Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - WestRock Coexhibit321q217.htm
EX-31.2 - EXHIBIT 31.2 - WestRock Coexhibit312q217.htm
EX-31.1 - EXHIBIT 31.1 - WestRock Coexhibit311q217.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 March 31, 2017
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”, “smaller reporting company” and “emerging growth 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
Emerging growth company o
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange act. 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 24, 2017
Common Stock, $0.01 par value
 
251,098,810
 



WESTROCK COMPANY
INDEX
 
 
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
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
 
 
 
Adjusted Earnings from Continuing Operations Per Diluted Share
 
As defined on p. 49
Adjusted Income from Continuing Operations
 
As defined on p. 49
A/R Sales Agreement
 
As defined on p. 27
Antitrust Litigation
 
As defined on p. 33
ASC
 
FASB’s Accounting Standards Codification
ASU
 
Accounting Standards Update
BSF
 
Billion square feet
Boiler MACT
 
As defined on p. 31
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. 32
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. 26
Credit Facility
 
As defined on p. 26
EPA
 
U.S. Environmental Protection Agency
FASB
 
Financial Accounting Standards Board
Farm Credit Facility
 
As defined on p. 26
Farm Loan Credit Agreement
 
As defined on p. 26
FIFO
 
First-in first-out inventory valuation method
Fiscal 2016 Form 10-K
 
WestRock’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016
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.
HH&B
 
Home, Health and Beauty, a division of our Consumer Packaging segment
IDBs
 
Industrial Development Bonds
Ingevity
 
Ingevity Corporation, formerly the Specialty Chemicals business of WestRock
LIFO
 
Last-in first-out inventory valuation method
MEPP or MEPPs
 
Multiemployer pension plan(s)
MWV
 
WestRock MWV, LLC, formerly MeadWestvaco Corporation

3


Term or Acronym
 
Definition
 
 
 
MWV Merger Sub
 
Milan Merger Sub, LLC
MMSF
 
Millions of square feet
MPS
 
Multi Packaging Solutions International Limited
Packaging Acquisition
 
The January 19, 2016 acquisition of certain legal entities formerly owned by Cenveo Inc.
Paris Agreement
 
An agreement signed in April 2016 among the U.S. and over 170 other countries which arose out of negotiations at the United Nation’s Conference of Parties (COP21) climate summit in December 2015
Pension Act
 
Pension Protection Act of 2006
Plan
 
WestRock Company Consolidated Pension Plan
PRPs or PRP
 
Potentially responsible parties
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.
SARs
 
Stock appreciation rights
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 stockholders
Seven Hills
 
Seven Hills Paperboard LLC
SG&A
 
Selling, general and administrative expenses
Smurfit-Stone
 
Smurfit-Stone Container Corporation
Silgan
 
Silgan Holdings Inc.
SP Fiber
 
SP Fiber Holdings, Inc.
SP Fiber Acquisition
 
The October 1, 2015 acquisition of SP Fiber
Star Pizza Acquisition
 
Our March 13, 2017 purchase of certain assets and liabilities of Star Pizza, a privately owned and operated corrugated pizza box distributor
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
 
Six Months Ended
 
March 31,
 
March 31,
 
2017
 
2016
 
2017
 
2016
Net sales
$
3,656.3

 
$
3,492.7

 
$
7,103.5

 
$
6,963.6

Cost of goods sold
2,980.9

 
2,835.4

 
5,836.8

 
5,651.6

Gross profit
675.4

 
657.3

 
1,266.7

 
1,312.0

Selling, general and administrative, excluding intangible amortization
349.1

 
342.0

 
685.4

 
677.9

Selling, general and administrative intangible amortization
49.6

 
53.5

 
102.2

 
106.1

Pension lump sum settlement
28.7

 

 
28.7

 

Land and Development impairment
42.7

 

 
42.7

 

Restructuring and other costs, net
18.3

 
111.1

 
99.3

 
273.9

Operating profit
187.0

 
150.7

 
308.4

 
254.1

Interest expense
(65.8
)
 
(64.0
)
 
(130.9
)
 
(129.2
)
Loss on extinguishment of debt
(0.1
)
 

 
(0.1
)
 

Interest income and other income (expense), net
14.2

 
6.5

 
26.3

 
22.3

Equity in income (loss) of unconsolidated entities
6.5

 
(0.3
)
 
20.2

 
1.0

Income from continuing operations before income taxes
141.8

 
92.9

 
223.9

 
148.2

Income tax expense
(43.6
)
 
(34.5
)
 
(47.2
)
 
(59.4
)
Income from continuing operations
98.2

 
58.4

 
176.7

 
88.8

Income (loss) from discontinued operations, net of income tax expense of $0, $5.9, $0 and $7.2

 
1.4

 

 
(480.7
)
Consolidated net income (loss)
98.2

 
59.8

 
176.7

 
(391.9
)
Less: Net loss (income) attributable to noncontrolling interests
4.9

 
(2.9
)
 
7.3

 
(4.7
)
Net income (loss) attributable to common stockholders
$
103.1

 
$
56.9

 
$
184.0

 
$
(396.6
)
 
 
 
 
 
 
 
 
Basic earnings per share from continuing operations
$
0.41

 
$
0.22

 
$
0.73

 
$
0.34

Basic loss per share from discontinued operations


 

 

 
(1.89
)
Basic earnings (loss) per share attributable to common stockholders
$
0.41

 
$
0.22

 
$
0.73

 
$
(1.55
)
 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
$
0.40

 
$
0.22

 
$
0.72

 
$
0.34

Diluted loss per share from discontinued operations


 

 

 
(1.87
)
Diluted earnings (loss) per share attributable to common stockholders
$
0.40

 
$
0.22

 
$
0.72

 
$
(1.53
)
 
 
 
 
 
 
 
 
Cash dividends paid per share
$
0.40

 
$
0.375

 
$
0.80

 
$
0.75


See Accompanying Notes to Condensed Consolidated Financial Statements

5


WESTROCK COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In Millions)
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2017
 
2016
 
2017
 
2016
Consolidated net income (loss)
$
98.2

 
$
59.8

 
$
176.7

 
$
(391.9
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
89.3

 
147.4

 
(21.4
)
 
97.7

Derivatives:
 
 
 
 
 
 
 
Deferred loss on cash flow hedges
(0.2
)
 
(0.6
)
 
(0.1
)
 
(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 arising during the period
30.7

 
1.4

 
20.5

 
1.4

Amortization and settlement recognition of net actuarial loss, included in pension cost
22.4

 
1.7

 
26.8

 
3.4

Prior service cost arising during the period
(0.9
)
 

 
(0.9
)
 

Amortization and curtailment recognition of prior service (credit) cost, included in pension cost
(0.5
)
 
0.3

 
(0.3
)
 
0.6

Other comprehensive income
140.8

 
150.5

 
24.6

 
103.1

Comprehensive income (loss)
239.0

 
210.3

 
201.3

 
(288.8
)
Less: Comprehensive loss (income) attributable to noncontrolling interests
4.6

 
(3.1
)
 
7.5

 
(4.8
)
Comprehensive income (loss) attributable to common stockholders
$
243.6

 
$
207.2

 
$
208.8

 
$
(293.6
)

See Accompanying Notes to Condensed Consolidated Financial Statements



6


WESTROCK COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions, Except Share Data) 
 
March 31,
2017
 
September 30,
2016
 
 
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
385.3

 
$
340.9

Restricted cash
5.9

 
25.5

Accounts receivable (net of allowances of $39.1 and $36.5)
1,563.5

 
1,592.2

Inventories
1,587.9

 
1,638.2

Other current assets
222.8

 
263.5

Assets held for sale
1,227.1

 
52.3

Total current assets
4,992.5

 
3,912.6

Property, plant and equipment, net
8,633.7

 
9,294.3

Goodwill
4,458.0

 
4,778.1

Intangibles, net
2,282.6

 
2,599.3

Restricted assets held by special purpose entities
1,290.4

 
1,293.8

Prepaid pension asset
336.0

 
257.8

Other assets

956.9

 
902.3

 
$
22,950.1

 
$
23,038.2

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Current portion of debt
$
214.2

 
$
292.9

Accounts payable
1,225.3

 
1,054.4

Accrued compensation and benefits
303.1

 
405.9

Other current liabilities
366.3

 
429.8

Liabilities held for sale
212.2

 

Total current liabilities
2,321.1

 
2,183.0

Long-term debt due after one year
5,459.5

 
5,496.3

Pension liabilities, net of current portion
291.6

 
328.1

Postretirement benefit liabilities, net of current portion
141.0

 
140.0

Non-recourse liabilities held by special purpose entities
1,165.8

 
1,170.2

Deferred income taxes
3,033.3

 
3,130.7

Other long-term liabilities
768.3

 
746.2

Commitments and contingencies (Note 16)

 


Redeemable noncontrolling interests
12.9

 
13.7

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; 251.0 million and 251.0 million shares outstanding at March 31, 2017 and September 30, 2016, respectively
2.5

 
2.5

Capital in excess of par value
10,431.0

 
10,458.6

Accumulated deficit
(147.2
)
 
(105.9
)
Accumulated other comprehensive loss
(601.6
)
 
(626.4
)
Total stockholders’ equity
9,684.7

 
9,728.8

Noncontrolling interests
71.9

 
101.2

Total equity
9,756.6

 
9,830.0

 
$
22,950.1

 
$
23,038.2


See Accompanying Notes to Condensed Consolidated Financial Statements

7


WESTROCK COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
 
Six Months Ended
 
March 31,
 
2017
 
2016
Operating activities:
 
 
 
Consolidated net income (loss)
$
176.7

 
$
(391.9
)
Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
539.1

 
585.5

Cost of real estate sold
124.6

 
23.4

Deferred income tax benefit
(55.5
)
 
(1.7
)
Share-based compensation expense
34.5

 
30.2

Loss on extinguishment of debt
0.1

 

Gain on disposal of plant, equipment and other, net
(8.5
)
 
(0.2
)
Equity in income of unconsolidated entities
(20.2
)
 
(1.0
)
Pension and other postretirement funding (more) than expense (income)
(10.0
)
 
(40.5
)
Loss on contribution of subsidiary
1.7

 

Cash surrender value increase in excess of premiums paid
(18.4
)
 
(17.5
)
Impairment adjustments
45.0

 
186.2

Distributed earnings from equity investments
12.7

 
2.7

Other non-cash items
(21.7
)
 
(16.0
)
Land and Development impairment
42.7

 

Impairment of Specialty Chemicals goodwill

 
478.3

Change in operating assets and liabilities, net of acquisitions and divestitures:
 
 
 
Accounts receivable
(90.8
)
 
113.5

Inventories
(50.7
)
 
(80.2
)
Other assets
(52.8
)
 
(66.1
)
Accounts payable
218.7

 
(58.8
)
Income taxes
10.3

 
23.7

Accrued liabilities and other
(60.4
)
 
5.6

Net cash provided by operating activities
817.1

 
775.2

Investing activities:
 
 
 
Capital expenditures
(365.3
)
 
(418.4
)
Cash paid for purchase of businesses, net of cash acquired
(31.7
)
 
(381.0
)
Debt purchased in connection with an acquisition

 
(36.5
)
Corporate-owned life insurance premium paid
(0.8
)
 

Investment in unconsolidated entities
(1.4
)
 
(0.4
)
Return of capital from unconsolidated entities
12.6

 
0.5

Proceeds from sale of subsidiary and affiliates

 
10.2

Proceeds from sale of property, plant and equipment
29.6

 
9.5

Net cash used for investing activities
(357.0
)
 
(816.1
)
Financing activities:
 
 
 
Additions to revolving credit facilities
65.6

 
78.3

Additions to debt
1.2

 
1,021.1

Repayments of debt
(175.9
)
 
(455.2
)
Other financing additions
7.8

 
0.2

Issuances of common stock, net of related minimum tax withholdings
7.2

 
(10.8
)
Purchases of common stock
(93.0
)
 
(238.8
)
Excess tax benefits from share-based compensation
1.5

 
0.1

Repayments to unconsolidated entity
(0.9
)
 
(0.2
)
Cash dividends paid to shareholders
(201.1
)
 
(191.6
)
Cash distributions paid to noncontrolling interests
(22.1
)
 
(16.8
)
Net cash (used for) provided by financing activities
(409.7
)
 
186.3

Effect of exchange rate changes on cash and cash equivalents
(6.0
)
 
(6.1
)
Increase in cash and cash equivalents
44.4

 
139.3


8


 
Six Months Ended
 
March 31,
 
2017
 
2016
Cash and cash equivalents from continuing operations, at beginning of period
340.9

 
207.8

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

 
20.5

Balance of cash and cash equivalents at beginning of period
340.9

 
228.3

Cash and cash equivalents from continuing operations, at end of period
385.3

 
345.2

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

 
22.4

Balance of cash and cash equivalents at end of period
$
385.3

 
$
367.6

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net of refunds
$
90.6

 
$
49.4

Interest, net of amounts capitalized
$
115.5

 
$
114.6


Supplemental schedule of non-cash investing and financing activities:

Liabilities assumed in the six months ended March 31, 2017 relate to the Star Pizza Acquisition. 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. Acquisitions and Investment.

 
Six Months Ended
 
March 31,
 
2017
 
2016
 
(In millions)
Fair value of assets acquired, including goodwill
$
35.5

 
$
577.4

Cash consideration for the purchase of businesses, net of cash acquired (1)
(35.2
)
 
(375.7
)
Debt purchased in connection with an acquisition

 
(36.5
)
Unreceived working capital or escrow
0.4

 

Liabilities assumed
$
0.7

 
$
165.2

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

 
14.9

(1) The amounts are different from the condensed consolidated statements of cash flows line item “cash paid for the purchase of businesses, net of cash acquired” as the statement of cash flow amount for the six months ended March 31, 2017 is net of the receipt of a $3.5 million escrow payment related to the Packaging Acquisition, and the statement of cash flows amount for the six months ended March 31, 2016 excludes the then unreceived 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


WESTROCK COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Month Period Ended March 31, 2017
(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 a multinational provider of paper and packaging solutions for consumer and corrugated packaging markets. We partner with our customers to provide differentiated paper and packaging solutions that help them win in the marketplace. Our team members support customers around the world from operating and business locations spanning North America, South America, Europe and Asia.

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, 2016 from the audited Consolidated Financial Statements included in our Fiscal 2016 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, 2017 and March 31, 2016, our comprehensive income (loss) for the three and six months ended March 31, 2017 and March 31, 2016, our financial position at March 31, 2017 and September 30, 2016, and our cash flows for the six months ended March 31, 2017 and March 31, 2016.

On May 15, 2016, WestRock completed the Separation. 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 our former Specialty Chemicals segment in its entirety and ceased to consolidate its assets, liabilities and results of operations in our consolidated financial statements. Accordingly, we have presented the results of operations of our former Specialty Chemicals segment prior to the Separation as discontinued operations in the accompanying condensed consolidated financial statements. See “Note 6. Discontinued Operations” for more information.

During the second quarter of fiscal 2017, we committed to a plan to sell HH&B. On January 23, 2017, we announced we had entered into an agreement with certain subsidiaries of Silgan under which Silgan would purchase HH&B. Accordingly, all the assets and liabilities of HH&B have been reported in the Condensed Consolidated Balance Sheet as of March 31, 2017 as assets and liabilities held for sale. See “Note 7. Assets Held For Sale” for more information. The presentation of other current assets and assets held for sale at September 30, 2016 has been changed to conform to the current year presentation.

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 2016 Form 10-K. The results for the three and six months ended March 31, 2017 are not necessarily indicative of results that may be expected for the full year.

Note 2.
New Accounting Standards

New Accounting Standards - Recently Issued

In March 2017, the FASB issued ASU 2017-07, “Compensation: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. The guidance in this update require that an employer disaggregate the service cost component from the other components of net benefit cost. Non-service cost components of net periodic pension cost are required to be presented in the income statement separately from the service cost component and outside the subtotal of operating income. The amendments in the update also allow only the service cost component to be eligible for capitalization for internally developed capital projects. The amendments in this update are effective for annual periods beginning after December 15, 2017 (October 1, 2018 for us), including interim periods within those annual periods. Early adoption is permitted. The guidance on the presentation of the components of net periodic benefit cost in the income statement will be applied retrospectively. The guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. The guidance includes a practical expedient that permits us to estimate amounts for comparative periods using the information previously disclosed in our pension and other postretirement plan footnote. We are currently evaluating the impact of this ASU.

In February 2017, the FASB issued ASU 2017-05, “Other Income: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”. The ASU provides guidance for recognizing gains and losses from the transfer

10

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


of nonfinancial assets in contracts with noncustomers. Specifically, the ASU clarifies the scope of an “in substance nonfinancial asset”, clarifies the treatment of partial sales of nonfinancial assets and clarifies guidance on accounting for contributions of nonfinancial assets to joint ventures and equity method investees. The amendments in this update are effective for annual periods beginning after December 15, 2017 (October 1, 2018 for us) including interim reporting periods within those annual reporting periods. Early adoption is permitted. The ASU may be applied by either a full or modified retrospective approach. We are currently evaluating the impact of this ASU.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment”, which amends the guidance in ASC 350, “Intangibles-Goodwill and Other”. The ASU eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The ASU is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The ASU will be applied prospectively. We currently do not expect that the adoption of these provisions will have a material effect on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business”, which amends the guidance in ASC 805, “Business Combinations”. The ASU changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business. If it is not met, the entity then evaluates whether the set meets the requirements that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The ASU defines an output as “the result of inputs and processes applied to those inputs that provide goods or services to customers, investment income (such as dividends or interest), or other revenues.” The ASU is effective for annual reporting periods beginning after December 15, 2017 (October 1, 2018 for us), including interim periods within those annual periods, and early adoption is permitted. The ASU will be applied prospectively to any transactions occurring within the period of adoption. We are evaluating the impact of these provisions.

In November 2016, the FASB issued ASU 2016-18, “Restricted Cash”, which amends the guidance in ASC 230, “Statement of Cash Flows”. The new ASU clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance will require entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. This reconciliation can be prepared either on the face of the statement of cash flows or in the notes to the financial statements. These provisions are effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2017 (October 1, 2018 for us), applied retrospectively for each period presented. Early adoption is permitted. We are evaluating the impact of these provisions.

In October 2016, the FASB issued ASU 2016-17, “Interests Held through Related Parties That Are under Common Control”, which amends certain provisions of ASU 810, “Consolidation”. The ASU amends the consolidation requirements that apply to a single decision maker’s evaluation of interests held through related parties that are under common control when it is determining whether it is the primary beneficiary of a variable interest entity. Under the ASU, a reporting entity considers its indirect economic interests in a variable interest entity held through related parties that are under common control on a proportionate basis, in a manner consistent with its consideration of its indirect economic interests held through related parties that are not under common control. These provisions are effective for annual periods, and for interim periods within those annual periods, beginning on or after December 15, 2016 (October 1, 2017 for us). We currently do not expect that the adoption of these provisions will have a material effect on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory”, which requires companies to recognize the income tax effects of intercompany sales and transfers of assets other than inventory (e.g., intangible assets) in the period in which the transfer occurs. Current guidance requires companies to defer the income tax effects of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized through use. The new guidance will require companies to defer the income tax effects only of intercompany transfers of inventory. The ASU is effective for annual reporting periods beginning after December 15, 2017 (October 1, 2018 for us), including interim periods within those annual periods. The guidance requires companies to apply a modified retrospective approach with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. Early adoption is permitted. We currently do not expect that the adoption of these provisions will have a material effect on our consolidated financial statements.

11

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



In August 2016, the FASB issued ASU 2016-15 “Classification of Certain Cash Receipts and Cash Payments”, which amends the guidance in ASC 230, “Statement of Cash Flows”. The ASU clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows for the following transactions: debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, distributions received from equity method investees and beneficial interest in securitization transactions. The ASU also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance requires retrospective adoption and is effective for fiscal years beginning after December 15, 2017 (October 1, 2018 for us), including interim periods within those fiscal years. Early adoption is permitted and an entity that elects early adoption must adopt all of the amendments in the period of adoption. We are evaluating the impact of these provisions.

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 (October 1, 2020 for us), including interim periods within those annual 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 currently 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 2016-09 “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 (October 1, 2017 for us), including interim periods within those fiscal years. Based on our current stock compensation awards, the adoption is currently not expected to have a material effect on our consolidated financial statements.

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 (October 1, 2017 for us), including interim periods within those fiscal years. We currently 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 (October 1, 2017 for us), including interim periods within those fiscal years, and can be adopted using a prospective or modified retrospective approach. Early adoption is permitted. We currently 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 (October 1, 2019 for us), including interim periods within those fiscal years. Early adoption is permitted.

12

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


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 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 (October 1, 2017 for us), including interim periods within those fiscal years, applied prospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. Given that the majority of our inventory is measured using LIFO, we currently do not expect that the adoption of these provisions will 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. The FASB has clarified this guidance in various updates (ASU 2016-08, ASU 2016-12 and ASU 2016-20) during 2015 and 2016, all of which have the same effective date as the original guidance. We are evaluating the impact of these provisions. We have created a project team and steering committee to develop a plan for adoption.

Note 3.
Equity and Other Comprehensive Income (Loss)

Equity

The following is a summary of the changes in total equity for the six months ended March 31, 2017 (in millions):
 
WestRock
Company
Stockholders’
Equity
 
Noncontrolling (1)
Interests
 
Total
Equity
Balance at September 30, 2016
$
9,728.8

 
$
101.2

 
$
9,830.0

Net income (loss) attributable to common stockholders
184.0

 
(8.2
)
 
175.8

Other comprehensive income, net of tax
24.8

 

 
24.8

Income tax benefit from share-based plans
0.1

 

 
0.1

Compensation expense under share-based plans
34.2

 

 
34.2

Cash dividends declared (per share - $0.80)(2)
(202.9
)
 

 
(202.9
)
Distributions and adjustments to noncontrolling interests

 
(21.1
)
 
(21.1
)
Issuance of common stock, net of stock received for minimum tax withholdings
8.7

 

 
8.7

Purchases of common stock
(93.0
)
 

 
(93.0
)
Balance at March 31, 2017
$
9,684.7

 
$
71.9

 
$
9,756.6


(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.

13

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



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. Pursuant to the program, in the six months ended March 31, 2017, we repurchased approximately 1.8 million shares of Common Stock for an aggregate cost of $93.0 million. As of March 31, 2017, we had approximately 24.7 million shares of Common Stock available for repurchase under the program.

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, 2017 and March 31, 2016 (in millions):

 
Cash Flow Hedges
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Items
 
Total (1)
Balance at September 30, 2016
$
(0.2
)
 
$
(523.8
)
 
$
(102.4
)
 
$
(626.4
)
Other comprehensive (loss) income before reclassifications
(0.1
)
 
19.7

 
(21.0
)
 
(1.4
)
Amounts reclassified from accumulated other comprehensive loss

 
26.2

 

 
26.2

Net current period other comprehensive (loss) income
(0.1
)
 
45.9

 
(21.0
)
 
24.8

Balance at March 31, 2017
$
(0.3
)
 
$
(477.9
)
 
$
(123.4
)
 
$
(601.6
)

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

 
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

 
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 interests.

The net of tax amounts were determined using the jurisdictional statutory rates, and reflect effective tax rates averaging approximately 37% to 38% for the six months ended March 31, 2017 and 34% to 35% for the six months ended March 31, 2016. Although we are impacted by a number of currencies, foreign currency translation losses recorded in accumulated other comprehensive loss for the six months ended March 31, 2017 were primarily due to the changes in the Euro, Canadian dollar and Yen exchange rates, partially offset by changes in the Brazilian Real and Mexican Peso exchange rates, each against the U.S. dollar. 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, Canadian dollar and Euro exchange rates, each against the U.S. dollar. For the six months ended March 31, 2017, we recorded defined benefit net actuarial gains of $19.7 million, net of $15.1 million of deferred income tax expense, in other comprehensive (loss) income, primarily due to the remeasurement of the Plan at February 28, 2017. For the six months ended March 31, 2017, amounts reclassified from accumulated other comprehensive loss totaled $26.2 million, net of deferred income tax of $15.3 million, primarily related to pension settlement accounting in the Plan in February 2017. For the six months ended March 31, 2016, we recorded defined benefit net actuarial

14

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


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.

The following table summarizes the reclassifications out of accumulated other comprehensive loss by component (in millions):

 
Three Months Ended
 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
 
Pretax
 
Tax
 
Net of Tax
 
Pretax
 
Tax
 
Net of Tax
Amortization of defined benefit pension and postretirement items (1)
 
 
 
 
 
 
 
 
 
 
 
Actuarial losses (2)
$
(35.5
)
 
$
13.2

 
$
(22.3
)
 
$
(2.3
)
 
$
0.6

 
$
(1.7
)
Prior service credits (costs) (2)
0.9

 
(0.3
)
 
0.6

 
(0.5
)
 
0.1

 
(0.4
)
Subtotal defined benefit plans
(34.6
)
 
12.9

 
(21.7
)
 
(2.8
)
 
0.7

 
(2.1
)
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Instruments (1)

 
 
 
 
 
 
 
 
 
 
 
Commodity cash flow hedges (3)


 

 

 
(0.4
)
 
0.2

 
(0.2
)
Foreign currency cash flow hedges (4)

(0.1
)
 
0.1

 

 
0.1

 

 
0.1

Subtotal derivative instruments


(0.1
)
 
0.1

 

 
(0.3
)
 
0.2

 
(0.1
)
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
$
(34.7
)
 
$
13.0

 
$
(21.7
)
 
$
(3.1
)
 
$
0.9

 
$
(2.2
)

(1)  
Amounts in parentheses indicate charges to earnings. Amounts pertaining to noncontrolling interests are excluded.
(2) 
These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See “Note 14. Retirement Plans” for additional details.
(3) 
These accumulated other comprehensive income components are included in cost of goods sold.
(4) 
These accumulated other comprehensive income components are 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, 2017
 
March 31, 2016
 
Pretax
 
Tax
 
Net of Tax
 
Pretax
 
Tax
 
Net of Tax
Amortization of defined benefit pension and postretirement items (1)
 
 
 
 
 
 
 
 
 
 
 
Actuarial losses (2)
$
(41.9
)
 
$
15.4

 
$
(26.5
)
 
$
(4.6
)
 
$
1.3

 
$
(3.3
)
Prior service credits (costs) (2)
0.5

 
(0.2
)
 
0.3

 
(0.9
)
 
0.2

 
(0.7
)
Subtotal defined benefit plans
(41.4
)
 
15.2

 
(26.2
)
 
(5.5
)
 
1.5

 
(4.0
)
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Instruments (1)

 
 
 
 
 
 
 
 
 
 
 
Commodity cash flow hedges (3)


 

 

 
(1.1
)
 
0.5

 
(0.6
)
Foreign currency cash flow hedges (4)

(0.1
)
 
0.1

 

 
0.3

 
(0.1
)
 
0.2

Subtotal derivative instruments


(0.1
)
 
0.1

 

 
(0.8
)
 
0.4

 
(0.4
)
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
$
(41.5
)
 
$
15.3

 
$
(26.2
)
 
$
(6.3
)
 
$
1.9

 
$
(4.4
)

(1)  
Amounts in parentheses indicate charges to earnings. Amounts pertaining to noncontrolling interests are excluded.
(2) 
These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See “Note 14. Retirement Plans” for additional details.
(3) 
These accumulated other comprehensive income components are included in cost of goods sold.
(4) 
These accumulated other comprehensive income components are 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,
 
2017
 
2016
 
2017
 
2016
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income from continuing operations

$
98.2

 
$
58.4

 
$
176.7

 
$
88.8

Less: Net loss (income) from continuing operations attributable to noncontrolling interest
4.9

 
(1.3
)
 
7.3

 
(1.4
)
Income available to common stockholders, before discontinued operations

103.1

 
57.1

 
184.0

 
87.4

Loss from discontinued operations (1)

 
(0.2
)
 

 
(484.0
)
Net income (loss) attributable to common stockholders
$
103.1

 
$
56.9

 
$
184.0

 
$
(396.6
)
Denominator:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
251.2

 
254.0

 
251.2

 
255.8

 
 
 
 
 
 
 
 
Basic earnings per share from continuing operations
$
0.41

 
$
0.22

 
$
0.73

 
$
0.34

Basic loss per share from discontinued operations

 

 

 
(1.89
)
Basic earnings (loss) per share attributable to common stockholders
$
0.41

 
$
0.22

 
$
0.73

 
$
(1.55
)
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income from continuing operations

$
98.2

 
$
58.4

 
$
176.7

 
$
88.8

Less: Net loss (income) from continuing operations attributable to noncontrolling interest
4.9

 
(1.3
)
 
7.3

 
(1.4
)
Income available to common stockholders, before discontinued operations

103.1

 
57.1

 
184.0

 
87.4

Loss from discontinued operations (1)

 
(0.2
)
 

 
(484.0
)
Net income (loss) attributable to common stockholders
$
103.1

 
$
56.9

 
$
184.0

 
$
(396.6
)
Denominator:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
251.2

 
254.0

 
251.2

 
255.8

Effect of dilutive stock options and non-participating securities
3.4

 
3.4

 
3.7

 
3.9

Diluted weighted average shares outstanding
254.6

 
257.4

 
254.9

 
259.7

 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
$
0.40

 
$
0.22

 
$
0.72

 
$
0.34

Diluted loss per share from discontinued operations

 

 

 
(1.87
)
Diluted earnings (loss) per share attributable to common stockholders
$
0.40

 
$
0.22

 
$
0.72

 
$
(1.53
)

(1)  
Net of income attributable to noncontrolling interests of discontinued operations of $1.6 million and $3.3 million for the three and six months ended March 31, 2016, respectively.

During the three and six months ended March 31, 2017 and March 31, 2016 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.

16

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



Weighted average shares includes approximately 0.2 million and 0.3 million of reserved, but unissued shares at March 31, 2017 and March 31, 2016, respectively. These reserved shares will be distributed as claims are liquidated or resolved in accordance with the Smurfit-Stone Plan of Reorganization and Confirmation Order.

Stock options and restricted stock in the amount of 0.7 million and 0.6 million common shares in the three and six months ended March 31, 2017, respectively, were not included in computing diluted earnings per share because the effect would have been antidilutive. Stock options and restricted stock in the amount of 2.5 million and 1.7 million common shares in the three and six months ended March 31, 2016, respectively, were not included in computing diluted earnings per share because the effect would have been antidilutive.

Note 5.
Acquisitions and Investment

Star Pizza Acquisition

On March 13, 2017, we completed the purchase of certain assets and liabilities of Star Pizza, a privately owned and operated corrugated pizza box distributor. The transaction provides us with a leadership position in the fast growing small-run pizza box market and increases our vertical integration. The purchase price was $34.8 million, net of a preliminary unreceived $0.4 million working capital settlement. We have included the financial results of the acquired assets since the date of the acquisition in our Corrugated Packaging segment.

The purchase price allocation for the acquisition primarily included $24.8 million of customer relationship intangible assets and $2.3 million of goodwill. We are amortizing the customer relationship intangibles over 10 years based on a straight-line basis because the amortization pattern was not reliably determinable. The fair value assigned to goodwill is primarily attributable to buyer-specific synergies expected to arise after the acquisition (e.g., enhanced reach of the combined organization and other synergies), and the assembled work force. We expect the goodwill and intangibles to be amortizable for income tax purposes.

Grupo Gondi Investment

On April 1, 2016, we completed the formation of a joint venture with Grupo Gondi in Mexico. We contributed $175.0 million in cash and the stock of an entity that owns three corrugated packaging facilities in Mexico in return for a 25.0% equity participation in the joint venture and put and call rights valued at approximately $0.3 billion. The joint venture operates paper machines, corrugated packaging and high graphic folding carton facilities across various production sites. Until utilized, the cash contribution remains in the joint venture to support its growth. As the majority equity holder, Grupo Gondi manages the joint venture and we provide technical and commercial resources and supply certain paperboard to the joint venture. 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 in the third quarter of fiscal 2016. 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 of the joint venture in our Corrugated Packaging segment, and are accounting for the investment under the equity method.
 
Packaging Acquisition

On January 19, 2016, we completed a 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 $94.1 million, net of cash received of $1.7 million, a working capital settlement and a $3.5 million escrow receipt in the first quarter of fiscal 2017. The transaction is subject to an election under Section 338(h)(10) of the Code that increases the U.S. tax basis in the acquired U.S. assets. 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 purchase price allocation for the acquisition included $10.5 million of customer relationship intangible assets, $9.3 million of goodwill and $25.8 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. The goodwill and intangibles of the U.S. entities are amortizable for income tax purposes.


17

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


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% interest in GPS. GPS is a joint venture providing steam to the Dublin mill and electricity to Georgia Power. The purchase price was $278.8 million, net of cash received of $9.2 million and a working capital settlement. In addition, we paid $36.5 million for debt owed by GPS and thereby own the majority of the debt issued by GPS.

The Dublin mill has helped balance the fiber mix of our mill system, including our ability to serve the increasing demand for lighter weight containerboard, and the addition of kraft and bag paper has diversified our product offering. 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 purchase price allocation for the acquisition included $13.5 million of customer relationship intangible assets, $57.3 million of goodwill and $150.3 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 are not amortizable for income tax purposes.

Note 6.
Discontinued Operations

On May 15, 2016, WestRock completed the Separation. Since the Separation, we have not beneficially owned any shares of Ingevity common stock and Ingevity has been 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. 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.

In connection with the Separation, we and Ingevity 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 services 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 wholly-owned subsidiary of WestRock, borrowed $500.0 million in contemplation of the Separation. In addition, Ingevity assumed an $80.0 million, 7.67% capital lease obligation due January 15, 2027 owed to the City of Wickliffe, KY. In contemplation of the Separation, Ingevity also funded a trust in the amount of $68.9 million to secure the balloon principal payment of that capital lease upon the lease’s maturity. We remain a co-obligor on the capital lease obligation; therefore, the capital lease assumed by Ingevity remains recorded in our Condensed Consolidated Financial Statements in long-term debt. At the time of the Separation, we recorded a $108.2 million long-term asset for the estimated fair value of the future principal and interest payments on the capital lease obligation assumed by Ingevity. The value of the long-term asset will reduce over the life of the lease with interest using the effective interest method. The $500.0 million of debt and the $68.9 million in the trust were assumed by Ingevity, and were removed from our condensed consolidated financial statements as part of our discontinued operations reporting.


18

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


The following table presents the financial results of Specialty Chemicals’ discontinued operations (in millions):
 
Three Months Ended
 
Six Months Ended
 
March 31, 2016
 
March 31, 2016
Net sales
$
203.9

 
$
413.7

Cost of goods sold
140.4

 
303.7

Gross Profit
63.5

 
110.0

Selling, general and administrative, excluding intangible amortization
26.0

 
53.8

Selling, general and administrative intangible amortization
11.3

 
22.9

Restructuring and other costs, net
20.1

 
28.4

Impairment of Specialty Chemicals goodwill

 
478.3

Operating profit (loss)
6.1

 
(473.4
)
Interest income (expense) and other income (expense), net
1.2

 
(0.1
)
Income (loss) from discontinued operations before income taxes
7.3

 
(473.5
)
Income tax expense
(5.9
)
 
(7.2
)
Income (loss) from discontinued operations
1.4

 
(480.7
)

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 $6.3 million of costs associated with the closure of Ingevity’s Duque de Caxias facility in Brazil.

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 Combination.

Accordingly, 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.

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.

The following table presents the significant non-cash items and capital expenditures for Specialty Chemicals’ that are included in the Condensed Consolidated Statements of Cash Flows (in millions):
 
Six Months Ended
 
March 31, 2016
Depreciation, depletion and amortization
$
45.6

Impairment of Specialty Chemicals goodwill
$
478.3

Capital expenditures
$
(41.1
)

19

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



Note 7.
Assets held for sale

During the second quarter of fiscal 2017, we committed to a plan to sell HH&B. On January 23, 2017, we announced we had entered into an agreement with certain subsidiaries of Silgan under which Silgan would purchase HH&B for approximately $1.025 billion in cash plus the assumption of approximately $25 million in foreign pension liabilities. Accordingly, all the assets and liabilities of HH&B have been reported in the Condensed Consolidated Balance Sheet as of March 31, 2017, as assets and liabilities held for sale. We discontinued recording depreciation and amortization while the assets were held for sale. The transaction closed April 6, 2017.
 
Net assets and liabilities held for sale at March 31, 2017 of $1,014.9 million include $771.1 million for HH&B and $225.1 million of Land and Development portfolio assets, with the remainder primarily related to closed facilities. The following is a summary of the major classes of assets and liabilities included as assets and liabilities held for sale as of March 31, 2017 (in millions):
ASSETS
Accounts receivable (net of allowance of $2.3)
$
107.4

Inventories
68.6

Other current assets
21.1

Property, plant and equipment, net
476.0

Goodwill
321.8

Intangible, net
214.5

Other assets
17.7

Total current assets held for sale
$
1,227.1

 
 
LIABILITIES
Current portion of debt
$
0.1

Accounts payable
45.9

Accrued compensation and benefits
14.2

Other current liabilities
18.3

Long term-debt due after one year
0.1

Pension liabilities, net of current portion
25.4

Postretirement benefit liabilities, net of current portion
0.5

Deferred income taxes
99.9

Other long-term liabilities
7.8

Total current liabilities held for sale
$
212.2

Due to our accelerated monetization strategy, we have met the held for sale criteria for the Land and Development portfolio of assets being sold and have reclassified them to assets held for sale at March 31, 2017. As of September 30, 2016, the $52.3 million of assets held for sale were primarily related to assets under contract in our Land and Development segment.

Note 8.
Restructuring and Other Costs, Net

Summary of Restructuring and Other Initiatives

We recorded pre-tax restructuring and other costs, net, of $18.3 million and $99.3 million for the three and six months ended March 31, 2017, respectively, and $111.1 million and $273.9 million for the three and six months ended March 31, 2016, 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

20

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


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.

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, 2017 and March 31, 2016, 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.
 
$
(2.7
)
 
$
(4.5
)
 
$
1.1

 
$
1.6

 
$
0.6

 
$
(3.9
)
 
YTD Fiscal 2017
 
(1.3
)
 
(4.7
)
 
1.5

 
3.3

 
0.7

 
(0.5
)
 
Prior Year 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

 
Cumulative
 
218.3

 
35.2

 
6.1

 
34.3

 
22.3

 
316.2

 
Expected Total
 
218.3

 
35.2

 
7.2

 
37.6

 
23.0

 
321.3

Consumer Packaging(3)
 
Current Qtr.
 
(0.2
)
 
(0.7
)
 
0.3

 

 
0.1

 
(0.5
)
 
YTD Fiscal 2017
 
19.7

 
8.0

 
1.0

 

 
17.9

 
46.6

 
Prior Year Qtr.
 
0.1

 

 
0.3

 
0.3

 

 
0.7

 
YTD Fiscal 2016
 
(2.0
)
 
0.6

 
0.5

 
0.4

 

 
(0.5
)
 
Cumulative
 
28.9

 
15.9

 
3.1

 
1.8

 
18.5

 
68.2

 
Expected Total
 
28.9

 
15.9

 
3.2

 
1.9

 
18.5

 
68.4

Land and Development (4)
 
Current Qtr.
 

 
0.6

 

 

 

 
0.6

 
YTD Fiscal 2017
 

 
1.5

 

 

 

 
1.5

 
Prior Year Qtr.
 

 

 

 

 

 

 
YTD Fiscal 2016
 

 

 

 

 

 

 
Cumulative
 

 
12.1

 

 

 

 
12.1

 
Expected Total
 

 
15.1

 

 

 

 
15.1

Other(5)
 
Current Qtr.
 
0.1

 
0.2

 

 

 
21.8

 
22.1

 
YTD Fiscal 2017
 
0.1

 
0.5

 

 

 
51.1

 
51.7

 
Prior Year Qtr.
 

 
0.9

 

 

 
32.2

 
33.1

 
YTD Fiscal 2016
 
1.2

 
0.9

 

 

 
56.0

 
58.1

 
Cumulative
 
1.4

 
1.9

 

 

 
438.2

 
441.5

 
Expected Total
 
1.4

 
1.9

 

 

 
438.2

 
441.5

Total
 
Current Qtr.
 
$
(2.8
)
 
$
(4.4
)
 
$
1.4

 
$
1.6

 
$
22.5

 
$
18.3

 
YTD Fiscal 2017
 
$
18.5

 
$
5.3

 
$
2.5

 
$
3.3

 
$
69.7

 
$
99.3

 
Prior Year Qtr.
 
$
58.8

 
$
7.0

 
$
0.4

 
$
7.6

 
$
37.3

 
$
111.1

 
YTD Fiscal 2016
 
$
179.1

 
$
16.7

 
$
0.8

 
$
12.9

 
$
64.4

 
$
273.9

 
Cumulative
 
$
248.6

 
$
65.1

 
$
9.2

 
$
36.1

 
$
479.0

 
$
838.0

 
Expected Total
 
$
248.6

 
$
68.1

 
$
10.4

 
$
39.5

 
$
479.7

 
$
846.3


(1) 
We have defined “Net Property, Plant and Equipment” as used in this Note 8 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.


21

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


(2) 
The Corrugated Packaging segment current quarter and year to date income primarily reflects the current quarter gain on sale of a previously closed recycling facility and current quarter severance adjustments, net of equipment impairments and on-going closure costs at previously closed facilities. The prior year quarter and year to date charges primarily reflect the charges associated with the permanent closures of the Coshocton, OH and Uncasville, CT medium mills and the Newberg, OR containerboard and newsprint mill, the Vapi, India linerboard mill and on-going closure costs at previously closed facilities. The cumulative charges are primarily associated with the closure of the Coshocton, Uncasville, Newberg, Vapi, India and Matane, Quebec mills, cumulative closure of corrugated container plants and recycled collection facilities 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 primarily reflect the charges associated with on-going closure costs. The current year to date charges primarily reflect the charges associated with a folding carton facility including a $17.6 million impairment of a customer relationship intangible in the other costs column, beverage facilities and on-going closure costs at previously closed facilities. The prior year quarter charges reflect the charges associated with on-going closure costs at previously closed facilities net of assets sales. The year to date income in the prior year 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 activity at previously closed facilities. The cumulative charges primarily reflect our Cincinnati, OH mill, the aforementioned customer relationship intangible impairment and cumulative closures of folding carton, beverage and merchandising display facilities. We have transferred a substantial portion of each closed facility's production to our other facilities.

(4) 
The Land and Development segment current quarter, year to date and cumulative charges reflect severance and other employee costs related to personnel reductions in the segment.

(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 acquisition, integration and divestiture expenses, excluding the fiscal 2016 Specialty Chemicals costs which are included in discontinued operations. The charges in the Net Property, Plant and Equipment column are primarily for the write-off of leasehold improvements associated with the Combination and included in integration expenses in following table. The pre-tax charges in the “Other” segment are summarized below (in millions):

 
Acquisition
Expenses
 
Integration
Expenses
 
Divestiture Expenses
 
Other Expenses
 
Total
Current Qtr.
$
2.7

 
$
15.7

 
$
2.3

 
$
1.4

 
$
22.1

YTD Fiscal 2017
$
4.3

 
$
37.6

 
$
8.1

 
$
1.7

 
$
51.7

Prior Year Qtr.
$
2.0

 
$
30.1

 
$
0.1

 
$
0.9

 
$
33.1

YTD Fiscal 2016
$
5.5

 
$
51.6

 
$
0.1

 
$
0.9

 
$
58.1


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 in fiscal 2017 are primarily associated with the evaluation of strategic alternatives for HH&B 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 from the Combination to continue during fiscal 2017.


22

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


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,
 
2017
 
2016
Accrual at beginning of fiscal year
$
44.8

 
$
21.4

Additional accruals
22.2

 
43.5

Payments
(20.8
)
 
(26.0
)
Adjustment to accruals
(5.8
)
 
2.2

Accrual at March 31
$
40.4

 
$
41.1


Reconciliation of accruals and charges to restructuring and other costs, net (in millions):
 
 
 
Six Months Ended
 
March 31,
 
2017
 
2016
Additional accruals and adjustments to accruals (see table above)
$
16.4

 
$
45.7

Acquisition expenses
4.3

 
5.5

Integration expenses
25.7

 
27.2

Divestiture expenses
8.1

 
0.1

Net property, plant and equipment
18.5

 
179.1

Severance and other employee expense
2.0

 
2.6

Equipment and inventory relocation costs
2.5

 
0.8

Facility carrying costs
3.3

 
12.9

Other expense
18.5