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EX-32.1 - EXHIBIT 32.1 - WestRock Coexhibit321q316.htm
EX-31.2 - EXHIBIT 31.2 - WestRock Coexhibit312q316.htm
EX-31.1 - EXHIBIT 31.1 - WestRock Coexhibit311q316.htm
EX-10.30 - EXHIBIT 10.30 - WestRock Coexhibit1030q316.htm

 
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 June 30, 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 July 29, 2016
Common Stock, $0.01 par value
 
251,494,672
 



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


2


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 from Continuing Operations Per Diluted Share
 
As defined on p. 52
Adjusted Income from Continuing Operations
 
As defined on p. 52
A/R Sales Agreement
 
As defined on p. 29
Antitrust Litigation
 
As defined on p. 36
ASC
 
FASB’s Accounting Standards Codification
ASU
 
Accounting Standards Update
BSF
 
Billion square feet
Boiler MACT
 
As defined on p. 34
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. 35
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. 28
Credit Facility
 
As defined on p. 28
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. 28
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, formerly 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


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 July 22, 2019
RockTenn
 
WestRock RKT Company, formerly Rock-Tenn Company
RockTenn Merger Sub
 
Rome Merger Sub, Inc.
SEC
 
Securities and Exchange Commission
Separation
 
The May 15, 2016 distribution of the outstanding common stock, par value $0.01 per share, of Ingevity to WestRock’s shareholders.
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
SARs
 
Stock appreciation rights
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


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
 
Nine Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
(recast)
 
 
Net sales
$
3,596.5

 
$
2,538.9

 
$
10,560.1

 
$
7,508.7

Cost of goods sold
2,869.2

 
2,012.6

 
8,520.8

 
6,055.8

Gross profit
727.3

 
526.3

 
2,039.3

 
1,452.9

Selling, general and administrative, excluding intangible amortization
341.5

 
224.7

 
1,019.4

 
676.5

Selling, general and administrative intangible amortization
53.3

 
22.1

 
159.4

 
66.6

Pension lump sum settlement and retiree medical curtailment, net

 
(0.4
)
 

 
11.5

Restructuring and other costs, net
43.1

 
13.1

 
317.0

 
35.7

Operating profit
289.4

 
266.8

 
543.5

 
662.6

Interest expense
(64.0
)
 
(22.6
)
 
(193.2
)
 
(68.9
)
Interest income and other income (expense), net
20.9

 
(0.7
)
 
43.2

 
(1.0
)
Equity in income of unconsolidated entities
5.8

 
2.7

 
6.8

 
7.3

Income from continuing operations before income taxes
252.1

 
246.2

 
400.3

 
600.0

Income tax expense
(99.7
)
 
(88.3
)
 
(159.1
)
 
(206.1
)
Income from continuing operations
152.4

 
157.9

 
241.2

 
393.9

Loss from discontinued operations (net of income tax benefit of $46.2, $0, $39.0 and $0)
(58.7
)
 

 
(539.4
)
 

Consolidated net income (loss)
93.7

 
157.9

 
(298.2
)
 
393.9

Less: Net income attributable to noncontrolling interests
(1.4
)
 
(1.5
)
 
(6.1
)
 
(2.6
)
Net income (loss) attributable to common stockholders
$
92.3

 
$
156.4

 
$
(304.3
)
 
$
391.3

 
 
 
 
 
 
 
 
Basic earnings per share from continuing operations
$
0.60

 
$
1.11

 
$
0.94

 
$
2.78

Basic loss per share from discontinued operations

(0.23
)
 

 
(2.13
)
 

Basic earnings (loss) per share attributable to common stockholders
$
0.37

 
$
1.11

 
$
(1.19
)
 
$
2.78

 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
$
0.59

 
$
1.10

 
$
0.93

 
$
2.74

Diluted loss per share from discontinued operations

(0.23
)
 

 
(2.11
)
 

Diluted earnings (loss) per share attributable to common stockholders
$
0.36

 
$
1.10

 
$
(1.18
)
 
$
2.74

 
 
 
 
 
 
 
 
Cash dividends paid per share
$
0.375

 
$
0.3205

 
$
1.125

 
$
0.8286


See Accompanying Notes to Condensed Consolidated Financial Statements

5


WESTROCK COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In Millions)
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Consolidated net income (loss)
$
93.7

 
$
157.9

 
$
(298.2
)
 
$
393.9

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
35.6

 
2.2

 
133.3

 
(45.0
)
Reclassification adjustment of net loss on foreign currency translation included in earnings
20.2

 

 
20.2

 

Derivatives:
 
 
 
 
 
 
 
Deferred gain (loss) on cash flow hedges
0.1

 

 
(0.5
)
 

Reclassification adjustment of net loss on cash flow hedges included in earnings
0.4

 

 
1.0

 

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

 
(0.5
)
 
1.4

 
(3.3
)
Amortization and settlement recognition of net actuarial loss, included in pension cost
1.5

 
6.3

 
4.9

 
29.1

Prior service credit (cost) arising during the period

 
0.7

 

 
(13.2
)
Amortization and curtailment recognition of prior service cost (credit), included in pension cost
0.2

 

 
0.8

 
(4.9
)
Other comprehensive income (loss)
58.0

 
8.7

 
161.1

 
(37.3
)
Comprehensive income (loss)
151.7

 
166.6

 
(137.1
)
 
356.6

Less: Comprehensive income attributable to noncontrolling interests
(1.5
)
 
(1.7
)
 
(6.3
)
 
(2.6
)
Comprehensive income (loss) attributable to common stockholders
$
150.2

 
$
164.9

 
$
(143.4
)
 
$
354.0


See Accompanying Notes to Condensed Consolidated Financial Statements



6


WESTROCK COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions, Except Share Data) 
 
June 30,
2016
 
September 30,
2015
 
 
 
(recast)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
258.7

 
$
207.8

Restricted cash
7.3

 
7.3

Accounts receivable (net of allowances of $38.5 and $29.5)
1,596.6

 
1,575.4

Inventories
1,691.1

 
1,761.0

Other current assets
331.5

 
261.7

Current assets of discontinued operations

 
362.8

Total current assets
3,885.2

 
4,176.0

Property, plant and equipment, net
9,345.2

 
9,159.8

Goodwill
4,788.0

 
4,647.1

Intangibles, net
2,651.3

 
2,794.9

Restricted assets held by special purpose entities
1,295.4

 
1,302.1

Prepaid pension asset
545.1

 
532.9

Other assets

936.2

 
503.9

Long-term assets of discontinued operations

 
2,255.7

 
$
23,446.4

 
$
25,372.4

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Current portion of debt
$
345.2

 
$
63.7

Accounts payable
1,109.5

 
1,231.4

Accrued compensation and benefits
376.1

 
354.9

Other current liabilities
476.3

 
410.2

Current liabilities of discontinued operations

 
118.6

Total current liabilities
2,307.1

 
2,178.8

Long-term debt due after one year
5,513.9

 
5,558.2

Pension liabilities, net of current portion
278.4

 
316.0

Postretirement benefit liabilities, net of current portion
145.3

 
143.0

Non-recourse liabilities held by special purpose entities
1,172.3

 
1,179.6

Deferred income taxes
3,283.0

 
3,189.7

Other long-term liabilities
709.3

 
647.2

Long-term liabilities of discontinued operations

 
361.8

Commitments and contingencies (Note 15)

 
 
Redeemable noncontrolling interests
14.3

 
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; 251.5 million and 257.0 million shares outstanding at June 30, 2016 and September 30, 2015, respectively
2.5

 
2.6

Capital in excess of par value
10,438.7

 
10,767.8

Retained earnings
83.3

 
1,661.6

Accumulated other comprehensive loss
(611.4
)
 
(780.2
)
Total stockholders’ equity
9,913.1

 
11,651.8

Noncontrolling interests
109.7

 
132.1

Total equity
10,022.8

 
11,783.9

 
$
23,446.4

 
$
25,372.4


See Accompanying Notes to Condensed Consolidated Financial Statements

7


WESTROCK COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
 
Nine Months Ended
 
June 30,
 
2016
 
2015
Operating activities:
 
 
 
Consolidated net (loss) income
$
(298.2
)
 
$
393.9

Adjustments to reconcile consolidated net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
867.7

 
459.5

Cost of real estate sold
50.1

 

Deferred income tax expense
35.4

 
152.1

Share-based compensation expense
51.8

 
28.5

Loss on disposal of plant, equipment and other, net
1.9

 
1.3

Equity in income of unconsolidated entities
(6.8
)
 
(7.3
)
Pension and other postretirement funding (more) than expense (income)
(69.0
)
 
(120.6
)
Gain on Grupo Gondi investment
(12.1
)
 

Cash surrender value increase in excess of premiums paid
(23.7
)
 

Impairment adjustments
191.3

 
3.0

Other non-cash items
(34.1
)
 
(6.0
)
Impairment of Specialty Chemicals goodwill and intangibles
579.4

 

Change in operating assets and liabilities, net of acquisitions and divestitures:
 
 
 
Accounts receivable
51.0

 
69.0

Inventories
25.8

 
(7.8
)
Other assets
(79.3
)
 
(111.9
)
Accounts payable
(104.1
)
 
(41.8
)
Income taxes
(13.0
)
 
(10.5
)
Accrued liabilities and other
92.7

 
15.2

Net cash provided by operating activities
1,306.8

 
816.6

Investing activities:
 
 
 
Capital expenditures
(614.7
)
 
(358.9
)
Cash (paid) received for purchase of businesses, net of cash acquired
(376.4
)
 
3.7

Debt purchased in connection with an acquisition
(36.5
)
 

Investment in unconsolidated entities
(178.5
)
 

Return of capital from unconsolidated entities
5.4

 
0.8

Proceeds from sale of subsidiary and affiliates
10.2

 

Proceeds from sale of property, plant and equipment
10.9

 
22.8

Net cash used for investing activities
(1,179.6
)
 
(331.6
)
Financing activities:
 
 
 
Additions (repayments) to revolving credit facilities
180.6

 
(84.9
)
Additions to debt
1,458.3

 
221.3

Repayments of debt
(1,012.2
)
 
(473.9
)
Other financing additions
2.5

 
2.0

Debt issuance costs
(3.6
)
 
(0.1
)
Specialty Chemicals spin-off of cash and trust funding
(118.9
)
 

Issuances of common stock, net of related minimum tax withholdings
(3.8
)
 
(24.6
)
Purchases of common stock
(285.1
)
 
(8.7
)
Excess tax benefits from share-based compensation
0.1

 
16.7

Repayments to unconsolidated entity
(1.0
)
 
(0.8
)
Cash dividends paid to shareholders
(286.3
)
 
(116.6
)
Cash distributions paid to noncontrolling interests
(21.8
)
 
(2.1
)
Net cash used for financing activities
(91.2
)
 
(471.7
)
Effect of exchange rate changes on cash and cash equivalents
(5.6
)
 
(2.7
)
Increase in cash and cash equivalents
30.4

 
10.6

Cash and cash equivalents from continuing operations, at beginning of period
207.8

 
32.6

Cash and cash equivalents from discontinued operations, at beginning of period
20.5

 

Balance of cash and cash equivalents at beginning of period
228.3

 
32.6

Cash and cash equivalents from continuing operations, at end of period
258.7

 
43.2

Cash and cash equivalents from discontinued operations, at end of period

 

Balance of cash and cash equivalents at end of period
$
258.7

 
$
43.2


8


 
Nine Months Ended
 
June 30,
 
2016
 
2015
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net of refunds
$
118.5

 
$
47.6

Interest, net of amounts capitalized
167.3

 
47.0


Supplemental schedule of non-cash operating and investing activities:

The formation of the Grupo Gondi joint venture consisted of a contribution of $175.0 million in cash and the stock of an entity that owns three corrugated packaging facilities in Mexico in return for a 25.0 percent equity participation in the joint venture valued at approximately $0.3 billion. The entity was deconsolidated as of April 1, 2016, which resulted in the derecognition and recognition of the following non-cash items:
 
Nine Months Ended
June 30, 2016
 
(In millions)
Derecognized:
 
Accounts receivable
$
34.7

Inventories
$
25.8

Other assets
$
86.3

Accounts payable
$
(15.4
)
Income taxes
$
(1.0
)
Accrued liabilities and other
$
(18.8
)
 
 
Recognized:
 
Investment in unconsolidated entities
$
(123.7
)

Supplemental schedule of non-cash investing and financing activities:

Liabilities assumed in the nine months ended June 30, 2016 relate to the SP Fiber Acquisition and the Packaging Acquisition. For additional information regarding these acquisitions, see Note 5. Merger, Acquisitions and Investment.

 
Nine Months Ended
June 30, 2016
 
(In millions)
Fair value of assets acquired, including goodwill
$
583.4

Cash consideration for the purchase of businesses, net of cash acquired
$
376.4

Debt purchased in connection with an acquisition
$
36.5

Liabilities assumed
$
170.5

 
 
Included in liabilities assumed is the following item:
 
Debt assumed in acquisitions
$
15.0



See Accompanying Notes to Condensed Consolidated Financial Statements

9


WESTROCK COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Month Periods Ended June 30, 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 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 nine months ended June 30, 2016 and June 30, 2015, our comprehensive income (loss) for the three and nine months ended June 30, 2016 and June 30, 2015, our financial position at June 30, 2016 and September 30, 2015, and our cash flows for the nine months ended June 30, 2016 and June 30, 2015.

On May 15, 2016, WestRock distributed 100% of the outstanding common stock, par value $0.01 per share, of Ingevity to WestRock’s shareholders and completed the separation of our Specialty Chemicals business from WestRock. Ingevity is now an independent public company trading under the symbol “NGVT” on the New York Stock Exchange. With the completion of the Separation, we disposed of the former Specialty Chemicals segment in its entirety and ceased to consolidate its assets, liabilities and results of operations in our Condensed Consolidated Financial Statements. Accordingly, we have presented the financial position and results of operations of our former Specialty Chemicals segment as discontinued operations in the accompanying Condensed Consolidated Financial Statements for all periods presented. See “Note 6. Discontinued Operations” for more information.
 
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 nine months ended June 30, 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 June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit losses: Measurement of Credit Losses on Financial Instruments”, which amends certain provisions of ASU 326, “Financial Instruments-Credit Loss”. The ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held to maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. For available for sale debt securities with unrealized losses, entities will be required to measure credit losses in a manner similar to what they do today, except that losses will be recognized as allowances rather than reductions in the amortized cost of the securities. Additionally, entities will have to disclose significantly more information, including information used to track credit quality by year or origination for most financing receivables. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual

10


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


periods, and will be applied as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period for which the guidance is effective. We expect to adopt these provisions on October 1, 2020, 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 May 2016, the FASB issued ASU 2016-12 “Revenue from Contracts with Customer, Narrow-Scope Improvements and Practical Expedients”, which amends its new revenue recognition guidance on transitioning to the new revenue recognition standard, collectibility, non-cash consideration and the presentation of sales and other similar taxes. The ASU clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. The ASU also clarifies how an entity should evaluate the collectibility threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. 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.

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.

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, 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 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 de-designation 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

11


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


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 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

12


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


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.

Note 3.
Equity and Other Comprehensive (Loss) Income

Equity

The following is a summary of the changes in total equity for the nine months ended June 30, 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 attributable to common stockholders
(304.3
)
 
4.2

 
(300.1
)
Other comprehensive income, net of tax
160.9

 

 
160.9

Noncontrolling interests assumed in acquisition

 
10.9

 
10.9

Income tax expense from share-based plans
(12.3
)
 

 
(12.3
)
Compensation expense under share-based plans
52.7

 

 
52.7

Cash dividends declared (per share - $1.125)(2)
(288.9
)
 

 
(288.9
)
Distributions and adjustments to noncontrolling interests

 
(11.2
)
 
(11.2
)
Sale of subsidiary shares from noncontrolling interest

 
(0.2
)
 
(0.2
)
Issuance of common stock, net of stock received for minimum tax withholdings
(3.2
)
 

 
(3.2
)
Purchases of common stock
(285.1
)
 

 
(285.1
)
Separation of Specialty Chemicals business
(1,058.5
)
 
(26.1
)
 
(1,084.6
)
Balance at June 30, 2016
$
9,913.1

 
$
109.7

 
$
10,022.8


(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 nine months ended June 30, 2016, we repurchased approximately 7.0 million shares of Common Stock for an aggregate cost of $285.1 million. As of June 30, 2016, we had approximately 27.6 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 nine months ended June 30, 2016 and June 30, 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 (loss) income before reclassifications
(0.5
)
 
1.4

 
133.4

 
134.3

Amounts reclassified from accumulated other comprehensive loss
1.0

 
5.4

 
20.2

 
26.6

Specialty Chemicals separation
0.4

 
1.9

 
5.6

 
7.9

Net current period other comprehensive income
0.9

 
8.7

 
159.2

 
168.8

Balance at June 30, 2016
$
(0.5
)
 
$
(532.0
)
 
$
(78.9
)
 
$
(611.4
)

(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

 
(16.5
)
 
(44.5
)
 
(61.0
)
Amounts reclassified from accumulated other comprehensive loss

 
23.8

 

 
23.8

Net current period other comprehensive income (loss)

 
7.3

 
(44.5
)
 
(37.2
)
Balance at June 30, 2015
$
(0.2
)
 
$
(490.9
)
 
$
(41.4
)
 
$
(532.5
)

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

The net of tax amounts were determined using effective tax rates averaging approximately 34% to 35% for the nine months ended June 30, 2016 and 38% to 39% for the nine months ended June 30, 2015. Although we are impacted by a number of currencies, foreign currency translation gains recorded in accumulated other comprehensive loss for the nine months ended June 30, 2016 were primarily due to the changes in the Brazilian Real/U.S. dollar and Canadian/U.S. dollar exchange rates. Foreign currency translation gains and losses recorded in accumulated other comprehensive loss for the nine months ended June 30, 2015 were primarily due to the change in the Canadian/U.S. dollar exchange rates. For the nine months ended June 30, 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 nine months ended June 30, 2015, we recorded defined benefit net actuarial losses and prior service costs, net of tax, in other comprehensive (loss) income of $3.3 million and $13.2 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 $2.0 million and $8.3 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
 
June 30, 2016
 
June 30, 2015
 
Pretax
 
Tax
 
Net of Tax
 
Pretax
 
Tax
 
Net of Tax
Amortization of defined benefit pension and postretirement items (1)
 
 
 
 
 
 
 
 
 
 
 
      Actuarial losses (2)
$
(1.9
)
 
$
0.6

 
$
(1.3
)
 
$
(9.9
)
 
$
3.7

 
$
(6.2
)
      Prior service (costs) credits (2)
(0.4
)
 
0.3

 
(0.1
)
 

 

 

Subtotal defined benefit plans
(2.3
)
 
0.9

 
(1.4
)
 
(9.9
)
 
3.7

 
(6.2
)
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
      Sale of foreign subsidiary (3)
(20.2
)
 

 
(20.2
)
 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Derivative Instruments (1)

 
 
 
 
 
 
 
 
 
 
 
      Commodity cash flow hedges (4)

(0.3
)
 

 
(0.3
)
 

 

 

      Foreign currency cash flow hedges (5)

(0.5
)
 
0.2

 
(0.3
)
 

 

 

Subtotal derivative instruments


(0.8
)
 
0.2

 
(0.6
)
 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
$
(23.3
)
 
$
1.1

 
$
(22.2
)
 
$
(9.9
)
 
$
3.7

 
$
(6.2
)

(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 13. Retirement Plans” for additional details).
(3) 
Included in interest income and other income (expense), net.
(4) 
Included in cost of goods sold.
(5) 
Included in net sales.

The following table summarizes the reclassifications out of accumulated other comprehensive loss by component (in millions):      
 
Nine Months Ended
 
Nine Months Ended
 
June 30, 2016
 
June 30, 2015
 
Pretax
 
Tax
 
Net of Tax
 
Pretax
 
Tax
 
Net of Tax
Amortization of defined benefit pension and postretirement items (1)
 
 
 
 
 
 
 
 
 
 
 
      Actuarial losses (2)
$
(6.5
)
 
$
1.9

 
$
(4.6
)
 
$
(46.2
)
 
$
17.5

 
$
(28.7
)
      Prior service (cost) credits (2)
(1.3
)
 
0.5

 
(0.8
)
 
8.0

 
(3.1
)
 
4.9

Subtotal defined benefit plans
(7.8
)
 
2.4

 
(5.4
)
 
(38.2
)
 
14.4

 
(23.8
)
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
      Sale of foreign subsidiary (3)
(20.2
)
 

 
(20.2
)
 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Derivative Instruments (1)
 
 
 
 
 
 
 
 
 
 
 
    Commodity cash flow hedges (4)
(1.4
)
 
0.5

 
(0.9
)
 

 

 

    Foreign currency cash flow hedges (5)
(0.2
)
 
0.1

 
(0.1
)
 

 

 

Subtotal derivative instruments
(1.6
)
 
0.6

 
(1.0
)
 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
$
(29.6
)
 
$
3.0

 
$
(26.6
)
 
$
(38.2
)
 
$
14.4

 
$
(23.8
)

(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 13. Retirement Plans” for additional details).
(3) 
Included in interest income and other income (expense), net.

15


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


(4) 
Included in cost of goods sold.
(5) 
Included in net sales.

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
 
Nine Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income from continuing operations

$
152.4

 
$
157.9

 
$
241.2

 
$
393.9

Less: Net income from continuing operations attributable to noncontrolling interest
(0.4
)
 
(1.5
)
 
(1.8
)
 
(2.6
)
Income available to common stockholders, before discontinued operations

152.0

 
156.4

 
239.4

 
391.3

Loss from discontinued operations (1)
(59.7
)
 

 
(543.7
)
 

Net income (loss) attributable to common stockholders
$
92.3

 
$
156.4

 
$
(304.3
)
 
$
391.3

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
252.7

 
141.1

 
254.8

 
140.7

 
 
 
 
 
 
 
 
Basic earnings per share from continuing operations
$
0.60

 
$
1.11

 
$
0.94

 
$
2.78

Basic loss per share from discontinued operations
(0.23
)
 

 
(2.13
)
 

Basic earnings (loss) per share attributable to common stockholders
$
0.37

 
$
1.11

 
$
(1.19
)
 
$
2.78

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income from continuing operations

$
152.4

 
$
157.9

 
$
241.2

 
$
393.9

Less: Net income from continuing operations attributable to noncontrolling interest
(0.4
)
 
(1.5
)
 
(1.8
)
 
(2.6
)
Income available to common stockholders, before discontinued operations

152.0

 
156.4

 
239.4

 
391.3

Loss from discontinued operations (1)
(59.7
)
 

 
(543.7
)
 

Net income (loss) attributable to common stockholders
$
92.3

 
$
156.4

 
$
(304.3
)
 
$
391.3

Denominator:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
252.7

 
141.1

 
254.8

 
140.7

Effect of dilutive stock options and non-participating securities
3.5

 
1.6

 
3.8

 
2.0

Diluted weighted average shares outstanding
256.2

 
142.7

 
258.6

 
142.7

 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
$
0.59

 
$
1.10

 
$
0.93

 
$
2.74

Diluted loss per share from discontinued operations
(0.23
)
 

 
(2.11
)
 

Diluted earnings (loss) per share attributable to common stockholders
$
0.36

 
$
1.10

 
$
(1.18
)
 
$
2.74


(1)  
Net of income attributable to noncontrolling interests of discontinued operations of $1.0 million and $4.3 million for the three and nine months ended June 30, 2016, respectively.


16


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


During the three and nine months ended June 30, 2016 and June 30, 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 June 30, 2016 and June 30, 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 1.9 million and 1.8 million common shares, respectively, in the three and nine months ended June 30, 2016, respectively, were not included in computing diluted earnings per share because the effect would have been antidilutive. Options and restricted stock in the amount of 0.3 million and 0.4 million common shares, respectively, in the three and nine months ended June 30, 2015, respectively, were not included in computing diluted earnings per share because the effect would have been antidilutive.

Note 5.
Merger, Acquisitions and Investment

Grupo Gondi Investment
On April 1, 2016, we completed the formation of a joint venture with Grupo Gondi to combine our respective operations in Mexico. We contributed $175.0 million in cash and the stock of an entity that owns three corrugated packaging facilities in Mexico in return for a 25.0 percent equity participation in the joint venture valued at approximately $0.3 billion. The cash contribution was borrowed at March 31, 2016 in order to fund at closing. The joint venture operates paper machines, corrugated packaging and high graphic folding carton facilities across 13 production sites. The cash contribution will remain in the joint venture and will be available to support its growth. As the majority equity holder, Grupo Gondi will manage the joint venture and we will provide technical and commercial resources. We believe the joint venture will help grow our presence in the attractive Mexican market. As a result of the transaction, we recorded a pre-tax non-cash gain of $12.1 million included in “Interest income and other income (expense), net” on our Condensed Consolidated Statements of Operations. The transaction includes future put and call rights with respect to the respective parties’ ownership interest in the joint venture. We have included the financial results of the Grupo Gondi investment since the formation in our Corrugated Packaging segment, and are accounting for the investment on the equity method. We are in the process of analyzing third-party valuation of certain tangible and intangible assets; thus, the allocation of the purchase price used for equity accounting is preliminary and subject to revision.

Packaging Acquisition

On January 19, 2016, we completed the 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 $97.6 million, net of cash received of $1.7 million and a working capital settlement. The transaction 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 $10.3 million of customer relationship intangible assets, $10.2 million of goodwill and $26.1 million of liabilities, including $1.3 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 fair 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 $278.8 million, net of cash received of $9.2 million. In addition, we paid $36.5 million for debt owed by GPS and thereby own the majority of the debt issued by GPS.

17


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



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, $50.5 million of goodwill, including recording an adjustment to deferred taxes in the second quarter of fiscal 2016, and $144.4 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 fair 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 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.




18


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


The following table summarizes the fair values of the assets acquired and liabilities assumed by major class of assets and liabilities as of the acquisition date, as well as adjustments made during fiscal 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

 
4.8

 
1,863.6

Property, plant and equipment
3,991.5

 
16.7

 
4,008.2

Prepaid pension asset
1,407.8

 
(9.9
)
 
1,397.9

Goodwill
3,817.3

 
55.3

 
3,872.6

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

 
18.4

 
382.2

Total assets acquired
16,001.1

 
85.3

 
16,086.4

 
 
 
 
 
 
Current portion of debt
62.3

 
74.8

 
137.1

Current liabilities
1,099.4

 
(47.3
)
 
1,052.1

Long-term debt due after one year
2,090.6

 
18.3

 
2,108.9

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

 
(4.4
)
 
2,362.3

Other long-term liabilities
520.0

 
43.9

 
563.9

Noncontrolling interest
159.3

 

 
159.3

Total liabilities and noncontrolling interest assumed
7,714.4

 
85.3

 
7,799.7

 
 
 
 
 
 
Net assets acquired (4)
$
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 nine months ended June 30, 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, other tax adjustments and the classification of supplier financing arrangements. The net impact of the measurement period adjustments resulted in a net increase to goodwill.

(4) 
The net assets acquired include the Specialty Chemicals business which was separated on May 15, 2016. See “Note 6. Discontinued Operations” for more information.

The fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced geographic reach of the combined organization, increased vertical integration and other synergistic opportunities), 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.


19


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


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 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. In connection with purchase accounting, we increased the carrying value of the debt assumed by $364.5 million to increase the carrying value of the debt assumed to fair value, including $18.3 million in the third quarter of fiscal 2016. The fair value adjustment 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. The net sales have been adjusted to reflect the discontinued operations of the Specialty Chemicals business.
 
Three Months Ended June 30, 2015
 
Nine Months Ended June 30, 2015
 
(Unaudited, in millions)
Net sales
$
3,654.3

 
$
10,730.9

Net income attributable to common stockholders
$
188.2

 
$
483.1


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 nine months ended June 30, 2015 were adjusted to exclude $17.4 million and $42.5 million, respectively, of acquisition costs, which primarily consist of advisory, legal, accounting, valuation and other professional or consulting fees.

Note 6.
Discontinued Operations

On May 15, 2016 WestRock distributed 100% of the outstanding common stock, par value $0.01 per share, of Ingevity to WestRock’s shareholders of record as of the close of business on May 4, 2016 receiving one share of Ingevity common stock for every six shares of WestRock Common Stock held as of such record date, and completed the Separation. Following the Separation, we do not beneficially own any shares of Ingevity common stock and Ingevity is now an independent public company trading under the symbol “NGVT” on the New York Stock Exchange. We disposed of the former Specialty Chemicals segment in its entirety and ceased to consolidate its assets, liabilities and results of operations in our Condensed Consolidated Financial Statements. Accordingly, we have presented the financial position and results of operations of our former Specialty Chemicals segment as discontinued operations in the accompanying Condensed Consolidated Financial Statements for all periods presented.


20


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


In connection with the Separation, we and Ingevity have entered into a separation and distribution agreement as well as various other agreements that provide a framework for the relationships between the parties going forward, including among others a tax matters agreement, a lease and ground service agreement with respect to our Covington, Virginia facility, an intellectual property agreement, a crude tall oil and black liquor soap skimming supply agreement, a trust agreement, an employee matters agreement and a transition service agreement. These agreements provided for the allocation between us and Ingevity of assets, employees, liabilities and obligations attributable to periods prior to, at and after the Separation and govern certain relationships between us and Ingevity after the Separation.

Prior to the Separation, Ingevity (then a subsidiary of WestRock) borrowed $500.0 million in contemplation of the Separation. In connection with the Separation, based on current market rates at the time of the Separation, we have recorded a $108.2 million long-term asset for the estimated fair value of the future principal and interest payments on an $80.0 million, 7.67% capital lease obligation assumed by Ingevity that is owed to the city of Wickliffe, KY. In contemplation of the Separation, Ingevity funded a trust in the amount of $68.9 million to secure the principal payment of the capital lease upon its maturity on January 15, 2027. We are co-obligors on the capital lease and the associated obligation remains recorded in long-term debt. The $500.0 million of debt and the $68.9 million in the trust were assumed by Ingevity, and removed from our Condensed Consolidated Financial Statements as part of our discontinued operations reporting.

The following table presents the financial results of Specialty Chemicals’ discontinued operations (in millions):
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2016
 
June 30, 2016
Net sales
$
120.0

 
$
533.7

Cost of goods sold
83.8

 
387.5

Gross Profit
36.2

 
146.2

Selling, general and administrative, excluding intangible amortization
11.8

 
65.6

Selling, general and administrative intangible amortization
5.9

 
28.8

Restructuring and other costs, net

22.5

 
50.9

Impairment of Specialty Chemicals goodwill and intangibles
101.1

 
579.4

Operating loss
(105.1
)
 
(578.5
)
Interest income (expense) and other income (expense), net
0.2

 
0.1

Loss from discontinued operations before income taxes
(104.9
)
 
(578.4
)
Income tax benefit
46.2

 
39.0

Loss from discontinued operations

$
(58.7
)
 
$
(539.4
)

Restructuring and other costs, net are primarily associated with costs incurred to support the Separation and consist primarily of advisory, legal, accounting and other professional fees. Additionally, restructuring and other costs, net include $10.0 million of costs associated with the closure of Ingevity’s Duque de Caxias facility in Brazil and other severance and stock-based compensation expenses.

In the first quarter of fiscal 2016, as part of our evaluation of whether events or changes in circumstances had occurred that would indicate whether it was more likely than not that the goodwill of our then-owned Specialty Chemicals reporting unit was impaired, we considered factors such as, but not limited to, macroeconomic conditions, industry and market considerations, and financial performance, including the planned revenue and earnings of the reporting unit. We concluded that an impairment indicator had occurred related to the goodwill of the Specialty Chemicals reporting unit and that the indicator was driven by market factors subsequent to the purchase price allocation to the Specialty Chemical’s reporting unit.

We performed a “Step 1” goodwill impairment test where we updated the discounted cash flow analysis used to determine the reporting unit’s initial fair value on July, 1 2015. We also compared those results to the valuations performed by our investment bankers in connection with the planned separation of our Specialty Chemicals business. Based on the results of the impairment test and analysis, we concluded that the fair value of the Specialty Chemicals reporting unit was less than its carrying amount and began a “Step 2” goodwill impairment test to determine the amount of impairment loss, if any. As part of the analysis, we determined that the carrying value of the property, plant and equipment and intangibles, all of which have finite lives, on a “held and used” basis did not exceed the estimated undiscounted future cash flows.


21


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


In light of changing market conditions, expected revenue and earnings of the reporting unit, lower comparative market valuations for companies in Specialty Chemicals’ peer group and our preliminary “Step 2” test, we concluded that an impairment of the Specialty Chemicals reporting unit was probable and could be reasonably estimated. As a result, we recorded a pre-tax and after-tax non-cash goodwill impairment charge of $478.3 million. This amount is included in the line item “Loss from discontinued operations” in the Condensed Consolidated Statements of Operations. No tax benefit was recorded for the goodwill impairment.

Until the completion of the Separation, GAAP required us to assess impairment of the Specialty Chemicals’ long-lived assets using the “held and used” model which is based on undiscounted future cash flows. Under this model, if the expected cash flows over the life of the primary asset of the reporting unit were in excess of the carrying amount, then there would be no impairment. At the date of the Separation, GAAP required us to assess impairment using the “held for sale” model. This model compares the fair value of the disposal unit to its carrying value and if the fair value less cost to sell is lower, then an impairment loss would be recorded. At the date of the Separation, we evaluated our intangibles, which consisted predominantly of customer list intangibles for impairment. Our analysis at May 15, 2016, using the income approach (multi-period excess earnings method), indicated that there was a $101.1 million pre-tax non-cash impairment of our Specialty Chemicals customer relationships intangible. The impairment loss was recorded on the Separation and is included as a component of discontinued operations.

The following table presents the significant non-cash items and capital expenditures for Specialty Chemicals’ that are included in the nine months ended June 30, 2016 Condensed Consolidated Statements of Cash Flows (in millions):
 
Nine Months Ended
 
June 30, 2016
Depreciation, depletion and amortization
$
57.2

Impairment of Specialty Chemicals goodwill and intangibles
$
579.4

Capital expenditures
$
(43.9
)
The carrying value of the assets and liabilities of discontinued operations on the Condensed Consolidated Balance Sheet as of September 30, 2015 were as follows (in millions):
 
September 30,
2015
ASSETS
Cash and cash equivalents
$
20.5

Accounts receivable (net of allowance of $0.1)
114.6

Inventories
202.4

Other current assets
25.3

Total current assets of discontinued operations
$
362.8

 
 
Property, plant and equipment, net
436.9

Goodwill
1,047.4

Intangibles, net
757.3

Other non-current assets
14.1

Total non-current assets of discontinued operations
$
2,255.7

 
 
LIABILITIES
Current portion of debt
10.4

Accounts payable
72.4

Accrued compensation and benefits
3.1

Other current liabilities
32.7

Total current liabilities of discontinued operations

$
118.6

 
 
Long-term debt due after one year
0.1

Deferred income taxes
350.9

Other non-current liabilities
10.8

Total non-current liabilities of discontinued operations

$
361.8



22


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


Note 7.
Restructuring and Other Costs, Net

Summary of Restructuring and Other Initiatives

We recorded pre-tax restructuring and other costs, net, of $43.1 million and $13.1 million for the three months ended June 30, 2016 and June 30, 2015, respectively, and recorded pre-tax restructuring and other costs, net, of $317.0 million and $35.7 million for the nine months ended June 30, 2016 and June 30, 2015, respectively. These amounts are not comparable since the timing and scope of the individual actions associated with a restructuring, acquisition or integration can vary. The restructuring and other costs, net, exclude the Specialty Chemicals costs which are included in discontinued operations. We discuss our restructuring and other costs, net in more detail below and those charged to discontinued operations in “Note 6. Discontinued Operations”.

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.


23


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 nine months ended June 30, 2016 and June 30, 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.
 
$
1.4

 
$
0.4

 
$

 
$
3.4

 
$
0.4

 
$
5.6

 
YTD Fiscal 2016
 
181.3

 
15.6

 
0.3

 
15.9

 
8.8

 
221.9

 
Prior Year Qtr.
 
(2.5
)
 
0.2

 
0.4

 
0.6

 
0.1

 
(1.2
)
 
YTD Fiscal 2015
 
(0.9
)
 
0.2

 
0.8

 
2.5

 
1.2

 
3.8

 
Cumulative
 
223.2

 
45.1

 
8.0

 
30.8

 
22.4

 
329.5

 
Expected Total
 
223.2

 
45.1

 
8.7

 
33.3

 
23.8

 
334.1

Consumer Packaging(3)
 
Current Qtr.
 
1.5

 
3.4

 
0.4

 
0.1

 

 
5.4

 
YTD Fiscal 2016
 
(0.5
)
 
4.0

 
0.9

 
0.5

 

 
4.9

 
Prior Year Qtr.
 
0.1

 
0.6

 
(0.1
)
 
0.4

 

 
1.0

 
YTD Fiscal 2015
 
0.4

 
0.8

 
0.1

 
0.6

 
0.2

 
2.1

 
Cumulative
 
5.0

 
7.4

 
1.9

 
1.7

 
0.5

 
16.5

 
Expected Total
 
5.0

 
7.7

 
2.6

 
1.7

 
0.5

 
17.5

Other(4)
 
Current Qtr.
 

 

 

 

 
32.1

 
32.1

 
YTD Fiscal 2016
 
1.2

 
0.9

 

 

 
88.1

 
90.2

 
Prior Year Qtr.
 

 

 

 

 
13.3

 
13.3

 
YTD Fiscal 2015
 

 

 

 

 
29.8

 
29.8

 
Cumulative
 
1.2

 
0.9

 

 

 
362.2

 
364.3

 
Expected Total
 
1.2

 
0.9

 

 

 
362.2

 
364.3

Total
 
Current Qtr.
 
$
2.9

 
$
3.8

 
$
0.4

 
$
3.5

 
$
32.5

 
$
43.1

 
YTD Fiscal 2016
 
$
182.0

 
$
20.5

 
$
1.2

 
$
16.4

 
$
96.9

 
$
317.0

 
Prior Year Qtr.
 
$
(2.4
)
 
$
0.8

 
$
0.3

 
$
1.0

 
$
13.4

 
$
13.1

 
YTD Fiscal 2015
 
$
(0.5
)
 
$
1.0

 
$
0.9

 
$
3.1<