Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

For the transition period from _________________________ to _________________________

Commission File Number 0-23340

Rock-Tenn Company

Registrant’s telephone number, including area code (770) 448-2193

N/A

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes   x    No   o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Table of Contents

ROCK-TENN COMPANY

INDEX

Table of Contents

ROCK-TENN COMPANY

See accompanying notes

1

Table of Contents

ROCK-TENN COMPANY

See accompanying notes

2

Table of Contents

ROCK-TENN COMPANY

See accompanying notes

3

Table of Contents

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, 2002 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 periods ended December 31, 2002 and 2001, the Company’s financial position at December 31, 2002 and September 30, 2002, and the cash flows for the three month periods ended December 31, 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, 2002.

The results for the three months ended December 31, 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.

Note 2. 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 collectbility 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.

4

Table of Contents

Note 3. Comprehensive Income

Total comprehensive income for the three months ended December 31, 2002 and 2001 was $5.8 million and $6.4 million, respectively. The difference between total comprehensive income and net income was due to foreign currency translation adjustments and adjustments to the fair value of derivative instruments as detailed below (in thousands, net of tax):

Note 4. 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 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.

Inventories at December 31, 2002 and September 30, 2002 were as follows (in thousands):

5

Table of Contents

Note 5. Restructuring and Other Costs

During the first quarter of fiscal 2003, the Company recognized income from restructuring and other costs of approximately $0.5 million. This was primarily due to accrual reversals resulting from the earlier than planned sales of property associated with its Dothan, Alabama corrugated and Vineland, New Jersey converting operations, which were closed in fiscal 2002, as well as a reduction in severance and equipment carrying costs. Partially offsetting these accrual adjustments was an impairment charge of $0.6 million which was incurred during the first quarter of fiscal 2003 as a result of the Company’s decision to remove from service certain equipment in its folding carton division.

During fiscal 2002, the Company closed a laminated paperboard products plant in Vineland, New Jersey, a corrugating plant in Dothan, Alabama, and a folding carton plant in El Paso, Texas. The closures resulted in the termination of approximately 190 employees. In connection with these closings, the Company made severance and other payments of $0.9 million during the first quarter of fiscal 2003 and made an accrual adjustment of $1.0 million to reduce the liability. The Company had a remaining liability of approximately $0.4 million at December 31, 2002. The Company has consolidated the operations of these closed plants into other existing facilities.

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 during the first quarter of fiscal 2003 and made an accrual adjustment to reduce the liability by $0.1 million. The Company had a nominal remaining liability at December 31, 2002. The Company has consolidated the operations of these closed plants into other existing facilities.

Note 6. New Accounting Standards

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB 51” (“FIN 46”). The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE (the “primary beneficiary”). This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures regarding the nature, purpose, size and activities of the VIE and the enterprise’s maximum exposure to loss as a result of its involvement with the VIE. The Company is required to adopt this interpretation no later than July 1, 2003 for any VIEs in which it holds a variable interest that it acquired before February 1, 2003. The interpretation is effective immediately for any VIEs created after January 31, 2003 and for VIEs in which an enterprise obtains an interest after that date. The Company believes that adoption of this interpretation may require it to consolidate the assets and liabilities associated with its $24.8 million synthetic lease facility. In addition, the Company may experience higher depreciation expense if it consolidates the assets and liabilities under the synthetic lease facility.

In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. FIN 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company is required to adopt the disclosure requirements of FIN 45 as of December 31, 2002. As of December 31, 2002, the Company has made the following guarantees to unconsolidated third parties:

•

The Company maintains a $24.8 million synthetic lease facility. The facility expires in April 2004 unless it is extended pursuant to two five-year renewal terms. In connection with this facility, the Company has

6

Table of Contents

			made a residual value guarantee for the leased property equal to 85% of the financing, or $20.8 million as of December 31, 2002.
	•		The Company has a 49% ownership interest in Seven Hills Paperboard, LLC, a joint venture. Funding of net losses is guaranteed by the partners of the joint venture in their proportionate share of ownership.
	•		The Company leases certain manufacturing and warehousing facilities and equipment under various operating leases. A substantial portion of these leases require the Company to indemnify the lessor in the event that additional taxes are assessed due to a change in the tax law. The Company is unable to estimate its maximum exposure under these leases as it is dependent on changes in the tax law.

In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS 148”), which amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” to provide alternative transition methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the Statement amends disclosure requirements in both annual and interim financial statements, including the addition of interim reporting of pro-forma results under the fair value based method of accounting. The transition and annual disclosure requirements are effective for fiscal years ending after December 15, 2002 and the interim disclosure requirements are effective for interim periods beginning after December 15, 2002. The Company will continue to account for its stock-based compensation under the intrinsic value based method of accounting allowed under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and will adopt the interim disclosure requirements of SFAS 148 for the interim reporting period beginning January 1, 2003.

In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). The statement applies to all exit or disposal activities initiated after December 31, 2002 and requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. The Company will adopt SFAS 146 for exit or disposal activities initiated after December 31, 2002. The Statement is not expected to have a material impact on the consolidated financial statements.

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). 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. SFAS 144 was adopted as of October 1, 2002 and did not have a material effect on the consolidated financial statements.

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). This statement applies to legal obligations associated with the retirement of long-lived assets and requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be determined. The Company adopted SFAS 143 on October 1, 2002 and the pronouncement did not have a material effect on the consolidated financial statements.

7

Table of Contents

Note 7. Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

8

Table of Contents

Note 8. Segment Information

The following table sets forth business segment information (in thousands):

Note 9. Subsequent Events

In January 2003, the Company completed its acquisition of the Cartem Wilco Group Inc., a privately held Montreal based manufacturer of folding cartons and specialty packaging. The acquisition will be accounted for under the purchase method of accounting which requires the Company to record the assets and liabilities of the acquisition at their estimated fair value with the excess of the purchase price over these amounts recorded as goodwill. The purchase price of this stock acquisition was $65.3 million. The Company acquired Cartem Wilco to strengthen its presence in the health-and-beauty and pharmaceutical packaging markets, expand its folding carton operations in Canada, and further its vertical integration by supplying additional recycled paperboard to the newly-acquired converting operations.

9

Table of Contents

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, 2002, 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. During fiscal 2002, the top ten customers represented approximately 28% of our consolidated net sales.

The packaging products segment consists of facilities that produce folding cartons, interior packaging and thermoformed plastic packaging. We compete with national, regional and local packaging suppliers operating in North America. During fiscal 2002, we sold packaging products to approximately 2,900 customers and the top ten customers accounted for approximately 32% 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 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 2002, we sold display products to approximately 350 customers and corrugated packaging products to approximately 800 customers. The top ten customers of the segment accounted for approximately 57% of the external sales of the merchandising displays and corrugated packaging segment in fiscal 2002.

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 2002, we sold recycled paperboard, corrugating medium, laminated paperboard products and recovered paper to approximately 2,000 customers and the top ten external customers of the segment represented approximately 49% of the external sales of the paperboard segment. For the fiscal year ended September 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.

All of our businesses are highly competitive. 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.

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 delay our ability to recover announced price increases for paperboard.

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.

10

Table of Contents

ROCK-TENN COMPANY
INDUSTRY SEGMENT INFORMATION
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR TONNAGE DATA)

Results of Operations

Net Sales (Unaffiliated Customers)
Net sales for the quarter ended December 31, 2002 decreased 0.9% to $347.6 million from $350.6 million for the quarter ended December 31, 2001. Net sales decreased primarily as a result of lower prices and volumes in our packaging products segment.

Net Sales (Aggregate) — Packaging Products Segment

Net sales of packaging products before intersegment eliminations for the quarter ended December 31, 2002 decreased 1.6% to $191.4 million from $194.5 million for the quarter ended December 31, 2001. The decrease for the quarter ended December 31, 2002 was primarily a result of price and volume declines in our folding carton business partially offset by slightly higher volumes in our plastic packaging and interior packaging businesses.

11

Table of Contents

Net Sales (Aggregate) – Merchandising Displays and Corrugated Packaging Segment

Net sales within this segment before intersegment eliminations for the quarter ended December 31, 2002 increased 2.1% to $73.9 million from $72.4 million for the quarter ended December 31, 2001. The increase was primarily attributable to higher sales volumes of merchandising displays due to the two acquisitions made in fiscal 2002. These results were partially offset by lower volumes and lower selling prices in our corrugated packaging division.

Net Sales (Aggregate) — Paperboard Segment

Net sales of paperboard before intersegment eliminations for the quarter ended December 31, 2002 decreased 1.6% to $123.1 million from $125.1 million for the quarter ended December 31, 2001. The decrease for the quarter ended December 31, 2002 was primarily due to lower sales volumes in our coated paperboard business. Our laminated paperboard products division continued to experience a decrease in demand for our products by customers in the furniture and book industries. These declines were partially offset by slightly higher volumes in our specialty paperboard business and increased sales in our recycled fiber business due to an increase in fiber prices over the first quarter of fiscal 2002.

Cost of Goods Sold
Cost of goods sold for the quarter ended December 31, 2002 increased 3.1% to $283.4 million from $274.9 million for the quarter ended December 31, 2001. Cost of goods sold as a percentage of net sales for the quarter ended December 31, 2002 increased to 81.6% from 78.4% for the quarter ended December 31, 2001. The increase in cost of goods sold resulted primarily from increases in raw material costs over the first quarter of fiscal 2002.

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.

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.

12

Table of Contents

Gross Profit

Gross profit for the quarter ended December 31, 2002 decreased 15.3% to $64.1 million from $75.7 million for the quarter ended December 31, 2001. Gross profit as a percentage of net sales was 18.4% and 21.6% for the quarters ended December 31, 2002 and 2001, respectively. See Cost of Goods Sold.

Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended December 31, 2002 increased 3.6% to $49.0 million from $47.3 million for the quarter ended December 31, 2001. Selling, general and administrative expenses as a percentage of net sales were 14.1% and 13.5% for the quarters ended December 31, 2002 and December 31, 2001, respectively. The increase in these expenses as a percentage of net sales resulted primarily from costs associated with an enterprise application integration project at our merchandising displays division as well as increased compensation expense, higher pension expense, and higher insurance costs.

Unconsolidated Joint Venture
During the first quarter of fiscal 2003, our Seven Hills joint venture with Lafarge Corporation reported break-even results compared to a loss of $0.9 million during the first quarter of fiscal 2002. This was due to start-up costs associated with the joint venture in the first quarter of fiscal 2002. The joint venture is structured so that our primary income is earned in fees paid by the joint venture to our mill division. The joint venture’s gains and losses reflect how the mill performs against benchmark performance standards set forth in the joint venture agreement.

Restructuring and Other Costs
During the first quarter of fiscal 2003, we recognized income from restructuring and other costs of approximately $0.5 million. This was primarily due to accrual reversals resulting from the earlier than planned sales of property associated with our Dothan, Alabama corrugated and Vineland, New Jersey converting operations, which were closed in fiscal 2002, as well as a reduction in severance and equipment carrying costs. Partially offsetting these accrual adjustments was an impairment charge of $0.6 million which was incurred during the first quarter of fiscal 2003 as a result of our decision to remove from service certain equipment in our folding carton division.

During fiscal 2002, we closed a laminated paperboard products plant in Vineland, New Jersey, a corrugating plant in Dothan, Alabama, and a folding carton plant in El Paso, Texas. The closures resulted in the termination of approximately 190 employees. In connection with these closings, we made severance and other payments of $0.9 million during the first quarter of fiscal 2003 and made an accrual adjustment of $1.0 million to reduce the liability. We had a remaining liability of approximately $0.4 million at December 31, 2002. We have consolidated the operations of these closed plants into other existing facilities.

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 during the first quarter of fiscal 2003 and made an accrual adjustment to reduce the liability by $0.1 million. We had a nominal remaining liability at December 31, 2002. We have consolidated the operations of these closed plants into other existing facilities.

13

Table of Contents

Segment Operating Income.

Operating Income — Packaging Products Segment

Operating income attributable to the packaging products segment for the quarter ended December 31, 2002 decreased 57.4% to $4.9 million from $11.5 million for the quarter ended December 31, 2001. Operating margin for the quarter ended December 31, 2002 was 2.6% compared to 5.9% for the quarter ended December 31, 2001. The decrease in operating margin was primarily the result of comparatively higher paperboard prices affecting our folding carton and interior packaging business and higher resin prices impacting our plastic packaging business. Competitive pricing pressure affecting our folding carton and plastic packaging divisions also contributed to the decline in operating income.

Operating Income – Merchandising Displays and Corrugated Packaging Segment