10-K 1 a10k9302016.htm 10-K Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________________ 
FORM 10-K 
_______________________________________________ 
(Mark One)
x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 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
 
(I.R.S. Employer
Incorporation or Organization)
 
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
_______________________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
_______________________________________________ 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x    No   o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o    No   x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o (Do not check if a 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
The aggregate market value of the common equity held by non-affiliates of the registrant as of March 31, 2016, the last day of the registrant’s most recently completed second fiscal quarter (based on the last reported closing price of $39.03 per share of WestRock Common Stock, as reported on the New York Stock Exchange on such date), was approximately $9,711 million. WestRock completed the Separation (as defined), which closed after March 31, 2016.
As of November 4, 2016, the registrant had 251,101,688 shares of Common Stock, par value $0.01 per share, outstanding.
_______________________________________________ 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 27, 2017, are incorporated by reference in Parts II and III.
 



WESTROCK COMPANY
INDEX TO FORM 10-K
 
 
 
Page
Reference
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
 
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
 
 
 
 
 
Item 15.
 
 
 
Item 16.


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Glossary of Terms
The following terms or acronyms used in this Form 10-K are defined below:
Term or Acronym
 
Definition
 
 
 
2016 Incentive Stock Plan
 
WestRock Company Incentive Stock Plan
2004 Incentive Stock Plan
 
Amended and Restated 2004 Incentive Stock Plan
Adjusted Earnings from Continuing Operations Per Diluted Share
 
As defined on p. 44
Adjusted Income from Continuing Operations
 
As defined on p. 44
A/R Sales Agreement
 
As defined on p. 90
AFMC
 
Alternative fuel mixture credits
AGI In-Store
 
A.G. Industries, Inc.
Antitrust Litigation
 
As defined on p. 115
APBO
 
Accumulated postretirement benefit obligation
ASC
 
FASB’s Accounting Standards Codification
ASU
 
Accounting Standards Update
BSF
 
Billion square feet
Boiler MACT
 
As defined on p. 10 and 113
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, Rome Merger Sub, Inc., and Milan Merger Sub, LLC.

CBA or CBAs
 
Collective bargaining agreements
CBPC
 
Cellulosic biofuel producers credits
CEO
 
Chief Executive Officer
CERCLA
 
The Comprehensive Environmental Response, Compensation, and Liability Act of 1980
Clean Power Plan
 
As defined on p.11 and 114
CFO
 
Chief Financial Officer
Code
 
The Internal Revenue Code of 1986, as amended
Combination
 
Pursuant to the Business Combination Agreement, (i) Rome Merger Sub, Inc. was merged with and into RockTenn, with RockTenn surviving the merger as a wholly-owned subsidiary of WestRock, and (ii) Milan Merger Sub, LLC 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
 
Our common stock, par value $0.01 per share
containerboard
 
Linerboard and corrugating medium
CPM
 
Canadian Pensioners’ Mortality
Credit Agreement
 
As defined on p. 88
Credit Facility
 
As defined on p. 88
EBITDA
 
Earnings before interest, taxes, depreciation and amortization
EPA
 
U.S. Environmental Protection Agency
ERISA
 
Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations thereunder
ESPP Plan
 
WestRock Company Employee Stock Purchase Plan
Exchange Act
 
Securities Exchange Act of 1934, as amended
FASB
 
Financial Accounting Standards Board
FCPA
 
Foreign Corrupt Practices Act
Farm Credit Facility
 
As defined on p. 87
Farm Loan Credit Agreement
 
As defined on p. 87

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Term or Acronym
 
Definition
 
 
 
FIFO
 
First-in first-out inventory valuation method
FIP
 
Funding improvement plan
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
Installment Note
 
As defined on p. 116
IRS
 
Internal Revenue Service
LIBOR
 
The London Interbank Offered Rate
LIFO
 
Last-in first-out inventory valuation method
MACT
 
Maximum Achievable Control Technology
MEPP or MEPPs
 
Multiemployer pension plan(s)
MMBtu
 
One million British Thermal Units
MMSF
 
Millions of square feet
MWV
 
WestRock MWV, LLC, formerly known as MeadWestvaco Corporation
MWV TN
 
As defined on p. 116
MWV TN II
 
As defined on p. 116
MWV Merger Sub
 
Milan Merger Sub, LLC
NPG
 
NPG Holding, Inc.
NYSE
 
New York Stock Exchange
OSHA
 
The Occupational Safety and Health Act
Packaging Acquisition
 
The January 19, 2016 acquisition of certain legal entities formerly owned by Cenveo Inc., in a stock purchase
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
PRP or PRPs
 
Potentially responsible parties
Prudential
 
The Prudential Insurance Company of America, a subsidiary of Prudential Financial, Inc.
Receivables Facility
 
Our receivables-backed financing facility
RockTenn
 
WestRock RKT Company, formerly known as Rock-Tenn Company
RockTenn Common Stock
 
RockTenn Class A common stock, par value $0.01 per share
RockTenn Merger Sub
 
Rome Merger Sub, Inc.
RP
 
Rehabilitation plan
SAR or 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
Smurfit-Stone Acquisition
 
Our May 27, 2011 acquisition of Smurfit-Stone
SP Fiber
 
SP Fiber Holdings, Inc.
SP Fiber Acquisition
 
Our October 1, 2015 acquisition of SP Fiber

4


Term or Acronym
 
Definition
 
 
 
Supplemental Plans
 
Supplemental retirement savings plans
Tacoma Mill
 
The Tacoma Kraft Paper Mill formerly owned by Simpson Lumber Company LLC
Timber Note
 
As defined on p. 116
TNH
 
Timber Note Holdings LLC
USW
 
United Steelworkers Union
U.S.
 
United States
WestRock
 
WestRock Company
WestRock MWV, LLC
 
Formerly named MWV
WestRock RKT Company
 
Formerly named RockTenn

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PART I

Item 1.
BUSINESS

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.

General

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. We also develop real estate in the Charleston, SC region.

WestRock was formed on March 6, 2015 for the purpose of effecting the Combination and, prior to the Combination, did not conduct any activities other than those incidental to its formation and the matters contemplated by the Business Combination Agreement. On July 1, 2015, pursuant to the Business Combination Agreement, RockTenn and MWV completed a strategic combination of their respective businesses. RockTenn and MWV each became wholly-owned subsidiaries of WestRock. RockTenn was the accounting acquirer in the Combination. We believe the Combination has combined two industry leaders to create a premier global provider of consumer and corrugated packaging solutions. The Combination is described in “Note 6. Merger, Acquisitions and Investment” of the Notes to Consolidated Financial Statements.

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 financial position and results of operations of our former Specialty Chemicals segment as discontinued operations in the accompanying consolidated financial statements for all periods presented. See “Note 7. Discontinued Operations” of the Notes to Consolidated Financial Statements for more information.

Following the Combination, we aligned our financial results of operations in four reportable segments: Corrugated Packaging, Consumer Packaging, Specialty Chemicals and Land and Development. Subsequent to the Separation, we have aligned our financial results of operations in three reportable segments: Corrugated Packaging, which consists of our containerboard mill and corrugated packaging operations, as well as our recycling operations; Consumer Packaging, which consists of consumer mills, folding carton, beverage, merchandising displays, home, health and beauty dispensing, and partition operations; and Land and Development, which develops and sells real estate primarily in the Charleston, SC region. We have reclassified prior period segment results to align to these segments for all periods presented herein.

Our principal executive offices are located at 501 South 5th Street, Richmond, VA and our principal operating offices are located at 504 Thrasher Street, Norcross, GA.

Products

Corrugated Packaging Segment

We are one of the largest integrated producers of containerboard measured by tons produced, and one of the largest producers of high-graphics preprinted linerboard measured by net sales in North America. We have integrated corrugated operations in North America, Brazil and India. We believe we are one of the largest paper recyclers in North America and our recycling operations provide substantially all of the recycled fiber to our mills as well as to third parties. Our Brazil operation also owns forestlands which provide virgin fiber to our Brazilian mill. We operate an integrated corrugated packaging system that manufactures primarily containerboard, corrugated sheets, corrugated packaging and preprinted linerboard for sale to consumer and industrial products manufacturers and corrugated box manufacturers. We produce a full range of high-quality corrugated containers designed to protect, ship, store and display products made to our customers' merchandising and distribution specifications. We also convert corrugated sheets into corrugated products ranging from one-color protective cartons to graphically brilliant point-of-purchase packaging. Our corrugated container plants serve local customers and regional and large national accounts. Corrugated packaging is used to provide protective packaging for shipment and distribution of food, paper, health and beauty and other household, consumer, commercial and industrial products. Corrugated packaging may also be graphically enhanced for retail sale, particularly in club store locations. We provide customers with innovative packaging solutions to promote and sell their products. We also provide structural and graphic design, engineering services and custom, proprietary and standard automated packaging machines, offering customers turn-key installation, automation, line integration and packaging solutions. To make corrugated sheet stock,

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we feed linerboard and corrugating medium into a corrugator that flutes the medium to specified sizes, glues the linerboard and fluted medium together, and slits and cuts the resulting corrugated paperboard into sheets to customer specifications. Our containerboard mills and corrugated container operations are integrated with the majority of our containerboard production used internally by our corrugated container operations. The balance is either used in trade swaps with other manufacturers or sold domestically and internationally.

Our recycling operations procure recovered paper (also known as recycled fiber) from our converting facilities and from third parties, such as factories, warehouses, commercial printers, office complexes, grocery and retail stores, document storage facilities, paper converters and other wastepaper collectors. We handle a wide variety of grades of recovered paper, including old corrugated containers, office paper, box clippings, newspaper and print shop scraps. We operate recycling facilities that collect, sort, grade, and bale recovered paper and, after sorting and baling, we transfer it to our mills for processing, or sell it principally to U.S. manufacturers of paperboard or containerboard as well as manufacturers of tissue, newsprint, roofing products and insulation, and to export markets. We also collect aluminum and plastics for resale to manufacturers of these products. Our waste services business arranges recycling and waste disposal services for its customers. We operate a nationwide fiber marketing and brokerage system that serves large regional and national accounts, as well as our recycled paperboard and containerboard mills, and sells scrap materials from our converting businesses and mills. Brokerage contracts provide bulk purchasing, often resulting in lower prices and cleaner recovered paper. Many of our recycling facilities are located close to our recycled paperboard and containerboard mills, ensuring availability of supply with reduced shipping costs.

Sales of corrugated packaging products to external customers accounted for 54.6%, 66.4% and 71.8% of our net sales in fiscal 2016, 2015 and 2014, respectively.

Consumer Packaging Segment

We operate integrated virgin and recycled fiber paperboard mills and consumer packaging converting operations, which convert items such as folding and beverage cartons, displays, dispensing and interior partitions. Our integrated system of virgin and recycled mills produces paperboard for our converting operations and third parties. We internally consume or sell coated natural kraft, bleached paperboard and coated recycled paperboard to manufacturers of folding cartons and other paperboard products, and internally consume or sell our specialty recycled paperboard to manufacturers of solid fiber interior packaging, tubes and cores, book covers and other paperboard products. The mill owned by our Seven Hills joint venture in Lynchburg, VA manufactures gypsum paperboard liner for sale to our joint venture partner.

We are one of the largest manufacturers of folding and beverage cartons in North America. We believe we are the largest manufacturer of temporary promotional point-of-purchase displays in North America measured by net sales and the largest manufacturer of solid fiber partitions in North America measured by net sales. Our folding and beverage cartons are used to package food, paper, beverages, dairy products, tobacco, health and beauty and other household consumer, commercial and industrial products primarily for retail sale. We also manufacture express mail envelopes for the overnight courier industry, and for the global healthcare market, secondary packages designed to enhance patient adherence for prescription drugs, as well as paperboard packaging and closures for over-the-counter and prescription drugs. Folding cartons typically protect customers’ products during shipment and distribution, and employ graphics to promote them at retail. We manufacture folding and beverage cartons from recycled and virgin paperboard, laminated paperboard and various substrates with specialty characteristics, such as grease masking and microwaveability. We print, coat, die-cut and glue the cartons to customer specifications and ship finished cartons to customers for assembling, filling and sealing. We employ a broad range of offset, flexographic, gravure, backside printing, coating and finishing technologies and support our customers with new package development, innovation and design services and package testing services. We manufacture and sell our solid fiber and corrugated partitions and die-cut paperboard components principally to glass container manufacturers and producers of beer, food, wine, spirits, cosmetics and pharmaceuticals and to the automotive industry.

We design, manufacture and, in many cases, pack temporary displays for sale to consumer products companies and retailers. These displays are used as marketing tools to support new product introductions and specific product promotions in mass merchandising stores, supermarkets, convenience stores, home improvement stores and other retail locations. We also design, manufacture and, in some cases, pre-assemble permanent displays for the same categories of customers. We make temporary displays primarily from corrugated paperboard. Unlike temporary displays, permanent displays are restocked; therefore, they are constructed primarily from metal, plastic, wood and other durable materials. We provide contract packing services, such as multi-product promotional packing and product manipulation, such as multipacks and onpacks. We manufacture and distribute point of sale material utilizing litho, screen, and digital printing technologies. We manufacture lithographic laminated packaging for sale to our customers that require packaging with high quality graphics and strength characteristics.


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We produce dispensing systems, such as pumps for fragrances, lotions, creams and soaps, flip-top and applicator closures for bath and body products and lotions, and plastic packaging for hair and skin care products. For the global home and garden market, we produce trigger sprayers for surface cleaners and fabric care, aerosol actuators for air fresheners, hose-end sprayers for lawn and garden maintenance and spouted and applicator closures for a variety of other home and garden products. For the global healthcare market, we produce sprayers used for nasal and throat applications.

Sales of consumer packaging products to external customers accounted for 44.6%, 33.2% and 28.2% of our net sales in fiscal 2016, 2015 and 2014, respectively.

Land and Development Segment

We are responsible for maximizing the value of the various real estate holdings we own that are concentrated in the Charleston, SC region, some of which are held through partnerships. We are in the process of accelerating the monetization of these holdings. Sales in our Land and Development segment to external customers accounted for 0.8% and 0.4% of our net sales in fiscal 2016 and 2015, respectively. The Land and Development segment was formed as a result of the Combination; therefore, there is not comparative information for fiscal 2014.

For more information on our segments, see “Note 20. Segment Information” of the Notes to Consolidated Financial Statements.

Raw Materials

The primary raw materials that our mill operations use are recycled fiber at our recycled paperboard and containerboard mills and virgin fibers from hardwoods and softwoods at our virgin containerboard and paperboard mills. Certain of our virgin containerboard is manufactured with some recycled fiber content. Recycled fiber prices and virgin fiber prices can fluctuate significantly. While virgin fiber prices have generally been more stable than recycled fiber prices, they also fluctuate, particularly driven by changes in weather, such as during prolonged periods of heavy rain or drought, or during housing construction slowdowns or accelerations.
 
Recycled and virgin paperboard and containerboard are the primary raw materials used by our converting operations. Our converting operations use many different grades of paperboard and containerboard. We supply substantially all of our converting operations' needs for recycled and virgin paperboard and containerboard from our own mills and through the use of trade swaps with other manufacturers, which allow us to optimize our mill system and reduce freight costs. Because there are other suppliers that produce the necessary grades of recycled and bleached paperboard and containerboard used in our converting operations, we believe we would be able to source significant replacement quantities from other suppliers in the event we incur production disruptions for recycled or virgin paperboard or containerboard. See Item 1A. “Risk Factors — We May Face Increased Costs or Inadequate Availability of Raw Materials, Energy and Transportation”.

Energy

Energy is one of the most significant costs of our mill operations. The cost of natural gas, coal, oil, electricity and wood by-products (biomass) can fluctuate significantly. In our recycled paperboard mills, we use primarily natural gas and electricity, supplemented with fuel oil and coal to generate steam used in the paper making process and to operate our recycled paperboard machines. In our virgin fiber mills, we use biomass, natural gas, coal and fuel oil to generate steam used in the paper making process, to generate some or all of the electricity used on site and to operate our paperboard machines. We primarily use electricity and natural gas to operate our converting facilities. We generally purchase these products from suppliers at market or tariff rates. See Item 1. “Business — Governmental Regulation — Environmental and Other Matters” for additional information regarding our energy related spending. See Item 1A. “Risk Factors — We May Face Increased Costs or Inadequate Availability of Raw Materials, Energy and Transportation”.

Transportation

Inbound and outbound freight is a significant expenditure for us. Factors that influence our freight expense are distance between our shipping and delivery locations, distance from customers and suppliers, mode of transportation (rail, truck, intermodal and ocean) and freight rates, which are influenced by supply and demand and fuel costs. The principal markets for our products are in North America, South America, Europe and Asia. See Item 1A. “Risk Factors — We May Face Increased Costs or Inadequate Availability of Raw Materials, Energy and Transportation”.


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Sales and Marketing

Our top 10 external customers represented approximately 12% of consolidated net sales in fiscal 2016, none of which individually accounted for more than 10% of our consolidated net sales. We generally manufacture our products pursuant to customers’ orders. We believe that we have good relationships with our customers. In fiscal 2016, products sold to our top 10 customers by segment represented 15% and 19% of our external sales in our Corrugated Packaging segment and Consumer Packaging segment, respectively. See Item 1A. “Risk Factors — We Depend on Certain Large Customers”.

As a result of our vertical integration, our mills’ sales volumes may be directly impacted by changes in demand for our packaging products. During fiscal 2016, we sold approximately two-thirds of our coated natural kraft mill’s production and approximately one-fifth of our bleached paperboard production to our converting operations, primarily to manufacture folding and beverage cartons, and we sold approximately two-thirds of our containerboard production, including trade swaps and buy/sell transactions, to our converting operations, to manufacture corrugated products. Under the terms of our Seven Hills joint venture arrangement, our joint venture partner is required to purchase all of the qualifying gypsum paperboard liner produced by Seven Hills. Excluding the Seven Hills production and our Aurora, IL production converted into book covers and other products, we supplied approximately two-fifths of our specialty mills’ production in fiscal 2016 to our converting operations, primarily to manufacture interior partitions. We have the ability to move our internal sourcing among certain of our mills to optimize the efficiency of our operations.

We market our products primarily through our own sales force. We also market a number of our products through independent sales representatives, independent distributors or both. We generally pay our sales personnel a base salary plus commissions. We pay our independent sales representatives on a commission basis. We discuss foreign net sales to unaffiliated customers and other non-U.S. operations financial and other segment information in “Note 20. Segment Information” of the Notes to Consolidated Financial Statements.

Competition

We operate in a challenging global marketplace and compete with many large, well established and highly competitive manufacturers and service providers. Our business is affected by a range of macroeconomic conditions, including industry capacity changes, global competition, economic conditions in the U.S. and abroad, as well as fluctuations in currency exchange rates.

The industries we operate in are highly competitive, and no single company dominates any of those industries. Our paperboard and containerboard operations compete with integrated and non-integrated national and regional companies operating primarily in North America, and to a limited extent, manufacturers outside of North America. Our competitors include large and small, vertically integrated companies and numerous smaller non-integrated companies. In the corrugated packaging and folding and beverage carton markets, we compete with a significant number of national, regional and local packaging suppliers in North America and abroad. Our dispensing operations compete globally with manufacturers for global end markets. In the solid fiber interior packaging, promotional point-of-purchase display and converted paperboard products markets, we primarily compete with a smaller number of national, regional and local companies offering highly specialized products. Our recycled fiber brokerage and collection operations compete with various other companies for the procurement and supply of recovered paper, including brokers and companies that export recovered paper to international markets. The Land and Development segment competes in the real estate sales and development market in the Charleston, SC region.

Because all of our businesses operate in highly competitive industry segments, we regularly bid for sales opportunities to customers for new business or for renewal of existing business. Our packaging products compete with packaging made from other materials. The primary competitive factors we face include price, design, product innovation, quality and service, with varying emphasis on these factors depending on the product line and customer preferences. We believe that we compete effectively with respect to each of these factors and we evaluate our performance with annual customer surveys, among other means.

The businesses we operate in have undergone consolidation. Within the packaging products industry, larger customers, with an expanded geographic presence, have tended to seek suppliers who can, because of their broad geographic presence, efficiently and economically supply all or a range of their packaging needs. In addition, our customers continue to demand higher quality products meeting stricter quality control requirements.

See Item 1A. “Risk Factors — We Face Intense Competition” and “Risk Factors — We May Be Adversely Affected by Economic and Financial Markets Conditions, and Social and Political Change”.


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Governmental Regulation

Health and Safety Regulations

Our operations are subject to federal, state, local and foreign laws and regulations relating to workplace safety and worker health including OSHA and related regulations. OSHA, among other things, establishes asbestos and noise standards and regulates the use of hazardous chemicals in the workplace. Although we do not use asbestos in manufacturing our products, some of our facilities contain asbestos. For those facilities where asbestos is present, we believe we have properly contained the asbestos and/or we have conducted training of our employees in an effort to ensure that no federal, state or local rules or regulations are violated in the maintenance of our facilities. We do not believe that future compliance with health and safety laws and regulations will have a material adverse effect on our results of operations, financial condition or cash flows.

Environmental and Other Matters

Environmental compliance requirements are a significant factor affecting our business. We employ manufacturing processes which result in various discharges, emissions and wastes. These processes are subject to numerous federal, state, local and international environmental laws and regulations, as well as the requirements of environmental permits and similar authorizations issued by various governmental authorities.

On January 31, 2013, the EPA published a set of four interrelated final rules establishing national air emissions standards for hazardous air pollutants from industrial, commercial and institutional boilers and process heaters, commonly known as “Boiler MACT.” For our boilers, Boiler MACT required compliance by January 31, 2016, unless a facility requested and received an extension. All of our mills that are subject to regulation under Boiler MACT met the January 31, 2016 compliance deadline, with the exception of those mills for which we obtained a compliance extension. We expect our mills that obtained an extension to be in compliance by their respective extension dates, none of which extend beyond January 31, 2017. On July 29, 2016, the U.S. Court of Appeals for the District of Columbia Circuit issued a ruling on the consolidated cases challenging Boiler MACT. The court vacated key portions of the rule, including emission limits for certain subcategories of solid fuel boilers, and remanded other issues to the EPA for further rulemaking. At this time, we cannot predict with certainty how the recent decision will impact our existing Boiler MACT strategies or whether we will incur additional costs to comply with any revised Boiler MACT standards.

In addition to Boiler MACT, we are subject to a number of other federal, state, local and international environmental rules that may impact our business, including the National Ambient Air Quality Standards for nitrogen oxide, sulfur dioxide, fine particulate matter and ozone for facilities in the U.S.

We are involved in various administrative proceedings relating to environmental matters that arise in the normal course of business, and may be involved in future matters. Although the ultimate outcome of such matters cannot be predicted with certainty and we cannot at this time estimate any reasonably possible losses based on available information, management does not believe that the currently expected outcome of any environmental proceedings and claims that are pending or threatened against us will have a material adverse effect on our results of operations, financial condition or cash flows.

See Item 1A. “Risk Factors — We are Subject to Extensive and Costly Environmental and Other Governmental Regulation”.

CERCLA and Other Remediation Costs

We face potential liability under federal, state, local and international laws as a result of releases, or threatened releases, of hazardous substances into the environment from various sites owned and operated by third parties at which Company-generated wastes have allegedly been deposited. Generators of hazardous substances sent to off-site disposal locations at which environmental problems exist, as well as the owners of those sites and certain other classes of persons, are liable for response costs for the investigation and remediation of such sites under CERCLA and analogous laws. While joint and several liability is authorized under CERCLA, liability is typically shared with other PRPs and costs are commonly allocated according to relative amounts of waste deposited and other factors.

In addition, certain of our current or former locations are being investigated or remediated under various environmental laws and regulations. Based on information known to us and assumptions, we do not believe that the costs of these projects will have a material adverse effect on our results of operations, financial condition or cash flows. However, the discovery of contamination or the imposition of additional obligations at these or other sites in the future could result in additional costs.


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On January 26, 2009, Smurfit-Stone and certain of its subsidiaries filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. Smurfit-Stone’s Canadian subsidiaries also filed to reorganize in Canada. We believe that matters relating to previously identified third party PRP sites and certain facilities formerly owned or operated by Smurfit-Stone have been or will be satisfied claims in the Smurfit-Stone bankruptcy proceedings. However, we may face additional liability for cleanup activity at sites that existed prior to bankruptcy discharge, but are not currently identified. Some of these liabilities may be satisfied from existing bankruptcy reserves.

We believe that we can assert claims for indemnification pursuant to existing rights we have under settlement and purchase agreements in connection with certain of our existing remediation sites. In addition, we believe that we have insurance coverage, subject to applicable deductibles/retentions, policy limits and other conditions, for certain environmental matters. However, there can be no assurance that we will be successful with respect to any claim regarding these insurance or indemnification rights or that, if we are successful, any amounts paid pursuant to the insurance or indemnification rights will be sufficient to cover all our costs and expenses. We also cannot predict with certainty whether we will be required to perform remediation projects at other locations, and it is possible that our remediation requirements and costs could increase materially in the future and exceed current reserves. In addition, we cannot currently assess with certainty the impact that future changes in cleanup standards or federal, state or other environmental laws, regulations or enforcement practices will have on our results of operations, financial condition or cash flows.

We estimate that we will invest approximately $47 million for capital expenditures during fiscal 2017 in connection with matters relating to environmental compliance. It is possible that our capital expenditure assumptions may change, project completion dates may change, and our projections are subject to change due to items such as the finalization of ongoing engineering and implementation work, the EPA determinations on Boiler MACT implementation issues and the outcomes of pending legal challenges to the rules.

Climate Change

Certain jurisdictions in which we have manufacturing facilities or other investments have taken actions to address climate change. In the U.S., the EPA has issued the Clean Air Act permitting regulations applicable to certain facilities that emit GHG. The EPA also has promulgated a rule requiring certain industrial facilities that emit 25,000 metric tons or more of carbon dioxide equivalent per year to file an annual report of their emissions. While we have facilities subject to existing GHG permitting and reporting requirements, the impact of these requirements has not been material to date.

Additionally, the EPA has been working on a set of interrelated rulemakings aimed at cutting carbon emissions from power plants. On August 3, 2015, the EPA issued a final rule establishing GHG emission guidelines for existing electric utility generating units (known as the “Clean Power Plan”). On the same day, the EPA issued a second rule setting standards of performance for new, modified and reconstructed electric utility generating units. While these rules do not apply directly to the power generation facilities at our mills, they have the potential to increase the cost of purchased electricity for our manufacturing operations and change the treatment of certain types of biomass that are currently considered carbon neutral. On February 9, 2016, the U.S. Supreme Court issued a stay halting implementation of the Clean Power Plan until the pending legal challenges to the rule are resolved. A number of states subject to the Clean Power Plan have stopped working on their implementation strategies in light of this decision; however, certain states where we operate manufacturing facilities are continuing their efforts. We are carefully monitoring the state-level developments relating to this rule. Due to ongoing litigation and other uncertainties regarding these GHG regulations, including the potential impact of a new U.S. executive administration in 2017, their impact on us cannot be quantified with certainty at this time.

In addition to national efforts to regulate climate change, some U.S. states in which we have manufacturing operations are also taking measures to reduce GHG emissions, such as requiring GHG emissions reporting or the development of regional cap-and trade programs. California has enacted a cap-and-trade program that took effect in 2012, and includes enforceable compliance obligations that began on January 1, 2013. We do not have any manufacturing facilities that are subject to the cap-and-trade requirements in California; however, we are continuing to monitor the implementation of this program as well as proposed mandatory GHG reduction efforts in other states. Also, the Washington Department of Ecology has issued a final rule, known as the Clean Air Rule, which limits GHGs from facilities that have average annual carbon dioxide equivalent emissions equal to or exceeding 100,000 metric tons/year and proposes to begin GHG emissions reduction requirements for some regulated entities in 2017. Energy intensive and trade exposed facilities and transportation fuel importers, including our Tacoma, WA mill, are subject to regulation under this program. In September 2016, various groups filed lawsuits against the Washington Department of Ecology challenging the Clean Air Rule. We are carefully monitoring this litigation to assess its potential impact on our Tacoma operations.

In April 2016, the U.S. and over 170 other countries signed the Paris Agreement, which arose out of negotiations at the United Nation’s Conference of Parties (COP21) climate summit in December 2015. The Paris Agreement establishes a framework for

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reducing global GHG emissions. By signing the Paris Agreement, the U.S. made a non-binding commitment to reduce economy-wide GHG emissions by 26% to 28% below 2005 levels by 2025. Other countries in which we conduct business, including China, European Union member states and India, have set similar GHG reduction targets. The Paris Agreement came into force on October 3, 2016. Although, the Paris Agreement does not contain legally binding emissions reduction requirements and it is unclear if the new U.S. executive administration will seek to implement it, implementing legislation by ratifying governments to achieve their respective commitments may require industrial facilities, including our operations, to make process changes, incur capital expenditures and/or increase operating costs.
    
Several of our international facilities are located in countries that have already adopted GHG emissions trading schemes. For example, Quebec has become a member of the Western Climate Initiative, which is a collaboration among California and certain Canadian provinces that have joined together to create a cap-and-trade program to reduce GHG emissions. In 2009, Quebec adopted a target of reducing GHG emissions by 20% below 1990 levels by 2020. In 2011, Quebec issued a final regulation establishing a regional cap-and-trade program that required reductions in GHG emissions from covered emitters as of January 1, 2013. Our mill in Quebec is subject to these cap-and-trade requirements, although the direct impact of this regulation has not been material to date. Compliance with this program and other similar programs may require future expenditures to meet required GHG emission reduction requirements in future years.

The regulation of climate change continues to develop in the areas of the world where we conduct business. We have systems in place for tracking the GHG emissions from our energy-intensive facilities, and we carefully monitor developments in climate change laws, regulations and policies to assess the potential impact of such developments on our results of operations, financial condition, cash flows and disclosure obligations.

Patents and Other Intellectual Property

We hold a substantial number of foreign and domestic trademarks, trademark applications, trade names, patents, patent applications, and licenses relating to our business, our products and our production processes. Our patent portfolio consists primarily of utility and design patents relating to our products and manufacturing operations. It also includes exclusive rights to substantial proprietary packaging system technology in the U.S. or other licenses obtained from a third party. Our brand name and logo, and certain of our products and services, are protected by domestic and foreign trademark rights. Our patents, trademarks and other intellectual property rights, particularly those relating to our converting operations, are important to our operations as a whole. Our intellectual property has various expiration dates. See Item 1A. “Risk Factors — We Depend On Our Ability to Develop and Successfully Introduce New Products and to Acquire and Retain Intellectual Property Rights”.

Employees

At September 30, 2016, we had approximately 39,000 employees. Of these employees, approximately 27,700 were hourly and approximately 11,300 were salaried. Approximately 13,900 of our hourly employees in the U.S. and Canada are covered by CBAs, which most frequently have four or six year terms. Approximately 500 of our employees are working under expired contracts and approximately 3,850 of our employees are covered under CBAs that expire within one year.

While we have experienced isolated work stoppages in the past, we have been able to resolve them and we believe that working relationships with our employees are generally good. While the terms of our CBAs may vary, we believe the material terms of the agreements are customary for the industry, the type of facility, the classification of the employees and the geographic location covered.

In October 2014, we entered into a master agreement with the USW that applied to substantially all of our legacy RockTenn facilities represented by the USW at that time. The agreement has a six year term and covers a number of specific items, including wages, medical coverage and certain other benefit programs, substance abuse testing and successorship. Individual facilities will continue to have local agreements for subjects not covered by the master agreement and those agreements will continue to have staggered terms. Wage increases specified in the master agreement will not begin until the local facility agreements have been negotiated and ratified. The agreement permits us to apply its terms to USW employees who work at facilities we acquire during the term of the agreement. The master agreement covers 59 of our U.S. facilities and approximately 8,400 of our employees.

See Item 1A. “Risk Factors — Work Stoppages and Other Labor Relations Matters May Have an Adverse Effect on Our Financial Results”.

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International Operations

Our operations outside the U.S. are conducted through subsidiaries located in Canada, Mexico, South America, Europe and Asia. Sales attributable to non-U.S. operations were 17.1%, 13.5% and 12.0% of our total net sales in fiscal 2016, 2015 and 2014, respectively, some of which were transacted in U.S. dollars. For more information about our non-U.S. operations, see “Note 20. Segment Information” of the Notes to Consolidated Financial Statements. See Item 1A. “Risk Factors — We are Exposed to Risks Related to International Sales and Operations”.

Available Information

Our Internet address is www.westrock.com. Our Internet address is included herein as an inactive textual reference only. The information contained on our website is not incorporated by reference herein and should not be considered part of this report. We file annual, quarterly and current reports, proxy statements and other information with the SEC and we make available free of charge most of our SEC filings through our Internet website as soon as reasonably practicable after filing with the SEC. You may access these SEC filings via the hyperlink that we provide on our website to a third-party SEC filings website. We also make available on our website the charters of our audit committee, our compensation committee, our nominating and corporate governance committee, and our finance committee, as well as the corporate governance guidelines adopted by our board of directors, our Code of Business Conduct for employees, our Code of Conduct and Ethics for directors and our Code of Ethical Conduct for CEO and Senior Financial Officers. Any amendments to, or waiver from, any provision of the codes will be posted on the our website at the address above. We will also provide copies of these documents, without charge, at the written request of any shareholder of record. Requests for copies should be mailed to: WestRock Company, 504 Thrasher Street, Norcross, Georgia 30071, Attention: Corporate Secretary.

Forward-Looking Information

Statements in this report that do not relate strictly to historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on our current expectations, beliefs, plans or forecasts and use words such as “may”, “will”, “could”, “would”, “anticipate”, “intend”, “estimate”, “project”, “plan”, “believe”, “expect”, “target” and “potential”, or refer to future time periods, and include statements made in this report regarding, among other things: our expectation that we will benefit from operational synergies resulting from the consolidation of capabilities and the elimination of redundancies related to the Combination, as well as greater efficiencies from increased scale and market integration and to realize revenue synergies through an expanded and complementary product offering and increased geographic reach; our expectation of achieving a $1.0 billion annualized run rate synergy and performance improvement target, before inflation, to be realized by September 30, 2018; our belief that should we incur production disruptions for recycled or virgin paperboard or containerboard we would be able to source replacement quantities internally or from other suppliers; our estimate for our capital expenditures in fiscal 2017 and that we expect our annual capital investment to continue in a similar range for the next three years, our belief that our strong balance sheet and cash flow provide us the flexibility to continue to invest to sustain and improve our operating performance; we expect to invest in projects in fiscal 2017 (i) to maintain and operate our mills and plants safely, reliably and in compliance with regulations, (ii) that support our strategy to improve the competitiveness of our mill and converting assets, (iii) to support our $1.0 billion annualized run rate synergy and performance improvement target, before inflation, to be realized by September 30, 2018, and (iv) to generate attractive returns; we expect to complete our monetization program by the end of calendar 2018; our belief that the Combination has combined two industry leaders to create a premier global provider of consumer and corrugated packaging solutions; our belief that the mills acquired in the SP Fiber Acquisition help balance the fiber mix of our mill system; our belief that the addition of kraft and bag paper from the SP Fiber Acquisition will diversify our product offering including our ability to serve the increasing demand for lighter weight containerboard and kraft paper; our belief that the partnership with Grupo Gondi will help grow our presence in the attractive Mexican market; our belief that the Quebec cap-and-trade program and other similar programs may require future expenditures to meet required GHG emission reduction requirements in future years; our belief that the acquisition of AGI In-Store supports our strategy to provide a more holistic portfolio of innovative in-store marketing solutions, including “store-within-a-store” displays, and has enhanced cross-selling opportunities and bolster our growing retail presence; our belief that the Tacoma Mill is a strategic fit and the mill has improved our ability to satisfy West Coast customers and generate operating efficiencies across our containerboard system; our belief that NPG is a strong strategic fit that has strengthened our displays business; we expect to contribute $30 million to our U.S. and non-U.S. pension plans in fiscal 2017, primarily related to our Canadian plans; we estimate that minimum pension contributions to our U.S. and non-U.S. pension plans will be in the range of $22 million to $36 million annually in fiscal 2018 through 2021; our expectation that we will continue to make contributions in the coming years to our pension plans in order to ensure that our funding levels remain adequate in light of projected liabilities and to meet the requirements of the Pension Act and other regulations; our belief that certain MEPPs in which we participate have material unfunded vested benefits; although the plan data for fiscal 2016 is not yet available, we would expect to continue to exceed 5% of total plan contributions to certain MEPPs; a current annualized dividend of $1.60 per share on our Common Stock; our anticipation that we will be able to fund our capital expenditures, interest payments, dividends and stock

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repurchases, pension payments, working capital needs, note repurchases, restructuring activities, repayments of current portion of long-term debt and other corporate actions for the foreseeable future from cash generated from operations, borrowings under our credit facilities, proceeds from the issuance of debt or equity securities or other additional long-term debt financing, including new or amended facilities; the effect of a hypothetical 10% increase on the prices of various commodities, freight and energy; our belief that there is not a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to estimate allowances; that based on our current projections, we expect to utilize our remaining U.S. federal net operating losses, Alternative Minimum Tax and other U.S. federal credits primarily over the next three years; we expect to receive tax benefits in fiscal 2017 and future years from the U.S. manufacturer’s deduction; we expect our cash tax payments to be in the high twenties in fiscal 2017 and for it to continue to move closer to our income tax expense in fiscal 2018 and 2019; our belief that integration activities will continue during fiscal 2017; our results of operations, financial condition, cash flows, liquidity or capital resources, including expectations regarding sales growth, income tax rates, our production capacities and our ability to achieve operating efficiencies; the consummation of acquisitions and financial transactions, the effect of these transactions on our business and the valuation of assets acquired in these transactions; our competitive position and competitive conditions; our ability to obtain adequate replacement supplies of raw materials or energy; our relationships with our customers and employees; our plans and objectives for future operations and expansion; our belief that the currently expected outcome of any environmental proceeding or claim that is pending or threatened against us will not have a material adverse effect on our results of operations, financial condition or cash flows; the possibility that we may engage in additional restructuring opportunities in the future; our belief that we have properly contained asbestos and/or have trained our employees in an effort to ensure that no rules or regulations are violated in the maintenance of our facilities where asbestos is present; the impact of any gain or loss of a customer’s business; our expectations surrounding credit loss rates; the impact of announced price changes; the scope, costs, timing and impact of any restructuring of our operations and corporate and tax structure including our expectation that the integration of closed facility’s assets and production with other facilities will enable the receiving facilities to better leverage their fixed costs; factors considered in connection with any impairment analysis, the outcome of any such analysis and the anticipated impact of any such analysis on our results of operations, financial condition or cash flows; pension and retirement plan obligations, contributions, the factors used to evaluate and estimate such obligations and expenses, the impact of amendments to our pension and retirement plans, the impact of governmental regulations on our results of operations, financial condition or cash flows; pension and retirement plan asset investment strategies; potential liability for outstanding guarantees and indemnities and the potential impact of such liabilities; the impact of any market risks, such as interest rate risk, pension plan risk, foreign currency risk, commodity price risks, energy price risk, rates of return, the risk of investments in derivative instruments, and the risk of counterparty nonperformance, and factors affecting those risks including our increased exposure to foreign currency as a result of the Combination; the amount of contractual obligations based on variable price provisions and variable timing and the effect of contractual obligations on liquidity and cash flow in future periods; the implementation of accounting standards and the impact of these standards once implemented; factors used to calculate the fair value of financial instruments and other assets and liabilities; factors used to calculate the fair value of options, including expected term and stock price volatility; our assumptions and expectations regarding critical accounting policies and estimates; our recording of net deferred tax assets to the extent we believe such assets are more likely than not to be realized; the Antitrust Litigation and other lawsuits and claims arising out of the conduct of our business; our expectation that the adoption of the provisions of ASU 2016-13, ASU 2016-09, ASU 2016-07, ASU 2016-05 and ASU 2015-11 will not have a material effect on our consolidated financial statements; our expectation that based on our current stock compensation awards, ASU 2014-12 will not have a material effect on our consolidated financial statements.

With respect to these statements, we have made assumptions regarding, among other things, the results and impacts of the Combination and the Separation; our ability to effectively integrate the operations of RockTenn and MWV; economic, competitive and market conditions; volumes and price levels of purchases by customers; competitive conditions in our businesses; possible adverse actions of our customers, our competitors and suppliers; labor costs; the amount and timing of capital expenditures, including installation costs, project development and implementation costs, severance and other shutdown costs; restructuring costs; utilization of real property that is subject to the restructurings due to realizable values from the sale of such property; credit availability; volumes and price levels of purchases by customers; raw material and energy costs; and competitive conditions in our businesses.

You should not place undue reliance on any forward-looking statements as such statements involve risks, uncertainties, assumptions and other factors that could cause actual results to differ materially, including the following: the level of demand for our products; our ability to successfully identify and make performance improvements; anticipated returns on our capital investments; our ability to achieve benefits from acquisitions and the timing thereof; our belief that matters relating to previously identified third party PRP sites and certain formerly owned facilities of Smurfit-Stone have been or will be satisfied claims in the Smurfit-Stone bankruptcy proceedings; the level of demand for our products; our belief that we can assert claims for indemnification pursuant to existing rights we have under settlement and purchase agreements in connection with certain of our existing environmental remediation sites; our belief that we have insurance coverage, subject to applicable deductibles and policy limits for certain environmental matters; our ability to successfully identify and make performance improvements; anticipated returns on our capital investments; uncertainties related to planned mill outages or production disruptions, including associated costs and

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the length of those outages; the possibility of unplanned mill outages; investment performance, discount rates, return on pension plan assets and expected compensation levels; market risk from changes in, including but not limited to, interest rates and commodity prices; possible increases in energy, raw materials, shipping and capital equipment costs; any reduction in the supply of raw materials; fluctuations in selling prices and volumes; intense competition; the potential loss of certain customers; the timing and impact of AFMC and CBPC; the impact of operational restructuring activities, including the cost and timing of such activities, the size and cost of employment terminations, operational consolidation, capacity utilization, cost reductions and production efficiencies; estimated fair values of assets, and returns from planned asset transactions, and the impact of such factors on earnings; potential liability for outstanding guarantees and indemnities and the potential impact of such liabilities; the impact of economic conditions, including the nature of the current market environment, raw material and energy costs and market trends or factors that affect such trends, such as expected price changes, competitive pricing pressures and cost increases, as well as the impact and continuation of such factors; our results of operations, including operational inefficiencies, costs, sales growth or declines; our desire or ability to continue to repurchase company stock; the timing and impact of customer transitioning, the impact of announced price increases or decreases and the impact of the gain and loss of customers; pension plan contributions and expense, funding requirements and earnings; environmental law liability as well as the impact of related compliance efforts, including the cost of required improvements and the availability of certain indemnification claims; capital expenditures; the cost and other effects of complying with governmental laws and regulations and the timing of such costs; the scope, and timing and outcome of any litigation, including the Antitrust Litigation or other dispute resolutions and the impact of any such litigation or other dispute resolutions on our results of operations, financial condition or cash flows; income tax rates, future deferred tax expense and future cash tax payments; future debt repayment; our ability to fund capital expenditures, interest payments, dividends and stock repurchases, pension payments, working capital needs, note repurchases, repayments of current portion of long term debt and other corporate actions for the foreseeable future from cash generated from operations, borrowings under our credit facilities, proceeds from the issuance of debt or equity securities or other additional long-term debt financing, including new or amended facilities; our estimates and assumptions regarding our contractual obligations and the impact of our contractual obligations on our liquidity and cash flow; the impact of changes in assumptions and estimates underlying accounting policies; the expected impact of implementing new accounting standards; the impact of changes in assumptions and estimates on which we based the design of our system of disclosure controls and procedures; the expected cash tax payments that may change due to changes in taxable income, tax laws or tax rates, capital expenditures or other factors; the occurrence of severe weather or a natural disaster, such as a hurricane, tropical storm, earthquake, tornado, flood, fire, or other unanticipated problems such as labor difficulties, equipment failure or unscheduled maintenance and repair, which could result in operational disruptions of varied duration; adverse changes in general market and industry conditions and other risks, uncertainties and factors discussed in Item 1A. Risk Factorsand by similar disclosures in any of our subsequent SEC filings. The information contained herein speaks as of the date hereof and we do not have or undertake any obligation to update such information as future events unfold.


Item 1A.
 RISK FACTORS

We are subject to certain risks and events that, if one or more of them occur, could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock. In evaluating us, our business and a potential investment in our securities, you should consider the following risk factors and the other information presented in this report, as well as the other reports and registration statements we file from time to time with the SEC. The risks addressed below are not the only ones we face. Additional risks not currently known to us or that we currently deem immaterial could also adversely impact our business in the future.

We May Fail to Realize the Anticipated Benefits of the Combination

The success of the Combination will depend on, among other things, our ability to combine the RockTenn and MWV businesses in a manner that facilitates growth opportunities and realizes anticipated synergies, and achieves the identified projected cost savings and revenue growth trends. In connection with the Combination, we set a $1.0 billion annualized run rate synergy and performance improvement target, before inflation, to be realized by September 30, 2018. At September 30, 2016, we had achieved an annualized run rate of $500 million. We expected, and continue to expect, to (a) benefit from operational synergies resulting from the consolidation of capabilities and the elimination of redundancies, as well as greater efficiencies from increased scale and market integration and (b) realize revenue synergies through an expanded and complementary product offering and increased geographic reach. However, we must successfully combine the RockTenn and MWV businesses in a manner that permits these cost savings and synergies to be realized. In addition, we must achieve the anticipated cost savings and synergies without adversely affecting current revenues and investments in future growth.

Achieving the anticipated benefits of the Combination is subject to a number of uncertainties, including market conditions, risks related to our businesses and whether we consolidate certain businesses and functions of RockTenn and MWV in an efficient, effective and timely manner. In particular, we may face significant challenges integrating the companies’ technologies,

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organizations, procedures, policies and operations, addressing differences in their business cultures and retaining key personnel. The integration may also be more difficult, complex, costly and time consuming than we expect, and the integration process and other disruptions resulting from the Combination may disrupt ongoing businesses or cause inconsistencies in standards, controls, procedures and policies that adversely affect our relationships with employees, suppliers, customers and others with whom RockTenn and MWV had business or other dealings or limit our ability to achieve the anticipated benefits of the Combination.

If we are not able to successfully combine the RockTenn and MWV businesses within the anticipated time frame, or at all, the expected cost savings and synergies and other benefits of the Combination may not be realized fully or at all or may take longer to realize than expected, the combined businesses may not perform as expected, management’s time and energy may be diverted, and our results of operations, cash flows and financial condition, and the trading price of our Common Stock, could be adversely affected.

We May Experience Pricing Variability

Our businesses have experienced, and are likely to continue experiencing, cycles relating to industry capacity and general economic conditions. The length and magnitude of these cycles have varied over time and by product. Prices for our products are driven by many factors, including general economic conditions, demand for our products and competitive conditions in our industry, and we have little influence over the timing and extent of price changes, which may be unpredictable and volatile. If supply exceeds demand, prices for our products could decline, and our results of operations, cash flows and financial condition, and the trading price of our Common Stock could be adversely affected. Further, certain published indices contribute to the setting of selling prices for some of our products. Future changes in how these indices are established or maintained could adversely impact selling prices.

Our Earnings Are Highly Dependent on Volumes

Because our operations generally have high fixed operating cost components, our earnings are highly dependent on volumes, which tend to fluctuate. These fluctuations make it difficult to predict our financial results with any degree of certainty. Any failure to maintain volumes may adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.

We May Face Increased Costs or Inadequate Availability of Raw Materials, Energy and Transportation

We rely heavily on the use of certain raw materials, energy sources and third-party companies to transport our goods. The cost of recovered paper and virgin fiber, the principal externally sourced raw materials for our mills, are subject to pricing variability due to market and industry conditions. Increasing demand for products packaged in 100% recycled paper, greater demand for U.S. sourced recovered paper by Asian-based paper manufacturers, and the shift by manufacturers of virgin paperboard, tissue, newsprint and corrugated packaging to the production of products with some recycled paper content have and may continue to increase demand for recovered paper, which may result in cost increases. Certain published indices contribute to price setting for some of our raw materials. Future changes in how these indices are established or maintained could adversely impact pricing.

At times, the cost of natural gas, which we use in many of our manufacturing operations, including many of our mills, and other energy costs (including energy generated by burning natural gas, fuel oil, biomass and coal) have fluctuated significantly. High energy costs could increase our operating costs and make our products less competitive compared to similar or alternative products offered by competitors.

We distribute our products primarily by truck and rail, although we also distribute some of our products by cargo ship. Reduced availability of trucks, rail cars or cargo ships could negatively impact our ability to ship our products in a timely manner, and high transportation costs could make our products less competitive compared to similar or alternative products offered by competitors.

Because all of our businesses operate in highly competitive industry segments, we may not be able to recoup past or future increases in the cost of raw materials, energy or transportation through price increases for our products. The failure to obtain raw materials, energy or transportation services at reasonable market prices (or the failure to pass on price increases to our customers) or a reduction in the availability of raw materials, energy or transportation services due to increased demand or other factors could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.

We Face Intense Competition

We compete in industries that are highly competitive, and no single company dominates an industry. Our competitors include large and small, vertically integrated companies and numerous smaller non-integrated companies. We generally compete with companies operating in North America, although we have operations spanning North America, South America, Europe and Asia.

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Competition from domestic or non-U.S. lower cost or more innovative manufacturers in the future could adversely impact our sales volumes and pricing, as could other actions taken by our competitors, including reducing the prices of their products, improving the quality of their products or enhancing their marketing or sales activities. To the extent one or more competitors are more successful than we are with respect to any key competitive factor, our results of operations, cash flows and financial condition, and the trading price of our Common Stock, could be adversely affected.
  
Our products also compete, to some extent, with various other packaging materials, including products made of paper, plastics, wood and various types of metal. Customer shifts away from paperboard and containerboard packaging to packaging from other materials could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.

Our Business Could Suffer if We Are Unsuccessful in Making, Integrating and Maintaining Mergers, Acquisitions and Investments

We have completed several mergers, acquisitions and investments in recent years, and we may acquire or invest in or enter into joint ventures with additional companies. We may not be able to identify suitable targets or successfully complete suitable transactions in the future and completed transactions may not be successful. These transactions create risks, including, but not limited to:

disruption of our ongoing business, including loss of management focus on existing businesses;
difficulties in integrating acquired businesses and personnel into our business;
inability to achieve expected synergies;
working with partners or other ownership structures with shared decision-making authority;
difficulties in obtaining and verifying relevant information regarding a business prior to the consummation of the transaction, including the identification and assessment of liabilities, claims or other circumstances that could result in litigation or regulatory exposure;
inability to obtain required regulatory approvals and/or required financing on favorable terms;
potential impairment of tangible and intangible assets and goodwill;
problems retaining key employees, contractual relationships or customers;
additional operating losses and expenses of the businesses we acquire or in which we invest;
the difficulty of implementing at companies we acquire the controls, procedures and policies appropriate for a larger public company;
dilution of interests of holders of our Common Stock through the issuance of equity securities;
for non-U.S. transactions, additional risks related to the integration of operations across different cultures and languages, and the economic, political and regulatory risks associated with specific countries; and
acquisitions or investments may ultimately harm our business or financial condition, as they may not be successful.

The Separation Could Result in Substantial Tax Liability to Us and to Those of Our Stockholders Who Received Ingevity Stock at the Time of the Separation
We have received an opinion from outside tax counsel to the effect that the Separation qualifies as a transaction that is described in Sections 355 and 368(a)(1)(D) of the Internal Revenue Code. The opinion relies on certain facts, assumptions, representations and undertakings from Ingevity and us regarding the past and future conduct of each of the two companies’ respective businesses and other matters. If any of these facts, assumptions, representations or undertakings prove to be incorrect or not satisfied, or if the IRS otherwise determines on audit that the Separation is taxable, our stockholders who received Ingevity stock at the time of the Separation and/or we may not be able to rely on the opinion of tax counsel and could be subject to significant tax liabilities. If the Separation is determined to be taxable, those of our stockholders who received Ingevity stock at the time of the Separation and/or we could be subject to a substantial tax liability. If the Separation is determined to be taxable to those of our stockholders who received Ingevity stock at the time of the Separation, each of those stockholders would generally be treated as having received a taxable distribution of property in an amount equal to the fair market value of the Ingevity shares received.
Even if the Separation otherwise qualifies as a tax-free transaction to those of our stockholders who received Ingevity stock at the time of the Separation, the distribution could be taxable to us in certain circumstances if future significant acquisitions of our stock or the stock of Ingevity are determined to be part of a plan or series of related transactions that included the Separation. In this event, the resulting tax liability would be substantial. In connection with the Separation, we entered into a tax matters agreement with Ingevity, pursuant to which Ingevity agreed (i) to not engage in certain transactions that could cause the Separation to be taxable to us and (ii) to indemnify us for any tax liabilities resulting from such a transaction. The indemnity from Ingevity may not be sufficient to protect us against the full amount of such liabilities. Any tax liabilities resulting from the Separation or

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related transactions could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.
We May Be Exposed to Claims and Liabilities as a Result of the Separation

We entered into a separation and distribution agreement and various other agreements with Ingevity to govern the Separation and the relationship of the two companies going forward. These agreements provide for specific indemnity and liability obligations and could lead to disputes between us and Ingevity. The indemnity rights we have against Ingevity under the agreements may not be sufficient to protect us. In addition, our indemnity obligations to Ingevity may be significant and these risks could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.

We May Be Adversely Affected by Economic and Financial Market Conditions, and Social and Political Change

Our businesses may be affected by a number of factors that are beyond our control, such as general economic and business conditions, changes in tax laws or tax rates and conditions in the financial services markets, including counterparty risk, insurance carrier risk, rising interest rates, inflation, deflation, fluctuations in the value of local currency versus the U.S. dollar, the impact of a stronger U.S. dollar or changes in U.S social and political change impacting matters such as environmental regulations, non-U.S. trade policies, or other factors, each of which may adversely impact our ability to compete. Macro-economic challenges, including conditions in financial and capital markets and levels of unemployment, and the ability of the U.S. and other countries to address their rising debt levels may continue to put pressure on the economy or lead to changes in tax laws or tax rates. Changes in tax laws or tax rates may have a material impact on our future cash taxes, effective tax rate or deferred tax assets and liabilities. Adverse developments in the U.S. and global economy, including locations such as Europe, Brazil, India and China, could adversely affect the demand for our products, our revenues and manufacturing costs. We are not able to predict with certainty economic and financial market conditions, and our results of operations, cash flows and financial condition, and the trading price of our Common Stock, could be adversely affected by adverse market conditions.
 
Our Joint Ventures May Limit Our Flexibility with Respect to These Jointly Owned Investments

We have invested in a number of joint ventures with other entities when circumstances warranted the use of these structures, and we may form additional joint ventures in the future. Our participation in joint ventures is subject to risks, including, but not limited to:

experiencing an impasse on certain decisions because we do not have sole decision-making authority, which could require us to expend additional resources to resolve impasses or potential disputes;
inability to maintain good relationships with our partners, which could limit our future growth potential;
conflict of interest issues if our partners have competing interests in our markets;
conflicting investment or operational goals with our partners, including the timing, terms and strategies for investments or future growth opportunities;
failure by our partners to fund their share of required capital contributions or to otherwise fulfill their obligations as partners, which may require us to infuse our own capital into these ventures on behalf of the related partner despite other competing uses for capital; and
obtaining consents from our partners for any sale or other disposition of our interest in a joint venture or underlying assets of the joint venture.

Our Investment in Grupo Gondi May Require Us to Utilize Our Cash Flow or Incur Additional Indebtedness to Satisfy Certain Payment Obligations
 
In connection with our investment in the joint venture with Grupo Gondi, we entered into an option agreement pursuant to which we and certain shareholders of Grupo Gondi agreed to future put and call options with respect to the equity interests in the joint venture held by each party. These put and call arrangements may require us to dedicate a substantial portion of our cash flow to satisfy our payment obligations in respect of these arrangements, which may reduce the amount of funds available for our operations, capital expenditures and corporate development activities. Similarly, we may be required to incur additional indebtedness to satisfy our payment obligations in respect of these arrangements.

We are Exposed to Risks Related to International Sales and Operations

We predominately operate in U.S. markets, but derive a portion of our total sales from outside the U.S. through international operations or exports to foreign customers. We are exposed to risks of operating in many countries, including, but not limited to:


18


difficulties and costs associated with complying with a wide variety of complex laws, treaties and regulations;
unexpected changes in political or regulatory environments; earnings and cash flows that may be subject to tax withholding requirements or the imposition of tariffs, exchange controls or other restrictions;
restrictions on, or difficulties and costs associated with, the repatriation of cash from foreign countries to the U.S.;
political and economic instability;
import and export restrictions and other trade barriers;
difficulties in maintaining overseas subsidiaries and international operations;
difficulties in obtaining approval for significant transactions;
government limitations on foreign ownership;
government takeover or nationalization of business;
government mandated price controls; and
fluctuations in foreign currency exchange rates.

Any one or more of these risks could adversely affect our international operations and our results of operations, cash flows and financial condition, and the trading price of our Common Stock.

The Future Success of our International Operations Could be Adversely Affected by Violations or Alleged Violations of the Anti-Bribery Laws

The FCPA, and similar world-wide anti-bribery laws, including those in Brazil, Mexico and India (where we maintain operations directly or through a joint venture), prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. Our policies mandate compliance with anti-bribery laws, including the FCPA. Our internal control policies and procedures, or those of our vendors, may not adequately protect us from reckless or criminal acts committed or alleged to be committed by our employees, agents or vendors. Any such allegations could lead to civil or criminal monetary and non-monetary penalties and/or could damage our reputation. Violations of these laws, or allegations of such violations, could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.

We Depend on Certain Large Customers

Each of our corrugated packaging and consumer packaging segments has large customers, the loss of which could adversely affect the segment’s sales and, depending on the significance of the loss, our results of operations, cash flows and financial condition, and the trading price of our Common Stock. In particular, because all of our businesses operate in highly competitive industry segments, we regularly bid for new business or for the renewal of existing business. The loss of business from our larger customers, or the renewal of business on less favorable terms, may adversely impact our financial results.

We May Incur Business Disruptions

The operations at our manufacturing facilities may be interrupted or impaired by various operating risks, including, but not limited to:

catastrophic events, such as fires, floods, explosions, natural disasters, severe weather or other similar occurrences;
interruptions in the delivery of raw materials or other manufacturing inputs;
adverse government regulations;
equipment breakdowns or failures;
unscheduled maintenance;
information system failures;
violations of our permit requirements or revocation of permits;
releases of pollutants and hazardous substances to air, soil, surface water or ground water;
shortages of equipment or spare parts; and
labor disputes.

The occurrence of any of these events may impair our production capabilities and adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.

Our Net Income Could Be Negatively Affected If Interest Rates Increase

We maintain levels of fixed and floating rate debt that we consider prudent based on our cash flows (and other financial metrics) and business outlook, and these levels may vary over time. Our floating rate debt exposes us to changes in interest rates.

19


We utilize fixed rate debt and, from time to time, derivative financial instruments to manage our exposure to interest rate risks. However, our financial risk management may not be successful in reducing the risks inherent in exposures to interest rate fluctuations, which could adversely affect our financial condition and the trading price of our Common Stock.

A Downgrade in our Credit Ratings Could Adversely Affect our Business

Some of our outstanding indebtedness has received credit ratings from rating agencies. These ratings are limited in scope and do not purport to address all risks relating to an investment in those debt securities. Our credit ratings could change based on, among other things, our results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies, and they may be lowered, suspended or withdrawn entirely by a rating agency or placed on a so-called “watch list” for a possible downgrade or assigned a negative ratings outlook if, in any rating agency’s judgment, circumstances so warrant. Actual or anticipated changes or downgrades in our credit ratings, including any announcement that our ratings are under review for a downgrade or have been assigned a negative outlook, would likely increase our borrowing costs, which could in turn adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock. If a downgrade or negative outlook were to occur, it could impact our ability to access the capital markets to raise debt and/or increase the cost thereof. In addition, while our credit ratings are important to us, we may take actions and otherwise operate our business in a manner that adversely affects our credit ratings.

We are Subject to Extensive and Costly Environmental and Other Governmental Regulation

We are subject to various federal, state, local and foreign environmental laws and regulations, including those regulating the discharge, storage, handling and disposal of a variety of substances, the regulation of chemicals used in our operations, as well as other financial and non-financial regulations, including items such as air and water quality, the cleanup of contaminated soil and groundwater, standards applicable to our finished products and matters related to the health and safety of employees.

We regularly make capital expenditures to maintain compliance with applicable environmental laws and regulations. However, environmental laws and regulations are becoming increasingly stringent. Consequently, our compliance and remediation costs could increase materially. In addition, we cannot currently assess the impact of future changes in governmental regulations, including future emissions standards (such as regulations on emissions from certain industrial boilers), climate change initiatives and government’s enforcement practices will have on our operations or capital expenditure requirements. Further, we are responsible for conducting environmental investigation and cleanup activities at current and formerly owned sites. We also have been identified as a PRP at various third-party disposal sites pursuant to U.S. federal or state statutes. Any liability we may incur in connection with these or other sites at which we may be identified in the future as a responsible party or in connection with other governmental requirements, including capital investments or business disruptions associated with regulatory compliance, may adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock. In addition, our operations also consume significant amounts of energy, and we may incur additional indirect costs as a result of changes in costs of energy due to increased climate-related and other environmental regulations.

Our Capital Expenditures May Not Achieve the Desired Outcome or May Be Achieved at a Higher Cost than Anticipated

We regularly make capital expenditures with respect to our manufacturing facilities. Many of our projects are complex, costly and are implemented over an extended period of time. Consequently, our capital expenditures could be higher than we anticipated, we may experience unanticipated business disruptions and/or we may not achieve the desired benefits from these projects. Should these types of conditions and risks occur, they could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.

We May Incur Additional Restructuring Costs and May Not Realize Expected Benefits from Restructuring

We have restructured portions of our operations from time to time, including in connection with the Combination, and we may engage in additional restructuring initiatives. Because we are not able to predict with certainty market conditions, including changes in the supply and demand for our products, the loss of large customers or the selling prices for our products, we also may not be able to predict with certainty when it will be appropriate to undertake restructurings. The costs associated with these activities will vary depending upon the type of facility impacted, with the non-cash cost of a mill closure generally being more significant than that of a converting facility due to the higher level of fixed costs. It is also possible, in connection with these restructuring efforts, that our costs could be higher than we anticipate and that we may not realize the expected benefits.


20


Work Stoppages and Other Labor Relations Matters May Have an Adverse Effect on Our Financial Results

A significant number of our union employees are governed by CBAs. Expired contracts are in the process of renegotiation, and others expire within one year. We may not be able to successfully negotiate new union contracts without work stoppages or labor difficulties or renegotiate them on favorable terms. We have experienced work stoppages in the past and we may experience work stoppages in the future. If we are unable to successfully renegotiate the terms of any of these agreements or an industry association is unable to successfully negotiate a national agreement when it expires, or if we experience any extended interruption of operations at any of our facilities as a result of strikes or other work stoppages, our results of operations and financial condition, and the trading price of our Common Stock, could be adversely affected.

We May Incur Increased Employee Benefit Costs and Certain of Our Pension Plans Will Likely Require Additional Cash Contributions

Employee healthcare costs continue to rise. Our pension contribution and health care benefits costs depend on multiple factors resulting from actual plan experience and assumptions of future experience. Following the Combination, WestRock merged MWV’s U.S. qualified defined benefit pension plans into the Rock-Tenn Company Consolidated Pension Plan, and renamed the merged plan the WestRock Company Consolidated Pension Plan. The WestRock Company Consolidated Pension Plan is over funded. We expect to make future contributions primarily to our non-U.S. pension plans in the coming years in order to ensure that our funding levels remain adequate and meet regulatory requirements. The actual required amounts and timing of future cash contributions will be highly sensitive to changes in the applicable discount rates and returns on plan assets, and could also be impacted by future changes in the laws and regulations applicable to plan funding. Our pension plan assets are primarily made up of fixed income, equity and alternative investments. Fluctuations in market performance of these assets and changes in interest rates may result in increased or decreased pension costs in future periods. Changes in assumptions regarding expected long-term rate of return on plan assets, our discount rate, expected compensation levels or mortality could also increase or decrease pension costs. These changes, along with turmoil in financial and capital markets, may adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.

We May Incur Increased Funding Requirements in the Multiemployer Pension Plans in Which We Participate

We participate in several MEPPs administered by labor unions that provide retirement benefits to certain union employees in accordance with various CBAs. As one of many participating employers in these plans, we are generally responsible with the other participating employers for any plan underfunding. Our contributions to a particular MEPP are established by the applicable CBAs; however, our required contributions may increase based on the funded status of a MEPP and legal requirements such as those of the Pension Act, which requires substantially underfunded MEPPs to implement a funding improvement plan or a rehabilitation plan to improve their funded status.

We believe certain of the MEPPs in which we participate have material unfunded vested benefits. Due to uncertainty regarding future factors that could trigger a withdrawal liability, including partial withdrawal liabilities triggered by facility closures, as well as the absence of specific information regarding matters such as the MEPPs’ current financial situation due in part to delays in reporting, the potential withdrawal or bankruptcy of other contributing employers, the impact of future plan performance or the success of current and future funding improvement or rehabilitation plans to restore solvency to the plans, we are unable to determine with certainty the amount and timing of any future withdrawal liability, changes in future funding obligations or the impact of increased contributions including those that could be triggered by a mass withdrawal of other employers from a MEPP. MEPPs may also be significantly impacted by changes in legislation and actions taken by particular MEPP trustees. The impact of increased contributions, future funding obligations or future withdrawal liabilities may adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.
We are Subject to Cyber-Security Risks Related to Customer, Employee, Vendor or Other Company Data

We use information technologies to securely manage operations and various business functions. We rely on various technologies to process, store and report on our business and interact with customers, vendors and employees. Our systems are subject to repeated attempts by third parties to access information or to disrupt our systems. Despite our security design and controls, and those of our third-party providers, we may become subject to cyber-attacks that could result in operational disruptions or the misappropriation of sensitive data. Such disruptions or misappropriations and the resulting repercussions may adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.


21


We Depend On Our Ability to Develop and Successfully Introduce New Products and to Acquire and Retain Intellectual Property Rights

Our ability to develop and successfully market new products and to develop, acquire and retain necessary intellectual property rights is important to our continued success and competitive position. If we were unable to protect our existing intellectual property rights, develop new rights, or if others developed similar or improved technologies our results of operations, cash flows and financial condition, and the trading price of our Common Stock, could be adversely affected.

Our Real Estate Development Activities are Subject to Challenges

We engage in value-added real estate development activities in the Charleston, SC region, including obtaining entitlements and establishing joint ventures and other development-related arrangements. Our ability to execute our plans to realize the greater value associated with our development land holdings may be affected by the following factors, among others:
 
general economic conditions, including credit markets and interest rates;
local real estate market conditions, including competition from sellers of land and real estate developers; and
impact of federal, state and local laws and regulations affecting land use, land use entitlements, land protection and zoning.

Any failure to execute our plans could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.

Item 1B.
UNRESOLVED STAFF COMMENTS

Not applicable – there are no unresolved SEC staff comments.

Item 2.
PROPERTIES

We operate locations in North America, including the majority of U.S. states, South America, Europe and Asia. We lease our principal executive offices in Richmond, VA and we own our principal operating offices in Norcross, GA. We believe that our existing production capacity is adequate to serve existing demand for our products and consider our plants and equipment to be in good condition.

Our corporate and operating facilities as of September 30, 2016 are summarized below:
 
Number of Facilities
Segment
Owned
 
Leased
 
Total
Corrugated Packaging
100
 
38
 
138
Consumer Packaging
67
 
37
 
104
Land and Development
2
 
1
 
3
Corporate and significant regional offices
1
 
9
 
10
Total
170
 
85
 
255


22


The tables that follow show our annual production capacity by mill at September 30, 2016 in thousands of tons. Although our mill system operating rates may vary from year to year due to changes in market and other factors, our simple average mill system operating rates for the last three years averaged 95%. We own all of our mills. Our fiber sourcing for our mills is approximately 65% virgin and 35% recycled.
Corrugated Packaging Mills
 
Location of Mill
Linerboard
Medium
White Top Linerboard
Kraft Paper/Bag
Market Pulp
Bleached Paperboard
Total Capacity
Fernandina Beach, FL
930
 
 
 
 
 
930
West Point, VA
 
185
735
 
 
 
920
Stevenson, AL
 
885
 
 
 
 
885
Solvay, NY
548
272
 
 
 
 
820
Hodge, LA
800
 
 
 
 
 
800
Florence, SC
683
 
 
 
 
 
683
Panama City, FL
353
 
 
 
292
 
645
Seminole, FL
402
198
 
 
 
 
600
Dublin, GA
130
130
 
325
 
 
585
Hopewell, VA
527
 
 
 
 
 
527
Rigesa, Brazil
330
170
 
 
 
 
500
Tacoma, WA
90
 
275
60
60
 
485
La Tuque, QC
 
 
345
 
 
131
476
St. Paul, MN
 
200
 
 
 
 
200
Morai, India
155
25
 
 
 
 
180
Total Corrugated Packaging Mill Capacity
4,948
2,065
1,355
385
352
131
9,236

Consumer Packaging Mills
Location of Mill
Bleached Paperboard
Coated Natural Kraft
Coated Recycled Paperboard
Specialty Recycled Paperboard
Market Pulp
Total Capacity
Mahrt, AL
 
1,066
 
 
 
1,066
Covington, VA
942
 
 
 
 
942
Evadale, TX
585
 
 
 
125
710
Demopolis, AL
350
 
 
 
100
450
St. Paul, MN
 
 
168
 
 
168
Battle Creek, MI
 
 
160
 
 
160
Chattanooga, TN
 
 
 
140
 
140
Dallas, TX
 
 
127
 
 
127
Sheldon Springs, VT (Missisquoi Mill)
 
 
111
 
 
111
Lynchburg, VA
 
 
 
103
 
103
Stroudsburg, PA
 
 
80
 
 
80
Eaton, IN
 
 
 
64
 
64
Aurora, IL
 
 
 
32
 
32
Total Consumer Packaging Mill Capacity
1,877
1,066
646
339
225
4,153

The production at our Lynchburg, VA mill is gypsum paperboard liner and the paper machine is owned by our Seven Hills joint venture. At September 30, 2016, we owned approximately 61,000 acres of development landholdings primarily in the Charleston, SC region and approximately 135,000 acres of forestlands in Brazil.

23


Item 3.
 LEGAL PROCEEDINGS

We are a defendant in a number of lawsuits and claims arising out of the conduct of our business. While the ultimate results of such suits or other proceedings against us cannot be predicted with certainty, management believes the resolution of these matters will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Additional information is included in “Note 18. Commitments and Contingencies” of the Notes to Consolidated Financial Statements.

Item 4.
MINE SAFETY DISCLOSURES

Not applicable.


PART II: FINANCIAL INFORMATION

Item 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock

Our Common Stock trades on the New York Stock Exchange under the symbol “WRK”. From October 1, 2014 through July 1, 2015 in the table below, the stock that traded was RockTenn Common Stock under the symbol “RKT”. RockTenn was the accounting acquirer in the Combination. On July 2, 2015, shares of our Common Stock began regular-way trading on the NYSE under the ticker symbol “WRK”.

As of October 28, 2016, there were approximately 6,965 stockholders of record of our Common Stock. The number of stockholders of record includes one single stockholder, Cede & Co., for all of the shares of our Common Stock held by our stockholders in individual brokerage accounts maintained at banks, brokers and institutions.

The table below reflects the market price of our Common Stock beginning on July 2, 2015. For periods prior to July 2, 2015, the table below reflects the market price of RockTenn Common Stock.

Price Range of Common Stock and Dividends
 
Fiscal 2016
 
Fiscal 2015
 
Market Price
 
 
 
Market Price
 
 
 
High
 
Low
 
Dividend
 
High
 
Low
 
Dividend
First Quarter
$
57.85

 
$
42.75

 
$
0.3750

 
$
62.50

 
$
43.32

 
$
0.1875

Second Quarter
$
45.71

 
$
29.73

 
$
0.3750

 
$
71.47

 
$
59.35

 
$
0.3205

Third Quarter
$
44.49

 
$
35.52

 
$
0.3750

 
$
66.88

 
$
59.25

 
$
0.3205

Fourth Quarter
$
49.18

 
$
36.33

 
$
0.3750

 
$
66.40

 
$
48.80

 
$
0.3750


The range of prices in the table above are impacted by the Separation subsequent to May 15, 2016. Ingevity became an independent public company trading under the symbol “NGVT” on the New York Stock Exchange. Under the terms of the Separation, WestRock stockholders received one share of Ingevity common stock for every six common shares of WestRock common stock held as of the close of business on May 4, 2016.

In November 2016, our board of directors declared a quarterly dividend of $0.40 per share which represented a 6.7% increase from the prior $0.375 per share dividend and an annual dividend of $1.60 per share. During fiscal 2016, we paid quarterly dividends of $0.375 per share for an annual dividend of $1.50 per share. In the first quarter of fiscal 2015, RockTenn increased its dividend from $0.175 to $0.1875 per share. Subsequently, as a result of the Business Combination Agreement, RockTenn increased the per share amount of the dividends it distributed in the second and third fiscal quarters of 2015 to $0.3205 per share to equalize RockTenn and MWV dividend payments. In July and October 2015, our board of directors approved our August and November 2015 quarterly dividends of $0.375 per share, indicating an annualized dividend of $1.50 per share. During fiscal 2015, we paid aggregate dividends (including those paid by RockTenn prior to the closing of the Combination) on our Common Stock of approximately $1.20 per share. For additional dividend information, please see Item 6. Selected Financial Data”.


24


Securities Authorized for Issuance Under Equity Compensation Plans

The section under the heading “Executive Compensation Tables” entitled “Equity Compensation Plan Information” in the Proxy Statement for the annual meeting of stockholders to be held on January 27, 2017, which will be filed with the SEC on or before December 31, 2016, is incorporated herein by reference. For additional information concerning our capitalization, see “Note 15. Stockholders’ Equity” of the Notes to Consolidated Financial Statements.

Stock Repurchase Plan

In July 2015, our board of directors authorized a repurchase program of up to 40.0 million shares of our Common Stock, representing approximately 15% of our outstanding Common Stock as of July 1, 2015. The shares of our Common Stock may be repurchased over an indefinite period of time at the discretion of management. In fiscal 2016, we repurchased approximately 8.1 million shares of our Common Stock for an aggregate cost of $335.3 million. Subsequent to the authorization in the fourth quarter of fiscal 2015, we repurchased approximately 5.4 million shares of our Common Stock for an aggregate cost of $328.0 million. Separately, as part of the Combination, RockTenn repurchased 10.5 million shares of RockTenn Common Stock for an aggregate cost of $667.8 million. Prior to the closing of the Combination and pursuant to the then existing RockTenn repurchase plan, in the first quarter of fiscal 2015, RockTenn repurchased 0.2 million shares of RockTenn Common Stock for an aggregate cost of $8.7 million and in fiscal 2014, it repurchased approximately 4.7 million shares for an aggregate cost of $236.3 million. As of September 30, 2016, we had remaining authorization under our July 2015 repurchase program to purchase approximately 26.5 million shares of our Common Stock.

The following table presents information with respect to purchases of our Common Stock that we made during the three months ended September 30, 2016:

 
 
Total Number
of Shares
Purchased
 
Average
Price Paid
Per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
 
Maximum Number
of Shares that May Yet Be Purchased Under the Plans or 
Programs
July 1, 2016 through July 31, 2016
 
132,779

 
$
37.64

 
132,779

 
27,460,277

August 1, 2016 through August 31, 2016
 
268,711

 
44.86

 
268,711

 
27,191,566

September 1, 2016 through September 30, 2016
 
694,827

 
47.47

 
694,827

 
26,496,739

Total
 
1,096,317

 
 
 
1,096,317

 
 


Item 6.
SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and notes thereto and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. RockTenn was the accounting acquirer in the Combination; therefore, the historical consolidated financial statements of RockTenn for periods prior to the Combination are considered to be the historical financial statements of WestRock and thus WestRock’s consolidated financial statements for fiscal 2015 reflect RockTenn’s consolidated financial statements for periods from October 1, 2014 through June 30, 2015, and WestRock’s thereafter. We derived the consolidated statements of operations and consolidated statements of cash flows data for the years ended September 30, 2016, 2015 and 2014, and the consolidated balance sheet data as of September 30, 2016 and 2015 from the WestRock Company consolidated financial statements. We derived the consolidated statements of operations and consolidated statements of cash flows data for the years ended September 30, 2013 and 2012, and the consolidated balance sheet data as of September 30, 2014, 2013 and 2012, from audited Rock-Tenn Company consolidated financial statements not included in this report. The table that follows is consistent with those presentations with the exception of diluted earnings per share attributable to common stockholders, diluted weighted average shares outstanding, dividends per common share and book value per common share that have been adjusted retroactively due to RockTenn’s August 2014 two-for-one stock split.

The Combination was the primary reason for the changes in the selected financial data in fiscal 2016 and 2015 as compared to prior years due to the size and timing of the transaction. The selected financial data has been updated to reflect the Separation. Our results of operations shown below may not be indicative of future results.

25


 
Year Ended September 30,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(In millions, except per share amounts)
Net sales
$
14,171.8

 
$
11,124.8

 
$
9,895.1

 
$
9,545.4

 
$
9,207.6

Pension risk transfer expense (a)
$
370.7

 
$

 
$

 
$

 
$

Pension lump sum settlement and retiree medical curtailment, net (b)
$

 
$
11.5

 
$
47.9

 
$

 
$

Restructuring and other costs, net
$
366.4

 
$
140.8

 
$
55.6

 
$
78.0

 
$
75.2

Income from continuing operations (c)
$
154.8

 
$
501.2

 
$
483.8

 
$
732.5

 
$
252.2

(Loss) income from discontinued operations (net of tax) (d)
$
(544.7
)
 
$
10.6

 
$

 
$

 
$

Net (loss) income attributable to common stockholders
$
(396.3
)
 
$
507.1

 
$
479.7

 
$
727.3

 
$
249.1

Diluted earnings per share from continuing operations
$
0.59

 
$
2.87

 
$
3.29

 
$
4.98

 
$
1.72

Diluted (loss) earnings per share from discontinued operations
$
(2.13
)
 
$
0.06

 
$

 
$

 
$

Diluted (loss) earnings per share attributable to common stockholders
$
(1.54
)
 
$
2.93

 
$
3.29

 
$
4.98

 
$
1.72

Diluted weighted average shares outstanding
257.9

 
173.3

 
146.0

 
146.1

 
144.1

Dividends paid per common share
$
1.50

 
$
1.20

 
$
0.70

 
$
0.525

 
$
0.40

Book value per common share
$
38.75

 
$
45.34

 
$
30.76

 
$
29.94

 
$
24.02

Total assets
$
23,038.2

 
$
25,372.4

 
$
11,039.7

 
$
10,733.4

 
$
10,687.1

Current portion of debt
$
292.9

 
$
63.7

 
$
132.6

 
$
2.9

 
$
261.3

Long-term debt due after one year
$
5,496.3

 
$
5,558.2

 
$
2,852.1

 
$
2,841.9

 
$
3,151.2

Total debt
$
5,789.2

 
$
5,621.9

 
$
2,984.7

 
$
2,844.8

 
$
3,412.5

Total stockholders’ equity
$
9,728.8

 
$
11,651.8

 
$
4,306.8

 
$
4,312.3

 
$
3,405.7

Net cash provided by operating activities
$
1,688.4

 
$
1,203.6

 
$
1,151.8

 
$
1,032.5

 
$
656.7

Capital expenditures
$
796.7

 
$
585.5

 
$
534.2

 
$
440.4

 
$
452.4

Cash paid (received) for purchase of businesses, net of cash acquired
$
376.4

 
$
(3.7
)
 
$
474.4

 
$
6.3

 
$
125.6

Cash received in merger
$

 
$
265.7

 
$

 
$

 
$

Purchases of common stock
$
335.3

 
$
336.7

 
$
236.3

 
$

 
$

Purchases of commons stock - merger related
$

 
$
667.8

 
$

 
$

 
$

 
(a) 
In fiscal 2016, using plan assets we settled $2.5 billion of pension obligations of the WestRock Company Consolidated Pension Plan by purchasing group annuity contracts from Prudential. This transaction transferred payment responsibility to Prudential for retirement benefits owed to approximately 35,000 U.S. retirees and their beneficiaries. As a result of the transaction, we recorded a non-cash charge of $370.7 million pre-tax. For additional information see Note 14. Retirement Plansof the Notes to Consolidated Financial Statements.

(b) 
In fiscal 2015, payments were made to former employees to partially settle obligations of one of our defined benefit pension plans and we recorded a non-cash pre-tax charge of $20.0 million. In addition, changes in retiree medical coverage for certain employees covered by the USW master agreement resulted in the recognition of an $8.5 million pre-tax curtailment gain. These two items netted to an $11.5 million pre-tax charge. In fiscal 2014, we completed the first phase of our previously announced lump sum pension settlement to certain eligible former employees and recorded a pre-tax charge of $47.9 million. For additional information see Note 14. Retirement Plansof the Notes to Consolidated Financial Statements.

(c) 
Income from continuing operations in fiscal 2015 was reduced by $64.7 million pre-tax expense for inventory stepped-up in purchase accounting, primarily related to the Combination. Net income attributable to common stockholders in fiscal 2015, 2014 and 2013 was increased as a result of a reduction of cost of goods sold of $6.7 million, $32.3 million and $12.2 million pre-tax, respectively, due to the recording of additional value of spare parts at our containerboard mills acquired in the Smurfit-Stone Acquisition. For additional information see Note 4. Inventoriesof the Notes to Consolidated Financial Statements.

26


Net income attributable to common stockholders in fiscal 2013 was increased by the reversal of $254.1 million of tax reserves related to AFMC acquired in the Smurfit-Stone Acquisition that were partially offset by a resulting increase in a state tax valuation allowance of $1.2 million. Net income attributable to common stockholders in fiscal 2012 was reduced by $25.9 million pre-tax for a loss on extinguishment of debt in connection with the redemption of the then outstanding 9.25% senior notes due March 2016.
 
(d)
Loss from discontinued operations, net of tax in fiscal 2016 includes a $478.3 million pre-tax goodwill impairment charge and $101.1 million pre-tax customer list impairment charge associated with our former Specialty Chemicals operations. For additional information on these non-cash charges see Note 7. Discontinued Operationsof the Notes to Consolidated Financial Statements. Income from discontinued operations, net of tax in the fourth quarter of fiscal 2015 was reduced by $8.2 million pre-tax of acquisition inventory step-up expense, net of related LIFO impact.

Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

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. We also develop real estate in Charleston, SC region.

On July 1, 2015, pursuant to the Business Combination Agreement, RockTenn and MWV completed a strategic combination of their respective businesses. RockTenn and MWV each became wholly-owned subsidiaries of WestRock. The Combination is described in “Note 6. Merger, Acquisitions and Investment” of the Notes to Consolidated Financial Statements. RockTenn was the accounting acquirer in the Combination; therefore, the historical consolidated financial statements of RockTenn for periods prior to the Combination are considered to be the historical financial statements of WestRock and thus WestRock’s consolidated financial statements for fiscal 2015 reflect RockTenn’s consolidated financial statements for periods from October 1, 2014 through June 30, 2015, and WestRock’s thereafter.

On May 15, 2016, we completed the Separation. Accordingly, we have presented the financial position and results of operations of our former Specialty Chemicals segment as discontinued operations in the accompanying consolidated financial statements for all periods presented, as well as in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. See “Note 7. Discontinued Operations” for more information.

Following the Combination, we aligned our financial results of operations in four reportable segments: Corrugated Packaging, Consumer Packaging, Specialty Chemicals and Land and Development. Subsequent to the Separation, we report our financial results of our continuing operations in three reportable segments: Corrugated Packaging, Consumer Packaging and Land and Development. We reclassified prior period segment results to align to these segments for all periods presented.
 
Year Ended September 30,
 
2016
 
2015
 
2014
 
(In millions)
Net sales
$
14,171.8

 
$
11,124.8

 
$
9,895.1

Segment income
$
1,226.2

 
$
1,070.3

 
$
1,039.4

Income from continuing operations
$
154.8

 
$
501.2

 
$
483.8


Net sales of $14,171.8 million in fiscal 2016 increased $3,047.0 million, or 27.4%, compared to fiscal 2015. The increase was primarily a result of the full year impact of the Combination in fiscal 2016 results, compared to three months in fiscal 2015, and the full year impact of the SP Fiber Acquisition and the partial year impact of the Packaging Acquisition in fiscal 2016. The increase in net sales due to the facilities received in the Combination and the acquisitions completed in fiscal 2016 accounted for $3,365.7 million. Excluding these transactions, net sales in fiscal 2016 decreased as compared to fiscal 2015 due to an estimated $169.6 million of lower selling price/mix and lower volume of $149.1 million.

Segment income increased $155.9 million in fiscal 2016, primarily the result of the Combination and the fiscal 2016 acquisitions noted above. Segment income was reduced by $8.1 million of expense for inventory stepped-up in purchase accounting, net of related LIFO impact in fiscal 2016 and $64.7 million in fiscal 2015. Income from continuing operations in fiscal 2016 was $154.8

27


million compared to $501.2 million in fiscal 2015. The reduction in income from continuing operations in fiscal 2016 was primarily attributable to the $370.7 million of non-cash pre-tax pension risk transfer expense and $366.4 million of restructuring and other costs, net compared to $140.8 million of restructuring and other costs, net in fiscal 2015. Diluted earnings per share from continuing operations were $0.59 in fiscal 2016 compared to $2.87 in fiscal 2015. Adjusted Income from Continuing Operations and Adjusted Earnings from Continuing Operations Per Diluted Share (each as hereinafter defined) in fiscal 2016 were $653.0 million and $2.53, respectively, compared to $650.6 million and $3.75 in fiscal 2015. Adjusted Income from Continuing Operations and Adjusted Earnings from Continuing Operations Per Diluted Share are non-GAAP financial measures. For more information on non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measures, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Measures” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations (Consolidated)” below.

We continued our balanced capital allocation approach by investing $796.7 million in capital expenditures while returning $335.3 million to our stockholders in share repurchases and $380.7 million to our stockholders in dividends in fiscal 2016. We believe our strong balance sheet and cash flow provide us the flexibility to continue to invest to sustain and improve our operating performance.

Results of Operations (Consolidated)

The following table summarizes our consolidated results for the three years ended September 30, 2016:
 
Year Ended September 30,
 
2016
 
2015
 
2014
 
(In millions, except per share data)
Net sales
$
14,171.8

 
$
11,124.8

 
$
9,895.1

Cost of goods sold
11,413.2

 
8,986.5

 
7,961.5

Gross profit
2,758.6

 
2,138.3

 
1,933.6

Selling, general and administrative, excluding intangible amortization
1,379.4

 
1,014.6

 
889.7

Selling, general and administrative intangible amortization
211.8

 
118.9

 
86.0

Pension risk transfer expense
370.7

 

 

Pension lump sum settlement and retiree medical curtailment, net

 
11.5

 
47.9

Restructuring and other costs, net
366.4

 
140.8

 
55.6

Operating profit
430.3

 
852.5

 
854.4

Interest expense
(256.7
)
 
(132.5
)
 
(95.3
)
Gain (loss) on extinguishment of debt
2.7

 
(2.6
)
 

Interest income and other income (expense), net
58.6

 
9.7

 
2.4

Equity in income of unconsolidated entities
9.7

 
7.1

 
8.8

Income from continuing operations before income taxes
244.6

 
734.2

 
770.3

Income tax expense
(89.8
)
 
(233.0
)
 
(286.5
)
Income from continuing operations
154.8

 
501.2

 
483.8

(Loss) income from discontinued operations (net of income tax benefit (expense) of $32.3, $(17.5) and $0)
(544.7
)
 
10.6

 

Consolidated net (loss) income
(389.9
)
 
511.8

 
483.8

Less: Net income attributable to noncontrolling interests
(6.4
)
 
(4.7
)
 
(4.1
)
Net (loss) income attributable to common stockholders
$
(396.3
)
 
$
507.1

 
$
479.7


Set forth below is a reconciliation of the non-GAAP financial measure Adjusted Earnings from Continuing Operations Per Diluted Share to Earnings from continuing operations per diluted share, the most directly comparable GAAP measure (in dollars per share) for the periods indicated. The reconciliation is followed by a discussion of the adjustments. See “Non-GAAP Financial Measures” for more information on why our management believes that presentation of this non-GAAP financial measure provides useful information to investors regarding our financial condition and results of operations, as well as the additional purposes for which our management uses this non-GAAP financial measure.


28


 
Years Ended September 30,
 
2016
 
2015
 
2014
 
 
 
 
 
 
Earnings from continuing operations per diluted share
$
0.59

 
$
2.87

 
$
3.29

Non-cash pension risk transfer expense
0.89

 

 

Restructuring and other items
1.05

 
0.58

 
0.26

Inventory stepped-up in purchase accounting, net of LIFO
0.02

 
0.25

 
0.01

Pension lump sum settlement and retiree medical curtailment, net

 
0.04

 
0.20

Gain on investment in Grupo Gondi
(0.01
)
 

 

(Gain) loss on extinguishment of debt
(0.01
)
 
0.01

 

Adjusted Earnings from Continuing Operations Per Diluted Share
$
2.53

 
$
3.75

 
$
3.76


In fiscal 2016, using plan assets we settled $2.5 billion of pension obligations of the WestRock Company Consolidated Pension Plan and recorded a non-cash charge of $370.7 million pre-tax. For additional information see “Note 14. Retirement Plans” of the Notes to Consolidated Financial Statements. In fiscal 2016, our restructuring and other items included $241.7 million of pre-tax facility closure costs, which primarily related to the permanent closures of the Coshocton, OH and Uncasville, CT medium mills, the permanent closure of the Newberg, OR mill, the permanent closure of the Vapi, India linerboard mill, certain non-mill facility closures and costs at other previously closed facilities; $104.7 million of pre-tax integration expenses primarily including severance and other costs primarily associated with the Combination; $25.1 million of operating losses and transition and other costs primarily associated with operations in the process of being closed; $9.4 million of acquisition and divestiture expenses; and $10.6 million of severance and other employee costs in our Land and Development segment. Additionally, we incurred $8.1 million of pre-tax expense for inventory stepped-up in purchase accounting, net of related LIFO impact, a $1.5 million after-tax gain on investment in Grupo Gondi and a $2.7 million pre-tax gain on extinguishment of debt.

In fiscal 2015, our restructuring and other costs and operating losses and transition costs due to plant closures consisted primarily of $84.3 million of pre-tax integration costs, $44.4 million of pre-tax merger and acquisition costs, $14.8 million of pre-tax facility closure and related operating losses and transition costs primarily related to charges associated with previously closed facilities. Additionally, fiscal 2015 included a $64.7 million pre-tax charge for inventory step-up expense, primarily related to inventory acquired in the Combination. Also, in fiscal 2015 we completed our previously announced lump sum pension settlement to certain eligible former employees and recorded a pre-tax charge of $20.0 million; and changes in retiree medical coverage for certain employees covered by the United Steelworkers Union master agreement resulted in the recognition of $8.5 million pre-tax curtailment gain. These two items netted to an $11.5 million pre-tax charge.

In fiscal 2014, our restructuring and other costs and operating losses and transition costs due to plant closures consisted primarily of $29.0 million of pre-tax facility closure and related operating losses and transition costs primarily related to consolidating corrugated container plants and recycled collection facilities and $30.5 million of pre-tax integration and acquisition costs. In fiscal 2014, we completed the first phase of our previously announced lump sum pension settlement to certain eligible former employees and recorded a pre-tax charge of $47.9 million. Additionally, the period included a $3.2 million pre-tax charge for inventory step-up expense related to inventory acquired in the Tacoma Mill, AGI In-Store and NPG acquisitions.

For additional information regarding our restructuring and other costs, see Note 8. Restructuring and Other Costs, Netof the Notes to Consolidated Financial Statements.

Net Sales (Unaffiliated Customers)

Net sales for fiscal 2016 increased $3,047.0 million to $14,171.8 million compared to $11,124.8 million in fiscal 2015 primarily as a result of the full year impact of the Combination in fiscal 2016 results, compared to three months in fiscal 2015, and the impact of the SP Fiber and the Packaging Acquisitions completed in fiscal 2016. The increase in net sales attributable to the facilities received in the Combination and the noted acquisitions compared to fiscal 2015 were $3,365.7 million. Excluding these transactions, net sales decreased due to an estimated $169.6 million of lower selling price/mix and lower volume of $149.1 million. The increase in net sales by segment is outlined in the “Results of Operations — Segment Data” section that follows.

Net sales for fiscal 2015 increased $1,229.7 million to $11,124.8 million compared to $9,895.1 million in fiscal 2014 primarily as a result of the one quarter impact of the Combination in fiscal 2015 results and the full year impact of the AGI In-Store, Tacoma Mill and NPG acquisitions completed in fiscal 2014. Net sales from the facilities received in the Combination and the increase in net sales in fiscal 2015 compared to fiscal 2014 for the acquisitions completed in fiscal 2014 accounted for $1,299.2 million.

29


Additionally, net sales increased primarily due to higher corrugated volumes, which were partially offset by decreased corrugated selling price/mix.

Cost of Goods Sold

Cost of goods sold increased to $11,413.2 million in fiscal 2016 compared to $8,986.5 million in fiscal 2015. Cost of goods sold as a percentage of net sales was 80.5% in fiscal 2016 compared to 80.8% in fiscal 2015 due to increased synergies and performance improvements, and lower energy costs, which were largely offset by the impact of lower selling prices in the current year. On a volume adjusted basis, excluding the impact of the Combination, the SP Fiber Acquisition and the Packaging Acquisition, energy costs decreased $85.6 million, commodity costs decreased $41.3 million, shipping and warehousing costs decreased $41.3 million and aggregate depreciation and amortization increased $5.2 million. Fiscal 2016 and 2015 included $8.1 million and $64.7 million of expense for inventory stepped-up in purchase accounting, net of related LIFO impact, respectively. Fiscal 2016 included an $8.7 million gain on the sale of certain land at our Panama City, Florida mill to the port authority which was more than offset by the $10.0 million estimated impact of the major maintenance outage at our Stevenson, Alabama mill. Fiscal 2015 included a reduction of cost of goods sold of $6.7 million pre-tax related to the recording of additional value of spare parts at our containerboard mills acquired in the Smurfit-Stone Acquisition.

Cost of goods sold increased to $8,986.5 million in fiscal 2015 compared to $7,961.5 million in fiscal 2014. Cost of goods sold as a percentage of net sales of 80.8% was essentially unchanged in fiscal 2015 compared to 80.5% in fiscal 2014 as productivity improvements and lower fiber and energy costs were offset by the impact of lower selling prices and higher non-fiber commodity and other costs. On a volume adjusted basis excluding the impact of the Combination, commodity costs decreased $97.1 million due to aggregate fiber and board costs decreasing $139.0 million partially offset by other commodity costs that increased $41.9 million. In addition, on a volume adjusted basis, energy costs decreased $101.4 million including the impact of less severe winter weather in fiscal 2015 compared to fiscal 2014, direct labor costs decreased $11.7 million, depreciation and amortization expense increased $26.4 million, other fixed and indirect costs increased $25.9 million, other manufacturing costs increased $21.0 million primarily for machine maintenance, and aggregate freight, shipping and warehousing costs increased $9.2 million, each as compared to the prior year. Fiscal 2015 included $64.7 million of expense for inventory stepped-up in purchase accounting, net of related LIFO impact primarily related to the Combination. Fiscal 2015 included a reduction of cost of goods sold of $6.7 million pre-tax related to the recording of additional value of spare parts at our containerboard mills acquired in the Smurfit-Stone Acquisition compared to a reduction of $32.3 million pre-tax in the prior year.

We value the majority of our U.S. inventories at the lower of cost or market with cost determined on a LIFO basis, which we believe generally results in a better matching of current costs and revenues than under FIFO. In periods of increasing costs, the LIFO method generally results in higher cost of goods sold than under the FIFO method. In periods of decreasing costs, the results are generally the opposite.

The following table illustrates the comparative effect of LIFO and FIFO accounting on our results of operations. This supplemental FIFO earnings information reflects the after-tax effect of eliminating the LIFO adjustment each year.
 
 
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
 
LIFO
 
FIFO
 
LIFO
 
FIFO
 
LIFO
 
FIFO
 
 
 
 
 
(In millions)
 
 
 
 
Cost of goods sold
$
11,413.2

 
$
11,452.8

 
$
8,986.5

 
$
8,996.8

 
$
7,961.5

 
$
7,958.4

Income from continuing operations
$
154.8

 
$
128.4

 
$
501.2

 
$
494.5

 
$
483.8

 
$
485.8


Income from continuing operations in fiscal 2016 and 2015 was higher under the LIFO method because we experienced periods of declining costs, compared to fiscal 2014, which was lower under the LIFO method because we experienced periods of rising costs.

Selling, General and Administrative Excluding Intangible Amortization

SG&A excluding intangible amortization increased $364.8 million to $1,379.4 million in fiscal 2016 compared to $1,014.6 million in fiscal 2015, primarily due to the full year impact of the Combination in fiscal 2016 results compared to three months in fiscal 2015, and the impact of the SP Fiber Acquisition and the Packaging Acquisition completed in fiscal 2016. SG&A, excluding intangible amortization as a percentage of sales increased slightly to 9.7% in fiscal 2016 compared to 9.1% in fiscal 2015.
  
SG&A excluding intangible amortization increased $124.9 million to $1,014.6 million in fiscal 2015, compared to $889.7 million in fiscal 2014. SG&A, excluding intangible amortization as a percentage of sales increased slightly to 9.1% in fiscal 2015

30


compared to 9.0% in fiscal 2014. Excluding the impact of the Combination and acquisitions, compensation and benefit costs increased $20.6 million and professional services expense increased $5.8 million and commissions expense decreased $15.5 million.

Selling, General and Administrative Intangible Amortization

SG&A intangible amortization was $211.8 million, $118.9 million and $86.0 million in fiscal 2016, 2015 and 2014, respectively. The increase in fiscal 2016 was primarily due to the full year inclusion of intangible amortization related to the Combination in fiscal 2016 results, compared to three months in fiscal 2015, as well as the full year impact of the SP Fiber Acquisition and partial year impact of the Packaging Acquisition completed in fiscal 2016.

Pension Risk Transfer Expense

In fiscal 2016, using plan assets we settled $2.5 billion of pension obligations of the WestRock Company Consolidated Pension Plan by purchasing group annuity contracts from Prudential. This transaction transferred payment responsibility to Prudential for retirement benefits owed to approximately 35,000 U.S. retirees and their beneficiaries. As a result of the transaction, we recorded a non-cash charge of $370.7 million pre-tax. The settlement reduced WestRock’s overall U.S. pension obligations and assets by approximately 40%. The monthly retirement benefit payment amounts currently received by retirees and their beneficiaries did not change as a result of this transaction. Those plan participants not included in the transaction remain in the WestRock Company Consolidated Pension Plan, and responsibility for payment of retirement benefits remains with WestRock. For additional information see “Note 14. Retirement Plans” of the Notes to Consolidated Financial Statements.

Pension Lump Sum Settlement Expense and Retiree Medical Curtailment, Net

In fiscal 2015, we partially settled obligations of one of our defined benefit pension plans through lump sum payments to certain eligible former employees and as a result recorded a pre-tax charge of $20.0 million. In addition, changes in retiree medical coverage for certain employees covered by the USW master agreement resulted in the recognition of an $8.5 million pre-tax curtailment gain. These two items netted to an $11.5 million pre-tax charge. During the fourth quarter of fiscal 2014, we completed the first phase of the lump sum pension settlement to certain eligible former employees and as a result recorded a pre-tax charge of $47.9 million. For additional information, see “Note 14. Retirement Plans” of the Notes to Consolidated Financial Statements.

In September 2016, we committed to an offer to partially settle obligations of our U.S. defined benefit pension plans in the first quarter of fiscal 2017, through lump sum and annuity payments to certain eligible former employees who are not currently receiving a monthly benefit. Depending upon the percentage of former employees that accept the offer, and whether or not settlement accounting is required, we might recognize a non-cash charge in the period in which the settlements occur. For additional information, see “Note 22. Subsequent Events (Unaudited) — Pension Settlement Offer” of the Notes to Consolidated Financial Statements.

Restructuring and Other Costs, Net

We recorded aggregate pre-tax restructuring and other costs of $366.4 million, $140.8 million and $55.6 million for fiscal 2016, 2015 and 2014, respectively. We generally expect the integration of the closed facility’s assets and production with other facilities to enable the receiving facilities to better leverage their fixed costs while eliminating fixed costs from the closed facility. Costs recorded in each period are not comparable since the timing and scope of the individual actions vary. The restructuring and other costs, net, exclude the Specialty Chemicals costs which are included in discontinued operations. We discuss these charges in more detail in Note 8. Restructuring and Other Costs, Net and Note 7. Discontinued Operationsof the Notes to Consolidated Financial Statements. We have restructured portions of our operations from time to time and it is possible that we may engage in additional restructuring opportunities in the future.

Mergers, Acquisitions and 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 valued at approximately $0.3 billion. The joint venture operates paper machines, corrugated packaging and high graphic folding carton facilities across 13 production sites. As the majority equity holder, Grupo Gondi will manage the joint venture and we will provide technical and commercial resources. 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 on the equity method.


31


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 $94.1 million, net of cash received of $1.7 million, a working capital settlement and an estimated escrow 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.

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. 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 that 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.

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 was the accounting acquirer in the Combination. 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 for the Combination is approximately $210.9 million related to outstanding MWV equity awards that were replaced with WestRock equity awards with identical terms for pre-Combination service. The amount related to post-Combination service is being expensed over the remaining service period of the awards. We believe the Combination has combined two industry leaders that will create a premier global provider of consumer and corrugated packaging solutions.

On August 29, 2014, we acquired the stock of AGI In-Store, a manufacturer of permanent point-of-purchase displays and fixtures to the consumer products and retail industries. The purchase price was $69.9 million, net of cash and a working capital settlement. We made an election under section 338(h)(10) of the Code that increased our tax basis in the acquired assets. We acquired the AGI In-Store business to support our strategy to provide a more holistic portfolio of innovative in-store marketing solutions, including “store-within-a-store” displays, and we believe the acquisition has enhanced cross-selling opportunities and bolstered our growing retail presence. We have included the results of AGI In-Store’s operations since the date of the acquisition in our consolidated financial statements in our Consumer Packaging segment.

On May 16, 2014, we acquired certain assets and liabilities of the Tacoma Mill. The purchase price was $343.2 million including a working capital settlement. The purchase price was increased $2.6 million during the third quarter of fiscal 2015, the offset to which was primarily goodwill. We recorded a measurement period adjustment in fiscal 2015 and have not retrospectively adjusted the comparative fiscal 2014 financial information presented herein. We believe the Tacoma Mill, located in Tacoma, WA, is a strategic fit and the mill has improved our ability to satisfy West Coast customers and generate operating efficiencies across our containerboard system. We have included the results of the Tacoma Mill since the date of the acquisition in our consolidated financial statements in our Corrugated Packaging segment.

On December 20, 2013, we acquired the stock of NPG, a specialty display company. The purchase price was $59.6 million, net of cash acquired of $1.7 million and a working capital settlement. It provided a broad range of display products and services to many of the most recognized retailers and its innovative retail solutions and large-format printing capability has expanded our customer base and significantly improved our ability to provide retail insights, innovation and connectivity to all of our customers. We have included the results of NPG’s operations since the date of the acquisition in our consolidated financial statements in our Consumer Packaging segment.


32


We discuss the Combination and other acquisitions in more detail in Note 6. Merger, Acquisitions and Investment of the Notes to Consolidated Financial Statements. See Item 1A. “Risk Factors — Our Business Could Suffer if We Are Unsuccessful in Making, Integrating and Maintaining Mergers, Acquisitions and Investments”.

Interest Expense

Interest expense was $256.7 million, $132.5 million and $95.3 million for fiscal 2016, 2015 and 2014, respectively. The increase in fiscal 2016 was primarily due to the full year impact of debt assumed in the Combination in fiscal 2016 results. Interest expense in fiscal 2016 was reduced by $44.5 million related to the amortization of the fair value of debt stepped-up in purchase accounting. The increase in fiscal 2015 was primarily due to three months of interest on debt assumed in the Combination. Interest expense in fiscal 2016 was reduced by $10.3 million related to the amortization of the fair value of debt stepped-up in purchase accounting. During fiscal 2016, 2015 and 2014 amortization of debt issuance costs charged to interest expense were $4.6 million, $9.3 million and $10.3 million, respectively. See Item 1A. “Risk Factors — Our Net Income Could Be Negatively Affected If Interest Rates Increase”.

Provision for Income Taxes

We recorded income tax expense from continuing operations of $89.8 million, at an effective tax rate of 36.7% in fiscal 2016, as compared to income tax expense from continuing operations of $233.0 million, at an effective tax rate of 31.7% in fiscal 2015, and compared to an income tax expense from continuing operations of $286.5 million, at an effective tax rate expense of 37.2% in fiscal 2014.

The effective tax rate from continuing operations for fiscal 2016 was different than the statutory rate primarily due to the impact of state taxes, the ability to claim the domestic manufacturer’s deduction against U.S. taxable earnings, the deconsolidation of a subsidiary related to the Grupo Gondi joint venture, including non-deductible goodwill disposed of in connection with the transaction, an increase in valuation allowances and a tax rate differential with respect to foreign earnings primarily in Canada.

The effective tax rate from continuing operations for fiscal 2015 was different than the statutory rate primarily due to the impact of state taxes, the ability to claim the domestic manufacturer’s deduction against U.S. taxable earnings and a tax rate differential with respect to foreign earnings. The effective tax rate from continuing operations for fiscal 2014 was different than the statutory rate primarily due to the impact of state taxes, a tax rate differential with respect to foreign earnings, and a $9.6 million charge to income tax expense to reflect an increase in the valuation allowance related to the State of New York’s March 31, 2014 income tax law change, which reduced the tax rate for qualified New York State manufacturers to 0% effective for tax years beginning on or after January 1, 2014 and thereby rendered a previously recorded deferred tax asset, net of certain deferred tax liabilities, to no longer have any value. For additional information on income taxes see Note 13. Income Taxes of the Notes to Consolidated Financial Statements.

Interest Income and Other Income (Expense), net

Interest income and other income (expense), net increased to income of $58.6 million in fiscal 2016 from income of $9.7 million in fiscal 2015 and $2.4 million in fiscal 2014. The increase in fiscal 2016 primarily included a $12.1 million gain on investment in Grupo Gondi related to the three corrugated box plants WestRock contributed to the joint venture and an increase in interest income of $30.3 million. The increase in interest income in fiscal 2016 compared to fiscal 2015 was primarily the result of the full year impact of a long-term note receivable acquired in the Combination. For additional information on the long-term note receivable see Note 19. Special Purpose Entities of the Notes to Consolidated Financial Statements.

(Loss) Income from 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 and completed the separation of our Specialty Chemicals business from WestRock. Subsequent to the Separation, the operating results of our former Specialty Chemicals segment are reported as discontinued operations. Loss from discontinued operations, net of tax, was $544.7 million for fiscal 2016 and income from discontinued operations was $10.6 million in fiscal 2015. The loss in fiscal 2016 was the result of goodwill and intangible impairments, and restructuring and other costs being partially offset by income from operations.

In the third quarter of fiscal 2016, in conjunction with the Separation, we performed an impairment assessment under the held for sale model and recorded a pre-tax non-cash impairment charge of $101.1 million for a customer relationships intangible. In the first quarter of fiscal 2016, 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 the results of our preliminary “Step 2” test,

33


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. For additional information on the Specialty Chemicals impairments and restructuring charges or the financial results of the discontinued operations, see “Note 7. Discontinued Operations” of the Notes to Consolidated Financial Statements.

Results of Operations Segment Data

RockTenn was the accounting acquirer in the Combination, therefore, the historical consolidated financial statements of RockTenn for periods prior to the Combination are considered to be the historical financial statements of WestRock and thus WestRock’s consolidated financial statements for fiscal 2015 reflect RockTenn’s consolidated financial statements for periods from October 1, 2014 through June 30, 2015, and WestRock’s thereafter. Following the Separation, our financial results of operations are aligned in three reportable segments: Corrugated Packaging, Consumer Packaging and Land and Development.

Corrugated Packaging Segment (Aggregate Before Intersegment Eliminations)
 
Net Sales
(Aggregate)
 
Segment
Income
 
Return
on Sales
 
(In millions, except percentages)
Fiscal 2014
 
 
 
 
 
First Quarter
$
1,751.2

 
$
157.8

 
9.0
%
Second Quarter
1,738.5

 
135.9

 
7.8

Third Quarter
1,855.1

 
181.9

 
9.8

Fourth Quarter
1,912.6

 
252.4

 
13.2

Total
$
7,257.4

 
$
728.0

 
10.0
%
 
 
 
 
 
 
Fiscal 2015
 
 
 
 
 
First Quarter
$
1,842.8

 
$
184.9

 
10.0
%
Second Quarter
1,799.5

 
169.4

 
9.4

Third Quarter
1,887.3

 
217.0

 
11.5

Fourth Quarter
1,987.3

 
235.4

 
11.8

Total
$
7,516.9

 
$
806.7

 
10.7
%
 
 
 
 
 
 
Fiscal 2016
 
 
 
 
 
First Quarter
$
1,964.3

 
$
180.1

 
9.2
%
Second Quarter
1,932.8

 
175.0

 
9.1

Third Quarter
1,967.7

 
192.4

 
9.8

Fourth Quarter
2,003.7

 
192.4

 
9.6

Total
$
7,868.5

 
$
739.9

 
9.4
%


34


Corrugated Packaging Shipments are expressed as a tons equivalent which includes external and intersegment tons shipped from our Corrugated Packaging mills plus Corrugated Packaging container shipments converted from BSF to tons. We have presented the Corrugated Packaging Shipments in two groups following the Combination, North America and Brazil / India. We have included the impact of the Combination beginning in the fourth quarter of fiscal 2015. We have recast the North American Corrugated Container Shipments in the table below to remove the historical impact of the three box plants contributed to the Grupo Gondi joint venture to provide comparability to the third and fourth quarter of fiscal 2016 and future results. Our recycled fiber tons reclaimed and brokered are separately presented below.

North American Corrugated Packaging Shipments
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Fiscal
Year
Fiscal 2014
 
 
 
 
 
 
 
 
 
North American Corrugated Packaging Shipments - thousands of tons
1,803.8

 
1,809.5

 
1,961.8

 
2,074.6

 
7,649.7

North American Corrugated Containers Shipments - BSF
17.7

 
17.5

 
18.2

 
18.2

 
71.6

North American Corrugated Containers Per Shipping Day - MMSF
290.9

 
277.8

 
287.5

 
284.7

 
285.2

 
 
 
 
 
 
 
 
 
 
Fiscal 2015
 
 
 
 
 
 
 
 
 
North American Corrugated Packaging Shipments - thousands of tons
1,995.8

 
1,936.7

 
2,032.6

 
2,018.0

 
7,983.1

North American Corrugated Containers Shipments - BSF
18.2

 
18.1

 
18.8

 
18.7

 
73.8

North American Corrugated Containers Per Shipping Day - MMSF
297.7

 
292.6

 
298.7

 
292.6

 
295.4

 
 
 
 
 
 
 
 
 
 
Fiscal 2016
 
 
 
 
 
 
 
 
 
North American Corrugated Packaging Shipments - thousands of tons
2,046.7

 
2,040.3

 
2,114.1

 
2,153.2

 
8,354.3

North American Corrugated Containers Shipments - BSF
18.7

 
18.2

 
18.6

 
18.9

 
74.4

North American Corrugated Containers Per Shipping Day - MMSF
306.3

 
288.6

 
291.4

 
294.5

 
295.1


Brazil / India Corrugated Packaging Shipments
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Fiscal
Year
Fiscal 2015
 
 
 
 
 
 
 
 
 
Brazil / India Corrugated Packaging Shipments - thousands of tons

 

 

 
171.4

 
171.4

Brazil / India Corrugated Containers Shipments - BSF

 



 
1.4

 
1.4

Brazil / India Corrugated Containers Per Shipping Day - MMSF

 

 

 
18.1

 
18.1

 
 
 
 
 
 
 
 
 
 
Fiscal 2016
 
 
 
 
 
 
 
 
 
Brazil / India Corrugated Packaging Shipments - thousands of tons
180.2

 
173.5

 
166.8

 
164.8

 
685.3

Brazil / India Corrugated Containers Shipments - BSF
1.5

 
1.3

 
1.4

 
1.6

 
5.8

Brazil / India Corrugated Containers Per Shipping Day - MMSF
19.2

 
19.8

 
19.1

 
19.6

 
19.4




35


Fiber Reclaimed and Brokered
(Shipments in thousands of tons)
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Fiscal
Year
Fiscal 2014
1,562.5

 
1,564.0

 
1,573.6

 
1,609.0

 
6,309.1

Fiscal 2015
1,628.0

 
1,576.6

 
1,781.8

 
1,834.9

 
6,821.3

Fiscal 2016
1,975.2

 
1,911.2

 
1,885.8

 
1,905.5

 
7,677.7


Net Sales (Aggregate) — Corrugated Packaging Segment

Net sales before intersegment eliminations for the Corrugated Packaging segment increased $351.6 million in fiscal 2016 compared to fiscal 2015 primarily due to $565.4 million of incremental net sales from the full year impact of facilities acquired in the Combination in fiscal 2016 results, compared to three months last year, the impact of the SP Fiber Acquisition in fiscal 2016 and $57.8 million of lower recycled fiber sales due to lower selling price/mix. These increases were partially offset by the impact of an estimated $178.2 million of lower corrugated selling price/mix and $93.4 million of lower volumes excluding these transactions. The lower corrugated selling price/mix is primarily the result previously published index reductions. Corrugated Packaging shipments in North America increased 4.6% in fiscal 2016 compared to the prior year, inclusive of the SP Fiber Acquisition.

Net sales before intersegment eliminations for the Corrugated Packaging segment increased $259.5 million in fiscal 2015 compared to fiscal 2014 primarily due to increased sales post-Combination, and a full year of sales from the Tacoma Mill in fiscal 2015 compared to four and a half months in fiscal 2014. Increased North American corrugated shipments were partially offset by the impact of decreased corrugated selling price/mix and $12.6 million of lower recycled fiber sales. Net sales from the aforementioned transactions increased sales by $264.4 million compared to the prior year. Lower corrugated selling price/mix reduced net sales by approximately $123.6 million compared to the prior year quarter. Corrugated Packaging shipments in North America increased 4.4% in fiscal 2015 compared to the prior year.

Segment Income — Corrugated Packaging Segment

Segment income attributable to the Corrugated Packaging segment in fiscal 2016 decreased $66.8 million to $739.9 million compared to segment income of $806.7 million in fiscal 2015. The decrease in segment income was primarily a result of lower selling price/mix and volume that were partially offset by synergies and productivity improvements, lower energy and commodity costs, and lower aggregate freight, shipping and warehousing costs. The estimated impact of lower selling price/mix was $178.2 million and the estimated impact of lower volume was $37.1 million compared to the prior year. Excluding the Combination and the SP Fiber Acquisition, on a volume adjusted basis compared to the prior year, energy costs decreased $73.2 million, commodity costs decreased $35.0 million, aggregate freight, shipping and warehousing costs decreased $46.7 million, and depreciation and amortization expense increased $7.3 million. Segment income was also reduced by $3.4 million and $2.2 million of expense for inventory stepped-up in purchase accounting, net of related LIFO impact in fiscal 2016 and 2015, respectively. Segment income in fiscal 2016 included an $8.7 million gain on the sale of certain land at our Panama City, Florida mill to the port authority which was more than offset by the $10.0 million estimated impact of the major maintenance outage at our Stevenson, Alabama mill. Segment income in fiscal 2015 included a reduction of cost of goods sold of $6.7 million related to the recording of additional value of spare parts at our containerboard mills acquired in the Smurfit-Stone Acquisition.

Segment income attributable to the Corrugated Packaging segment in fiscal 2015 increased $78.7 million to $806.7 million compared to segment income of $728.0 million in fiscal 2014. The increase in segment income was primarily a result of lower fiber and energy costs, increased volume, productivity improvements and income from the operations received in the Combination and Tacoma Mill acquisition, which were partially offset by the impact of decreased selling price/mix, higher non-fiber commodity costs, freight and other costs. The estimated impact of higher volume was $75.4 million and the estimated impact of lower selling price/mix was $155.4 million in fiscal 2015 compared to the prior fiscal year. On a volume adjusted basis, commodity costs decreased $103.5 million, primarily due to aggregate fiber and board costs, energy costs decreased $90.4 million including the impact of less severe weather in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014, direct labor costs decreased $15.5 million and aggregate freight, shipping and warehousing costs increased $8.8 million, and depreciation and amortization expense increased $23.4 million, each as compared to the prior fiscal year. Segment income included a reduction of cost of goods sold of $6.7 million in fiscal 2015 related to the recording of additional value of spare parts at our containerboard mills acquired in the Smurfit-Stone Acquisition compared to the recognition of $32.3 million in the prior fiscal year. Segment income in fiscal 2015 was reduced by $2.2 million of expense for inventory stepped-up in purchase accounting, net of related LIFO impact.


36



Consumer Packaging Segment (Aggregate Before Intersegment Eliminations)
 
Net Sales
(Aggregate)
 
Segment
Income
 
Return
on Sales
 
(In millions, except percentages)
Fiscal 2014
 
 
 
 
 
First Quarter
$
654.4

 
$
76.9

 
11.8
%
Second Quarter
699.9

 
66.3

 
9.5

Third Quarter
719.2

 
81.0

 
11.3

Fourth Quarter
745.0

 
87.2

 
11.7

Total
$
2,818.5

 
$
311.4

 
11.0
%
 
 
 
 
 
 
Fiscal 2015
 
 
 
 
 
First Quarter
$
713.0

 
$
59.0

 
8.3
%
Second Quarter
694.9

 
52.4

 
7.5

Third Quarter
690.2

 
77.9

 
11.3

Fourth Quarter
1,642.0

 
77.7

 
4.7

Total
$
3,740.1

 
$
267.0

 
7.1
%
 
 
 
 
 
 
Fiscal 2016
 
 
 
 
 
First Quarter
$
1,542.2

 
$
91.2

 
5.9
%
Second Quarter
1,588.4

 
99.7

 
6.3

Third Quarter
1,635.8

 
151.7

 
9.3

Fourth Quarter
1,621.7

 
139.1

 
8.6

Total
$
6,388.1

 
$
481.7

 
7.5
%


37


Consumer Packaging Shipments are expressed as a tons equivalent which includes external and intersegment tons shipped from our Consumer Packaging mills plus Consumer Packaging converting shipments converted from BSF to tons. We have included the impact of the Combination beginning in the fourth quarter of fiscal 2015. The table excludes merchandising displays and dispensing sales since there is not a common unit of measure, as well as gypsum paperboard liner tons produced by Seven Hills since it is not consolidated.

Consumer Packaging Shipments - tons in thousands
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Fiscal
Year
Fiscal 2014
 
 
 
 
 
 
 
 
 
Consumer Packaging Shipments - thousands of tons
378.1

 
386.0

 
394.3

 
408.7

 
1,567.1

Consumer Packaging Converting Shipments - BSF
5.0

 
5.3

 
5.2

 
5.4

 
20.9

Consumer Packaging Converting Per Shipping Day - MMSF
82.0

 
83.6

 
82.9

 
84.4

 
83.2

 
 
 
 
 
 
 
 
 
 
Fiscal 2015
 
 
 
 
 
 
 
 
 
Consumer Packaging Shipments - thousands of tons
371.2

 
378.5

 
388.6

 
1,043.9

 
2,182.2

Consumer Packaging Converting Shipments - BSF
5.2

 
5.3

 
5.5

 
9.2

 
25.2

Consumer Packaging Converting Per Shipping Day - MMSF
84.8

 
86.7

 
86.3

 
144.5

 
100.9

 
 
 
 
 
 
 
 
 
 
Fiscal 2016
 
 
 
 
 
 
 
 
 
Consumer Packaging Shipments - thousands of tons
949.3

 
974.4

 
986.3

 
998.7

 
3,908.7

Consumer Packaging Converting Shipments - BSF
8.8

 
9.0

 
9.5

 
9.4

 
36.7

Consumer Packaging Converting Per Shipping Day -
MMSF
144.2

 
143.7

 
148.5

 
146.3

 
145.7


Net Sales (Aggregate) — Consumer Packaging Segment

Net sales before intersegment eliminations increased $2,648.0 million for the Consumer Packaging segment in fiscal 2016 compared to fiscal 2015 primarily due to $2,748.7 million of incremental net sales from the full year impact of facilities acquired in the Combination in fiscal 2016 results, compared to three months last year, and the partial year impact of the Packaging Acquisition. Those increased net sales were partially offset by $81.0 million of lower display sales due to softness in customer promotional spending, an estimated $8.6 million of higher consumer packaging, excluding display, selling price/mix and $28.3 million of lower volumes excluding these transactions.

Net sales before intersegment eliminations increased $921.6 million for the Consumer Packaging segment in fiscal 2015 compared to fiscal 2014 primarily due to the one quarter impact of the Combination in fiscal 2015, the full year of sales from the display acquisitions in fiscal 2014, and the impact of higher selling price/mix which was partially offset by lower segment shipments and display sales excluding the acquisitions. Net sales from the Combination and display acquisitions increased sales by $1,004.7 million compared to the prior year. The impact of selling price/mix increased net sales by approximately $27.2 million compared to the prior year.

Segment Income — Consumer Packaging Segment

Segment income attributable to the Consumer Packaging segment in fiscal 2016 increased $214.7 million compared to fiscal 2015, primarily reflecting $235.0 million from facilities acquired in the Combination and the Packaging Acquisition, the impact of synergy and productivity improvements, and lower energy related costs compared to the prior year partially offset by the impact of lower volume and lower selling price/mix. Segment income was reduced by $4.7 million and $62.5 million of expense for inventory stepped-up in purchase accounting, net of related LIFO impact in fiscal 2016 and 2015, respectively. The estimated impact of lower volume was $30.9 million and higher selling price/mix was $8.6 million. Excluding the Combination and the Packaging Acquisition, on a volume adjusted basis compared to the prior year, commodity costs decreased $6.3 million and energy costs decreased $12.3 million.


38


Segment income attributable to the Consumer Packaging segment in fiscal 2015 decreased $44.4 million compared to fiscal 2014, and increased $18.1 million excluding $62.5 million of of expense for inventory stepped-up in purchase accounting, net of related LIFO impact primarily related to the Combination. The increase was primarily due to income from the operations received in the Combination, the favorable impact of selling price/mix, productivity improvements and the reduced impact of adverse weather in fiscal 2015 compared to fiscal 2014 which were partially offset by lower display income as a result of higher costs associated with supporting and onboarding new business and a more competitive commercial environment, and higher commodity and other costs. The estimated impact of higher selling price/mix and lower volume was $27.2 million and $21.3 million, respectively, in fiscal 2015 compared to fiscal 2014. On a volume adjusted basis, energy costs decreased $11.1 million primarily due to less severe weather in fiscal 2015 compared to fiscal 2014.

Land and Development Segment (Aggregate Before Intersegment Eliminations)
 
Net Sales
(Aggregate)
 
Segment
Income (Loss)
 
Return
on Sales
 
(In millions, except percentages)
Fiscal 2015
 
 
 
 
 
Fourth Quarter
$
45.0

 
$
(3.4
)
 
(7.6
)%
Total
$
45.0

 
$
(3.4
)
 
(7.6
)%
 
 
 
 
 
 
Fiscal 2016
 
 
 
 
 
First Quarter
$
15.4

 
$
0.7

 
4.5
 %
Second Quarter
18.7

 
(4.0
)
 
(21.4
)%
Third Quarter
42.0

 
9.5

 
22.6
 %
Fourth Quarter
43.7

 
(1.6
)
 
(3.7
)%
Total
$
119.8

 
$
4.6

 
3.8
 %

Net Sales (Aggregate) — Land and Development Segment

The Land and Development segment was formed as a result of the Combination; therefore, there are no prior year comparisons as we only reported results for the fourth quarter of 2015. Land and Development net sales in fiscal 2015 included the sale of a tract of land for a new automobile manufacturing facility. We are making great progress on accelerating the monetization of our land and development portfolio. We expect to realize one-half of the estimated $275 million to $300 million in net after-tax free cash flow during fiscal 2017, and expect to complete our monetization program by the end of calendar 2018.

Segment Income (Loss) — Land and Development Segment

Segment income attributable to the Land and Development segment was $4.6 million in fiscal 2016 compared to a loss of $3.4 million in fiscal 2015. The segment’s assets were stepped-up to fair value as a result of purchase accounting which resulted in substantially lower margins on the properties sold compared to pre-Combination levels. The step-up of our land portfolio in this segment is expected to reduce future profitability on existing projects but should not impact future cash flows.

Liquidity and Capital Resources

We fund our working capital requirements, capital expenditures, mergers, acquisitions and investments, restructuring activities, dividends and stock repurchases from net cash provided by operating activities, borrowings under our credit facilities, proceeds from our A/R Sales Agreement, proceeds from the sale of property, plant and equipment removed from service and proceeds received in connection with the issuance of debt and equity securities. Our primary credit facilities are summarized below. See Note 10. Debtof the Notes to Consolidated Financial Statements. Funding for our domestic operations in the foreseeable future is expected to come from sources of liquidity within our domestic operations, including cash and cash equivalents, and available borrowings under our credit facilities. As such, our foreign cash and cash equivalents are not expected to be a key source of liquidity to our domestic operations.

Cash and cash equivalents were $340.9 million at September 30, 2016 and $207.8 million at September 30, 2015. Approximately 81% of the cash and cash equivalents at September 30, 2016 were outside of the U.S. At September 30, 2016, total debt was $5,789.2 million, $292.9 million of which was current. At September 30, 2015, total debt was $5,621.9 million. The increase in debt from September 30, 2015 was primarily related to the cash paid for the SP Fiber Acquisition, the Packaging Acquisition, the cash to fund the joint venture with Grupo Gondi, capital investments, dividends and stock repurchases net of cash

39


receipts related to the Separation and cash generated from operations. Prior to the Separation, Ingevity (then a subsidiary of WestRock) borrowed $500.0 million in contemplation of the Separation. Ingevity used $68.9 million to fund a trust as security for a long term capital lease obligation and we used the balance to pay down other debt and for general corporate purposes. The $500.0 million of Ingevity debt and the $68.9 million funded to the trust were assumed by Ingevity and removed from our consolidated financial statements as part of our discontinued operations reporting.

Certain restrictive covenants govern our maximum borrowing availability under the credit facilities. We test and report our compliance with these covenants as required and we were in compliance with all of our covenants at September 30, 2016. At September 30, 2016, we had $107.0 million of outstanding letters of credit not drawn upon, approximately $2.6 billion of availability under our committed credit facilities and approximately $0.4 billion available under our uncommitted credit facilities. This liquidity may be used to provide for ongoing working capital needs and for other general corporate purposes, including acquisitions, dividends and stock repurchases. A portion of the debt classified as long-term may be paid down earlier than scheduled at our discretion without penalty.

Term Loans and Revolving Credit Facilities

In connection with the Combination, on July 1, 2015, we entered into the Credit Facility which provides for a 5-year senior unsecured term loan in an aggregate principal amount of $2.3 billion and a 5-year senior unsecured revolving credit facility in an aggregate committed principal amount of $2.0 billion. We drew $1.2 billion of the $2.3 billion unsecured term loan and $1.1 billion was available to be drawn on a delayed draw basis not later than April 1, 2016 in up to two separate draws. The Credit Facility is unsecured and is guaranteed by WestRock’s wholly-owned subsidiaries WestRock RKT Company and WestRock MWV, LLC. The Credit Facility contains usual and customary representations, warranties and covenants.

On March 24, 2016, we drew $600 million of the then available $1.1 billion delayed draw term loan and used the proceeds for general corporate purposes. The balance of the 5-year senior unsecured term loan facility has been terminated. On June 22, 2016, we pre-paid $200.0 million of amortization payments through the second quarter of fiscal 2018, reducing our outstanding debt under the term loan facility from $1.8 billion to $1.6 billion. Our next amortization payment is due in June 2018.

On July 1, 2016, we executed an option to extend the term of our senior unsecured revolving credit facility for one year beyond the original 5-year term. Approximately $1.82 billion of the original $2.0 billion aggregate committed principal amount has been extended to July 1, 2021, and the remainder of this facility matures on July 1, 2020.

On July 1, 2015, we also entered into the Farm Loan Credit Agreement which provides for a 7-year senior unsecured term loan in an aggregate principal amount of $600.0 million. The Farm Credit Facility is guaranteed by WestRock and its wholly-owned subsidiaries WestRock RKT Company and WestRock MWV, LLC.

On December 1, 2015, we entered into a $200.0 million uncommitted and revolving line of credit with Sumitomo Mitsui Banking Corporation that matures on December 1, 2016. We are currently negotiating a renewal of this facility. On February 11, 2016, we entered into a $100.0 million uncommitted and revolving line of credit with The Bank of Tokyo-Mitsubishi that matures on February 9, 2017. On March 4, 2016, we entered into a $100.0 million uncommitted and revolving line of credit with Cooperatieve Rabobank U.A., New York Branch that matures on March 2, 2017.

Receivables-Backed Financing Facility

We have a $700.0 million Receivables Facility and on July 22, 2016, we executed an agreement to extend the maturity of this facility from October 24, 2017 to July 22, 2019. Borrowing availability under this facility is based on the eligible underlying accounts receivable and compliance with certain covenants. The Receivables Facility includes certain restrictions on what constitutes eligible receivables under the facility and allows for the exclusion of eligible receivables of specific obligors each calendar year subject to certain restrictions as outlined in the Receivables Facility. The borrowing rate, which consists of a blend of the market rate for asset-backed commercial paper and the one month LIBOR rate plus a utilization fee, was 1.4% as of September 30, 2016. At September 30, 2016, we had borrowed $0.0 million of our $584.3 million maximum available borrowings outstanding under the Receivables Facility. The carrying amount of accounts receivable collateralizing the maximum available borrowings at September 30, 2016 was approximately $873.9 million. We have continuing involvement with the underlying receivables as we provide credit and collections services pursuant to the securitization agreement.

Public Bonds and Other Indebtedness

In connection with the Combination, the public bonds previously issued by WestRock RKT Company and WestRock MWV, LLC are guaranteed by WestRock and have cross-guarantees. The IDBs associated with the capital lease obligations of WestRock

40


MWV, LLC are guaranteed by WestRock. We also have certain international and other debt. In connection with the Combination, we increased the value of debt assumed by $364.5 million to reflect the debt at fair value. At September 30, 2016, the face value of our public bonds and capital lease obligations outstanding were $3.1 billion with a weighted average interest rate of 6.1%. At September 30, 2016, the unamortized fair market value step-up was $316.3 million, which will be amortized over a weighted average remaining life 13.1 years.

Certain proceeds of the credit facilities were used to repay certain indebtedness of the Company’s subsidiaries at the time of the Combination, including the then existing RockTenn credit facility, and to pay fees and expenses incurred in connection with the Combination. See “Note 10. Debt” of the Notes to Consolidated Financial Statements for additional information on our outstanding debt, the fair value of our debt, and the classification within the fair value hierarchy.

Accounts Receivable Sales Agreement

We have an A/R Sales Agreement to sell to a third party financial institution all of the short term receivables generated from certain customer trade accounts, on a revolving basis, until the agreement is terminated by either party. Transfers under this agreement meet the requirements to be accounted for as sales in accordance with the “Transfers and Servicing” guidance in ASC 860. On June 27, 2016, the A/R Sales Agreement was amended to increase the maximum outstanding balance of receivables sold from $300.0 million to $400.0 million. Cash proceeds related to the sales are included in cash from operating activities in the consolidated statement of cash flows in the accounts receivable line item. The loss on sale is not material as it is currently less than 1% per annum of the receivables sold, and is included in interest income and other income (expense), net. For additional information see “Note 11. Fair Value — Accounts Receivable Sales Agreement” of the Notes to Consolidated Financial Statements.

Cash Flow Activity

 
Year Ended September 30,
 
2016
 
2015
 
2014
 
 
 
(In millions)
 
 
Net cash provided by operating activities
$
1,688.4

 
$
1,203.6

 
$
1,151.8

Net cash used for investing activities
$
(1,351.4
)
 
$
(282.7
)
 
$
(967.4
)
Net cash used for financing activities
$
(231.0
)
 
$
(718.0
)
 
$
(188.1
)

Net cash provided by operating activities during fiscal 2016 increased from fiscal 2015 primarily due to the impact of the Combination and a smaller use for working capital in fiscal 2016 of $25.8 million as compared to $142.9 million in fiscal 2015. The change in working capital in the current and prior year included a source of cash resulting from the sale of $99.4 million and $96.2 million, respectively, of accounts receivables in connection with the A/R Sales Agreement. Net cash provided by operating activities during fiscal 2015 increased from fiscal 2014 primarily due to the impact of decreased pension funding, increased aggregate net income, depreciation, depletion and amortization, and deferred taxes, which were partially offset by increased investment in working capital in the current year. The use of working capital included cash proceeds of $96.2 million from a financial institution for the collection of accounts receivables sold in connection with the A/R Sales Agreement in fiscal 2015 compared to $136.6 million in fiscal 2014.

Net cash used for investing activities in fiscal 2016 consisted primarily of $796.7 million of capital expenditures, $376.4 million for the SP Fiber Acquisition and Packaging Acquisition, $175.0 million for the investment in Grupo Gondi and $36.5 million for the purchase of debt owed by GPS in connection with the SP Fiber Acquisition partially offset by $31.2 million of proceeds from the sale of property, plant and equipment. Net cash used for investing activities in fiscal 2015 consisted primarily of $585.5 million of capital expenditures partially offset by $265.7 million for cash received in the Combination and $28.8 million of proceeds from the sale of property, plant and equipment. Net cash used for investing activities in fiscal 2014 consisted primarily of $534.2 million of capital expenditures and $474.4 million for the Tacoma Mill, NPG and AGI In-Store acquisitions that were partially offset by proceeds from the sale of various assets, the return of capital from unconsolidated entities and insurance proceeds.
 
In fiscal 2016, net c