costs, Net
Segment
 
Period
 
Net Property,
Plant and
Equipment (1)
 
Severance
and Other
Employee
Related
Costs
 
Equipment
and Inventory
Relocation
Costs
 
Facility
Carrying
Costs
 
Other
Costs
 
Total
Corrugated
Packaging(2)
 
Current Qtr.
 
$
58.7

 
$
6.1

 
$
0.1

 
$
7.3

 
$
5.1

 
$
77.3

 
YTD Fiscal 2016
 
179.9

 
15.2

 
0.3

 
12.5

 
8.4

 
216.3

 
Prior Year Qtr.
 
1.3

 

 
0.3

 
1.0

 
0.2

 
2.8

 
YTD Fiscal 2015
 
1.6

 

 
0.4

 
1.9

 
1.1

 
5.0

 
Cumulative
 
221.8

 
44.6

 
8.0

 
27.5

 
22.0

 
323.9

 
Expected Total
 
221.8

 
44.6

 
9.8

 
35.3

 
23.5

 
335.0

Consumer Packaging(3)
 
Current Qtr.
 
0.1

 

 
0.3

 
0.3

 

 
0.7

 
YTD Fiscal 2016
 
(2.0
)
 
0.6

 
0.5

 
0.4

 

 
(0.5
)
 
Prior Year Qtr.
 
0.2

 
(0.2
)
 
0.2

 
0.2

 
0.2

 
0.6

 
YTD Fiscal 2015
 
0.3

 
0.2

 
0.2

 
0.2

 
0.2

 
1.1

 
Cumulative
 
3.5

 
4.0

 
1.5

 
1.6

 
0.5

 
11.1

 
Expected Total
 
3.5

 
4.0

 
1.5

 
1.6

 
0.5

 
11.1

Specialty Chemicals(4)
 
Current Qtr.
 
4.4

 
1.7

 
0.2

 

 

 
6.3

 
YTD Fiscal 2016
 
4.4

 
1.7

 
0.2

 

 

 
6.3

 
Prior Year Qtr.
 

 

 

 

 

 

 
YTD Fiscal 2015
 

 

 

 

 

 

 
Cumulative
 
4.4

 
1.7

 
0.2

 

 

 
6.3

 
Expected Total
 
4.4

 
1.7

 
0.2

 

 

 
6.3

Other(5)
 
Current Qtr.
 

 
0.9

 

 

 
46.0

 
46.9

 
YTD Fiscal 2016
 
1.2

 
0.9

 

 

 
78.1

 
80.2

 
Prior Year Qtr.
 

 

 

 

 
13.8

 
13.8

 
YTD Fiscal 2015
 

 

 

 

 
16.5

 
16.5

 
Cumulative
 
1.2

 
0.9

 

 

 
358.9

 
361.0

 
Expected Total
 
1.2

 
0.9

 

 

 
358.9

 
361.0

Total
 
Current Qtr.
 
$
63.2

 
$
8.7

 
$
0.6

 
$
7.6

 
$
51.1

 
$
131.2

 
YTD Fiscal 2016
 
$
183.5

 
$
18.4

 
$
1.0

 
$
12.9

 
$
86.5

 
$
302.3

 
Prior Year Qtr.
 
$
1.5

 
$
(0.2
)
 
$
0.5

 
$
1.2

 
$
14.2

 
$
17.2

 
YTD Fiscal 2015
 
$
1.9

 
$
0.2

 
$
0.6

 
$
2.1

 
$
17.8

 
$
22.6

 
Cumulative
 
$
230.9

 
$
51.2

 
$
9.7

 
$
29.1

 
$
381.4

 
$
702.3

 
Expected Total
 
$
230.9

 
$
51.2

 
$
11.5

 
$
36.9

 
$
382.9

 
$
713.4


(1) 
We have defined “Net Property, Plant and Equipment” as used in this Note 6 to represent property, plant and equipment impairment losses, subsequent adjustments to fair value for assets classified as held for sale, subsequent (gains) or losses on sales of property, plant and equipment and related parts and supplies, and accelerated depreciation on such assets, if any.

(2) 
The Corrugated Packaging segment current quarter and year to date charges primarily reflect the charges associated with the permanent closures of the Coshocton, OH and Uncasville, CT medium mills, the Newberg, OR containerboard and newsprint mill, the Vapi, India linerboard mill and on-going closure costs at previously closed facilities. The prior year quarter and prior year to date charges primarily reflect on-going closure costs at previously closed facilities net of asset sales. The cumulative charges are primarily associated with the closure of the Coshocton, Uncasville, Newberg, Vapi and Matane, Quebec mills and

21


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)


the cumulative closure of certain corrugated container plants and recycled collection facilities acquired in the Smurfit-Stone Acquisition, and gains and losses associated with the sale of closed facilities. We have transferred a substantial portion of each closed facility's production to our other facilities.

(3) 
The Consumer Packaging segment current quarter charges reflect the charges associated with on-going closure costs at previously closed facilities net of asset sales. The year to date income is primarily associated with the gain on sale of the Cincinnati, OH specialty recycled paperboard mill, partially offset by severance costs relating to exiting a product offering at one of our facilities and on-going closure costs at previously closed facilities. The prior year quarter and prior year to date charges are primarily associated with on-going closure activity at previously closed facilities including the Cincinnati, OH mill. The cumulative charges primarily reflect our Cincinnati, OH mill and the consolidation of converting and merchandising displays facilities. We have transferred a substantial portion of each closed facility's production to our other facilities.

(4) The Specialty Chemicals segment current quarter, year to date and cumulative charges reflect the charges associated with the closure of our Duque de Caxias facility in Brazil.

(5) The expenses in the “Other” segment primarily reflect costs that we consider as related to Corporate that primarily consist of costs incurred as a result of the Combination, the Smurfit-Stone Acquisition, and other acquisition and divestiture expenses, including the planned Specialty Chemicals segment separation. The charges in the Net Property, Plant and Equipment column are for the write-off of leasehold improvements associated with the integration of the Combination. The pre-tax charges in the “Other” segment are summarized below (in millions):

 
Acquisition
Expenses
 
Integration
Expenses
 
Divestiture Expenses
 
Other Expenses
 
Total
Current Qtr.
$
2.0

 
$
33.0

 
$
11.0

 
$
0.9

 
$
46.9

YTD Fiscal 2016
$
5.5

 
$
54.5

 
$
19.3

 
$
0.9

 
$
80.2

Prior Year Qtr.
$
10.3

 
$
3.5

 
$

 
$

 
$
13.8

YTD Fiscal 2015
$
10.8

 
$
5.7

 
$

 
$

 
$
16.5


Acquisition expenses include expenses associated with mergers, acquisitions and other business combinations, whether consummated or not, as well as litigation expenses associated with mergers, acquisitions and business combinations, net of recoveries. Acquisition expenses primarily consist of advisory, legal, accounting, valuation and other professional or consulting fees. Integration expenses reflect primarily severance and other employee costs, professional services including work being performed to facilitate merger and acquisition integration, such as information systems integration costs, lease expense and other costs. Divestiture expenses are primarily associated with costs incurred to support the planned Specialty Chemicals segment separation and consist primarily of advisory, legal, accounting and other professional fees. Due to the complexity and duration of the integration activities associated with the Combination, the precise amount expected to be incurred has not been quantified in the “Expected Total” in the Summary of Restructuring and Other Costs, Net table above. We expect integration activities to continue during fiscal 2016 and 2017.

The following table represents a summary of and the changes in the restructuring accrual, which is primarily composed of lease commitments, accrued severance and other employee costs, and a reconciliation of the restructuring accrual charges to the line item “Restructuring and other costs, net” on our Condensed Consolidated Statements of Operations (in millions):
 
Six Months Ended
 
March 31,
 
2016
 
2015
Accrual at beginning of fiscal year
$
21.4

 
$
10.9

Additional accruals
45.2

 
0.2

Payments
(26.3
)
 
(5.0
)
Adjustment to accruals
2.2

 
0.8

Accrual at March 31
$
42.5

 
$
6.9



22


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)


Reconciliation of accruals and charges to restructuring and other costs, net:
 
 
 
 
Six Months Ended
 
March 31,
 
2016
 
2015
Additional accruals and adjustments to accruals (see table above)
$
47.4

 
$
1.0

Acquisition expenses
5.5

 
10.8

Integration expenses
30.1

 
5.9

Divestiture expenses
19.3

 

Net property, plant and equipment
183.5

 
1.9

Severance and other employee expense
2.6

 
0.1

Equipment and inventory relocation costs
1.0

 
0.6

Facility carrying costs
12.9

 
2.1

Other expense (income)

 
0.2

Total restructuring and other costs, net
$
302.3

 
$
22.6

 
Note 7.
Income Taxes

The effective tax rates for the three and six months ended March 31, 2016 were 40.3% and (20.5)%, respectively. The effective tax rates for the three and six months ended March 31, 2015 were 33.6% and 33.3%, respectively. The effective tax rate for the three months ended March 31, 2016 was different than the statutory rate primarily due to the domestic manufacturer’s deduction, the exclusion of tax benefits related to certain foreign losses and a tax rate differential with respect to foreign earnings. The effective tax rate for the six months ended March 31, 2016 was different than the statutory rate primarily due to no tax benefit being recorded for the goodwill impairment with respect to our Specialty Chemicals reporting unit (see Note 15.Segment Information” for additional details), the domestic manufacturer’s deduction, the exclusion of tax benefits related to certain foreign losses, and a tax rate differential with respect to foreign earnings primarily in Canada. The effective tax rates for the three and six months ended March 31, 2015 were different than the statutory rate primarily due to the impact of state taxes, the ability to claim the domestic manufacturer’s deduction against U.S. taxable earnings and a lower tax rate with respect to foreign earnings primarily in Canada.
  
Note 8.
Inventories

We value substantially all of our U.S. inventories at the lower of cost or market, with cost determined on the LIFO inventory valuation method, which we believe generally results in a better matching of current costs and revenues than under the FIFO inventory valuation method. In periods of increasing costs, the LIFO method generally results in higher cost of goods sold than under the FIFO method. In periods of decreasing costs, the results are generally the opposite. Since LIFO is designed for annual determinations, it is possible to make an actual valuation of inventory under the LIFO method only at the end of each fiscal year based on the inventory levels and costs at that time. Accordingly, we base interim LIFO estimates on management’s projection of expected year-end inventory levels and costs. We value all other inventories at the lower of cost or market, with cost determined using methods which approximate cost computed on a FIFO basis. These other inventories represent primarily foreign inventories and certain inventoried spare parts and supplies inventories. Inventories were as follows (in millions):
 
March 31,
2016
 
September 30,
2015
Finished goods and work in process
$
1,044.3

 
$
983.3

Raw materials
682.9

 
697.4

Spare parts and supplies
352.3

 
333.3

Inventories at FIFO cost
2,079.5

 
2,014.0

LIFO reserve
(20.6
)
 
(50.6
)
Net inventories
$
2,058.9

 
$
1,963.4



23


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)


Note 9.
Property, Plant and Equipment

Property, plant and equipment, net consists of the following (in millions):    
 
March 31,
2016
 
September 30,
2015
Property, plant and equipment at cost:
 
 
 
Land and buildings
$
2,385.3

 
$
2,336.8

Machinery and equipment
10,786.2

 
10,066.6

Forestlands and mineral rights
164.7

 
161.3

Transportation equipment
25.6

 
20.3

Leasehold improvements
65.8

 
60.7

 
13,427.6

 
12,645.7

Less accumulated depreciation and amortization
(3,640.3
)
 
(3,049.0
)
Property, plant and equipment, net
$
9,787.3

 
$
9,596.7



Note 10.
Debt

In connection with the Combination, the public bonds previously issued by WestRock RKT Company and WestRock MWV, LLC are guaranteed by WestRock and have cross-guarantees by WestRock RKT Company and WestRock MWV, LLC. The IDBs associated with the capital lease obligations of WestRock MWV, LLC are guaranteed by WestRock. The public bonds are unsecured unsubordinated obligations that rank equally in right of payment with all of our existing and future unsecured unsubordinated obligations. At March 31, 2016, our Credit Facility and public bonds were unsecured. For more information regarding certain of our debt characteristics, see “Note 9. Debt” of the Notes to Consolidated Financial Statements section of the Fiscal 2015 Form 10-K.

The following were individual components of debt (in millions): 
 
March 31, 2016
 
September 30, 2015
 
Carrying Value
 
Weighted Avg. Interest Rate
 
Carrying Value
 
Weighted Avg. Interest Rate
U.S. Dollar Denominated Fixed Rate Debt:
 
 
 
 
 
 
 
Public bonds due fiscal 2017 to 2022
$
1,661.6

 
3.8
%
 
$
1,672.2

 
3.8
%
Public bonds due fiscal 2023 to 2027
429.6

 
4.4
%
 
436.8

 
4.4
%
Public bonds due fiscal 2030 to 2033
995.1

 
4.7
%
 
1,002.8

 
4.6
%
Public bonds due fiscal 2037 to 2047
179.7

 
5.9
%
 
180.1

 
5.9
%
 
 
 
 
 
 
 
 
U.S. Dollar Denominated Floating Rate Debt:
 
 
 
 
 
 
 
Term loan facilities
2,395.2

 
1.7
%
 
1,794.7

 
1.4
%
Revolving credit and swing facilities
173.3

 
1.1
%
 
64.1

 
2.6
%
Receivables-backed financing facility
199.0

 
1.2
%
 
198.0

 
0.9
%
 
 
 
 
 
 
 
 
Capital lease obligations
169.2

 
5.4
%
 
165.9

 
5.7
%
 
 
 
 
 
 
 
 
Supplier Financing and Commercial Card Programs
102.2

 

 
3.2

 

 
 
 
 
 
 
 
 
International and other debt
72.3

 
7.4
%
 
114.6

 
7.1
%
Total debt
6,377.2

 
3.1
%
 
5,632.4

 
3.3
%
Less current portion of debt
518.9

 
 
 
74.1

 
 
Long-term debt due after one year
$
5,858.3

 
 
 
$
5,558.3

 
 

In connection with purchase accounting, we increased the value of debt assumed to reflect the debt at fair value. Total debt at March 31, 2016 and September 30, 2015 includes unamortized fair market value step-up of $323.1 million and $340.9 million,

24


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)


respectively. A portion of the debt classified as long-term, principally our Credit Facility and Receivables Facility, may be paid down earlier than scheduled at our discretion without penalty. Certain restrictive covenants govern our maximum availability under our credit facilities. We test and report our compliance with these covenants as required and were in compliance with all of our covenants at March 31, 2016. At March 31, 2016, we had $109.4 million of outstanding letters of credit not drawn upon, approximately $2.3 billion of availability under our committed credit facilities and over $0.2 billion available under our uncommitted credit facilities. This liquidity may be used to provide for ongoing working capital needs and for other general corporate purposes, including acquisitions, dividends and stock repurchases. The estimated fair value of our debt was approximately $6.4 billion and $5.7 billion as of March 31, 2016 and September 30, 2015, respectively. The fair value of our long-term debt is primarily either based on quoted prices for those or similar instruments, or approximate the carrying amount as the variable interest rates reprice frequently at observable current market rates, and are categorized as level 2 within the fair value hierarchy.

Term Loans and Revolving Credit Facilities

In connection with the Combination, on July 1, 2015, WestRock entered into a credit agreement (the “Credit Agreement”) that provides for a 5-year senior unsecured term loan in an aggregate principal amount of $2.3 billion ($1.1 billion of which was previously available to be drawn on a delayed draw basis not later than April 1, 2016 in up to two separate draws) and a 5-year senior unsecured revolving credit facility in an aggregate committed principal amount of $2.0 billion (together the “Credit Facility”). On March 24, 2016, we drew $600 million of the available $1.1 billion delayed draw term loan for general corporate purposes. The balance of the delayed draw term loan facility has been terminated. Also, on July 1, 2015, we entered into a credit agreement (the “Farm Loan Credit Agreement”) with CoBank ACB. The Farm Loan Credit Agreement provides for a 7-year senior unsecured term loan in an aggregate principal amount of $600.0 million.

On December 1, 2015, we entered into a $200.0 million uncommitted and revolving line of credit with Sumitomo Mitsui Banking Corporation. The facility matures on December 1, 2016. At March 31, 2016, there were no amounts outstanding under this facility.

On February 11, 2016, we entered into a $100.0 million uncommitted and revolving line of credit with the Bank of Tokyo-Mitsubishi UFJ, LTD. The facility matures on February 9, 2017. At March 31, 2016, we had $99.0 million outstanding under this facility.

On March 4, 2016 we entered into a $100.0 million uncommitted and revolving line of credit with Cooperatieve Rabobank U.A., New York Branch. The facility matures on March 2, 2017. At March 31, 2016, we had $71.3 million outstanding under this facility.
 
Receivables-Backed Financing Facility

Our $700.0 million receivables-backed financing facility matures on October 24, 2017. At March 31, 2016 and September 30, 2015, maximum available borrowings, excluding amounts outstanding, under the Receivables Facility were approximately $527.8 million and $555.4 million, respectively. The carrying amount of accounts receivable collateralizing the maximum available borrowings at March 31, 2016 was approximately $716.2 million. We have continuing involvement with the underlying receivables as we provide credit and collections services pursuant to the securitization agreement.

Note 11.
Fair Value

Assets and Liabilities Measured or Disclosed at Fair Value

We estimate fair values in accordance with ASC 820 “Fair Value Measurement”. ASC 820 provides a framework for measuring fair value and expands disclosures required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and a hierarchy prioritizing the inputs to valuation techniques. ASC 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Additionally, ASC 820 defines levels within the hierarchy based on the availability of quoted prices for identical items in active markets, similar items in active or inactive markets and valuation techniques using observable and unobservable inputs. We incorporate credit valuation adjustments to reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in our fair value measurements.

We disclose the fair value of our pension and postretirement assets and liabilities in “Note 13. Retirement Plans” of the Notes to Consolidated Financial Statements section of the Fiscal 2015 Form 10-K and the fair value of our long-term debt in “Note 10. Debt” herein. We have, or from time to time may have, various assets or liabilities whose fair value are not significant, such as

25


Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)


supplemental retirement savings 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 classes of assets or liabilities.

Accounts Receivable Sales Agreement        

In fiscal 2014, we entered into an agreement (the “A/R Sales Agreement”) to sell to a third party financial institution all of the short term receivables generated from certain customer trade accounts, on a revolving basis, until the agreement is terminated by either party. Transfers under this agreement meet the requirements to be accounted for as sales in accordance with the “Transfers and Servicing” guidance in ASC 860. Subsequently, on February 27, 2015, the A/R Sales Agreement was amended to increase the maximum amount of receivables to $300.0 million.

The following table represents a summary of the activity under the A/R Sales Agreement for the six months ended March 31, 2016 and March 31, 2015 (in millions):

 
Six Months Ended
 
March 31,
 
2016
 
2015
Receivable from financial institution at beginning of fiscal year
$
5.8

 
$
10.4

Receivables sold to the financial institution and derecognized
671.4

 
564.6

Receivables collected by financial institution
(649.6
)
 
(453.7
)
Cash proceeds from financial institution
(4.8
)
 
(87.1
)
Receivable from financial institution at March 31,