10-K 1 a10k9302017.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, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission file number 001-37484
____________________________________________________________
WESTROCK COMPANY
(Exact Name of Registrant as Specified in Its Charter)
____________________________________________________________
Delaware
 
47-3335141
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
 
 
1000 Abernathy Road, Suite L-2, Atlanta, Georgia
 
30328
(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 the 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o    No  x
The aggregate market value of the common equity held by non-affiliates of the registrant as of March 31, 2017 (based on the closing price per share as reported on the New York Stock Exchange on such date), was approximately $13,240 million.
As of November 3, 2017, the registrant had 254,614,437 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 February 2, 2018 are incorporated by reference in Part 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.


2


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 2016 Incentive Stock Plan
2004 Incentive Stock Plan
 
Amended and Restated 2004 Incentive Stock Plan
ACM
 
Asbestos containing material
Adjusted Earnings from Continuing Operations Per Diluted Share
 
As defined on p. 33
Adjusted Income from Continuing Operations
 
As defined on p. 33
A/R Sales Agreement
 
The second amended and restated agreement for the purchasing and servicing of receivables, dated September 18, 2015, among certain sellers named therein, WestRock Converting Company, WestRock and Cooperatieve Rabobank, U.A., New York branch, as subsequently amended on June 27, 2016, March 27, 2017 and September 29, 2017
AFMC
 
Alternative fuel mixture credits
Antitrust Litigation
 
A lawsuit filed in the U.S. District Court of the Northern District of Illinois alleging that certain named defendants violated the Sherman Act by conspiring to limit the supply and fix the prices of containerboard and products containing containerboard from February 15, 2004 through November 8, 2010, and for which WestRock CP, LLC as the successor to Smurfit-Stone is a named defendant with respect to the period after Smurfit-Stone’s discharge from bankruptcy on June 30, 2010 through November 8, 2010

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. 11
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.12
CFO
 
Chief Financial Officer
Code
 
The Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder
Combination
 
Pursuant to the Business Combination Agreement, (i) Rome Merger Sub, Inc. merged with and into RockTenn, with RockTenn surviving the merger as a wholly-owned subsidiary of WestRock, and (ii) Milan Merger Sub, LLC 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
Company
 
As defined on p. 7
containerboard
 
Linerboard and corrugating medium

3


Term or Acronym
 
Definition
 
 
 
Credit Agreement
 
The credit agreement, dated July 1, 2015, among WestRock, WestRock Company of Canada Holdings Corp./Compagnie de Holdings WestRock du Canada Corp., the other borrowers, guarantors and lenders, in each case from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent and multicurrency agent, providing for a five-year senior unsecured term loan in an aggregate principal amount of $2.3 billion and a five-year senior unsecured revolving credit facility in an aggregate committed principal amount of $2.0 billion

Credit Facility
 
The five-year senior unsecured term loan with an initial aggregate principal amount of $2.3 billion and a five-year senior unsecured revolving credit facility in an aggregate committed principal amount of $2.0 billion provided for under the Credit Agreement
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
 
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 of 1977
Farm Credit Facility
 
The seven-year unsecured term loan in an aggregate principal amount of $600 million provided for under the Farm Credit Agreement.
Farm Loan Credit Agreement
 
The credit agreement, dated July 1, 2015, among RockTenn CP, LLC, RockTenn Converting Company, MeadWestvaco Virginia Corporation and CoBank ACB, as administrative agent, providing for a seven-year unsecured term loan in an aggregate principal amount of $600 million
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.
Hanna Group
 
Hanna Group Pty Ltd
Hannapak Acquisition
 
The August 1, 2017 acquisition of Hanna Group Pty Ltd
HH&B
 
Home, Health and Beauty, a former division of our Consumer Packaging segment
HH&B Sale
 
The April 6, 2017 sale of HH&B
IDBs
 
Industrial Development Bonds
Ingevity
 
Ingevity Corporation, formerly the Specialty Chemicals business of WestRock
Island Container Acquisition
 
The July 17, 2017 acquisition of certain assets and liabilities of Island Container Corp. and Combined Container Industries LLC, which together are independent producers of corrugated boxes, sheets and point-of-purchase displays
Installment Note
 
An installment note receivable in the amount of $860.0 million received by MWV TN II on December 6, 2013 pursuant to the sale of MWV’s remaining U.S. forestlands and assumed by WestRock in connection with the Combination


IRS
 
U.S. Internal Revenue Service
LIBOR
 
The London Interbank Offered Rate
LIFO
 
Last-in first-out inventory valuation method
MACT
 
Maximum Achievable Control Technology
Measurement period adjustments
 
As defined on p. 84

4


Term or Acronym
 
Definition
 
 
 
MEPP or MEPPs
 
Multiemployer pension plan(s)
MMBtu
 
One million British Thermal Units
MMSF
 
Millions of square feet
MPS
 
Multi Packaging Solutions International Limited, a Bermuda exempted company
MPS Acquisition
 
The June 6, 2017 acquisition of MPS pursuant to a merger agreement among WestRock, MPS and WRK Merger Sub Limited
MWV
 
WestRock MWV, LLC, formerly known as MeadWestvaco Corporation, and a wholly-owned subsidiary of WestRock
MWV TN
 
MWV Timber Notes Holding, LLC, a special purpose entity

MWV TN II
 
MWV Timber Notes Holding Company II, LLC, a special purpose entity

MWV Merger Sub
 
Milan Merger Sub, LLC
NAV
 
Net asset value
NYSE
 
New York Stock Exchange
OSHA
 
The Occupational Safety and Health Act of 1970
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
PIUMPF
 
Pace Industry Union-Management Pension Fund
Plan
 
WestRock Company Consolidated Pension Plan
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
 
The sixth amended and restated receivables sale agreement, dated July 22, 2016, among certain originators named therein and WestRock Financial, Inc.

RockTenn
 
WestRock RKT Company, formerly known as Rock-Tenn Company, and a wholly-owned subsidiary of WestRock
RockTenn Common Stock
 
RockTenn Class A common stock, par value $0.01 per share
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
Silgan
 
Silgan Holdings Inc.
Smurfit-Stone
 
Smurfit-Stone Container Corporation
Smurfit-Stone Acquisition
 
The May 27, 2011 acquisition of Smurfit-Stone, in a stock purchase
SP Fiber
 
SP Fiber Holdings, Inc.
SP Fiber Acquisition
 
The October 1, 2015 acquisition of SP Fiber
Star Pizza Acquisition
 
The March 13, 2017 acquisition of certain assets and liabilities of Star Pizza Box of Arizona, LLC, Star Pizza Box of Florida, Inc., Star Pizza Box of Ohio, LLC, Star Pizza Box of Texas, LLC and Box Logistics LLC
Supplemental Plans
 
Supplemental retirement savings plans

5


Term or Acronym
 
Definition
 
 
 
Timber Note
 
An installment note receivable in the amount of $398.0 million received by MWV TN pursuant to the sale of certain large-tract forestlands in 2007 and assumed by WestRock in connection with the Combination

USW
 
United Steelworkers Union
U.S.
 
United States
U.S. Corrugated
 
U.S. Corrugated Holdings, Inc.
U.S. Corrugated Acquisition
 
The June 9, 2017 acquisition of U.S. Corrugated
WestRock
 
WestRock Company
WestRock MWV, LLC
 
Formerly named MWV
WestRock RKT Company
 
Formerly named RockTenn, and a wholly-owned subsidiary of WestRock

6


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

WestRock is 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 our operating and business locations in North America, South America, Europe, Asia and Australia. We also sell real estate primarily 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 and RockTenn and MWV each became wholly-owned subsidiaries of WestRock. RockTenn was the accounting acquirer in the Combination. We believe the Combination combined two industry leaders to create a leading global provider of consumer and corrugated packaging solutions. See “Note 6. Merger, Acquisitions and Investment” of the Notes to Consolidated Financial Statements for additional information.

On May 15, 2016, WestRock completed the Separation, pursuant to which 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 additional information.

On April 6, 2017, we completed the HH&B Sale. We used the proceeds from the HH&B Sale in connection with the MPS Acquisition. We recorded a pre-tax gain on sale of HH&B of $192.8 million in fiscal 2017. See “Note 8. Assets Held For Sale” of the Notes to Consolidated Financial Statements for additional information.

On June 6, 2017, we completed the MPS Acquisition. MPS is a global provider of print-based specialty packaging solutions and its differentiated product offering includes premium folding cartons, inserts, labels and rigid packaging. MPS is reported in our Consumer Packaging segment. See “Note 6. Merger, Acquisitions and Investment” of the Notes to Consolidated Financial Statements for additional information.

We report 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 (prior to the HH&B Sale), and partition operations; and Land and Development, which sells real estate primarily in the Charleston, SC region. In fiscal 2016, we reclassified prior period segment results to align to these segments for all periods presented. Following the Combination and until the completion of the Separation, our financial results of operations had a fourth reportable segment, Specialty Chemicals.

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 operations own and operate forestlands that 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 convert corrugated sheets into corrugated products ranging from one-color protective cartons to graphically brilliant point-of-purchase packaging. Our corrugated container plants

7


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 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, 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 small amounts of other products for resale to manufacturers of those 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 55.5%, 54.6% and 66.4% of our net sales in fiscal 2017, 2016 and 2015, respectively. See “Note 21. Segment Information” of the Notes to Consolidated Financial Statements, as well as Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for additional information.

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 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 to manufacturers of folding cartons and other paperboard products our coated natural kraft, bleached paperboard and coated recycled paperboard, and internally consume or sell to manufacturers of solid fiber interior packaging, tubes and cores, book covers and other paperboard products our specialty recycled paperboard. 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 one of the largest manufacturers 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 items such as food, paper, beverages, dairy products, tobacco, confectionery, health and beauty and other household consumer, commercial and industrial products primarily for retail sale. Our folding and beverage cartons are also used by our customers to attract consumer attention at the point-of-sale. We also manufacture express mail packages for the overnight courier industry, provide inserts and labels as well as rigid packaging and other printed packaging products, such as transaction cards (e.g., credit, debit, etc.), brochures, product literature, marketing materials (such as booklets, folders, inserts, cover sheets and slipcases) and grower tags and plant stakes for the horticultural market. For the global healthcare market, we manufacture secondary packages designed to enhance patient adherence for prescription drugs, as well as paperboard packaging for over-the-counter and prescription drugs. Our customers generally use our inserts and labels to provide customer product information either inside a secondary package (e.g., a folding carton) or affixed to the outside of a primary package (e.g., a bottle). 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, as well as iridescent, holographic, textured and dimensional effects to provide differentiated packaging products, 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

8


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.

Sales of consumer packaging products to external customers accounted for 42.8%, 44.6% and 33.2% of our net sales in fiscal 2017, 2016 and 2015, respectively. See “Note 21. Segment Information” of the Notes to Consolidated Financial Statements, as well as Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for additional information.

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 1.7%, 0.8% and 0.4% of our net sales in fiscal 2017, 2016 and 2015, respectively. See “Note 21. Segment Information” of the Notes to Consolidated Financial Statements, as well as Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for additional information.

Raw Materials

The primary raw materials used by our mill operations 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 during significant 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. These arrangements 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 coal and fuel oil to generate steam used in the paper making process and, at a few mills, to generate electricity used on site. In our virgin fiber mills, we use biomass, natural gas and coal to generate steam used in the pulping and paper making processes and to generate some or all of the electricity used on site. 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 also Item 1. “Business — Governmental Regulation — Environmental and Other Matters” for additional information. See also Item 1A. “Risk Factors — We May Face Increased Costs or Inadequate Availability of Raw Materials, Energy and Transportation”.


9


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, Asia and Australia. See Item 1A. “Risk Factors — We May Face Increased Costs or Inadequate Availability of Raw Materials, Energy and Transportation”.

Sales and Marketing

Our top 10 external customers represented approximately 11% of our consolidated net sales in fiscal 2017. None of these customers 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 2017, products sold to our top 10 customers by segment represented 16% and 18% 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 2017, we sold approximately two-thirds of our coated natural kraft 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 three-fourths 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 recycled paperboard production in fiscal 2017 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 combination of base salary, commissions and annual bonus. 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 21. Segment Information” of the Notes to Consolidated Financial Statements.

Competition

We operate in a competitive 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. 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, primarily 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

10


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 U.S. and Worldwide Economic and Financial Market Conditions, and Social and Political Change”.

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, ACM is present in some of our facilities. For those facilities where ACM is present, we have established procedures for properly managing the material, including, but not limited to, employee training and work practices to maintain the ACM in good condition and minimize exposure. 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 that 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.” Boiler MACT required compliance by January 31, 2016 or by January 31, 2017 for those mills for which we obtained a prior compliance extension. All work required for our boilers to comply with the rule has been completed. 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 this 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, we do not believe that the currently expected outcome of any environmental proceedings and claims that are pending or threatened against us will have a material adverse effect on our results of operations, financial condition or cash flows.

See Item 1A. “Risk Factors — We are Subject to Extensive and Costly Safety and Environmental Laws and 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, including CERCLA, and regulations. Based on information known to us and assumptions, we do not believe that the costs of these

11


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.

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 are not subject to the 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 purchase and other 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 $40 million for capital expenditures during fiscal 2018 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. 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. As directed by Executive Order, on April 4, 2017, the EPA issued a proposed rule announcing its intention to review the Clean Power Plan, and, if appropriate, initiate proceedings to suspend, revise or rescind it. A number of states subject to the Clean Power Plan have stopped working on their implementation strategies in response to the litigation and Executive Order; however, certain states where we operate manufacturing facilities have indicated their intention to continue their carbon reduction efforts. On October 16, 2017, the EPA issued a proposed rule that would repeal the Clean Power Plan. Due to ongoing litigation and other uncertainties regarding the Clean Power Plan, its 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 developing 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. In July 2017, California extended the cap-and-trade program to 2030. 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

12


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. On May 16, 2017, the Governor of Virginia issued Executive Directive 11, directing the Secretary of Natural Resources to convene a work group to study and recommend methods to reduce carbon dioxide emissions from electric power facilities and grow the clean energy economy within existing state authority. We have been selected by the Virginia Department of Environmental Quality to participate in this work group.

The Paris Agreement established a framework for 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 became effective on November 4, 2016. Although a party to the agreement may not provide the required one-year notice of withdrawal until three years after the effective date, in June 2017, President Trump announced that the U.S. intended to withdraw from the Paris Agreement. The governors of New York, California and Washington subsequently announced their intent to form a “climate alliance” to coordinate a state response to climate change. At this time, it is not possible to determine how the Paris Agreement, or any potential U.S. commitments in lieu of those under the agreement, may impact U.S. industrial facilities, including our domestic operations.

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 and 37.5% from 1990 levels by 2030. 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/or to Acquire and Retain Intellectual Property Rights”.

Employees

At September 30, 2017, we had approximately 44,800 employees, of which approximately 34,100 were located in the U.S. and Canada and 10,700 were located in Europe, South America, Mexico and Asia/Pacific. Of the approximately 44,800 employees, approximately 31,800 were hourly and approximately 13,000 were salaried. Approximately 13,900 of our hourly employees in the U.S. and Canada are covered by CBAs, which typically have four to six year terms. Approximately 2,500 of our employees in the U.S. and Canada are working under expired contracts and approximately 1,100 of our U.S. and Canada employees are covered under CBAs that expire within one year. Approximately 5,200 of our employees outside the U.S. and Canada are covered by agreements similar to CBAs, which most frequently have four to six year terms. Approximately 2,100 of our employees not based in the U.S. and Canada are working under expired agreements and approximately 1,100 of them are covered under agreements 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 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.


13


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 master 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 6,800 of our employees.

See Item 1A. “Risk Factors — We May Be Adversely Impacted By Work Stoppages and Other Labor Relations Matters”.

International Operations

Our operations outside the U.S. are conducted through subsidiaries located in Canada, Mexico, South America, Europe, Asia and Australia. Sales attributable to non-U.S. operations were 17.6%, 17.1% and 13.5% of our net sales in fiscal 2017, 2016 and 2015, respectively, some of which were transacted in U.S. dollars. See “Note 21. Segment Information” of the Notes to Consolidated Financial Statements for additional information. 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 our board committee charters, as well as the corporate governance guidelines adopted by our board of directors, our Code of Conduct for employees, our Code of Conduct and Ethics for the Board of Directors and our Code of Ethical Conduct for CEO and Senior Financial Officers. Any amendments to, or waiver from, any provision of these codes that are required to be disclosed will be posted on our website. We will also provide copies of these documents, without charge, at the written request of any stockholder of record. Requests for copies should be mailed to: WestRock Company, 504 Thrasher Street, Norcross, Georgia 30071, Attention: Corporate Secretary through December 31, 2017 and WestRock Company, 1000 Abernathy Road, Suite L-2, Atlanta, Georgia 30328, Attention: Corporate Secretary thereafter. 

Forward-Looking Information

This report contains statements that relate to future, rather than past, events. These are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements often address our expected future business and financial performance and financial conditions, and often contain words such as “may”, “will”, “could”, “would”, “anticipate”, “intend”, “estimate”, “project”, “plan”, “believe”, “expect”, “target” and “potential”, or refer to future time periods. Forward-looking statements are based on currently available information and our current expectations, beliefs, plans or forecasts, and include statements made in this report regarding, among other things: our belief that we are one of the largest paper recyclers in North America; our belief that we are one of 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 belief that 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; our belief that we have good relationships with our customers; our belief that we compete effectively on price, design, product innovation, quality and service; our belief that future compliance with health and safety laws and regulations will not have a material adverse effect on our results of operations, financial condition or cash flows; our belief that the currently expected outcome of environmental proceedings and claims that are pending or threatened against us will not have a material adverse effect on our results of operations, financial condition or cash flows; our belief that the costs associated with investigations or remediations under environmental laws, including CERCLA, and regulations will not have a material adverse effect on our results of operations, financial condition or cash flows; our belief 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; that we may face additional liability for cleanup activity at sites that are not subject to the Smurfit-Stone bankruptcy discharge, but are not currently identified; our belief that we can assert claims for indemnification pursuant to existing rights we have under purchase and other agreements in connection with certain of our existing remediation sites and have insurance coverage, subject to applicable deductibles/retentions, policy limits and other conditions, for certain environmental matters; our belief that working relationships with our employees are generally good; our belief that the material terms of our CBAs are customary for the industry, the type of facility, the classification of the employees and the geographic location covered; our expectation that we will benefit from operational synergies resulting from

14


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 realize revenue synergies through an expanded and complementary product offering and increased geographic reach; our belief that certain MEPPs in which we participate, including PIUMPF, have material unfunded vested benefits; that we are considering withdrawing from one or more MEPPs, and it is reasonably possible that we may incur significant withdrawal liability with respect to certain MEPPs in connection with such withdrawal(s) and that we may be obligated to pay a share of a particular MEPP’s accumulated funding deficiency as determined under the Pension Act; that we believe our withdrawal liability would be approximately $140 million to $200 million if we were to withdraw from all of the MEPPs in which we participate prior to the end of calendar 2017; our expectation that we will complete the monetization of our Land and Development asset portfolio in fiscal 2018; our expectation that we will complete the relocation of our principal offices in the first half of fiscal 2018; our belief that our existing production capacity is adequate to serve existing demand for our products and that our plants and equipment are in good condition; our expectation that should the volume of asbestos-related personal injury litigation grow substantially, it is possible that we could incur significant costs resolving these cases; our expectation that the resolution of pending asbestos-related personal injury litigation and proceedings will not have a material adverse effect on our consolidated financial condition or liquidity; our expectation that in any given period or periods, it is possible that asbestos-related proceedings or matters could have a material adverse effect on our results of operations; our belief that the resolution of other lawsuits, claims and other proceedings arising out of the conduct of our business will not have a material adverse effect on our consolidated financial condition, results of operations, financial condition or cash flows; our belief that our exposure related to guarantees will not have a material impact on our results of operations, financial condition or cash flows; 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; the potential for us to engage in restructuring opportunities in the future; our expectation that the Island Container Acquisition will enable us to integrate more than 80,000 tons of containerboard annually into our Corrugated Packaging segment; our expectation that the Hannapak Acquisition will build on our established and growing packaging business in Australia; our belief that the U.S. Corrugated Acquisition will enable us to increase the vertical integration of our Corrugated Packaging segment by approximately 105,000 tons of containerboard annually through the acquired facilities and another 50,000 tons under a long-term supply contract with another company owned by the seller; our belief that the MPS Acquisition increases annual paperboard consumption by approximately 225,000 tons, of which we expect 35% to 45% to be supplied by us; our belief that the Star Pizza Acquisition provides us with a leadership position in the fast growing small-run pizza box market and increases our vertical integration; our belief that the joint venture with Grupo Gondi will help us grow our presence in the attractive Mexican market; that we may be required to incur additional indebtedness to satisfy our payment obligations in respect of our put and call options related to the Grupo Gondi joint venture; that we may form additional joint ventures; our belief that the Packaging Acquisition has provided us with attractive and complementary customers, markets and facilities; our belief that we have an opportunity to improve our performance through capital investment; our belief that capital expenditures in fiscal 2018 will be approximately $1.0 billion, of which approximately $0.2 billion will be deployed in fiscal 2018 in connection with a planned investments in (A) a new corrugated box plant in the Brazilian state of Sao Paulo, and our belief that this box plant will allow us to meet a growing demand from our regional customers in South America, (B) a project to install a 330” state-of-the-art kraft linerboard machine in our Florence, South Carolina mill with production expected to commence in the first half of calendar 2020 and (C) a coater at our Mahrt mill in Alabama that will be completed in fiscal 2019; our estimation that we will invest approximately $40 million for capital expenditures during fiscal 2018 in connection with matters relating to environmental compliance; our expectation that in fiscal 2018 we will invest in projects (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 run rate synergy and performance improvement target, before inflation, to be realized by June 30, 2018, (iv) to build the box plant in Brazil noted above to meet growing demand from our regional customers in South America, (v) to install the machine in our Florence, South Carolina mill noted above, (vi) to invest in the coater at our Mahrt mill noted above and (vii) to generate attractive returns; our estimation that our baseline maintenance and return generating capital expenditures will be approximately $800 to $850 million per year; our expectation that we will utilize the remaining U.S. federal net operating losses, alternative minimum tax and other U.S. federal credits primarily over the next three years; our expectation that we will receive tax benefits in fiscal 2018 and future years from the U.S. manufacturer’s deduction; that foreign and state net operating losses and credits will be used over a longer period of time; our expectation that our cash tax rate will move closer to our income tax rate in fiscal 2018, 2019 and 2020; our expectation that we will contribute approximately $39 million to our U.S. and non-U.S. pension plans in fiscal 2018, primarily related to our Canadian plans; 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 estimation that minimum pension contributions to our U.S. and non-U.S. pension plans will be in the range of approximately $27 million to $42 million annually in fiscal 2019 through 2022; that we do not expect the settlement of certain U.S. qualified defined benefit pension plan obligations through lump sum payments to require us to make additional pension plan contributions; that we anticipate that we will be able to fund our capital expenditures, interest payments, dividends and stock repurchases, pension payments, working capital needs, note repurchases, restructuring and integration 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 our A/R Sales Agreement, proceeds from the issuance of debt or equity securities or other additional long-term debt financing, including new or amended facilities; our belief that there is not a reasonable l

15


ikelihood that there will be a material change in the future estimates or assumptions we use to estimate allowances for doubtful accounts, credits, returns and allowances, and cash discounts; our belief that there is not a reasonable likelihood that there will be a material change in future assumptions or estimates we use to calculate impairment losses; that we may be exposed to impairment losses that could be material; our belief that our restructuring estimates are reasonable; that we may enter into various hedging transactions; that we may from time to time use interest rate swap agreements to manage the interest rate characteristics of a portion of our outstanding debt; that we may from time to time use foreign-exchange hedge contracts with terms of generally less than one year to hedge exposures; our belief that our pension assumptions are within accepted industry ranges; our belief that our health insurance, workers’ compensation and pension and other postretirement benefits assumptions are appropriate; our belief that our restructuring actions have allowed us to more effectively manage our business; our belief that our tax positions are appropriate; 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; the impact of a hypothetical 10% increase on the prices of various commodities, products, raw materials, freight and energy; our expectation that integration activities will continue during fiscal 2018 and that we may face significant challenges integrating the acquired company’s technologies, organizations, procedures, policies and operations, addressing differences in their business cultures and retaining key personnel; our expectation that the integration of closed facilities’ assets and production with other facilities will enable the receiving facilities to better leverage their fixed costs while eliminating fixed costs from closed facilities; the expected impact of 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 expected factors affecting those risks including our increased exposure to foreign currency as a result of the Combination and the MPS Acquisition; 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; our expectation of the impact of implementation of various accounting standards, including that certain of these standards will not have a material effect on our consolidated financial statements.

Forward-looking statements are based on currently available information and our current assumptions, expectations and projections about future events. You should not rely on our forward-looking statements. These statements are not guarantees of future performance and are subject to future events, risks and uncertainties — many of which are beyond our control, dependent on actions of third parties or currently unknown to us — as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections. Particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include: 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; uncertainties related to planned and unplanned mill outages or production disruptions; investment performance, discount rates, return on pension plan assets and expected compensation levels; increases in energy, raw materials, shipping and capital equipment costs; fluctuations in selling prices and volumes; intense competition; the impact of operational restructuring activities; potential liability for outstanding guarantees and indemnities and the potential impact of such liabilities; changes in law, economic and financial conditions, including interest and exchange rate volatility, commodity and equity prices; our ability to maintain our current credit rating and the impact on our funding costs and competitive position if we do not do so; the amount and timing of our cash flows and earnings and other conditions, which may affect our ability to pay our quarterly dividend at the planned level or to repurchase shares at planned levels; our capital allocation plans, as such plans may change including with respect to the timing and size of share repurchases, acquisitions, joint ventures, dispositions and other strategic actions; the impact of announced price increases or decreases and the impact of the gain and loss of customers; compliance with governmental laws and regulations, including those related to the environment; the scope, and timing and outcome of any litigation, claims, or other proceedings or dispute resolutions, including the Antitrust Litigation and the impact of any such litigation, claims or other proceedings or 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; 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; and other factors that are discussed in Item 1A. Risk Factors.

Forward-looking statements speak only as of the date they are made, and we do not undertake to update these statements other than as required by law. You are advised, however, to review any further disclosures we make on related subjects in our periodic filings with the SEC.


Item 1A.
 RISK FACTORS

We are subject to certain risks and events that, if one or more 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

16


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, 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 run rate synergy and performance improvement target, before inflation, to be realized by June 30, 2018. At September 30, 2017, we had achieved a run rate of $840 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, 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 otherwise 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 the industries within which we compete, 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 the selling prices for these products.

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 costs 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

17


for some of our raw materials. Future changes in how these indices are established or maintained could adversely impact the pricing of these raw materials.

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) has at times 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. The reduced availability of trucks, rail cars or cargo ships could negatively impact our ability to distribute 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, significant changes in climate or weather conditions, 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, Asia and Australia. Competition from domestic or non-U.S. lower cost or more innovative manufacturers 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. In addition, changes within these industries, including the consolidation of our competitors and our customers, have occurred and may continue to occur, which may adversely affect our competitiveness. To the extent our 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 made from other materials could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.

We May Be Unsuccessful in Making and Integrating Mergers, Acquisitions and Investments and Completing Divestitures

We have completed a number of mergers, acquisitions, investments and divestitures in recent years, including the Combination, our investment in Grupo Gondi, the Separation, the HH&B Sale and the MPS Acquisition, and we may acquire, invest in or sell, or enter into joint ventures with additional companies. We may not be able to identify suitable targets or purchasers or successfully complete suitable transactions in the future and completed transactions may not be successful. These transactions create risks, including, but not limited to, risks associated with:

disrupting our ongoing business, including distracting management from our existing businesses;
integrating acquired businesses and personnel into our business;
working with partners or other ownership structures with shared decision-making authority;
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 risk exposure;
obtaining required regulatory approvals and/or financing on favorable terms;
retaining key employees, contractual relationships or customers;
the potential impairment of tangible and intangible assets and goodwill;
the additional operating losses and expenses of businesses we acquire or in which we invest;
implementing controls, procedures and policies appropriate for a larger public company at companies we acquire;
the dilution of interests of holders of our Common Stock through the issuance of equity securities; and

18


integrating operations across different cultures and languages, and the economic, political and regulatory risks associated with specific countries.

Further, the benefits we expect to achieve as a result of these transactions depend, in part, on our ability to realize anticipated growth opportunities, cost savings and synergies. Our success in realizing these opportunities and synergies and the timing of realizing them depend on the successful integration of the acquired businesses and operations with our business and operations. Even if we are able to integrate these businesses and operations successfully, we may not realize the full benefits of the growth opportunities and synergies we expected within the anticipated timeframe, or at all. Accordingly, the benefits from these acquisitions may be offset by unanticipated costs or delays in integrating the acquired companies.

Mergers, acquisitions and investments may not be successful and may 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 U.S. and Worldwide 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 and the impact of a stronger U.S. dollar; financial uncertainties in our major international markets, including uncertainties surrounding the United Kingdom’s impending withdrawal from the European Union, commonly referred to as “Brexit”; social and political change impacting matters such as environmental regulations and trade policies; sluggish or uneven recovery, government deficit reduction and other austerity measures in specific countries or regions, or in the various industries in which we operate; 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 that 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, Mexico, India and China, could adversely affect the demand for our products, our revenues and our manufacturing costs. We are not able to predict with certainty economic and financial market conditions, and social and political change, 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 and social and political change.
 
Our Joint Ventures May Limit Our Flexibility with Respect to These Jointly Owned Investments

We have invested in joint ventures 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, risks associated with:

shared decision-making, which could require us to expend additional resources to resolve impasses or potential disputes;
maintaining good relationships with our partners, which could limit our future growth potential;
conflict of interest issues if our partners have competing interests;
investment or operational goals that conflict with our partners’ goals, including the timing, terms and strategies for investments or future growth opportunities;
our partners’ ability 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.


19


We are Exposed to Risks Related to International Sales and Operations

We predominately operate in U.S. markets, but derived 17.6% of our net sales in fiscal 2017 from outside the U.S. through international operations or exports to foreign customers, some of which were transacted in U.S. dollars. We are exposed to risks of operating in many countries, including, but not limited to, risks associated with:

the difficulties with and costs of 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;
repatriating cash from foreign countries to the U.S.;
political and economic instability;
import and export restrictions and other trade barriers;
maintaining overseas subsidiaries and managing international operations;
obtaining approval for significant transactions;
government limitations on foreign ownership;
government takeovers or nationalizations of business;
government mandated price controls;
fluctuations in foreign currency exchange rates; and
transfer pricing.

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 local anti-bribery laws, including those in Brazil, Mexico and India (where we maintain operations directly or through a joint venture), prohibit companies and their intermediaries from making improper payments to government officials for the purpose of influencing official decisions. 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 have been 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

Our corrugated packaging segment and consumer packaging segment each have 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 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 Fail to Anticipate Trends That Would Enable Us to Offer Products That Respond to Changing Customer Preferences

Our success depends, in part, on our ability to offer differentiated solutions, and we must continually develop and introduce new products and services in a timely manner to keep pace with technological and regulatory developments and achieve customer acceptance. The services and products we offer customers may not meet their needs as their business models evolve, or our customers may decide to decrease or use alternative materials for their product packaging or forego the packaging of certain products entirely. Regulatory developments can also significantly alter the market for our solutions. For example, a move to electronic distribution of disclaimers and other paperless regimes could negatively impact our healthcare inserts and labels businesses. Our success depends, in part, on our ability to identify and respond promptly to changes in customer preferences, expectations and needs. Our results of operations, cash flows and financial condition, and the trading price of our Common Stock, could be adversely affected if we fail to anticipate trends that would enable us to offer products that respond to changing customer preferences.


20


We May Produce Faulty or Contaminated Products Due to Failures in Quality Control Measures and Systems

We maintain quality control measures and systems to ensure the safety and quality of our products. The consequences of a product not meeting these standards could be severe. These consequences may include adverse effects on consumer health, litigation exposure, loss of market share and adverse financial impacts. If our products fail to meet our standards, we may be required to incur substantial costs in taking appropriate corrective action (up to and including recalling products from end consumers) and to reimburse customers and/or end consumers for losses that they suffer as a result of this failure. Customers and end consumers may seek to recover these losses through litigation and, under applicable legal rules, may succeed in any such claim despite there being no negligence or other fault on our part. Placing an unsafe product on the market, failing to notify the regulatory authorities of a safety issue, failing to take appropriate corrective action and failing to meet other regulatory requirements relating to product safety could lead to regulatory investigation, enforcement action and/or prosecution. Any product quality or safety issue may also result in adverse publicity, which may damage our reputation. Any of these results could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.

In certain contracts, we provide guarantees that our products are produced in accordance with customer specifications regarding the proper functioning of our products and the conformity of a product to the specific use defined by the customer. In addition, if the product contained in packaging manufactured by us is faulty or contaminated, the manufacturer of the product may allege that the packaging we provided caused the fault or contamination, even if the packaging complies with contractual specifications. If certain of our packaging fails to open properly or to preserve the integrity of its contents, we could face liability to our customers and to third parties for bodily injury or other tangible or intangible damages suffered as a result. Such liability, if it were to be established in relation to a sufficient volume of claims or to claims for sufficiently large amounts, could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.

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, risks associated with:

catastrophic events, such as fires, floods, explosions, natural disasters, severe weather, including hurricanes, 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.

For example, in fiscal 2017, operations at a number of our facilities were interrupted by several hurricanes. We lost mill production at certain of these facilities and incurred damages, supply chain disruptions and increased input costs associated with these hurricanes.

The occurrence of any of the events noted above 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.

Interest Rate Increases Could Impact Our Financial Condition

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

Downgrades in our Credit Ratings Could Increase our Borrowing Costs

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,

21


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 Safety and Environmental Laws and Regulations

We are subject to various federal, state, local and foreign safety and environmental laws and regulations, including those regulating the discharge, storage, handling and disposal of a variety of substances, the chemicals used in our operations, air emissions and water discharges from our facilities, the cleanup of contaminated soil and groundwater, the environmental impacts of our finished products and the health and safety of our employees.

We regularly make capital expenditures to maintain compliance with applicable safety and environmental laws and regulations; however, these laws and regulations are becoming increasingly stringent. Consequently, our compliance costs could increase materially, which could materially adversely affect our competitive position. In addition, we cannot currently assess the impact of future changes in governmental regulations or governments’ enforcement practices will have on our operations or capital expenditure requirements. For example, our manufacturing operations consume significant amounts of energy, and we may in the future incur additional or increased capital and operating costs from changes due to increased climate-related and other environmental regulations.

In addition to environmental regulations, 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. Any liability or damages we may incur in connection with these or other sites at which we may be identified in the future as a PRP or in connection with safety or environmental 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.

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

We regularly make capital expenditures. Many of our projects are complex, costly and/or 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, any of which could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock. In addition, disputes between us and contractors who are involved with implementing projects could lead to time-consuming and costly litigation.

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

We have previously restructured portions of our operations, and we may engage in future 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, the selling prices for our products, or the cost of manufacturing our products, we also may not be able to predict with certainty the appropriate time to undertake restructurings. The cash and non-cash 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 investment. These activities may divert the attention of management, disrupt our operations and fail to achieve the intended cost and operations benefits.


22


We May Be Adversely Impacted By Work Stoppages and Other Labor Relations Matters

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, cash flows and financial condition, and the trading price of our Common Stock, could be adversely affected.

In addition, our businesses rely on certain vendors, suppliers and other third parties that have union employees. Strikes or work stoppages at these vendors, suppliers and other third parties could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.

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 plan contribution and health care benefits costs depend on multiple factors resulting from actual plan experience and assumptions of future experience. While the 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 the market performance of these assets and changes in interest rates may result in increased or decreased pension plan 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 Withdrawal Liability and/or Increased Funding Requirements in Connection with the MEPPs in Which We Participate

We participate in several MEPPs that provide retirement benefits to certain union employees in accordance with various CBAs. Our contributions to a particular MEPP are established by the applicable CBAs; however, our required contributions may increase based on the declining funded status of an MEPP and legal requirements, such as those of the Pension Act, which require substantially underfunded MEPPs to implement a FIP or a RP to improve their funded status. Factors that could impact the funded status of a MEPP include, without limitation, a shrinking contribution base as a result of the insolvency or withdrawal of other companies that currently contribute to these plans, the inability or failure of companies withdrawing from the plan to pay their withdrawal liability, low interest rates, changes in actuarial assumptions and/or lower than expected returns on pension fund assets.

We believe that certain of the MEPPs in which we participate, including PIUMPF, have material unfunded vested benefits. In the normal course of business, we evaluate our potential exposure to MEPPs, including with respect to potential withdrawal liabilities. We are considering withdrawing from one or more MEPPs. It is reasonably possible that we may incur significant withdrawal liabilities with respect to certain MEPPs in connection with such withdrawal(s). Our withdrawal liability for any particular MEPP would depend on the nature and timing of any triggering event and the extent of that MEPP’s funding of vested benefits. In addition, we may be obligated to pay a share of a particular MEPP’s accumulated funding deficiency as determined under the Pension Act. Due to the absence of specific information regarding the applicable funded status and other relevant information for each MEPP, we are unable to determine with certainty the exact amount of any withdrawal liability. However, based on available information, including the MEPP’s latest available actuarial valuation reports and annual funding notices, we believe our withdrawal liability would be approximately $140 million to $200 million if we were to withdraw from all of the MEPPs in which we participate prior to the end of calendar 2017. The foregoing estimate assumes payment of the liabilities over 20 years discounted at 5% and excludes the potential impact of future mass withdrawals.

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. See “Note 15. Retirement Plans — Multiemployer Plans” of the Notes to Consolidated Financial Statements for additional information.

23


We are Subject to Cyber-Security Risks, Including Related to Customer, Employee, Vendor or Other Company Data and Including in Connection with Integration of Acquired Businesses and Operations

We use information technologies to securely manage operations and various business functions. We rely on various technologies, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including reporting on our business and interacting with customers, vendors and employees. In addition, we collect and store certain data, including proprietary business information, and may have access to confidential or personal information in certain of our segments that is subject to privacy and security laws, regulations and customer-imposed controls. 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 system damage, disruptions or shutdowns due to any number of causes, including cyber-attacks, breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, service providers, natural disasters or other catastrophic events. It is possible for such vulnerabilities to remain undetected for an extended period, up to and including several years. We may face other challenges and risks as we upgrade and standardize our information technology systems as part of our integration of acquired businesses and operations. We have contingency plans in place to prevent or mitigate the impact of these events, however, these events could result in operational disruptions or the misappropriation of sensitive data, and depending on their nature and scope, could lead to the compromise of confidential information, improper use of our systems and networks, manipulation and destruction of data, defective products, production downtimes and operational disruptions and exposure to liability. Such disruptions or misappropriations and the resulting repercussions, including reputational damage and legal claims or proceedings, may adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock.

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

Our ability to develop and successfully market new products and to develop, acquire and/or retain necessary intellectual property rights is important to our continued success and competitive position. If we are unable to develop and successfully introduce new products, protect our existing intellectual property rights, or develop new rights or if others develop 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.

We are Subject to Risks Associated with Monetizing our Land and Development Asset Portfolio

Our land and development segment has historically engaged in value-added real estate development activities in the Charleston, SC region, including obtaining entitlements and establishing joint ventures and other development-related arrangements. In fiscal 2016, we commenced an accelerated monetization strategy of our land and development asset portfolio that we expect to complete in fiscal 2018. Our ability to execute our plans may be affected by 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 the impact of federal, state and local laws and regulations affecting land use, land use entitlements, land protection and zoning, among other factors. 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.

We are Subject to Risks Associated with the Relocation of Our Principal Offices

We are in the process of relocating our principal offices from Norcross, GA to Sandy Springs, GA and we expect to complete the relocation in the first half of fiscal 2018.  We may not complete the relocation during the expected timeframe and we may not effectively transition our workforce to the new location, in which case we could experience business disruption due to a loss of historical knowledge and a lack of business continuity. In addition, we may not realize the expected benefits of the relocation as a result of business disruption or other factors.

We May Fail to Attract, Motivate, Train and Retain Qualified Personnel, Including Key Personnel

Our ability to maintain or expand our business depends on our ability to attract, motivate, train and retain employees with the skills necessary to understand and adapt to the continuously developing needs of our customers. The increasing demand for qualified personnel makes it more difficult for us to attract and retain employees with requisite skill sets, particularly employees with specialized technical and trade experience. Changing demographics and labor work force trends also may result in a loss of knowledge and skills as experienced workers retire. If we fail to attract, motivate, train and retain qualified personnel, or if we experience excessive turnover, we may experience declining sales, manufacturing delays or other inefficiencies, increased

24


recruiting, training and relocation costs and other difficulties, and our results of operations, cash flows and financial condition, and the trading price of our Common Stock may be adversely impacted.

In addition, we rely on key executive and management personnel to manage our business efficiently and effectively.  As our business has grown in size and geographic scope, we have relied on these individuals to manage increasingly complex projects, teams and operations, and to allocate resources to match the size and geographic scope of our business. The loss of any of our key personnel could adversely affect our results of operations, cash flows and financial condition, and the trading price of our Common Stock may be adversely impacted.

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 (a) to not engage in certain transactions that could cause the Separation to be taxable to us and (b) to indemnify us for any tax liabilities resulting from such transactions. 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 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.

Item 1B.
UNRESOLVED STAFF COMMENTS

There are no unresolved SEC staff comments.


25


Item 2.
PROPERTIES

We operate locations in North America, including the majority of U.S. states, South America, Europe, Asia and Australia. We lease our principal offices in Norcross, GA. We have announced our intention to relocate our principal offices to leased space located in Sandy Springs, GA and expect to complete the relocation in the first half of fiscal 2018. See Item 1A. “Risk Factors - We are Subject to Risks Associated with the Relocation of Our Principal Offices”.

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, 2017 are summarized below:
 
Number of Facilities
Segment
Owned
 
Leased
 
Total
Corrugated Packaging
97
 
48
 
145
Consumer Packaging
86
 
58
 
144
Land and Development
2
 
1
 
3
Corporate and significant regional offices
 
10
 
10
Total
185
 
117
 
302

The tables that follow show our annual production capacity by mill at September 30, 2017 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
Tres Barras, Brazil
345
175
 
 
 
 
520
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
4,963
2,070
1,355
385
352
131
9,256


26


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
950
 
 
 
 
950
Evadale, TX
630
 
 
 
70
700
Demopolis, AL
360
 
 
 
110
470
St. Paul, MN
 
 
170
 
 
170
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
1,940
1,066
648
339
180
4,173

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, 2017, we owned approximately 27,000 acres of development landholdings primarily in the Charleston, SC region and approximately 135,000 acres of forestlands in Brazil.

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, we believe the resolution of these matters will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

See “Note 19. Commitments and Contingencies” of the Notes to Consolidated Financial Statements for additional information.

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 NYSE under the symbol “WRK”. As of October 27, 2017, there were approximately 6,705 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.


27


Price Range of Common Stock and Dividends

 
Fiscal 2017
 
Fiscal 2016
 
Market Price
 
 
 
Market Price
 
 
 
High
 
Low
 
Dividend
 
High
 
Low
 
Dividend
First Quarter
$
53.56

 
$
43.79

 
$
0.40

 
$
57.85

 
$
42.75

 
$
0.375

Second Quarter
$
56.12

 
$
50.53

 
$
0.40

 
$
45.71

 
$
29.73

 
$
0.375

Third Quarter
$
58.62

 
$
49.23

 
$
0.40

 
$
44.49

 
$
35.52

 
$
0.375

Fourth Quarter
$
60.36

 
$
54.05

 
$
0.40

 
$
49.18

 
$
36.33

 
$
0.375


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

In October 2017, our board of directors declared a quarterly dividend of $0.43 per share, representing a 7.5% increase from the prior $0.40 per share quarterly dividend and an annual dividend of $1.72 per share. During fiscal 2017, we paid quarterly dividends of $0.40 per share for an annual dividend of $1.60 per share, representing a 6.7% increase from the prior year. During fiscal 2016, we paid quarterly dividends of $0.375 per share for an annual dividend of $1.50 per share. See Item 6. “Selected Financial Data” for additional information.

Securities Authorized for Issuance Under Equity Compensation Plans

See Part III, Item 12 of this Form 10-K and “Note 16. Stockholders’ Equity” of the Notes to Consolidated Financial Statements for additional information.

Stock Repurchase Plan

See “Note 16. Stockholders’ Equity” of the Notes to Consolidated Financial Statements for additional information.

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, 2017, 2016 and 2015 and the consolidated balance sheet data as of September 30, 2017 and 2016 from the Consolidated Financial Statements included herein. We derived the consolidated statements of operations and consolidated statements of cash flows data for the year ended September 30, 2014 and the consolidated balance sheet data as of September 30, 2015 from audited WestRock Company consolidated financial statements not included in this report. We derived the consolidated statements of operations and consolidated statements of cash flows data for the year ended September 30, 2013 and the consolidated balance sheet data as of September 30, 2014 and 2013, 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.

28


 
Year Ended September 30,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In millions, except per share amounts)
Net sales
$
14,859.7

 
$
14,171.8

 
$
11,124.8

 
$
9,895.1

 
$
9,545.4

Pension risk transfer expense (1)
$

 
$
370.7

 
$

 
$

 
$

Pension lump sum settlement and retiree medical curtailment, net (2)
$
32.6

 
$

 
$
11.5

 
$
47.9

 
$

Land and Development impairment (3)
$
46.7

 
$

 
$

 
$

 
$

Restructuring and other costs, net
$
196.7

 
$
366.4

 
$
140.8

 
$
55.6

 
$
78.0

Gain on sale of HH&B (4)
$
192.8

 
$

 
$

 
$

 
$

Income from continuing operations (5)
$
698.6

 
$
154.8

 
$
501.2

 
$
483.8

 
$
732.5

(Loss) income from discontinued operations (net of tax) (6)
$

 
$
(544.7
)
 
$
10.6

 
$

 
$

Net income (loss) attributable to common stockholders
$
708.2

 
$
(396.3
)
 
$
507.1

 
$
479.7

 
$
727.3

Diluted earnings per share from continuing operations
$
2.77

 
$
0.59

 
$
2.87

 
$
3.29

 
$
4.98

Diluted (loss) earnings per share from discontinued operations
$

 
$
(2.13
)
 
$
0.06

 
$

 
$

Diluted earnings (loss) per share attributable to common stockholders
$
2.77

 
$
(1.54
)
 
$
2.93

 
$
3.29

 
$
4.98

Diluted weighted average shares outstanding
255.7

 
257.9

 
173.3

 
146.0

 
146.1

Dividends paid per common share
$
1.60

 
$
1.50

 
$
1.20

 
$
0.70

 
$
0.525

Book value per common share
$
40.64

 
$
38.75

 
$
45.34

 
$
30.76

 
$
29.94

Total assets
$
25,089.0

 
$
23,038.2

 
$
25,372.4

 
$
11,039.7

 
$
10,733.4

Current portion of debt
$
608.7

 
$
292.9

 
$
63.7

 
$
132.6

 
$
2.9

Long-term debt due after one year
$
5,946.1

 
$
5,496.3

 
$
5,558.2

 
$
2,852.1

 
$
2,841.9

Total debt
$
6,554.8

 
$
5,789.2

 
$
5,621.9

 
$
2,984.7

 
$
2,844.8

Total stockholders’ equity
$
10,342.5

 
$
9,728.8

 
$
11,651.8

 
$
4,306.8

 
$
4,312.3

Net cash provided by operating activities
$
1,900.5

 
$
1,688.4

 
$
1,203.6

 
$
1,151.8

 
$
1,032.5

Capital expenditures
$
778.6

 
$
796.7

 
$
585.5

 
$
534.2

 
$
440.4

Cash paid (received) for purchase of businesses, net of cash acquired
$
1,588.5

 
$
376.4

 
$
(3.7
)
 
$
474.4

 
$
6.3

Cash received in merger
$

 
$

 
$
265.7

 
$

 
$

Purchases of common stock
$
93.0

 
$
335.3

 
$
336.7

 
$
236.3

 
$

Purchases of commons stock - merger related
$

 
$

 
$
667.8

 
$

 
$

Cash dividends paid to stockholders
$
403.2

 
$
380.7

 
$
214.5

 
$
101.1

 
$
75.3

 
(1) 
In fiscal 2016, we used plan assets to settle $2.5 billion of pension obligations of the 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, we recorded a non-cash charge of $370.7 million pre-tax. See Note 15. Retirement Plansof the Notes to Consolidated Financial Statements for additional information.

(2) 
In fiscal 2017, lump sum payments to certain beneficiaries of the Plan, together with several one-time severance benefit payments out of the Plan, triggered pension settlement accounting and a remeasurement of the Plan. As a result of settlement accounting, we recognized as a current period expense a pro-rata portion of the unamortized net actuarial loss, after remeasurement, and recorded a $32.6 million non-cash charge to our earnings. In fiscal 2015, payments were made to former employees to partially settle obligations of one of our qualified 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. See Note 15. Retirement Plansof the Notes to Consolidated Financial Statements for additional information.

29



(3) 
Due to the accelerated monetization strategy in our Land and Development segment, we recorded a pre-tax non-cash real estate impairment of $46.7 million, or $39.7 million net of $7.0 million of noncontrolling interest, in fiscal 2017. The impairment was recorded to write-down the carrying value on projects where the projected sales proceeds were less than the carrying value.
 
(4) 
On April 6, 2017, we completed the HH&B Sale. In fiscal 2017, we recorded a pre-tax gain on sale of HH&B of $192.8 million. See “Note 8. Assets Held For Sale” of the Notes to Consolidated Financial Statements for additional information.

(5) 
Income from continuing operations was impacted by the HH&B Sale, restructuring and other costs, net, the Land and Development impairment, the pension lump sum settlements and pension risk transfer as identified in the table above for the respective years. In addition, income from continuing operations in fiscal 2017 was reduced by $26.5 million pre-tax for the expensing of inventory stepped-up in purchase accounting, primarily related to the MPS Acquisition, and fiscal 2015 was reduced by $64.7 million pre-tax for the expensing of inventory stepped-up in purchase accounting, primarily related to the Combination. Income from continuing operations 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. Income from continuing operations 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.
 
(6) 
Loss from discontinued operations, net of tax in fiscal 2016 included 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. See Note 7. Discontinued Operationsof the Notes to Consolidated Financial Statements for additional information. Income from discontinued operations, net of tax in fiscal 2015 was reduced by $8.2 million pre-tax for the expensing of inventory stepped-up in purchase accounting, 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 our operating and business locations in North America, South America, Europe, Asia and Australia. We also sell real estate primarily in the Charleston, SC region.

Organization

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 and RockTenn and MWV each became wholly-owned subsidiaries of WestRock. 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 believe the Combination combined two industry leaders to create a leading global provider of consumer and corrugated packaging solutions. See “Note 6. Merger, Acquisitions and Investment” of the Notes to Consolidated Financial Statements for additional information.

On May 15, 2016, WestRock completed the Separation, pursuant to which 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 additional information.

On April 6, 2017, we completed the HH&B Sale. We recorded a pre-tax gain on sale of HH&B of $192.8 million in fiscal 2017. We used the proceeds from the HH&B Sale in connection with the of MPS Acquisition. See “Note 8. Assets Held For Sale” of the Notes to Consolidated Financial Statements for additional information.


30


On June 6, 2017, we completed the MPS Acquisition. MPS is reported in our Consumer Packaging segment. See “Note 6. Merger, Acquisitions and Investment” of the Notes to Consolidated Financial Statements for additional information.

Presentation

We report 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 (prior to the HH&B Sale), and partition operations; and Land and Development, which sells real estate, primarily in the Charleston, SC region. In fiscal 2016, we reclassified prior period segment results to align to these segments for all periods presented. Following the Combination and until the completion of the Separation, our financial results of operations had a fourth reportable segment, Specialty Chemicals.

Business

We completed a number of acquisitions in fiscal 2017 that expanded our product and geographic scope (notably the MPS Acquisition) or allowed us to increase our integration levels (primarily in the case of the MPS Acquisition, the U.S. Corrugated Acquisition, the Island Container Acquisition and the Star Pizza Acquisition), and we expect to continue to evaluate similar potential acquisitions in fiscal 2018.

 
Year Ended September 30,
 
2017
 
2016
 
2015
 
(In millions)
Net sales
$
14,859.7

 
$
14,171.8

 
$
11,124.8

Segment income
$
1,193.5

 
$
1,226.2

 
$
1,070.3


In fiscal 2017, we continued to pursue our strategy of offering differentiated paper and packaging solutions that help our customers win. We successfully executed this strategy in fiscal 2017 in a rapidly changing cost and price environment. Net sales of $14,859.7 million in fiscal 2017 increased $687.9 million, or 4.9%, compared to fiscal 2016. The increase was primarily a result of an increase in Corrugated Packaging segment net sales, including the partial period impact of the U.S. Corrugated Acquisition and the Island Container Acquisition, an increase in Land and Development segment net sales due to the accelerated monetization strategy and a net increase in the Consumer Packaging segment net sales associated with the MPS Acquisition and the Hannapak Acquisition, partially offset by factors that included the absence of full year net sales from HH&B due to the sale of HH&B. Segment income decreased $32.7 million in fiscal 2017 compared to fiscal 2016, primarily due to the decrease in segment income in the Consumer Packaging segment, including the $10.2 million negative impact of the HH&B Sale and the expensing of $25.1 million acquisition inventory stepped-up in purchase accounting, net of related LIFO primarily related to the MPS Acquisition, partially offset by increased segment income in the Corrugated Packaging and Land and Development segments.

Our Corrugated Packaging segment increased its net sales by $539.8 million in fiscal 2017 from $7,868.5 million in fiscal 2016 to $8,408.3 million in fiscal 2017 primarily due to higher corrugated selling price/mix, higher net sales of our recycling operations, primarily due to higher recycled fiber prices, higher corrugated volumes, and favorable foreign currency impacts. The segment benefited from strong supply and demand fundamentals in fiscal 2017. North American box shipments increased 4.1% on a per day basis in fiscal 2017 compared to fiscal 2016. Segment income attributable to the Corrugated Packaging segment in fiscal 2017 increased $14.0 million to $753.9 million compared to segment income of $739.9 million in fiscal 2016. The increase was primarily due to favorable selling price/mix, synergy and productivity improvements, and volumes exceeding the impact of higher inflation and the impact of several hurricanes and legal charges.

Our Consumer Packaging segment increased its net sales by $64.4 million in fiscal 2017 from $6,388.1 million in fiscal 2016 to $6,452.5 million in fiscal 2017, primarily as a result of net sales from the MPS Acquisition, the full year impact of the Packaging Acquisition and the Hannapak Acquisition, which were largely offset by lower volumes excluding acquisitions, a decrease in net sales related to the HH&B Sale and unfavorable selling price/mix. Segment income attributable to the Consumer Packaging segment in fiscal 2017 decreased $55.9 million compared to fiscal 2016, primarily as synergy and productivity improvements were more than offset by cost inflation, the impact of lower volumes, the impact from the HH&B Sale as compared to the full year in fiscal 2016, the impact of the expensing inventory stepped-up in purchase accounting primarily related to the MPS Acquisition, and the impact of several hurricanes.


31


Our Land and Development segment increased its net sales by $124.0 million in fiscal 2017 from $119.8 million in fiscal 2016 to $243.8 million in fiscal 2017, primarily due to the execution of the accelerated monetization strategy. We expect to complete the monetization of our portfolio by the end of fiscal 2018. Segment income attributable to the Land and Development segment was $13.8 million in fiscal 2017 compared to $4.6 million in fiscal 2016.

We generated $1,900.5 million of net cash provided by operating activities in fiscal 2017, compared to $1,688.4 million in fiscal 2016, and remained committed to our disciplined capital allocation strategy during fiscal 2017 by investing $778.6 million in capital expenditures while returning $93.0 million to our stockholders in share repurchases and $403.2 million in dividends. We believe our strong balance sheet and cash flow provide us the flexibility to continue to invest to sustain and improve our operating performance. In fiscal 2018, we expect capital expenditures to be approximately $1.0 billion, of which approximately $0.2 billion will be deployed in connection with planned investments in a new corrugated box plant in the Brazilian state of Sao Paulo, in a project to install a 330” state-of-the-art kraft linerboard machine in our Florence, South Carolina mill and in a coater at our Mahrt mill in Alabama. Excluding these three projects, we expect that approximately 50% of our capital expenditures in fiscal 2018 will be for maintenance and replacement projects and approximately 50% will be for return-generating projects.  See “Liquidity and Capital Resources” for more information. 

A detailed review of our fiscal 2017 performance appears below under “Results of Operations (Consolidated)”.

Results of Operations (Consolidated)

The following table summarizes our consolidated results for the three years ended September 30, 2017:
 
Year Ended September 30,
 
2017
 
2016
 
2015
 
(In millions, except per share data)
Net sales
$
14,859.7

 
$
14,171.8

 
$
11,124.8

Cost of goods sold
12,119.5

 
11,413.2

 
8,986.5

Gross profit
2,740.2

 
2,758.6

 
2,138.3

Selling, general and administrative, excluding intangible amortization
1,399.6

 
1,379.4

 
1,014.6

Selling, general and administrative intangible amortization
229.6

 
211.8

 
118.9

Pension risk transfer expense

 
370.7

 

Pension lump sum settlement and retiree medical curtailment, net
32.6

 

 
11.5

Land and Development impairment
46.7

 

 

Restructuring and other costs, net
196.7

 
366.4

 
140.8

Operating profit
835.0

 
430.3

 
852.5

Interest expense
(277.7
)
 
(256.7
)
 
(132.5
)
Gain (loss) on extinguishment of debt
1.8

 
2.7

 
(2.6
)
Interest income and other income (expense), net
66.7

 
58.6

 
9.7

Equity in income of unconsolidated entities
39.0

 
9.7

 
7.1

Gain on sale of HH&B
192.8

 

 

Income from continuing operations before income taxes
857.6

 
244.6

 
734.2

Income tax expense
(159.0
)
 
(89.8
)
 
(233.0
)
Income from continuing operations
698.6

 
154.8

 
501.2

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

 
(544.7
)
 
10.6

Consolidated net income (loss)
698.6

 
(389.9
)
 
511.8

Less: Net loss (income) attributable to noncontrolling interests
9.6

 
(6.4
)
 
(4.7
)
Net income (loss) attributable to common stockholders
$
708.2

 
$
(396.3
)
 
$
507.1



32


Non-GAAP Measures

We report our financial results in accordance with GAAP. However, we have included financial measures that were not prepared in accordance with GAAP. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our GAAP results. The non-GAAP financial measures we present may differ from similarly captioned measures of other companies.

We use the non-GAAP financial measures “Adjusted Income from Continuing Operations” and “Adjusted Earnings from Continuing Operations Per Diluted Share”. Management believes these non-GAAP financial measures provide our board of directors, investors, potential investors, securities analysts and others with useful information to evaluate our performance because the measures exclude restructuring and other costs, net, and other specific items that management believes are not indicative of ongoing operating results. We and our board of directors use this information to evaluate our performance relative to other periods. We believe that the most directly comparable GAAP measures to Adjusted Income from Continuing Operations and Adjusted Earnings from Continuing Operations Per Diluted Share are Income from continuing operations and Earnings from continuing operations per diluted share, respectively. The GAAP results in the tables below for Pre-Tax, Tax and Net of Tax are equivalent to the line items “Income from continuing operations before income taxes”, “Income tax expense” and “Income from continuing operations”, respectively, as reported on the Consolidated Statements of Operations.

Diluted earnings per share from continuing operations were $2.77 in fiscal 2017 compared to $0.59 in fiscal 2016 and $2.87 in fiscal 2015. Adjusted Earnings from Continuing Operations Per Diluted Share were $2.62, $2.52 and $3.76 in fiscal 2017, 2016 and 2015, respectively.

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.

 
Years Ended September 30,
 
2017
 
2016
 
2015
 
 
 
 
 
 
Earnings from continuing operations per diluted share
$
2.77

 
$
0.59

 
$
2.87

Gain on sale of HH&B
(0.76
)
 

 

HH&B - impact of held for sale accounting
(0.03
)
 

 

Restructuring and other items
0.52

 
0.97

 
0.57

Pension lump sum settlement and retiree medical curtailment, net
0.08

 

 
0.04

Inventory stepped-up in purchase accounting, net of LIFO
0.08

 
0.02

 
0.25

Land and Development operating results including impairment
0.06

 
(0.01
)
 
0.01

Losses at closed plants and transition costs
0.05

 
0.07

 
0.01

Gain on sale or deconsolidation of subsidiaries
(0.01
)
 

 

Federal, state and foreign tax items
(0.16
)
 

 

(Gain) loss on extinguishment of debt

 
(0.01
)
 
0.01

Other
0.02

 
0.01

 

Non-cash pension risk transfer expense

 
0.89

 

Gain on investment in Grupo Gondi

 
(0.01
)
 

Adjusted Earnings from Continuing Operations Per Diluted Share
$
2.62

 
$
2.52

 
$
3.76


The GAAP results in the tables below for Pre-Tax, Tax and Net of Tax are equivalent to the line items “Income from continuing operations before income taxes”, “Income tax expense” and “Income from continuing operations”, respectively, as reported on the Consolidated Statements of Operations. Set forth below are reconciliations of Adjusted Income from Continuing Operations to the most directly comparable GAAP measure, Income from continuing operations, for the periods indicated (in millions):

33


 
Year Ended September 30, 2017
 
Pre-Tax
 
Tax
 
Net of Tax
 
 
 
 
 
 
GAAP Results, from continuing operations
$
857.6

 
$
(159.0
)
 
$
698.6

Gain on sale of HH&B (1)
(192.8
)
 

 
(192.8
)
HH&B - impact of held for sale accounting
(10.1
)
 
2.3

 
(7.8
)
Restructuring and other items
196.7

 
(62.8
)
 
133.9

Pension lump sum settlement
32.6

 
(12.6
)
 
20.0

Inventory stepped-up in purchase accounting, net of LIFO
26.5

 
(7.0
)
 
19.5

Land and Development operating results including impairment
26.7

 
(10.6
)
 
16.1

Losses at closed plants and transition costs
18.2

 
(5.8
)
 
12.4

Gain on sale or deconsolidation of subsidiaries
(5.0
)
 
2.4

 
(2.6
)
Federal, state and foreign tax items

 
(40.5
)
 
(40.5
)
Gain on extinguishment of debt
(1.8
)
 
0.6

 
(1.2
)
Other
8.1

 
(2.7
)
 
5.4

Adjusted Income from Continuing Operations
$
956.7

 
$
(295.7
)
 
$
661.0

Noncontrolling interest from continuing operations
 
 
 
 
9.6

Adjusted net income attributable to common stockholders
 
 
 
 
$
670.6


(1) Due to the high tax basis and fees associated with the transaction there was essentially no tax

 
Year Ended September 30, 2016
 
Pre-Tax
 
Tax
 
Net of Tax
 
 
 
 
 
 
GAAP Results, from continuing operations
$
244.6

 
$
(89.8
)
 
$
154.8

Restructuring and other items
366.4

 
(116.0
)
 
250.4

Inventory stepped-up in purchase accounting, net of LIFO
8.1

 
(2.5
)
 
5.6

Land and Development operating results including impairment
(5.6
)
 
2.2

 
(3.4
)
Losses at closed plants and transition costs
23.3

 
(6.6
)
 
16.7

Gain on extinguishment of debt
(2.7
)
 
0.8

 
(1.9
)
Other
1.8

 
(0.6
)
 
1.2

Non-cash pension risk transfer expense
370.7

 
(140.9
)
 
229.8

Gain on investment in Grupo Gondi (1)
(12.1
)
 
10.6

 
(1.5
)
Adjusted Income from Continuing Operations
$
994.5

 
$
(342.8
)
 
$
651.7

Noncontrolling interest from continuing operations
 
 
 
 
(2.1
)
Adjusted net income attributable to common stockholders
 
 
 
 
$
649.6


(1) Impacted by non-deductible goodwill


34


 
Year Ended September 30, 2015
 
Pre-Tax
 
Tax
 
Net of Tax
 
 
 
 
 
 
GAAP Results, from continuing operations
$
734.2

 
$
(233.0
)
 
$
501.2

Restructuring and other items
140.8

 
(41.6
)
 
99.2

Pension lump sum settlement and retiree medical curtailment, net
11.5

 
(3.9
)
 
7.6

Inventory stepped-up in purchase accounting, net of LIFO
64.7

 
(22.0
)
 
42.7

Land and Development operating results including impairment
2.7

 
(1.1
)
 
1.6

Losses at closed plants and transition costs
2.4

 
(0.8
)
 
1.6

Loss on extinguishment of debt
2.6

 
(0.9
)
 
1.7

Adjusted Income from Continuing Operations
$
958.9

 
$
(303.3
)
 
$
655.6

Noncontrolling interest from continuing operations
 
 
 
 
(3.4
)
Adjusted net income attributable to common stockholders
 
 
 
 
$
652.2


In fiscal 2017, we excluded the benefit of ceasing recording depreciation and amortization expense while HH&B was held for sale. Due to the accelerated monetization strategy, we excluded results from the Land and Development segment in all periods presented, including the $46.7 million pre-tax non-cash impairment in fiscal 2017. The impairment was recorded to write-down the carrying value on projects where the projected sales proceeds were less than the carrying value. The adjustment to remove the favorable impact of certain federal, state and foreign tax items in fiscal 2017 was primarily due to the favorable resolution of items that management believed were not indicative of ongoing operating results, including the reduction of a state deferred tax liability as a result of an internal U.S. legal entity restructuring. See “Note 8. Assets Held For Sale”, “Note 9. Restructuring and Other Costs, Net” and “Note 15. Retirement Plans” for more information.

Net Sales (Unaffiliated Customers)

Net sales for fiscal 2017 increased $687.9 million to $14,859.7 million compared to $14,171.8 million in fiscal 2016. The increase was primarily a result of an increase in Corrugated Packaging segment net sales, including the partial period impact of the U.S. Corrugated Acquisition and the Island Container Acquisition, an increase in Land and Development segment net sales due to the accelerated monetization strategy and a net increase in the Consumer Packaging segment net sales associated with the MPS Acquisition and the Hannapak Acquisition, partially offset by factors that included the absence of full year net sales from HH&B due to the sale of HH&B.

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 Acquisition and the Packaging Acquisition 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 change in net sales by segment is outlined in the “Results of Operations — Segment Data” section below.

Cost of Goods Sold

Cost of goods sold increased to $12,119.5 million in fiscal 2017 compared to $11,413.2 million in fiscal 2016. Cost of goods sold as a percentage of net sales was 81.6% in fiscal 2017 compared to 80.5% in fiscal 2016 primarily due to cost inflation, primarily recycled fiber, as well as increased land sales due to the accelerated monetization strategy and the net impact of acquisitions offset by the HH&B Sale and other items. In addition, fiscal 2017 compared to fiscal 2016 was negatively impacted by the several hurricanes. These factors were partially offset by synergy and productivity improvements. Fiscal 2017 and 2016 included $26.5 million and $8.1 million for the expensing of inventory stepped-up in purchase accounting, net of related LIFO impact, respectively.

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 fiscal 2016. 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

35


an $8.7 million gain on the sale of a portion of the land at our Panama City, Florida mill to the port authority which was more than offset by the $10.0 million estimated impact of 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.

We discuss these items in greater detail below in “Results of Operations (Segment Data)”.

Selling, General and Administrative Excluding Intangible Amortization

SG&A excluding intangible amortization increased $20.2 million to $1,399.6 million in fiscal 2017 compared to $1,379.4 million in fiscal 2016, due primarily to acquisitions. SG&A excluding intangible amortization as a percentage of sales decreased slightly to 9.4% in fiscal 2017 compared to 9.7% in fiscal 2016.

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.

Selling, General and Administrative Intangible Amortization

SG&A intangible amortization was $229.6 million, $211.8 million and $118.9 million in fiscal 2017, 2016 and 2015, respectively. The increase in fiscal 2017 compared to fiscal 2016 was due to the fiscal 2017 acquisitions, as well as the full year impact of the Packaging Acquisition compared to nine months in fiscal 2016, which were partially offset by the impact of the HH&B Sale. 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, we used plan assets to settle $2.5 billion of pension obligations of the 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, 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 Plan, and responsibility for payment of their retirement benefits remains with WestRock. See “Note 15. Retirement Plans” of the Notes to Consolidated Financial Statements for additional information.

Pension Lump Sum Settlement Expense and Retiree Medical Curtailment, Net

In fiscal 2017, lump sum payments to certain beneficiaries of the Plan, together with several one-time severance benefit payments out of the Plan, triggered pension settlement accounting and resulted in a $32.6 million non-cash charge to our earnings. The lump sum payments were to certain eligible former employees who were not currently receiving a monthly benefit. Eligible former employees whose present value of future pension benefits exceeded a certain minimum threshold had the option to either voluntarily accept lump sum payments or to not accept the offer and continue to be entitled to their monthly benefit upon retirement.

In fiscal 2015, we partially settled obligations of one of our qualified 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.

See “Note 15. Retirement Plans” of the Notes to Consolidated Financial Statements for additional information.

Land and Development Impairment

Due to the accelerated monetization strategy in our Land and Development segment, we recorded a pre-tax non-cash real estate impairment of $46.7 million, or $39.7 million net of $7.0 million of noncontrolling interest, in fiscal 2017. The impairment was recorded to write-down the carrying value on projects where the projected sales proceeds were less than the carrying value. The charge is not reflected in segment income.


36


Restructuring and Other Costs, Net

We recorded aggregate pre-tax restructuring and other costs of $196.7 million, $366.4 million and $140.8 million for fiscal 2017, 2016 and 2015, 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. See Note 9. Restructuring and Other Costs, Net and Note 7. Discontinued Operationsof the Notes to Consolidated Financial Statements for additional information. 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 August 1, 2017, we completed the Hannapak Acquisition in a stock purchase. Hanna Group is one of Australia’s leading providers of folding cartons to a variety of markets, including beverage, food, confectionery and healthcare. We expect this acquisition will build on our established and growing packaging business in the region. We have included the financial results of Hanna Group since the date of the acquisition in our Consumer Packaging segment.

On July 17, 2017, we completed the Island Container Acquisition in an asset purchase. The assets acquired include a corrugator and corrugated converting operations located in Wheatley Heights, New York, and certain related fulfillment assets located in Saddle Brook, New Jersey. We expect this acquisition will enable us to integrate more than 80,000 tons of containerboard annually into our Corrugated Packaging segment. We have included the financial results of Island Container since the date of the acquisition in our Corrugated Packaging segment.

On June 9, 2017, we completed the U.S. Corrugated Acquisition in a stock purchase. We acquired five corrugated converting facilities in Ohio, Pennsylvania and Louisiana, which provide a comprehensive suite of products and services to customers in a variety of end markets, including food & beverage, pharmaceuticals and consumer electronics. We believe this acquisition will enable us to increase the vertical integration of our Corrugated Packaging segment by approximately 105,000 tons of containerboard annually through the acquired facilities and another 50,000 tons under a long-term supply contract with another company owned by the seller. We have included the financial results of U.S. Corrugated since the date of the acquisition in our Corrugated Packaging segment.

On June 6, 2017, we completed the MPS Acquisition in a stock purchase. MPS is a global provider of print-based specialty packaging solutions and its differentiated product offering includes premium folding cartons, inserts, labels and rigid packaging. We acquired the outstanding shares of MPS for $18.00 per share in cash and the assumption of debt. We believe this acquisition increases annual paperboard consumption by approximately 225,000 tons, of which we expect 35% to 45% to be supplied by us. We have included the financial results of MPS since the date of the acquisition in our Consumer Packaging segment.

On March 13, 2017, we completed the Star Pizza Acquisition. We believe this acquisition provides us with a leadership position in the fast growing small-run pizza box market and increases our vertical integration. We have included the financial results of the acquired assets since the date of the acquisition in our Corrugated Packaging segment.

On April 1, 2016, we completed the formation of a joint venture with Grupo Gondi to combine our respective operations in Mexico. We contributed 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 together with future put and call rights. The joint venture operates paper machines, corrugated packaging and high graphic folding carton facilities across various production sites. The majority equity holders of Grupo Gondi manage the joint venture and we provide technical and commercial resources. We believe the joint venture will help grow our presence in the attractive Mexican market. We have included the financial results of the joint venture since the date of formation in our Corrugated Packaging segment, and are accounting for the investment on the equity method. In fiscal 2017, the joint venture entity had a stock redemption from a minority partner. As a result, our equity participation in the joint venture increased to approximately 27.0%. The transaction continues to include future put and call rights with respect to the respective parties’ ownership interest in the joint venture. See “Note 23. Subsequent Events (Unaudited) — Grupo Gondi Investment” of the Notes to Consolidated Financial Statements for recent developments.


37


On January 19, 2016, we completed the Packaging Acquisition. The entities acquired provide value-added folding carton and litho-laminated display packaging solutions. 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 completed the SP Fiber Acquisition. 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, which we consolidate. GPS is a renewable energy joint venture providing steam to the Dublin mill and electricity to Georgia Power. The Dublin mill has helped balance the fiber mix of our mill system and the addition of kraft and bag paper has diversified our product offering including our ability to serve the increasing demand for lighter weight containerboard. Subsequent to the transaction, we announced the permanent closure of the Newberg mill due to the decline in market conditions of the newsprint business and our need to balance supply and demand in our containerboard system. We 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 each became wholly-owned subsidiaries of WestRock. RockTenn was the accounting acquirer in the Combination. We believe the Combination combined two industry leaders that created a leading global provider of consumer and corrugated packaging solutions.

See Note 6. Merger, Acquisitions and Investment of the Notes to Consolidated Financial Statements for additional information. See also Item 1A. “Risk Factors — We May Be Unsuccessful in Making and Integrating Mergers, Acquisitions and Investments and Completing Divestitures”.

Interest Expense

Interest expense was $277.7 million, $256.7 million and $132.5 million for fiscal 2017, 2016 and 2015, respectively. The increase in fiscal 2017 as compared to fiscal 2016 was primarily due to debt incurred as a result of acquisitions, and the increase in fiscal 2016 as compared to fiscal 2015 was primarily due to the full year impact of debt assumed in the Combination in fiscal 2016 results. Interest expense in fiscal 2017, 2016 and 2015 was reduced by $34.5 million, $44.5 million and $10.3 million, respectively related to the amortization of the fair value of debt stepped-up in purchase accounting. During fiscal 2017, 2016 and 2015 amortization of debt issuance costs charged to interest expense were $4.5 million, $4.6 million and $9.3 million, respectively. See Item 1A. “Risk Factors — Interest Rate Increases Could Impact Our Financial Condition”.

Provision for Income Taxes

We recorded income tax expense from continuing operations of $159.0 million, at an effective tax rate of 18.5% in fiscal 2017, as compared to income tax expense from continuing operations of $89.8 million, at an effective tax rate of 36.7% in fiscal 2016, and compared to an income tax expense from continuing operations of $233.0 million, at an effective tax rate expense of 31.7% in fiscal 2015.

The effective tax rate from continuing operations for fiscal 2017 was different than the statutory rate primarily due to (a) low rates of tax applicable to the HH&B Sale, (b) a $28.7 million tax benefit related to the reduction of a state deferred tax liability as a result of an internal U.S. legal entity restructuring that simplified future operating activities within the U.S., (c) favorable tax items, such as the domestic manufacturer’s deduction, (d) lower tax rates applied to foreign earnings, primarily in Canada, and (e) a change in valuation allowance due to realization of capital loss carryforward, partially offset by (f) the exclusion of tax benefits related to losses recorded by certain foreign operations and (g) the inclusion of state taxes.

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

See Note 14. Income Taxes of the Notes to Consolidated Financial Statements for additional information.


38


Interest Income and Other Income (Expense), net

Interest income and other income (expense), net increased to income of $66.7 million in fiscal 2017 from income of $58.6 million in fiscal 2016 and $9.7 million in fiscal 2015. The increase in fiscal 2017 was primarily due to an increase in interest rates. 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. See Note 20. Special Purpose Entities of the Notes to Consolidated Financial Statements for additional information.

Gain on Sale of HH&B

On April 6, 2017, we completed the HH&B Sale. In fiscal 2017, we recorded a pre-tax gain on sale of $192.8 million. We used the proceeds from the HH&B Sale in connection with the MPS Acquisition. See “Note 8. Assets Held For Sale” of the Notes to Consolidated Financial Statements for additional information.

(Loss) Income from Discontinued Operations

On May 15, 2016, we completed the Separation. 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 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, 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. 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. See “Note 7. Discontinued Operations” of the Notes to Consolidated Financial Statements for additional information.

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. Our financial results of operations are aligned in three reportable segments: Corrugated Packaging, Consumer Packaging and Land and Development.

Corrugated Packaging Segment

North American Corrugated Packaging Shipments

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 separated Brazil/India because we believe investors, potential investors, securities analysts and others find this presentation useful when evaluation our operating performance. 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 prior to April 1, 2016 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 quarters of fiscal 2016 and future results.

39



 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Fiscal
Year
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

 
 
 
 
 
 
 
 
 
 
Fiscal 2017
 
 
 
 
 
 
 
 
 
North American Corrugated Packaging Shipments - thousands of tons
2,031.9

 
2,116.1

 
2,112.7

 
2,079.7

 
8,340.4

North American Corrugated Containers Shipments - BSF
18.8

 
18.7

 
19.4

 
19.6

 
76.5

North American Corrugated Containers Per Shipping Day - MMSF
312.9

 
291.9

 
308.0

 
316.6

 
307.2


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

 
18.1

 
18.7

 
19.8

 
19.0

 
 
 
 
 
 
 
 
 
 
Fiscal 2017
 
 
 
 
 
 
 
 
 
Brazil / India Corrugated Packaging Shipments - thousands of tons
151.0

 
171.0

 
178.8

 
178.0

 
678.8

Brazil / India Corrugated Containers Shipments - BSF
1.5

 
1.6

 
1.6

 
1.6

 
6.3

Brazil / India Corrugated Containers Per Shipping Day - MMSF
20.4

 
20.2

 
21.3

 
20.8

 
20.7



40


Corrugated Packaging Segment (Aggregate Before Intersegment Eliminations)
 
Net Sales (1)
 
Segment
Income
 
Return
on Sales
 
(In millions, except percentages)
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
%
 
 
 
 
 
 
Fiscal 2017
 
 
 
 
 
First Quarter
$
1,943.6

 
$
141.5

 
7.3
%
Second Quarter
2,065.0

 
159.5

 
7.7

Third Quarter
2,161.2

 
223.9

 
10.4

Fourth Quarter
2,238.5

 
229.0

 
10.2

Total
$
8,408.3

 
$
753.9

 
9.0
%

(1) Net Sales before intersegment eliminations

Net Sales (Aggregate) — Corrugated Packaging Segment

Net sales before intersegment eliminations for the Corrugated Packaging segment increased $539.8 million in fiscal 2017 compared to fiscal 2016 primarily due to $321.8 million of higher corrugated selling price/mix, $143.9 million of higher net sales of our recycling operations, primarily due to higher recycled fiber prices, $98.2 million of higher corrugated volumes, including acquisitions, and $55.9 million of favorable foreign currency impacts. These increases were partially offset by an estimated $45.0 million decrease due to the impact of several hurricanes in fiscal 2017 and a net $42.2 million of lower corrugated net sales due to a shift in sales from converted boxes in the prior year period to sales of containerboard in fiscal 2017 as a result of having contributed three box plants to the Grupo Gondi joint venture in April 2016.

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 in fiscal 2015, 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 was primarily the result of 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.


41


Segment Income — Corrugated Packaging Segment

Segment income attributable to the Corrugated Packaging segment in fiscal 2017 increased $14.0 million to $753.9 million compared to segment income of $739.9 million in fiscal 2016. The increase was primarily due to an estimated $285.4 million of favorable selling price/mix, $154.4 million of synergy and productivity improvements and $21.0 million of favorable corrugated volumes, including acquisitions. These factors were largely offset by an estimated $380.0 million of cost inflation, the impact of several hurricanes and legal charges that reduced segment income by an estimated $40.4 million and higher depreciation and amortization of $18.3 million. The primary inflation resulted from materials, energy, freight, and wage and other costs. These items consisted primarily of $220.9 million of recycled fiber costs, $61.7 million of energy costs, $25.4 million of chemical costs, $21.8 million of freight costs and $62.2 million of wage and other costs, which were partially offset by $30.8 million of lower virgin fiber costs.

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 a portion of the land at our Panama City, Florida mill to the port authority, which was more than offset by the $10.0 million estimated impact of a 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.

Consumer Packaging Segment

Consumer Packaging Shipments

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. The shipment data table excludes merchandising displays and dispensing sales (prior to the closing of the HH&B Sale on April 6, 2017) 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. We have included the impact of the Combination beginning in the fourth quarter of fiscal 2015.

 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Fiscal
Year
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