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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
OR
[ ] 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 0-23340
ROCK-TENN COMPANY
(Exact name of registrant as specified in its charter)
Georgia 62-0342590
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
504 Thrasher Street, Norcross, Georgia 30071
---------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 448-2193
N/A
---------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding as of August 12, 2002
- ----------------------------------- ---------------------------------
Class A Common Stock, .01 par value 34,299,637
Class B Common Stock, .01 par value none
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ROCK-TENN COMPANY
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the three months
and nine months ended June 30, 2002 and 2001 1
Condensed Consolidated Balance Sheets at June 30, 2002 and
September 30, 2001 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended June 30, 2002 and 2001 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 21
Item 6. Exhibits and Reports on Form 8-K 22
Index to Exhibits 24
See accompanying notes
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
--------- --------- ----------- -----------
Net sales $ 357,142 $ 357,065 $ 1,055,828 $ 1,069,644
Cost of goods sold 280,433 280,508 829,475 853,107
--------- --------- ----------- -----------
Gross profit 76,709 76,557 226,353 216,537
Selling, general and administrative expenses 50,854 45,658 146,520 133,544
Amortization of goodwill -- 2,143 -- 6,428
Plant closing and other costs 9,681 2,523 9,681 7,563
--------- --------- ----------- -----------
Income from operations 16,174 26,233 70,152 69,002
Interest expense (6,542) (8,072) (19,638) (27,466)
Interest and other income 33 123 401 420
Loss from unconsolidated joint venture -- (1,208) (694) (1,423)
Minority interest in income of consolidated
subsidiary (874) (846) (2,394) (2,370)
--------- --------- ----------- -----------
Income before income taxes 8,791 16,230 47,827 38,163
Provision for income taxes 3,320 7,110 18,573 17,220
--------- --------- ----------- -----------
Income before cumulative effect of a
change in accounting principle 5,471 9,120 29,254 20,943
Cumulative effect of a change in accounting
principle (net of income taxes of $2,368
and $179) -- -- (5,844) 286
--------- --------- ----------- -----------
Net income $ 5,471 $ 9,120 $ 23,410 $ 21,229
========= ========= =========== ===========
Weighted average number of common and common
equivalent shares outstanding 34,694 33,582 34,301 33,348
========= ========= =========== ===========
Basic earnings per share $ 0.16 $ 0.27 $ 0.70 $ 0.64
========= ========= =========== ===========
Diluted earnings per share $ 0.16 $ 0.27 $ 0.68 $ 0.64
========= ========= =========== ===========
Cash dividends per common share $ 0.075 $ 0.075 $ 0.225 $ 0.225
========= ========= =========== ===========
See accompanying notes
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, September 30,
2002 2001
----------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,255 $ 5,191
Accounts receivable (net of allowances of
$5,752 and $5,400) 157,431 157,782
Inventories 115,407 102,011
Other current assets 12,738 6,098
----------- -----------
TOTAL CURRENT ASSETS 289,831 271,082
Property, plant and equipment, at cost:
Land and buildings 194,679 206,069
Machinery and equipment 939,506 902,769
Transportation equipment 9,976 11,526
Leasehold improvements 8,829 9,159
----------- -----------
1,152,990 1,129,523
Less accumulated depreciation and amortization (580,287) (540,870)
----------- -----------
Net property, plant and equipment 572,703 588,653
Goodwill, net 261,922 259,660
Other assets 47,786 45,018
----------- -----------
$ 1,172,242 $ 1,164,413
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 68,194 $ 79,596
Accrued compensation and benefits 39,309 35,863
Current maturities of debt 85,893 97,152
Other current liabilities 48,130 46,636
----------- -----------
TOTAL CURRENT LIABILITIES 241,526 259,247
Long-term debt due after one year 390,341 388,487
Adjustment for fair value hedge 7,988 8,603
----------- -----------
Total long-term debt, less current maturities 398,329 397,090
Deferred income taxes 93,862 87,993
Other long-term items 11,030 17,323
Shareholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized; no
shares outstanding -- --
Class A common stock, $.01 par value; 175,000,000 shares authorized,
34,210,489 and 22,968,317 outstanding at June 30 and September 30,
respectively; Class B common stock, $.01 par value; 60,000,000 shares
authorized; zero and 10,601,346 outstanding
at June 30 and September 30, respectively 340 335
Capital in excess of par value 138,634 130,640
Deferred compensation (2,536) (1,421)
Retained earnings 297,635 282,117
Accumulated other comprehensive loss (6,578) (8,911)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 427,495 402,760
----------- -----------
$ 1,172,242 $ 1,164,413
=========== ===========
See accompanying notes
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
June 30, June 30,
2002 2001
---------- ----------
OPERATING ACTIVITIES:
Net income $ 23,410 $ 21,229
Items in income not affecting cash:
Depreciation and amortization 54,234 57,926
Deferred income taxes 5,869 5,273
Deferred compensation expense 704 51
Gain on disposal of property, plant and equipment (713) (369)
Equity in loss from joint venture 694 1,423
Minority interest in income of consolidated subsidiary 2,394 2,370
Impairment loss and other non-cash charges 14,124 288
Change in operating assets and liabilities:
Accounts receivable 743 12,437
Inventories (9,417) (2,999)
Other assets 1,724 (1,002)
Accounts payable (11,639) (7,397)
Accrued and other liabilities (2,038) 2,756
---------- ----------
(20,627) 3,795
---------- ----------
CASH PROVIDED BY OPERATING ACTIVITIES 80,089 91,986
INVESTING ACTIVITIES:
Capital expenditures (53,538) (51,799)
Cash paid for purchase of businesses (22,876) --
Cash contributed to joint venture (1,682) (8,656)
Proceeds from sale of property, plant and equipment 11,446 818
(Increase) decrease in unexpended industrial revenue bond proceeds (1,554) 1,264
---------- ----------
CASH USED FOR INVESTING ACTIVITIES (68,204) (58,373)
FINANCING ACTIVITIES:
Net repayments to revolving credit facilities (4,300) (104,000)
Additions to debt 16,410 110,716
Repayments of debt (21,515) (30,650)
Debt issuance costs (156) (757)
Issuances of common stock 6,243 1,739
Purchases of common stock (345) (2,324)
Cash dividends paid to shareholders (7,610) (7,490)
Distribution to minority interest (2,555) (3,500)
---------- ----------
CASH USED FOR FINANCING ACTIVITIES (13,828) (36,266)
Effect of exchange rate changes on cash 1,007 168
---------- ----------
Decrease in cash and cash equivalents (936) (2,485)
Cash and cash equivalents at beginning of period 5,191 5,449
---------- ----------
Cash and cash equivalents at end of period $ 4,255 $ 2,964
========== ==========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Income taxes (net of refunds) $ 19,065 $ 7,585
Interest (net of amounts capitalized) 15,300 24,333
See accompanying notes
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements of Rock-Tenn
Company and its subsidiaries (the "Company") have not been audited by
independent auditors. The condensed consolidated balance sheet at September 30,
2001 has been derived from the audited consolidated financial statements. In the
opinion of the Company's management, the condensed consolidated financial
statements reflect all adjustments, which are of a normal recurring nature,
necessary for a fair presentation of the results of operations for the three
month and nine month periods ended June 30, 2002 and 2001, the Company's
financial position at June 30, 2002 and September 30, 2001, and the cash flows
for the nine month periods ended June 30, 2002 and 2001.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2001.
The results for the three months and nine months ended June 30, 2002 are not
necessarily indicative of results that may be expected for the full year.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
Comparison versus July 2002 Earnings Release
In the Company's merchandising displays and corrugated packaging segment,
revenues were reduced by $519,000 to correct a billing error discovered after
the issuance of the third quarter fiscal 2002 earnings release and the reserve
for inventory obsolescence was increased by $524,000. Additionally, the Company
revised the method of computation of paperboard and recovered paper costs
included in the supplemental disclosure of key financial statistics that
accompanies quarterly earnings releases to conform to the accrual basis
financial data reported in our filings.
In its fiscal 2001 10-K, the Company reported that no single external customer
accounted for more than 5% of consolidated net sales; during fiscal 2001, no
single external customer accounted for more than 6% of consolidated net sales.
NOTE 2. ACCOUNTING POLICIES
The Company enters into a variety of derivative transactions. The Company uses
interest rate cap agreements and interest rate swap agreements to manage the
interest rate characteristics of a portion of its outstanding debt. The Company
uses forward contracts to limit exposure to fluctuations in Canadian foreign
currency rates with respect to its receivables denominated in Canadian dollars.
The Company also uses commodity swap agreements to limit the Company's exposure
to falling sales prices and rising raw material costs.
For each derivative instrument that is designated and qualifies as a fair value
hedge, the gain or loss on the derivative instrument as well as the offsetting
loss or gain on the hedged item attributable to the hedged risk are recognized
in current earnings during the period of the changes in fair values. For each
derivative instrument that is designated and qualifies as a cash flow hedge, the
effective portion of the gain or loss on the derivative instrument is reported
as a component of accumulated other comprehensive income and reclassified into
earnings in the same period or periods during which the hedged transaction
affects earnings. The remaining gain or loss on the derivative instrument in
excess of the cumulative change in the present value of future cash flows of the
hedged item, if any, is recognized in current earnings during the period of
change. Gains or losses on terminations of interest rate swap agreements are
deferred and amortized as an adjustment to interest expense of the related debt
instrument over the remaining term of the original contract life of the
terminated swap agreements. For derivative instruments not designated as hedging
instruments, the gain or loss is recognized in current earnings during the
period of change. Derivatives are included in other long-term liabilities and
other assets on the balance sheet.
4
NOTE 3. COMPREHENSIVE INCOME
Total comprehensive income for the three and nine months ended June 30, 2002 was
approximately $7.8 million and $25.7 million, respectively. Total comprehensive
income for the three and nine months ended June 30, 2001 was approximately $11.7
million and $18.7 million, respectively. The difference between total
comprehensive income and net income was due to foreign currency translation
adjustments, adjustments to the fair value of derivative instruments, and a
minimum pension liability, as detailed below (in thousands):
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- ----------
Net income $5,471 $ 9,120 $23,410 $ 21,229
Foreign currency translation 2,702 2,387 2,106 (1,086)
Unrealized (loss) gain on derivative instruments (324) 187 (130) (1,486)
Minimum pension liability -- -- 357 --
-------- -------- -------- ----------
Total other comprehensive gain (loss) 2,378 2,574 2,333 (2,572)
Comprehensive income $ 7,849 $ 11,694 $ 25,743 $ 18,657
======== ======== ======== ========
NOTE 4. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and the
differences could be material.
The most significant accounting estimates inherent in the preparation of the
Company's financial statements include estimates associated with its evaluation
of the recoverability of goodwill and property, plant and equipment as well as
those used in the determination of taxation, restructuring, and environmental
matters. In addition, significant estimates form the bases for the Company's
reserves with respect to collectibility of accounts receivable, inventory
valuations, post-retirement benefits, post-employment benefits, and certain
benefits provided to current employees. Various assumptions and other factors
underlie the determination of these significant estimates. The process of
determining significant estimates is fact specific and takes into account
factors such as historical experience, current and expected economic conditions,
product mix, and in some cases, actuarial techniques. The Company constantly
re-evaluates these significant factors and makes adjustments where facts and
circumstances dictate. Historically, actual results have not significantly
deviated from those determined using the estimates described above.
NOTE 5. INVENTORIES
Substantially all U.S. inventories are stated at the lower of cost or market,
with cost determined on the last-in, first-out (LIFO) basis. All other
inventories are valued at the lower of cost or market, with cost determined
using methods which approximate cost computed on a first-in, first-out (FIFO)
basis. An actual valuation of inventory under the LIFO method can only be made
at the end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO estimates must necessarily be based on management's
projection of expected year-end inventory levels and costs. Because these are
subject to many factors beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
5
Inventories at June 30, 2002 and September 30, 2001 were as follows (in
thousands):
June 30, September 30,
2002 2001
----------- -----------
Finished goods and work in process $ 87,823 $ 79,357
Raw materials 37,126 35,488
Supplies 13,248 11,631
----------- -----------
Inventories at FIFO cost 138,197 126,476
LIFO reserve (22,790) (24,465)
----------- -----------
Net inventories $ 115,407 $ 102,011
========== ==========
NOTE 6. ACQUISITIONS, PLANT CLOSINGS, AND IMPAIRMENT COSTS
Acquisitions
In March 2002, the Company acquired substantially all of the assets of Athena
Industries, Inc., a designer and manufacturer of custom and stock
point-of-purchase displays and fixtures with expertise in wire and metal
fabrication. Athena Industries operates display manufacturing and assembly
facilities in Burr Ridge, Illinois.
In November 2001, the Company acquired certain assets of Advertising Display
Company, Inc., a producer of temporary and permanent point-of-purchase displays,
including its display operations in Memphis, Tennessee.
In accordance with Statement of Financial Accounting Standards No. 141,
"Business Combinations," these acquisitions are being accounted for under the
purchase method of accounting, which requires the Company to record the assets
and liabilities of the acquisitions at their estimated fair value with the
excess of the purchase price over these amounts being recorded as goodwill.
Total cash consideration paid was $22.9 million. Additional contingent cash
consideration of up to an aggregate of $1.25 million may be paid based on the
achievement of gross profit goals through calendar year 2003. Final adjustments
to the purchase price will be made based on finalization of the amount of
working capital acquired. Estimated goodwill of approximately $10.5 million was
recorded in connection with the acquisitions. The pro forma impact of the
acquisitions is not material to the interim operating results for the period
ending June 30, 2002.
Plant Closings and Impairment Costs
During the third quarter of fiscal 2002, the Company announced the closing of
its Vineland, New Jersey laminated paperboard products operations and the
consolidation of this facility into other laminated paperboard plants. This
closing resulted in the termination of approximately 110 employees. The Company
recorded an after-tax charge of approximately $4.7 million, consisting primarily
of equipment write-downs, severance, machinery relocation, and other one-time
costs. As of June 30, 2002, the Company had a remaining liability of
approximately $1.5 million. After giving effect to the sale of the Vineland real
estate for its estimated market value, the Company expects that the net sales
proceeds after cash closing costs will be approximately $1.2 million.
During the third quarter of fiscal 2002, the Company decided to permanently shut
down the No. 1 paper machine at its Lynchburg, Virginia mill, which was
previously idled in December 2000 to help increase operating rates at the
Company's other specialty paperboard mills. As a result, the Company incurred an
after-tax charge of $1.2 million during the three months ended June 30, 2002.
During fiscal 2001, the Company closed a folding carton plant in Augusta,
Georgia and an interior packaging plant in Eaton, Indiana. The closures resulted
in the termination of approximately 210 employees. In connection with these
closings, the Company made severance and other payments of $0.1 million and $1.3
million for the three and nine months ended June 30, 2002, respectively. The
Company had a remaining liability of approximately $0.2 million at June 30,
2002. The Company has consolidated the operations of these closed plants into
other existing facilities.
6
During fiscal 2000, the Company closed a laminated paperboard products plant in
Lynchburg, Virginia, and folding carton plants in Chicago, Illinois, Norcross,
Georgia and Madison, Wisconsin. The closures resulted in the termination of
approximately 550 employees. In connection with these closings, the Company made
severance and other payments of $0.3 million and $0.6 million for the three and
nine months ended June 30, 2002, respectively. The Company had a nominal
remaining liability at June 30, 2002. The Company has consolidated the
operations of these closed plants into other existing facilities.
NOTE 7. DEBT
During the first quarter of fiscal 2002, the Company amended its Liquidity Asset
Purchase Agreement to extend the term of its $125 million receivables-backed
financing transaction and back-up liquidity facility to November 12, 2002. The
proceeds of this transaction are used to repay borrowings outstanding under the
Company's revolving credit agreement.
NOTE 8. STOCK CONVERSION
On May 17, 2002, various executive officers and members of the Company's Board
of Directors delivered a notice to the Company of their election to convert the
shares of Class B Common Stock owned by them into shares of Class A Common Stock
pursuant to the Company's Restated and Amended Articles of Incorporation
("Articles of Incorporation"). Because the shares of Class B Common Stock
outstanding following such conversion represented less than 15% of the total
outstanding shares of the Company's common stock, pursuant to the Articles of
Incorporation, the remaining shares of Class B Common Stock were subject to
automatic conversion into shares of Class A Common Stock. On June 30, 2002, each
of the Company's 9,634,899 shares of issued and outstanding shares of Class B
Common Stock, par value $0.01 per share, were automatically converted into one
share of Class A Common Stock, par value $0.01 per share, thus eliminating all
Class B Common Stock. The Company's Articles of Incorporation do not authorize
any further issuance of shares of Class B Common Stock.
NOTE 9. NEW ACCOUNTING STANDARDS
On October 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." Under
SFAS 142, goodwill is no longer amortized but reviewed for impairment annually,
or more frequently if certain indicators arise. The Company is required to
complete the final step of the transitional impairment test by the end of the
fiscal year. The Company completed the final step as of June 30, 2002, and
determined that $8.2 million of the $12.6 million total goodwill associated with
its Laminated Paperboard Products division was impaired. An after-tax charge of
$5.8 million has been recognized as a cumulative effect of a change in
accounting principle as of the first quarter of fiscal 2002.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS 144 is effective for fiscal years beginning after December 15, 2001.
The Company expects to adopt SFAS 144 as of October 1, 2002 and is currently
assessing the impact of the pronouncement on the consolidated financial
statements.
7
NOTE 10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
--------- --------- ----------- -----------
Numerator:
Income before cumulative effect
of a change in accounting principle $ 5,471 $ 9,120 $ 29,254 $ 20,943
Cumulative effect of a change in
accounting principle, net of tax -- -- (5,844) 286
--------- --------- ----------- -----------
Net income available to common
shareholders 5,471 9,120 23,410 21,229
Add: Goodwill amortization, net of tax -- 1,951 -- 5,853
--------- --------- ----------- -----------
Adjusted net income $ 5,471 $ 11,071 $ 23,410 $ 27,082
========= ========= =========== ===========
Denominator:
Denominator for basic earnings per share -
weighted average shares 33,976 33,388 33,709 33,283
Effect of dilutive stock options and
restricted stock awards 718 194 592 65
--------- --------- ----------- -----------
Denominator for diluted earnings per share -
weighted average shares and
assumed conversions 34,694 33,582 34,301 33,348
Basic earnings per share:
Income before cumulative effect of a
change in accounting principle $ 0.16 $ 0.27 $ 0.87 $ 0.63
Cumulative effect of a change in
accounting principle -- -- (0.17) 0.01
--------- --------- ----------- -----------
Net income per share - basic 0.16 0.27 0.70 0.64
Add: Goodwill amortization, net of tax -- 0.06 -- 0.17
--------- --------- ----------- -----------
Adjusted net income per share - basic $ 0.16 $ 0.33 $ 0.70 $ 0.81
========= ========= =========== ===========
Diluted earnings per share:
Income before cumulative effect
of a change in accounting principle $ 0.16 $ 0.27 $ 0.85 $ 0.63
Cumulative effect of a change in
accounting principle -- -- (0.17) 0.01
--------- --------- ----------- -----------
Net income per share - diluted 0.16 0.27 0.68 0.64
Add: Goodwill amortization, net of tax -- 0.06 -- 0.17
--------- --------- ----------- -----------
Adjusted net income per share - diluted $ 0.16 $ 0.33 $ 0.68 $ 0.81
========= ========= =========== ===========
8
NOTE 11. SEGMENT INFORMATION
The following table sets forth business segment information (in thousands):
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
--------- --------- ----------- -----------
Net sales (aggregate):
Packaging Products $ 199,664 $ 198,618 $ 586,179 $ 601,111
Merchandising Displays and Corrugated Packaging 67,970 65,757 210,527 189,365
Paperboard 129,094 130,506 377,918 395,119
--------- --------- ----------- -----------
Total $ 396,728 $ 394,881 $ 1,174,624 $ 1,185,595
--------- --------- ----------- -----------
Less net sales (intersegment):
Packaging Products $ $ 965 $ 2,602 $ 2,644
1,034
Merchandising Displays and Corrugated Packaging 1,277 1,358 3,801 4,224
Paperboard 37,275 35,493 112,393 109,083
--------- --------- ----------- -----------
Total $ 39,586 $ 37,816 $ 118,796 $ 115,951
--------- --------- ----------- -----------
Net sales (unaffiliated customers):
Packaging Products $ 198,630 $ 197,653 $ 583,577 $ 598,467
Merchandising Displays and Corrugated Packaging 66,693 64,399 206,726 185,141
Paperboard 91,819 95,013 265,525 286,036
--------- --------- ----------- -----------
Total $ 357,142 $ 357,065 $ 1,055,828 $ 1,069,644
--------- --------- ----------- -----------
Segment income:
Packaging Products $ 14,605 $ 12,777 $ 38,989 $ 35,295
Merchandising Displays and Corrugated Packaging 4,569 8,328 23,807 19,604
Paperboard 9,033 10,503 21,667 31,114
--------- --------- ----------- -----------
28,207 31,608 84,463 86,013
Goodwill amortization -- (2,143) -- (6,428)
Plant closing and other costs (9,681) (2,523) (9,681) (7,563)
Other non-allocated expenses (2,352) (1,917) (5,324) (4,443)
Interest expense (6,542) (8,072) (19,638) (27,466)
Interest and other income 33 123 401 420
Minority interest in income of consolidated (874) (846) (2,394) (2,370)
subsidiary
--------- --------- ----------- -----------
Income before income taxes $ 8,791 $ 16,230 $ 47,827 $ 38,163
--------- --------- ----------- -----------
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto, included herein, and our
audited consolidated financial statements and notes thereto for the fiscal year
ended September 30, 2001 which have been filed with the Securities and Exchange
Commission as part of our Annual Report on Form 10-K.
SEGMENT AND MARKET INFORMATION
We report our results in three industry segments: (1) packaging products, (2)
merchandising displays and corrugated packaging, and (3) paperboard. No single
external customer accounts for more than 10% of our consolidated net sales. For
the nine months ended June 30, 2002, the top ten customers represented
approximately 29% of consolidated net sales.
The packaging products segment consists of facilities that produce folding
cartons, interior packaging and thermoformed plastic packaging. We compete with
a significant number of national, regional and local packaging suppliers
operating in North America. During fiscal 2001, we sold packaging products to
approximately 3,100 customers. For the nine months ended June 30, 2002, the top
ten customers accounted for approximately 34% of the external sales of the
packaging products segment. We sell packaging products to customers in a variety
of industries including customers in the food and beverage industries and to
manufacturers of other non-durable goods. The packaging business is highly
competitive. As a result, we regularly bid for sales opportunities to customers
for new business or for renewal of existing business. The loss of business or
the award of new business from our larger customers may have a significant
impact on our results of operations.
In July 2002, we terminated our relationship with DuPont Teijin Films as the
supplier of film used in our DuraFresh(R) line of packaging products. The
termination of this contract is not expected to have an adverse impact on our
packaging products operations.
The merchandising displays and corrugated packaging segment consists of
facilities that produce merchandising displays and flexographic and
litho-laminated corrugated packaging. We compete with a number of national,
regional and local suppliers of those goods in this segment. During fiscal 2001,
we sold display products to approximately 200 customers and corrugated packaging
to approximately 900 customers. For the nine months ended June 30, 2002, the top
ten customers accounted for approximately 56% of external sales. Due to the
highly competitive nature of the merchandising displays and corrugated packaging
business, we regularly bid for sales opportunities to customers for new business
or for renewal of existing business. The loss of business or the award of new
business from our larger customers may have a significant impact on our results
of operations.
The paperboard segment consists of facilities that collect recovered paper and
that manufacture 100% recycled clay-coated and specialty paperboard, corrugating
medium, and laminated paperboard products. In our clay-coated and specialty
paperboard divisions, we compete with integrated and non-integrated companies
operating in North America manufacturing various grades of paperboard as well as
a limited amount of paperboard imported by manufacturers outside of North
America. In our laminated paperboard products division, we compete with a small
number of national, regional and local companies offering highly specialized
products. We also compete with foreign companies in the book cover market. Our
recycled fiber division competes with national, regional and local companies.
During fiscal 2001, we sold recycled paperboard, corrugating medium, laminated
paperboard products and recovered paper to approximately 2,100 customers. For
the nine months ended June 30, 2002, the top ten external customers of the
segment represented approximately 51% of external sales. Due to the highly
competitive nature of the paperboard business, we regularly bid for sales
opportunities to customers for new business or for renewal of existing business.
The loss of business or the award of new business from our larger customers may
have a significant impact on our results of operations. For the nine months
ended June 30, 2002, approximately 30% of our segment sales were made to
internal customers, predominantly in our packaging products segment. Our
paperboard segment's sales volumes may therefore be directly impacted by changes
in demand for our packaging products.
10
In July 2002, Smurfit-Stone Container Corporation, a customer for whom we
provided approximately 15,000 tons of paperboard annually for use in tube and
core manufacturing, announced the sale of 17 of its tube and core manufacturing
facilities to Caraustar Industries, Inc. As a result, Caraustar Industries, Inc.
plans to increase its sales of paperboard to these newly acquired facilities. We
believe we will be able to shift a significant portion of the volume of
paperboard sold to Smurfit-Stone Container Corporation to other tube and core
manufacturers and, therefore, do not expect a material impact on our specialty
paperboard operations.
The following table shows certain operating data for our three industry
segments. Certain of our income and expenses are not allocated to our segments
and are thus not reflected in the information used by management to make
operating decisions and assess performance. These items are reported as
non-allocated expenses. These include elimination of intercompany profit, plant
closing and related expenses and certain corporate expenses.
ROCK-TENN COMPANY
INDUSTRY SEGMENT INFORMATION
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR TONNAGE DATA)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------- -------- --------- -----------
NET SALES:
Packaging Products Segment $199,664 $198,618 $586,179 $ 601,111
Merchandising Displays and
Corrugated Packaging Segment 67,970 65,757 210,527 189,365
Paperboard Segment 129,094 130,506 377,918 395,119
Intersegment Eliminations (39,586) (37,816) (118,796) (115,951)
-------- -------- --------- -----------
TOTAL $357,142 $357,065 $1,055,828 $1,069,644
-------- -------- --------- -----------
INCOME BEFORE INCOME TAXES:
Packaging Products Segment $14,605 $ 12,777 $38,989 $ 35,295
Merchandising Displays and
Corrugated Packaging Segment 4,569 8,328 23,807 19,604
Paperboard Segment 9,033 10,503 21,667 31,114
-------- -------- --------- -----------
Segment Income 28,207 31,608 84,463 86,013
Goodwill Amortization --- (2,143) --- (6,428)
Plant Closing and Other Costs (9,681) (2,523) (9,681) (7,563)
Other Non-Allocated Expenses (2,352) (1,917) (5,324) (4,443)
Interest Expense (6,542) (8,072) (19,638) (27,466)
Interest and Other Income 33 123 401 420
Minority Interest in Income of
Consolidated Subsidiary (874) (846) (2,394) (2,370)
-------- -------- --------- -----------
TOTAL $8,791 $ 16,230 $47,827 $ 38,163
======== ======== ========= ===========
Paperboard Shipped (in tons)* 279,336 268,687 819,574 789,034
======== ======== ========= ===========
*Includes tons shipped by Seven Hills Paperboard, LLC, our joint venture with
LaFarge Corporation.
11
RESULTS OF OPERATIONS
Net Sales (Unaffiliated Customers)
Net sales remained flat at $357.1 million for the quarters ended June 30, 2002
and June 30, 2001. Net sales for the nine months ended June 30, 2002 decreased
1.3% to $1,055.8 million from $1,069.6 million for the nine months ended June
30, 2001. Net sales for the nine months ended June 30, 2002 decreased primarily
as a result of weaker market conditions in our paperboard businesses and the
impact of lower paperboard prices on our paperboard and converting businesses.
Further information is provided in the segment discussions that follow.
Net Sales (Aggregate) - Packaging Products Segment
First Second Third Nine Months Fourth Fiscal
(In Millions) Quarter Quarter Quarter Ended 6/30 Quarter Year
------------- ------- ------- ------- ----------- ------- -------
2001 $195.6 $206.9 $198.6 $601.1 $205.0 $806.1
2002 194.5 192.0 199.7 586.2 -- --
Net sales of packaging products before intersegment eliminations for the quarter
ended June 30, 2002 increased 0.6% to $199.7 million from $198.6 million for the
quarter ended June 30, 2001. The increase was attributable to higher volumes in
our folding carton division partially offset by the pass through of lower
paperboard prices and by volume and price decreases in our plastic packaging and
interior packaging divisions. Net sales of packaging products before
intersegment eliminations for the nine months ended June 30, 2002 decreased 2.5%
to $586.2 million from $601.1 million for the nine months ended June 30, 2001.
The decrease for the nine months was a result of lower volumes and selling
prices in our plastic packaging and interior packaging divisions offsetting the
volume increases in our folding carton division. The decline in sales prices
reflected in part the pass through of lower costs for paperboard.
Net Sales (Aggregate) - Merchandising Displays and Corrugated Packaging Segment
First Second Third Nine Months Fourth Fiscal
(In Millions) Quarter Quarter Quarter Ended 6/30 Quarter Year
------------- ------- ------- ------- ----------- ------- ------
2001 $ 57.8 $ 65.8 $65.8 $189.4 $74.0 $263.4
2002 72.4 70.1 68.0 210.5 -- --
Net sales of merchandising displays and corrugated packaging before intersegment
eliminations for the quarter ended June 30, 2002 increased 3.3% to $68.0 million
from $65.8 million for the quarter ended June 30, 2001. Net sales within this
segment before intersegment eliminations for the nine months ended June 30, 2002
increased 11.1% to $210.5 million from $189.4 million for the nine months ended
June 30, 2001. The increase was attributable to higher volumes in our display
business, including the benefit of two major product launches on behalf of major
national consumer products companies during the first quarter of fiscal 2002.
These results were offset by lower volumes in our corrugated packaging business
due to generally weaker market conditions.
Net Sales (Aggregate) - Paperboard Segment
First Second Third Nine Months Fourth Fiscal
(In Millions) Quarter Quarter Quarter Ended 6/30 Quarter Year
------------- ------- ------- ------- ----------- ------- ------
2001 $131.5 $133.1 $130.5 $395.1 $129.4 $524.5
2002 125.1 123.7 129.1 377.9 -- --
Net sales of paperboard before intersegment eliminations for the quarter ended
June 30, 2002 decreased 1.1% to $129.1 million from $130.5 million for the
quarter ended June 30, 2001. The decrease for the three months ended June 30,
2002 was attributable to lower sales of laminated paperboard products and
specialty paperboard partially offset by increased sales in our recycled fiber
business due to increased demand and higher selling prices for recycled fiber in
the third quarter of fiscal 2002. Net sales of paperboard before intersegment
eliminations for the nine months ended June 30, 2002 decreased 4.4% to $377.9
million from $395.1 million for the nine months ended June 30, 2001. The
decrease for the nine months ended June 30, 2002 was primarily due to a decrease
in demand for our products by customers in the book and ready to assemble
furniture industries, which adversely affected volumes of laminated paperboard
products and specialty paperboard. Reduced sales volumes at our RTS packaging
division also contributed to the decline in sales in our specialty paperboard
division.
12
Cost of Goods Sold
Cost of goods sold for the quarter ended June 30, 2002 was $280.4 million
compared to $280.5 million for the quarter ended June 30, 2001. Cost of goods
sold as a percentage of net sales was 78.5% and 78.6% for the quarters ended
June 30, 2002 and June 30, 2001, respectively. Cost of goods sold for the nine
months ended June 30, 2002 decreased 2.8% to $829.5 million from $853.1 million
for the nine months ended June 30, 2001. Cost of goods sold as a percentage of
net sales for the nine months ended June 30, 2002 decreased to 78.6% from 79.8%
for the nine months ended June 30, 2001. The decrease in cost of goods sold as a
percentage of net sales resulted primarily from lower natural gas prices
compared to the prior year.
Substantially all of our U.S. inventories are valued at the lower of cost or
market with cost determined on the last-in, first-out (LIFO) inventory valuation
method, which we believe generally results in a better matching of current costs
and revenues than under the first-in, first-out (FIFO) inventory valuation
method. In periods of decreasing costs, the LIFO method generally results in
lower cost of goods sold than under the FIFO method. In periods of increasing
costs, the results are generally the opposite. Our quarterly results of
operations reflect LIFO estimates based on management's projection of expected
year-end inventory levels and costs. Because these estimates are subject to many
factors beyond management's control, interim results are subject to the final
year-end LIFO inventory valuation.
The following table illustrates the comparative effect of LIFO and FIFO
accounting on our results of operations. These supplemental FIFO earnings
reflect the after-tax effect of eliminating the LIFO adjustment each year.
Three months ended June 30, Nine months ended June 30,
2002 2001 2002 2001
--------------------- ------------------- ------------------- --------------------
(In Millions) LIFO FIFO LIFO FIFO LIFO FIFO LIFO FIFO
------------- ------- ------- ------- ------- ------- ------- ------- -------
Cost of goods sold $ 280.4 $ 280.7 $ 280.5 $ 281.8 $ 829.5 $ 831.1 $ 853.1 $ 854.6
Net income 5.5 5.3 9.1 8.3 23.4 22.4 21.2 20.3
Gross Profit
First Second Third Nine Months Fourth Fiscal
(% of Net Sales) Quarter Quarter Quarter Ended 6/30 Quarter Year
---------------- ------- ------- ------- ---------- ------- ------
2001 19.1% 20.1% 21.4% 20.2% 21.6% 20.6%
2002 22.0% 20.8% 21.5% 21.4% -- --
Gross profit for the quarter ended June 30, 2002 was $76.7 million compared to
$76.6 million for the quarter ended June 30, 2001. Gross profit as a percentage
of net sales was 21.5% and 21.4% for the quarters ended June 30, 2002 and 2001,
respectively. Gross profit for the nine months ended June 30, 2002 increased
4.6% to $226.4 million from $216.5 million for the nine months ended June 30,
2001. Gross profit as a percentage of net sales was 21.4% and 20.2% for the nine
months ended June 30, 2002 and 2001, respectively. See "Cost of Goods Sold."
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended June 30, 2002
increased 11.4% to $50.9 million from $45.7 million for the quarter ended June
30, 2001. Selling, general and administrative expenses for the nine months ended
June 30, 2002 increased 9.7% to $146.5 million from $133.5 million for the nine
months ended June 30, 2001. Selling, general and administrative expenses as a
percentage of net sales was 14.2% and 12.8% for the quarters ended June 30, 2002
and June 30, 2001, respectively. Selling, general and administrative expenses as
a percentage of net sales was 13.9% and 12.5% for the nine months ended June 30,
2002 and 2001, respectively. The increase in these expenses as a percentage of
net sales resulted primarily from $1.8 million of expenses incurred during the
nine months ended June 30, 2002 in connection with our Six Sigma quality and
process improvement program instituted in October 2001, and from higher
compensation expense associated with incentive compensation, higher health and
property insurance costs and growth initiatives at our merchandising displays
business.
Acquisitions
In March 2002, we acquired substantially all of the assets of Athena Industries,
Inc., a designer and manufacturer of custom and stock point-of-purchase displays
and fixtures with expertise in wire and metal fabrication. Athena Industries
operates display manufacturing and assembly facilities in Burr Ridge, Illinois.
In November 2001, we acquired certain assets of Advertising Display Company,
Inc., a producer of temporary and permanent point-of-purchase displays,
including its display operations in Memphis, Tennessee.
13
In accordance with Statement of Financial Accounting Standards No. 141,
"Business Combinations," these acquisitions are being accounted for under the
purchase method of accounting, which requires that we record the assets and
liabilities of the acquisitions at their estimated fair value with the excess of
the purchase price over these amounts being recorded as goodwill. Total cash
consideration paid was $22.9 million. Additional contingent cash consideration
of up to an aggregate of $1.25 million may be paid based on the achievement of
gross profit goals through calendar year 2003. Final adjustments to the purchase
price will be made based on finalization of the amount of working capital
acquired. Estimated goodwill of approximately $10.5 million was recorded in
connection with the acquisitions. The pro forma impact of the acquisitions is
not material to the interim operating results for the period ending June 30,
2002.
Plant Closings and Impairment Costs
During the third quarter of fiscal 2002, we announced the closing of our
Vineland, New Jersey laminated paperboard products operations and the
consolidation of this facility into other laminated paperboard plants. This
closing resulted in the termination of approximately 110 employees. We recorded
an after-tax charge of approximately $4.7 million, consisting primarily of
equipment write-downs, severance, machinery relocation, and other one-time
costs. As of June 30, 2002, the Company had a remaining liability of
approximately $1.5 million. After giving effect to the sale of the Vineland real
estate for its estimated market value, we expect that the net sales proceeds
after cash closing costs will be approximately $1.2 million.
During the third quarter of fiscal 2002, we decided to permanently shut down the
No. 1 paper machine at our Lynchburg, Virginia mill, which was previously idled
in December 2000 to help increase operating rates at our other specialty
paperboard mills. As a result, we incurred an after-tax charge of $1.2 million
during the three months ended June 30, 2002.
During fiscal 2001, we closed a folding carton plant in Augusta, Georgia and an
interior packaging plant in Eaton, Indiana. The closures resulted in the
termination of approximately 210 employees. In connection with these closings,
we made severance and other payments of $0.1 million and $1.3 million for the
three and nine months ended June 30, 2002, respectively. We had a remaining
liability of approximately $0.2 million at June 30, 2002. We have consolidated
the operations of these closed plants into other existing facilities.
During fiscal 2000, we closed a laminated paperboard products plant in
Lynchburg, Virginia, and folding carton plants in Chicago, Illinois, Norcross,
Georgia and Madison, Wisconsin. The closures resulted in the termination of
approximately 550 employees. In connection with these closings, we made
severance and other payments of $0.3 million and $0.6 million for the three and
nine months ended June 30, 2002, respectively. We had a nominal remaining
liability at June 30, 2002. We have consolidated the operations of these closed
plants into other existing facilities.
Segment Operating Income.
Operating Income - Packaging Products Segment
Net Sales Operating Return
(In Millions, except Percentages) (Aggregate) Income on Sales
- --------------------------------- ----------- --------- --------
First Quarter $195.6 $ 10.8 5.5%
Second Quarter 206.9 11.7 5.7
Third Quarter 198.6 12.8 6.4
------ ----
Nine Months Ended 6/30 601.1 35.3 5.9
Fourth Quarter 205.0 12.8 6.2
------ ------ ----
Fiscal 2001 $806.1 $ 48.1 6.0%
------ ------ ----
FIRST QUARTER $194.5 $ 11.5
5.9%
SECOND QUARTER 192.0 12.9 6.7
THIRD QUARTER 199.7 14.6 7.3
------ ----
NINE MONTHS ENDED 6/30 586.2 39.0 6.7
FOURTH QUARTER -- -- --
------ ------ ----
FISCAL 2002 -- -- --
------ ------ ----
14
Operating income attributable to the packaging products segment for the quarter
ended June 30, 2002 increased 14.1% to $14.6 million from $12.8 million for the
quarter ended June 30, 2001. Operating income attributable to the packaging
products segment for the nine months ended June 30, 2002 increased 10.5% to
$39.0 million from $35.3 million for the nine months ended June 30, 2001.
Operating margin for the quarter ended June 30, 2002 was 7.3% compared to 6.4%
for the quarter ended June 30, 2001. Operating margin for the nine months ended
June 30, 2002 was 6.7% compared to 5.9% for the nine months ended June 30, 2001.
The increase in operating margin was primarily the result of operating
efficiencies in our folding carton and interior packaging businesses gained
through plant consolidations in fiscal 2000 and 2001.
Operating Income - Merchandising Displays and Corrugated Packaging Segment
Net Sales Operating Return
(In Millions, except Percentages) (Aggregate) Income on Sales
- --------------------------------- ----------- --------- --------
First Quarter $ 57.8 $ 2.8 4.8%
Second Quarter 65.8 8.5 12.9
Third Quarter 65.8 8.3 12.6
------ ------ -----
Nine Months Ended 6/30 189.4 19.6 10.3
Fourth Quarter 74.0 10.6 14.3
------ ------ -----
Fiscal 2001 $263.4 $ 30.2 11.5%
------ ------ -----
FIRST QUARTER $ 72.4 $ 11.4 15.7%
SECOND QUARTER 70.1 7.8 11.1
THIRD QUARTER 68.0 4.6 6.8
------ ------ -----
NINE MONTHS ENDED 6/30 210.5 23.8 11.3
FOURTH QUARTER -- -- --
------ ------ -----
FISCAL 2002 -- -- --
------ ------ -----
Operating income attributable to this segment for the quarter ended June 30,
2002 decreased 44.6% to $4.6 million from $8.3 million in the quarter ended June
30, 2001. Operating margin for the quarter ended June 30, 2002 decreased to 6.8%
from 12.6% for the quarter ended June 30, 2001. The decrease in operating margin
for the quarter resulted from weaker demand and lower prices in our corrugated
packaging division due to generally weaker market conditions as well as the
impact of increased costs associated with building the sales and operations
infrastructure in our merchandising display business. Operating income
attributable to this segment for the nine months ended June 30, 2002 was $23.8
million as compared to $19.6 million for the nine months ended June 30, 2001, an
increase of 21.4%. Operating margin for the nine months ended June 30, 2002
increased to 11.3% from 10.3% for the nine months ended June 30, 2001. The
increase in operating margin for the nine months ended June 30, 2002 is
attributable to increased sales volumes in our merchandising display business
due to higher demand and two new product launches during the first quarter of
fiscal 2002, which offset weaker demand in our corrugated packaging division.
15
Operating Income - Paperboard Segment
Net Sales Operating
(In Millions, except Percentages) (Aggregate) Income Return on Sales
- --------------------------------- ----------- --------- ---------------
First Quarter $ 131.5 $ 10.3 7.8%
Second Quarter 133.1 10.3 7.7
Third Quarter 130.5 10.5 8.0
------- ------ ----
Nine Months Ended 6/30 395.1 31.1 7.9
Fourth Quarter 129.4 10.5 8.1
------- ------ ----
Fiscal 2001 $ 524.5 $ 41.6 7.9%
======= ====== ====
FIRST QUARTER $ 125.1 $ 6.3 5.0%
SECOND QUARTER 123.7 6.3 5.1
THIRD QUARTER 129.1 9.1 7.0
------- ------ ----
NINE MONTHS ENDED 6/30 377.9 21.7 5.7
FOURTH QUARTER --- --- ---
------- ------ ----
FISCAL 2002 --- --- ---
======= ====== ====
Operating income attributable to the paperboard segment for the quarter ended
June 30, 2002 decreased 13.3% to $9.1 million from $10.5 million for the quarter
ended June 30, 2001. Operating income attributable to the paperboard segment for
the nine months ended June 30, 2002 decreased 30.2% to $21.7 million from $31.1
million for the nine months ended June 30, 2001. Operating margin for the
quarter ended June 30, 2002 was 7.0% compared to 8.0% for the quarter ended June
30, 2001. Operating margin for the nine months ended June 30, 2002 was 5.7%
compared to 7.9% for the nine months ended June 30, 2001. The decrease in
operating margin resulted from weaker market conditions. Sales of laminated
paperboard products declined due to a decrease in demand by customers in the
book and ready to assemble furniture industries. The reduced sales volumes of
laminated paperboard products reduced operating income in our specialty
paperboard division, but was partially offset by improvements resulting from our
gypsum linerboard joint venture. Operating income in our coated paperboard
division for the nine months ended June 30, 2002 declined due to lower pricing
and a longer and more costly than expected capital improvement shutdown of our
Battle Creek mill. The decreases in operating margin of our mills were also
attributable to rising fiber prices during the three months ended June 30, 2002
which were not passed through to customers and were partially offset by lower
energy prices. Increasing prices and demand of recovered fiber increased the
operating margin of our recycled fiber division, partially offsetting the
declines in operating margin of the other divisions within the paperboard
segment.
Our ability to fully pass through fiber price increases can be limited based on
competitive market conditions for various products that we sell and by the
actions of our competitors. In addition, most of our paperboard and
paperboard-based converted products are sold pursuant to term contracts that
provide that prices are either fixed for specified terms, or provide for price
adjustments based on changes in specified paperboard index prices. The effect of
these contractual provisions generally is to either limit the amount or result
in delays in our ability to recover announced price increases for paperboard.
Effective for shipments on or after June 17, 2002 the paperboard group has
started passing through fiber costs by increasing selling prices for all grades
of paperboard.
16
The following table summarizes tonnage data, recovered paper costs and
paperboard prices for fiscal 2001 and 2002:
Average Corrugated Weighted
Specialty Coated Recycled Medium Average Total Average
Tons Tons Paperboard Tons Corrugated Tons Price Average
Shipped(a) Shipped Price Shipped Medium Shipped All Recovered
(In (In (a)(b) (In Price(b) (In Tons(b) Paper
Thousands) Thousands) (Per Ton) Thousands) (Per Ton) Thousands) (Per Ton) Cost(b)
---------- ---------- ---------- ----------- ---------- ---------- --------- ---------
First Quarter 97.9 118.8 $ 448 41.5 $ 378 258.2 $ 436 $ 74
Second Quarter 102.7 119.6 445 39.8 365 262.1 433 68
Third Quarter 109.1 117.6 430 42.0 350 268.7 417 66
----- ------- ----- -----
Nine Months
Ended 6/30 309.7 356.0 441 123.3 364 789.0 429 69
Fourth Quarter 104.7 126.0 428 45.9 349 276.6 414 67
------ ------ ----- ------ ----- ------- ----- -----
Fiscal 2001 414.4 482.0 $ 438 169.2 $ 360 1,065.6 $ 425 $ 69
------ ------ ----- ------ ----- ------- ----- -----
FIRST QUARTER 98.5 125.4 $ 424 43.6 $ 342 267.5 $ 410 $ 67
SECOND QUARTER 112.4 117.8 410 42.5 337 272.7 398 65
THIRD QUARTER 117.7 117.7 410 44.0 331 279.4 397 78
------ ------ ----- ------ ----- ------- ----- -----
NINE MONTHS
ENDED 6/30 328.6 360.9 415 130.1 337 819.6 402 70
FOURTH QUARTER -- -- -- -- -- -- -- --
------ ------ ----- ------ ----- ------- ----- -----
FISCAL 2002 -- -- -- -- -- -- -- --
------ ------ ----- ------ ----- ------- ----- -----
(a) Specialty Tons Shipped and Average Recycled Paperboard Price Per Ton
include tons shipped by Seven Hills Paperboard, LLC, our joint venture
with LaFarge Corporation.
(b) The method of computation for the Average Recycled Paperboard and
Corrugated Medium Prices and the Weighted Average Recovered Paper Cost
has been revised, and the amounts restated, for all periods shown, to
better reflect their impact on our segment operating results. The
Average Recycled Paperboard and Corrugated Medium Prices represent the
average gross sales price per manufactured ton shipped adjusted for
volume discounts and freight billed or allowed. The Average Recycled
Paperboard and Corrugated Medium Prices are not adjusted for payment
discounts or sales returns and allowances. The Weighted Average
Recovered Paper Cost represents the average cost of fiber per
manufactured ton shipped, including related freight and brokerage
costs.
Interest Expense
Interest expense for the quarter ended June 30, 2002 decreased to $6.5 million
from $8.1 million for the quarter ended June 30, 2001. Interest expense for the
nine months ended June 30, 2002 decreased to $19.6 million from $27.5 million
for the nine months ended June 30, 2001. The decrease in interest expense for
the quarter and nine months ended June 30, 2002 was due to lower interest rates
and a decrease in our average outstanding borrowings. For the three months ended
June 30, 2002 and June 30, 2001, average interest rates were 5.4% and 6.2%,
respectively, and the average outstanding borrowings were $485.7 million and
$517.0 million, respectively. For the nine months ended June 30, 2002 and June
30, 2001, average interest rates were 5.4% and 7.0%, respectively, and the
average outstanding borrowings were $480.9 million and $522.9 million,
respectively.
Provision for Income Taxes
Income tax expense for the quarter ended June 30, 2002 was $3.3 million compared
to income tax expense of $7.1 million for the quarter ended June 30, 2001.
Provision for income taxes increased to $18.6 million for the nine months ended
June 30, 2002 from $17.2 million for the nine months ended June 30, 2001. The
Company's effective tax expense rate was 37.8% for the quarter ended June 30,
2002 compared to an effective tax expense rate of 43.8% for the quarter ended
June 30, 2001. The Company's effective tax rate decreased to 38.8% for the nine
months ended June 30, 2002 compared to 45.1% for the nine months ended June 30,
2001. In the prior year, differences between our effective tax rate and
statutory rates related primarily to the amortization of goodwill, which is not
deductible for income tax purposes.
Net Income and Earnings Per Common and Common Equivalent Share
Net income for the quarter ended June 30, 2002 was $5.5 million compared to $9.1
million for the quarter ended June 30, 2001. Net income for the nine months
ended June 30, 2002 and 2001 was $23.4 million and $21.2 million, respectively.
Net income as a percentage of net sales was 1.5% and 2.6% for the quarters ended
June 30, 2002 and 2001, respectively. Net income as a percentage of net sales
was 2.2% and 2.0% for the nine months ended June 30, 2002 and 2001,
respectively. Earnings per common and common equivalent share for the quarter
ended June 30, 2002 were $0.16 compared to $0.27 for the same period last year.
Earnings per common and common equivalent share for the nine months ended June
30, 2002 and 2001 were $0.68 and $0.64, respectively.
17
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Capital Expenditures
We have funded our working capital requirements and capital expenditures,
including acquisitions, from net cash provided by operating activities,
borrowings under term notes, a receivables-backed financing facility, and bank
credit facilities and proceeds received in connection with the issuance of
industrial revenue bonds and debt and equity securities. We maintain a revolving
credit facility under which we have aggregate borrowing availability of $300
million. At June 30, 2002, we had $3.7 million outstanding under our revolving
credit facility. The revolving credit facility terminates in 2005. Cash and cash
equivalents, $4.3 million at June 30, 2002, decreased from $5.2 million at
September 30, 2001.
Net cash provided by operating activities was $80.1 million for the nine months
ended June 30, 2002 and $92.0 million for the nine months ended June 30, 2001.
The decrease was primarily a result of an increase in inventories and decreases
in accounts payable and accrued liabilities balances. Net cash used for
investing activities was $68.2 million for the nine months ended June 30, 2002
compared to $58.4 million for the nine months ended June 30, 2001 and consisted
primarily of capital expenditures for the nine months ended June 30, 2002 and
June 30, 2001 as well as the purchase of two businesses offset by proceeds from
the sale of real property in Chicago, Illinois and Madison, Wisconsin and the
sale of certain assets of our Des Moines, Iowa recycled fiber collection
facility during the nine months ended June 30, 2002. Net cash used for financing
activities aggregated $13.8 million for the nine months ended June 30, 2002 and
consisted primarily of net repayments of debt and dividend payments offset by
issuance of common stock. Net cash used for financing activities aggregated
$36.3 million for the nine months ended June 30, 2001 and consisted primarily of
net repayments of borrowings, net purchases of common stock and dividend
payments.
Capital expenditures during the nine months ended June 30, 2002 aggregated $53.5
million. We estimate that our capital expenditures will aggregate approximately
$72 to $75 million for fiscal 2002. These expenditures will be used to purchase
and upgrade machinery and operating equipment and for building expansions and
improvements. We currently estimate that our capital expenditures will aggregate
approximately $55 to $60 million in fiscal 2003. We continually review our needs
and opportunities for capital expenditures to increase our efficiency and
increase our sales. It is possible that we may change our capital expenditures
plans and that actual capital expenditures may vary materially from this amount.
We anticipate that we will be able to fund our capital expenditures,
acquisitions, interest payments, stock repurchases, dividends and working
capital needs for the foreseeable future from cash generated from operations,
borrowings under our revolving credit facility, proceeds from the issuance of
debt or equity securities or other additional long-term debt financing.
Derivative Instruments
We enter into a variety of derivative transactions. We use interest rate cap
agreements and interest rate swap agreements to manage the interest rate
characteristics of a portion of our outstanding debt. We use forward contracts
to limit exposure to fluctuations in Canadian foreign currency rates with
respect to our receivables denominated in Canadian dollars. We also use
commodity swap agreements to limit our exposure to falling sales prices and
rising raw material costs.
For each derivative instrument that is designated and qualifies as a fair value
hedge, the gain or loss on the derivative instrument as well as the offsetting
loss or gain on the hedged item attributable to the hedged risk are recognized
in current earnings during the period of the changes in fair values. For each
derivative instrument that is designated and qualifies as a cash flow hedge, the
effective portion of the gain or loss on the derivative instrument is reported
as a component of accumulated other comprehensive income and reclassified into
earnings in the same period or periods during which the hedged transaction
affects earnings. The remaining gain or loss on the derivative instrument in
excess of the cumulative change in the present value of future cash flows of the
hedged item, if any, is recognized in current earnings during the period of
change. For derivative instruments not designated as hedging instruments, the
gain or loss is recognized in current earnings during the period of change.
Derivatives are included in other long-term liabilities and other assets on the
balance sheet.
18
In August 2002, we realized $12.4 million cash proceeds by terminating the
interest rate swaps that were designated as fair value hedges of our fixed rate
debt and entering into comparable, replacement interest rate swaps at
then-current market levels. No material impact on net income or change in
interest rate risk is expected from these transactions relative to our position
prior to entering into these transactions.
NEW ACCOUNTING STANDARDS
On October 1, 2001, we adopted Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets." Under SFAS 142,
goodwill is no longer amortized but reviewed for impairment annually, or more
frequently if certain indicators arise. We are required to complete the final
step of the transitional impairment test by the end of the fiscal year. We
completed the final step as of June 30, 2002, and determined that $8.2 million
of the $12.6 million total goodwill associated with our Laminated Paperboard
Products division was impaired. An after-tax charge of $5.8 million has been
recognized as a cumulative effect of a change in accounting principle as of the
first quarter of fiscal 2002.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS 144 is effective for fiscal years beginning after December 15, 2001.
We expect to adopt SFAS 144 as of October 1, 2002 and are currently assessing
the impact of the pronouncement on the consolidated financial statements.
FORWARD-LOOKING STATEMENTS
Statements herein regarding, among other things, estimated capital expenditures
for fiscal 2002 and interim LIFO estimates constitute forward-looking statements
within the meaning of the Securities Act of 1933 and the Securities Exchange Act
of 1934. Such statements are subject to certain risks and uncertainties that
could cause actual amounts to differ materially from those projected. With
respect to these forward-looking statements, management has made assumptions
regarding, among other things, the amount and timing of expected capital
expenditures, expected year-end inventory levels and costs, competitive
conditions in our businesses and general economic conditions. These
forward-looking statements are subject to certain risks including, among others,
that the foregoing assumptions are incorrect. Further, these forward-looking
statements are subject to other general risks including, among others, decreases
in demand for our products, increases in energy and raw material costs,
fluctuations in selling prices, possible adverse actions of our customers, our
competitors and suppliers and adverse changes in general market and industry
conditions. We believe these forward-looking statements are reasonable; however,
undue reliance should not be placed on such estimates, which are based on
current expectations. Further, forward-looking statements speak only as of the
date they are made, and we undertake no obligation to update publicly any of
them in light of new information or future events.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of certain market risks related to the Company, see the "Market
Risk Sensitive Instruments and Positions" section in the Management's Discussion
and Analysis of Results of Operations and Financial Condition, in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 2001. There
have been no significant developments with respect to derivatives or exposure to
market risk.
20
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 17, 2002, various executive officers and members of the Company's Board
of Directors delivered a notice to the Company of their election to convert the
shares of Class B Common Stock owned by them into shares of Class A Common Stock
pursuant to the Company's Restated and Amended Articles of Incorporation
("Articles of Incorporation"). Because the shares of Class B Common Stock
outstanding following such conversion represented less than 15% of the total
outstanding shares of the Company's common stock, pursuant to the Articles of
Incorporation, the remaining shares of Class B Common Stock were subject to
automatic conversion into shares of Class A Common Stock. On June 30, 2002, each
of the Company's 9,634,899 shares of issued and outstanding shares of Class B
Common Stock, par value $0.01 per share, were automatically converted into one
share of Class A Common Stock, par value $0.01 per share, thus eliminating all
Class B Common Stock. The Company did not receive any compensation as a result
of the conversion. The Company's Articles of Incorporation do not authorize any
further issuance of shares of Class B Common Stock.
The conversion of the shares of Class B Common Stock was exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance on the exemption provided by Section 3(a)(9) of the
Securities Act because the shares were exchanged by the Company with its
existing security holders exclusively where no commission or other remuneration
was paid or given directly or indirectly for soliciting such exchange.
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
3.1 -- Restated and Amended Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1, File No. 33-73312).
3.2 -- Articles of Amendment to the Registrant's Restated and Amended Articles of
Incorporation (incorporated by reference to Exhibit 3.2 of the
Registrant's Annual Report on Form 10-K for the year ended September 30,
2000).
3.3 -- Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1, File No. 33-73312).
4.1 -- The rights of the Registrant's equity security holders are defined in
Article II of the Restated and Amended Articles of Incorporation of the
Registrant and Article II of the Articles of Amendment to the Registrant's
Restated and Amended Articles of Incorporation. See Exhibits 3.1 and 3.2.
(b) Reports on Form 8-K
None
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCK-TENN COMPANY
(Registrant)
Date: August 14, 2002 By: /s/ STEVEN C. VOORHEES
----------------------- -------------------------------------
Steven C. Voorhees
Executive Vice-President and
Chief Financial Officer
(Principal Financial Officer,
Principal Accounting Officer and
duly authorized officer)
23
ROCK-TENN COMPANY
INDEX TO EXHIBITS
Page No.
--------
Exhibit 3.1 Restated and Amended Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 to
the Registrant's Registration Statement on Form S-1, File
No 33-73312)
Exhibit 3.2 Articles of Amendment to the Registrant's Restated and Amended
Articles of Incorporation (incorporated by reference to Exhibit 3.2 of
the Registrant's Annual Report on Form 10-K for the year ended
September 30, 2000)
Exhibit 3.3 Bylaws of the Registrant (incorporated by reference
to Exhibit 3.2 to the Registrant's Registration Statement
on Form S-1, File No. 33-73312)
Exhibit 4.1 The rights of the Registrant's equity security
holders are defined in Article II of the Restated and
Amended Articles of Incorporation of the Registrant and
Article II of the Articles of Amendment to the
Registrant's Restated and Amended Articles of
Incorporation. See Exhibits 3.1 and 3.2