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EXHIBIT 13
[ROCK-TENN COMPANY LOGO]
Rock-Tenn Company
504 Thrasher Street
Norcross, GA 30071
770-448-2193
www.rocktenn.com
Rock-Tenn Company
2000 Annual Report
above
and beyond
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COMPANY OPERATIONS
[MAP]
FOLDING PLASTIC COATED LAMINATED CORRUGATED
CARTON PACKAGING PAPERBOARD PAPERBOARD PACKAGING
GROUP DIVISION DIVISION PRODUCTS DIVISION
DIVISION
Augusta, GA Conyers, GA Battle Creek, MI Dothan, AL
Baltimore, MD Franklin Park, IL Dallas, TX Aurora, IL(1) Gallatin, TN
Chicago, IL(2) Delaware Water Gap, PA Columbus, IN Greenville, SC
Chicopee, MA Sheldon Springs, VT Dallas, TX Norcross, GA(1)
Clinton, IA RTS St. Paul, MN(1) Macon, GA
Conway, AR PACKAGING, LLC Vineland, NJ
Dallas, TX(2) Wright City, MO ALLIANCE DIVISION
El Paso, TX Charleroi, PA
Eutaw, AL Dallas, TX SPECIALTY Brookfield, CT(2)
Greenville, TX Eaton, IN PAPERBOARD RECYCLED DeKalb, IL
Harrison, AR Hartwell, GA DIVISION FIBER Glendale, CA(2)
Kimball, TN Hillside, IL DIVISION Hershey, PA(2)
Knoxville, TN Merced, CA Chattanooga, TN Hunt Valley, MD
Lebanon, TN Mexico City, Mexico Cincinnati, OH Atlanta, GA Lincoln Park, NJ(2)
Madison, WI Monterrey, Nuevo Eaton, IN Chattanooga, TN Martinsville, VA
Marshville, NC Leon, Mexico Lynchburg, VA(1) Lynchburg, VA(1) Mason, OH(2)
Milwaukee, WI Orange, CA Otsego, MI Cincinnati, OH Mundelein, IL
Norcross, GA(2) Santiago, Chile Cleveland, TN Pennsauken, NJ
Springfield, OH Scarborough, ME Dallas, TX Tullahoma, TN
Stone Mountain, GA Tukwila, WA Des Moines, IA Winston-Salem, NC(1)
St. Paul, MN Fort Worth, TX
Warwick, Quebec, Huntsville, AL
Canada Indianapolis, IN
Waxahachie, TX Knoxville, TN
Maple Grove, MN Operations
Montreal, Quebec, 1 Two operations
Canada 2 Sales & Design
Shelbyville, TN Center
St. Paul, MN
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ROCK-TENN AT-A-GLANCE
Rock-Tenn is one of North America's leading manufacturers of packaging and 100%
recycled paperboard. Since its founding in 1936, Rock-Tenn has focused on
developing strong niche markets that bring high value to both its customers and
to its employees and shareholders.
The Company operates 80 manufacturing facilities throughout the United States,
Canada, Mexico and Chile, and employs approximately 8,700 people.
Headquartered in Norcross, Georgia, Rock-Tenn is listed on the New York Stock
Exchange. The Company's Class A common stock trades under the symbol RKT.
Rock-Tenn team members as they appear on the cover, from left to right beginning
on the back cover: JUN BANTUG Lotus Notes Administrator, MARC DUBOIS Die-making
& Die-cutting Supervisor, FRANCIS BEAUDETTE Order Processing Coordinator, MARY
SMITH Accounting Clerk, SHEILA FORTUIN Secretary to General Manager, ANNIE
BESMARGIAN Customer Service, SUSAN BENOIT Planning & Scheduling Technician, RUSS
FRITZ Extra Hand, JOSE CABRAL Extrusion Manager, DERIC C. JACKSON Extrusion
Manager, JANINA OLEARCZYK Inventory Control Clerk, SCOTT FU Plant Engineer,
JERRY WATTS Cabling Project Analyst, MATT HENRY Lotus Notes Systems Analyst,
WENDY FORD EUC Support Analyst, TIM OLDS Customer Service, BRENDA SCHREIBER
Division IS Coordinator
Rock-Tenn team members page one, from left to right: ANGEL OJEDA Machine
Operator, GRETCHEN VAUGHT Marketing & Communications Representative, JON HERMES
Sales Representative
PACKAGING PRODUCTS SEGMENT
[GRAPHIC] [GRAPHIC] [GRAPHIC]
FOLDING CARTONS PLASTIC PACKAGING PROTECTIVE PACKAGING
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PRODUCTS AND Folding cartons, multi-pack Custom thermoformed plas- Solid fiber partitions,
SERVICES wraps and promotional tic packaging and extruded sheeted and die-cut
packaging; mechanical pack- plastic roll stock. specialties; agricultural
aging system services. packaging; custom
protective packaging.
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MARKETS Manufacturers of consumer Manufacturers of bakery Manufacturers of glass and
SERVED and industrial products such items, prepared foods, plastic containers, electronic
as food, candy, household processed meats and parts, injection molded
products, hardware, software, poultry, hardware, products, automobile com-
electronics, automotive com- medical, electronic ponents, lighting products,
ponents, pharmaceuticals, and consumer products. textiles, agricultural products,
personal care products, and others requiring protec-
apparel, textiles, paper goods; tion during shipment.
quick-serve restaurants.
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COMPETITIVE Industry-leading manufactur- Modern design and pro- Proprietary manufacturing
STRENGTHS ing technology in flexographic, duction technology, rapid technology for high-speed
lithographic and rotogravure design, sampling and and industry-leading turn-
printing; networked structural prototyping capabilities; around capabilities; multiple
and graphic design systems in-house extrusion and plants in North and South
throughout North America; lamination of roll stock America; centralized customer
two industry-leading product for assured quality and service for design, sampling
development and package supply of raw materials. and ordering; integration
testing laboratories; integra- with Rock-Tenn and Sonoco
tion with Rock-Tenn's recycled paperboard mills.
paperboard mills.
PAPERBOARD SEGMENT
[GRAPHIC] [GRAPHIC] [GRAPHIC]
PAPERBOARD LAMINATED COMPONENTS RECYCLED FIBER
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PRODUCTS Coated and uncoated Furniture panels; drawer Paper recovery and recy-
AND grades of 100% recycled bottoms; mirror backs; cover- cling services; wide array
SERVICES paperboard and corru- board for books, notebooks of recovered paper grades.
gating medium; specially and binders; automotive
designed paperboard components; specialized
for custom applications. industrial components includ-
ing specialty die-cut items
and paperboard drums
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MARKETS Manufacturers of folding Manufacturers of home Industrial plants, printing
SERVED cartons, fiber partitions, and office furniture and facilities, office buildings and
tubes and cores, retail ready-to-assemble furniture; retailers that generate recy-
corrugated boxes and manufacturers of automobile clable paper as a byproduct;
interior protective packaging. and truck interior panels; Rock-Tenn paperboard mills,
producers of books, note- other paper and paperboard
books and binders. mills in the U.S., Canada
and Mexico.
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COMPETITIVE Nationwide production opera- Fast production cycles; Network of recovery facilities;
STRENGTHS tions; capability to produce in-house poly extrusion and internal marketing and broker-
paperboard grades for specific poly lamination, industry age group; integration with
customer applications; leading die-cutting tech- Rock-Tenn paperboard mills;
integration with recycled nology; innovative industrial strong reputation for reliability
fiber plants for consistent products; integration with in all market conditions.
supply of high-quality fiber. Rock-Tenn recycled paper-
board mills.
SPECIALTY CORRUGATED PACKAGING AND DISPLAY SEGMENT
[GRAPHIC] [GRAPHIC]
CORRUGATED PACKAGING P.O.P. DISPLAYS
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PRODUCTS Multi-color flexographic Complete design, manufacture,
AND direct print and lithographic assembly, pack-out and distri-
SERVICES laminated corrugated retail bution to retail of temporary
packaging; specialized indus- and permanent P.O.P. displays;
trial shipping containers; contract packing and distri-
corrugated sheet stock. bution services; direct-to-
consumer promotional mailers
and sampling.
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MARKETS Consumer products compa- Consumer products companies
SERVED nies and industrial products using high-end P.O.P. displays,
manufacturers requiring retail promotions, and direct-
short to medium run, high- to-consumer promotions
quality shipping containers for merchandising and
and retail packaging. brand marketing
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COMPETITIVE Strong structural and graphic Concept-to-Consumer(TM)
STRENGTHS design staffs; full ISTA- service for single-source retail
and NMFTA-certified testing merchandising solutions;
facility; state-of-the-art, multiple design and contract
centralized corrugator for packing facilities in geographic
fast turnaround and assured proximity to most consumer
quality of sheet stock; high products companies and/or
level of service and rapid their customers.
response times.
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[PHOTO]
We're creating a culture of high performance and innovation.
IF YOU WANT TO SEE HOW WE'RE CREATING OUR CULTURE OF HIGH PERFORMANCE AND
INNOVATION, THE NEXT FEW PAGES GIVE DETAILS ON FIVE OF OUR HIGH-PERFORMING
TEAMS. THEY ARE JUST SOME OF THE PEOPLE AT ROCK-TENN WHO ARE SHOWING ALL OF US
HOW TO GO ABOVE AND BEYOND TO ACHIEVE EXTRAORDINARY SUCCESS.
above and beyond 1 letter to shareholders 12 index to financials 21
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2000 ANNUAL REPORT
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Les Industries Ling, Rock-Tenn's industry-leading folding carton plant in
Quebec, is one of the most demanding purchasers of coated recycled paperboard in
North America. Having converted a low-volume specialty mill in Vermont into a
mill that could produce coated recycled paperboard for folding cartons,
Rock-Tenn wanted the mill to become a premier supplier to Ling and an industry
leader. Ling's general manager took the only approach he knew would work:
consistently demand the highest-quality board that could be used for Ling's
blue-chip customers, such as Quaker Oats and Johnson & Johnson. "Having Ling as
a customer gave the Missisquoi mill the challenge it needed to make itself over
into a quality leader in coated board," says Missisquoi General Manager Chris
Ham-Ellis. Now the Vermont mill provides - at a consistently high quality -
virtually all of the recycled paperboard that Ling uses. Ling continues to be
more successful each year, and Missisquoi is now one of the highest-performing
mills in the industry.
[GRAPHIC]
We met the needs of a demanding customer: us.
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ROCK-TENN COMPANY
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[PHOTO]
Chris Ham-Ellis
General Manager -
Missisquoi Mill
Andre Boissy
Plant Manager - Ling
Raymond Beaulieu
General Manager - Ling
"We are very demanding with our in-house mill at Missisquoi, because we supply
folding cartons to blue-chip customers who demand the best quality," says
Raymond Beaulieu, general manager of Rock-Tenn's Les Industries Ling folding
carton plant in Quebec.
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2000 ANNUAL REPORT
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[PHOTO]
Jim Einstein
Executive Vice President
and General Manager
Wayman Monroe
Shipping and Receiving
Marcia Viloria
Designer
"We give our customers exceptional quality and precision execution time after
time. That's how we grew our business 36% in 2000, and how we'll continue
growing in the years to come," says Jim Einstein, head of Rock-Tenn's Alliance
Division.
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ROCK-TENN COMPANY
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point-of-purchase displays >>
Launching new consumer products requires precise execution and cannot tolerate
the slightest delay. A key launch component is point-of-purchase display
promotions. Rock-Tenn's Alliance Division is North America's fastest-growing
provider of retail displays. The key to its success is its
Concept-to-Consumer(TM) service, enabling brand managers to source design,
manufacturing, display packing and distribution - all at Alliance. Alliance
operates nine technologically advanced design offices and six contract packing
facilities throughout the nation that are adjacent to many of the major consumer
products companies. Alliance's combination of excellence in design and
manufacturing, coupled with its precision execution in pack-out and distribution
services, is why pharmaceutical, food, tobacco and cosmetics companies turn to
Alliance for their point-of-purchase displays and national consumer product
rollouts. Alliance provides:
* Complete Concept-to-Consumer service to increase brand managers'
speed-to-market.
* The latest technology in design and manufacturing to assure system
efficiencies and the highest-quality point-of-purchase displays.
* Experienced team members to assure smooth rollouts for all products.
When you want one merchandising source with speed, creativity, high quality and
reliability, get with Alliance. We work at the speed of marketing.
[GRAPHIC]
We deliver complete Concept-to-Consumer(TM) merchandising services.
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[PHOTO]
Butch Campbell
Manager, Product and
Engineering Group
Chuck Bryan
National Sales Manager,
Specialty Products
"We've found a way to innovate in the protective packaging industry by printing
on partitions and creating a retail advertising product with colorful
graphics right in the box," says Butch Campbell of RTS Packaging.
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ROCK-TENN COMPANY
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[GRAPHIC]
We're making ordinary package partitions into instant advertising.
How does a winery transform a plain shipping box into colorful instant
advertising on the shelf? By turning its box into a billboard. Rock-Tenn's RTS
Packaging unit's Billboard(TM) partition provides instant merchandising by
using high-quality, colorful graphics printed on the box's interior protective
partition. All the retailer does is pull out a single printed partition strip
and - voila - instant advertising! Suppliers and retailers benefits because:
- - Partitions that are already needed to protect the product are used for
in-store advertising, thereby eliminating extra merchandising materials.
- - Billboard partitions are extremely easy to use, so retailers don't worry about
complicated assembly.
- - Eye-catching graphics attract customers' attention to help sell the product.
- - Merchandising gets where it needs to be - on the selling floor, not in the
wastebasket.
When you want unexpected value in your packaging, call Rock-Tenn. We get your
message out.
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2000 ANNUAL REPORT
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[GRAPHIC]
We're helping to revolutionize case-ready meat packaging.
How does a packaging and paperboard company help revolutionize
the meat-processing industry? It develops a new kind of plastic packaging that
resists breaking and helps keep meat fresh longer. That's what happened when the
meat-processing industry learned that Wal-Mart wanted to eliminate its
traditional in-store butcher operations and provide only case-ready meat in its
grocery stores. To meet this rapidly developing retail need, Rock-Tenn's Plastic
Packaging Division developed the innovative new DuraFresh(TM) case-ready tray.
What does DuraFresh do?
- - It helps enhance the shelf life of packaged meat.
- - DuraFresh resists cracking and reduces waste at retail.
- - The design of DuraFresh trays creates more room to display more meat in the
retail case.
- - DuraFresh packaging appeals to consumers because of its clean appearance and
resistance to breakage.
When you need a revolutionary idea, look to Rock-Tenn. We deliver.
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ROCK-TENN COMPANY
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plastic packaging
"We're literally changing the face of the meat case," says Bob Esser, product
sales manager for modified atmosphere packaging (MAP) in Rock-Tenn's Plastic
Packaging Division. "Our new packaging resists cracking and leaking and looks
better to the consumer. It simply performs better."
[PHOTO]
Bill Geary
General Manager
Eddie Mika
Plant Manager
Bob Esser
Product Sales Manager - MAP
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2000 ANNUAL REPORT
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Read a good book lately? The paperboard used to make the covers may have been
supplied by Rock-Tenn's Otsego, Michigan, mill. Three years ago, a European
manufacturer introduced to the U.S. a new grade of light-weight,
high-performance book coverboard. But by partnering with Rock-Tenn's Laminated
Paperboard Products Division, the Specialty Paperboard Division engineered an
even better grade of paperboard that meets book manufacturers' needs. Rock-Tenn
completely rebuilt its Otsego paperboard machine to produce this paperboard and
better serve the coverboard market. The result: many of the major book
manufacturers are now using Cirrus(TM), a laminated paperboard cover product
made from Otsego's new paperboard.
When you want an ordinary product to be extraordinary, partner with Rock-Tenn.
We can help you get where you want to be.
[GRAPHIC]
We're making it lighter, stronger and less expensive.
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[PHOTO]
Tom Doss
Production Manager
Garth Fuess
Tour Foreman
William Henagan
Customer Service
Representative
Phil Farmer
General Manager
"We have new tools that give us more control over the papermaking process," said
Phil Farmer, general manager of the Otsego, Michigan, Specialty Paperboard
Mill. "What we're now doing is using these tools to develop paperboard in
partnership with our customers to give them the products they require to meet
their specific market needs. We're creating value-added products and
value-added relationships."
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2000 ANNUAL REPORT
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Our strategy is a straightforward, threefold one: invest in ourselves for
competitive advantage and future growth; execute consistently with a relentless
pursuit of improvement; and create a culture of high performance and innovation
to maximize our return on assets and create market leaders.
James A. Rubright
Chairman and Chief Executive Officer
"Rock-Tenn is creating a culture of innovation and high performance to ensure
that our company is the first choice of our customers, our employees and our
shareholders."
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ROCK-TENN COMPANY
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letter to shareholders
Dear Customers, Fellow Rock-Tenn Employees and Shareholders:
I joined Rock-Tenn Company a year ago because I was confident that the core of
this great company that I'd worked with over the years was strong and would be a
challenge and a thrill in which to work. Over the last year I've traveled
broadly among our operations, from Les Industries Ling in Warwick, Quebec,
through our mill and folding carton networks in the Midwest, the Atlantic States
and the Southeast, to our RTS plants in Merced and Orange, California. I've met
with thousands of our employees and have confirmed that within our company there
are many men and women who, in our very competitive businesses, are achieving
extraordinary results. These are people who are delivering truly above-
and-beyond performance by any measure.
These high performers and the culture they embody are capable of creating value
year in and year out because they are driven to do it. We are making them our
role models. Their accomplishments are a testament to what our company can do-
and what everyone at Rock-Tenn must do if we are to take advantage of our size
and financial strength to generate significant and sustainable growth in our
sales and profits.
Those leaders need and deserve to be part of a company that supports and builds
on their achievements. That is the strategy we've set about in the last year.
ACHIEVING SUSTAINABLE HIGH PERFORMANCE
So, how do we achieve the kind of performance that wins customers, attracts
superior employees and creates shareholder value? Our strategy is a
straightforward, threefold one: invest in ourselves for competitive advantage
and future growth; execute consistently with a relentless pursuit of
improvement; and - something I've mentioned earlier - create a culture of high
performance and innovation to maximize our return on assets and create market
leaders.
INVEST IN OURSELVES
As we'll discuss in more detail, we've invested heavily in some core activities
where we have opportunities to reassert market leadership. We've focused much
greater attention and investment on our businesses that enjoy above-average
growth prospects, with much more than above-average results, and we've
restructured assets where we could not be successful without unacceptable
levels of investment. We are coupling these strategic commitments with the
recognition that performance is what matters and that superior people drive
performance. In short, we're rebuilding Rock-Tenn Company in its own former
image: a company of choice for customers and employees with a strong economic
future for our shareholders.
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2000 ANNUAL REPORT
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Let there be no misunderstanding of one basic fact: Rock-Tenn's employees and
directors are committed to Rock-Tenn's financial performance. Steve Voorhees,
our new CFO, and I are the two newest members of Rock-Tenn's senior management.
We both made substantial investments in Rock-Tenn stock. I'm not just talking
about option grants. We bought the stock. I believe that we should be, and we
will benefit from being, on the line. Our other key managers all have
significant investments in Rock-Tenn stock. Our Board members all own
significant amounts of our stock, approximately 25 percent of it, in fact. Our
aim is to make that investment grow. We will suffer greatly if it fails to do
so.
[CHART] [CHART]
Let's look at some defining steps we took in fiscal 2000, after a period of
reassessment:
- - We committed $13.9 million to build a new gypsum facing paper machine over the
foundation of an old uncoated paper machine in Lynchburg, Virginia, that will
operate in a joint venture with Lafarge Corporation, a leading international
gypsum wallboard manufacturer. We also committed $8.0 million to complete the
rebuilding of a large uncoated machine in Otsego, Michigan, that will now be
capable of making a world-class book board (please also see the description on
page 10).
- - We invested $10.4 million in our Alliance display business and $10.9 million
in our plastics business because the rapid growth in those businesses was
outstripping our planned capital investments (for more information on those
developments, please see pages 5 and 8).
- - We closed three unprofitable folding carton plants, two of which we acquired
in the mid-90s, where the continued investment required to be competitive was
not justified. As part of the restructuring, we absorbed a significant charge
against this year's earnings. We invested $10.1 million in two of our largest
folding carton plants to increase the returns from the plant closures and to
take advantage of excellent growth opportunities, and in a third to complete the
transformation of a technologically advanced niche-market plant.
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ROCK-TENN COMPANY
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letter to shareholders
These capital expenditures exemplify our commitment to own market-leading
assets and to invest heavily in growth opportunities.
We're also investing in Rock-Tenn in another important way: by repurchasing our
own stock. In fiscal 2000, Rock-Tenn bought back 2.1 million shares of stock at
an average price of $10.47 per share. Our Board acted in November, 2000, to
authorize the repurchase of another 2.0 million shares, which we will do if
current share prices continue.
EXECUTE CONSISTENTLY
We are fully aware of how inconsistent performance affects value. While the
results posted by most of our operations in fiscal 2000 are inspiring, Rock-Tenn
needs consistently high performance across the board in all lines of business.
While fiscal 2000 showed areas of strong improvement and new growth, we clearly
had areas where we under-performed, and we recognize hat more solid execution on
our part is necessary. We posted a net loss of 46 cents per diluted share at
year-end, compared to earnings per share of $1.13 in fiscal 1999. Contributing
to the loss were asset write-downs and plant closing expenses that totaled $51.3
million after-tax, or $1.48 per share. Excluding the effects of one-time
charges, fiscal
[GRAPHIC]
[GRAPHIC]
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2000 ANNUAL REPORT
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[CHART] [CHART]
[GRAPHIC]
The Paperboard segment has taken steps to grow its business in strong niche
markets by investing in technology that allows the mills to deliver high
value-added products that meet the specific market needs of their customers.
year 2000 results were $1.02 per share, compared to $1.25 per share a year ago.
Higher fiber, energy and freight costs accounted for much of the decline.
Underperformance in some of our assets, only partly attributable to the three
plants we closed during the year, more than offset the good performance of most
of our assets. (We discuss our financial performance in more detail below and in
our Management's Discussion and Analysis.)
Among customers in all of Rock-Tenn's businesses, including its growth
businesses, executing consistently is measured through outstanding products and
customer service. In our more mature businesses, consistent execution also
depends on driving out costs to improve margins on price-competitive commodity
products, as well as using innovative thinking and technology to develop
products that provide greater value.
Our plan to deliver consistent execution includes a commitment to decentralize
our operations. We have flattened our management structure to create leaner,
more agile operations. We increased the responsibility and authority of our
managers and empowered them with the capital resources, tools and authority they
need to take charge of their businesses. We are excited about the new ideas and
opportunities that they are creating as a result of these changes.
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letter to shareholders
CULTIVATE HIGH PERFORMANCE AND INNOVATION
In addition to recognizing our growth and market leadership opportunities, we
worked on our culture of high performance and innovation. Our management has
recognized that the leaders must lead, and get the job done, and that the pace
of change must be fast now and ever faster each day. This means that we need our
highest performers in positions where they can have the greatest impact. Thus,
in the last year we promoted over 20 aggressive, talented leaders as general
managers of manufacturing locations and we placed the sales organizations in
three of our operating divisions under new leaders.
We also acted in midyear to radically change our management compensation system
to tie incentive compensation of managers to results that are within each
manager's scope of authority. We're all on the line for our performance.
We will invest in ourselves to grow new businesses, reduce costs, enable product
innovation and empower people in a decentralized environment. We will execute
consistently in order to build customer relationships and to strengthen investor
confidence. It's a simple roadmap and an unwavering commitment.
OPERATIONS FOR FISCAL 2000 - IN BRIEF REVIEW
PACKAGING BUSINESS: INVEST IN NEW GROWTH
AND COMPETITIVENESS
A look at the results of our three business segments reveals our strategy, our
successes and some disappointments. Our Packaging business was reorganized to
include our Plastic Packaging Division, RTS Packaging and our Folding Carton
Group. Our Folding Carton Group is our largest line of business with
approximately $600 million in sales.
Aside from the three folding carton plant closures we announced, our Folding
Carton Group performed very well this year and is positioned to do even better
in fiscal 2001 due to the benefits of consolidating business from the closings
and the additional investments we made. We're an industry leader in a number of
niche folding carton markets, and we have a number of plants that are leaders in
performance.
Our Plastic Packaging Division continues to grow at an exceptional rate - 31% in
sales in fiscal 2000. We invested over $10.9 million in new extrusion and
thermoforming capacity to meet the sales growth in our new DuraFresh(TM) line of
modified atmosphere packaging and our high-end custom packaging. We believe that
the Plastic Packaging Division should again grow very well fiscal 2001.
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2000 ANNUAL REPORT
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letter to shareholders
market is both stable and extremely competitive. The ready-to-assemble furniture
market, where we are by far the largest supplier, is also highly competitive,
but it's growing at about 7% per year. We've gone through a series of
consolidations to rationalize our operations in this business and have taken
some charges to earnings as a result, but now believe we are in a much better
position to pursue new customers and win back those we lost in the course of
repositioning our assets.
SPECIALTY CORRUGATED PACKAGING AND DISPLAY
BUSINESS: CONTINUING GROWTH
In our Specialty Corrugated Packaging and Display business, we invested over
$10.4 million to expand our manufacturing capacity at Alliance and to open a new
contract packing facility to serve two new major consumer products customers.
The result was a 36% increase in sales to $152.7 million and a 25% increase in
profits at Alliance.
How are we doing so well? Certainly the market has been strong. The
point-of-purchase display business is a $9 billion industry and has grown 5%
annually since 1996. We focus on the high value and service temporary
promotional sector of this business where we believe superior performance is
rewarded. Alliance has formed strong customer relationships with some of the
largest
The Specialty Corrugated Packaging and Display segment continued its exceptional
growth in 2000. Customer service is the hallmark of the Corrugated Packaging
Division where it operates in the growing southeastern U.S. market. The Alliance
Division's Concept-to-Consumer(TM) approach to promotional merchandising
continues to attract business of major consumer products companies.
[GRAPHIC]
[GRAPHIC]
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2000 ANNUAL REPORT
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[CHART]
consumer products companies in the country thanks to its Concept-to-Consumer(TM)
approach. We think this is a very good business and one we believe has great
potential.
The Corrugated Packaging Division continues to grow and provide superior
returns. Sales increased 25% and profits increased 26% as we were able to take
advantage of our excellent markets in the southeastern United States and focus
on high service requirement customers.
MORE TO DO
Fiscal 2000 was a transition year for Rock-Tenn Company. While we have
accomplished a great deal, our markets have been tough and we did not achieve
our financial goals. Still, the evidence we see of strong, sustainable results
encourages us.
The examples of how Rock-Tenn is creating new opportunities and exceeding
customer expectations speak for themselves. I hope you'll take the time to
review them in more detail and, like me, share in the excitement of building a
high-performing company.
Sincerely,
/s/ James A. Rubright
James A. Rubright
Chairman and Chief Executive Officer
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ROCK-TENN COMPANY
FINANCIAL REVIEW
Five-Year Selected Financial and Operating Highlights 22
Management's Discussion and Analysis of
Results of Operations and Financial Condition 23
Consolidated Statements of Operations 34
Consolidated Balance Sheets 35
Consolidated Statements of Shareholders' Equity 36
Consolidated Statements of Cash Flows 37
Notes to Consolidated Financial Statements 38
Report of Independent Auditors 50
Management's Statement of Responsibility for Financial Information 51
Officers and Directors 52
Shareholder Information 53
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2000 ANNUAL REPORT
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FIVE-YEAR SELECTED FINANCIAL AND OPERATING HIGHLIGHTS
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 1998 1997(c),(d) 1996
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Net sales $ 1,463,288 $1,313,371 $1,297,360 $1,113,883 $ 879,571
Plant closing and other costs 65,630 6,932 1,997 16,251 3,580
(Loss) income before income taxes (4,346) 70,253 74,613 37,756 82,469
Net (loss) income (15,916) 39,698 42,020 16,101 51,125
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Diluted (loss) earnings per common share(a) (0.46) 1.13 1.20 .47 1.50
Diluted earnings per common share
before plant closing and other costs(a) 1.02 1.25 1.23 .90 1.57
Dividends paid per common share(a) 0.30 0.30 .30 .30 .27
Book value per common share(a) 11.57 12.36 11.49 10.80 10.54
- ---------------------------------------------------------------------------------------------------------------------
Total assets 1,158,963 1,161,470 1,111,481 1,113,686 581,688
Long-term debt, including current maturities 534,820 498,845 508,338 533,622 146,604
Shareholders' equity 386,303 432,164 397,415 371,212 349,155
- ---------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 102,444 112,416 125,688 106,377 123,530
Goodwill amortization(b) 9,069 9,410 9,429 7,070 2,723
Capital expenditures 94,640 92,333 81,666 87,016 72,151
Cash paid for purchases of businesses -- -- -- 301,287 --
- ---------------------------------------------------------------------------------------------------------------------
Notes:
(a) Gives effect to a 10% stock dividend paid on November 15, 1996.
(b) Amount not deductible for income tax purposes was $6,550,000,
$6,900,000, $6,928,000, $4,760,000 and $0 in fiscal 2000, 1999, 1998,
1997 and 1996, respectively.
(c) Effective October 1, 1996, the Company changed its method of
depreciation for assets placed in service after September 30, 1996 to
the straight-line method. This change was applied on a prospective
basis to such assets acquired after that date. The effect of this
change was to increase net income by $3,011,000 in fiscal 1997.
(d) Reflects (i) the results of operations of Waldorf Corporation, Rite
Paper Products Inc. and The Davey Company beginning from the respective
dates of acquisition and (ii) the results of operations of RTS
Packaging, LLC from the date of formation.
22
ROCK-TENN COMPANY
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Segment and Market Information
We report our results in three industry segments: (1) packaging
products, (2) paperboard and (3) specialty corrugated packaging and display.
These segments reflect the results of an evaluation of our businesses undertaken
at the end of fiscal year 2000. As a result, all previously reported segment
information has been restated to reflect the new composition of each segment.
During fiscal 2000, no customer accounted for more than 5% of our consolidated
net sales.
The packaging products segment consists of facilities that produce
folding cartons, solid fiber partitions and thermoformed plastic products. We
compete with a significant number of national, regional and local packaging
suppliers. During fiscal 2000, we sold packaging products to approximately 3,200
customers. We sell packaging products to several large national customers,
however, the majority of our packaging products sales are to smaller national
and regional customers. 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.
The paperboard segment consists of facilities that collect recovered
paper and that manufacture 100% recycled clay-coated and specialty paperboard,
which we refer to as boxboard; corrugating medium, which we refer to as medium;
and laminated paperboard products. In our clay-coated and specialty paperboard
divisions, we compete with integrated and non-integrated national, regional and
local companies manufacturing various grades of paperboard. 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
2000, we sold boxboard, corrugating medium, laminated paperboard products and
recovered paper to approximately 1,800 customers. A significant percentage of
our sales of boxboard is made to our packaging products and specialty corrugated
packaging and display segments and to our laminated paperboard products
division. Our paperboard segment's sales volumes may therefore be directly
impacted by changes in demand for our packaging and laminated paperboard
products.
The specialty corrugated packaging and display segment consists of
facilities that produce corrugated containers and displays. We compete with a
number of national, regional and local suppliers of those goods in this segment.
During fiscal 2000, we sold corrugated containers and display products to
approximately 1,100 customers. Due to the highly competitive nature of the
specialty packaging and display 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.
Income and expenses that are not reflected in the information used by
management to make operating decisions and assess performance are reported as
non-allocated expenses. These include adjustments to record inventory on the
last-in, first-out, or "LIFO," method, elimination of intersegment profit and
certain corporate expenses.
YEAR ENDED SEPTEMBER 30,
(IN MILLIONS) 2000 1999 1998
- ----------------------------------------------------------------------
Net sales (aggregate):
Packaging Products $ 797.4 $ 749.9 $ 774.4
Paperboard 588.5 529.0 555.4
Specialty Corrugated
Packaging and Display 238.8 180.9 138.0
- ----------------------------------------------------------------------
Total $ 1,624.7 $ 1,459.8 $ 1,467.8
- ----------------------------------------------------------------------
Net sales (intersegment):
Packaging Products $ 5.3 $ 3.5 $ 1.2
Paperboard 150.8 138.6 164.4
Specialty Corrugated
Packaging and Display 5.3 4.3 4.8
- ----------------------------------------------------------------------
Total $ 161.4 $ 146.4 $ 170.4
======================================================================
Net sales (unaffiliated
customers):
Packaging Products $ 792.1 $ 746.4 $ 773.2
Paperboard 437.7 390.4 391.0
Specialty Corrugated
Packaging and Display 233.5 176.6 133.2
- ----------------------------------------------------------------------
Total $ 1,463.3 $ 1,313.4 $ 1,297.4
======================================================================
Segment income:
Packaging Products $ 34.8 $ 40.5 $ 32.5
Paperboard 47.6 55.6 72.4
Specialty Corrugated
Packaging and Display 28.4 23.8 15.6
- ----------------------------------------------------------------------
110.8 119.9 120.5
Plant closing and other costs (65.6) (6.9) (2.0)
Non-allocated expenses (9.4) (5.9) (4.6)
- ----------------------------------------------------------------------
Income from operations 35.8 107.1 113.9
Interest expense (35.5) (31.2) (35.0)
Interest and other income 0.4 0.4 1.0
Minority interest in income
of consolidated subsidiary (5.0) (6.0) (5.3)
- ----------------------------------------------------------------------
(Loss) income before
income taxes $ (4.3) $ 70.3 $ 74.6
23
2000 ANNUAL REPORT
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
We provide quarterly information in the following tables to assist in evaluating
trends in our results of operations. For additional discussion of quarterly
information, see our quarterly reports on Form 10-Q filed with the Securities
and Exchange Commission.
Net Sales (Unaffiliated Customers)
Net sales for fiscal 2000 increased 11.4% to $1,463.3 million from $1,313.4
million for fiscal 1999. Net sales increased primarily as a result of increased
volumes and price increases in promotional displays, specialty corrugated
packaging and plastic packaging.
Net sales for fiscal 1999 increased 1.2% to $1,313.4 million from
$1,297.4 million for fiscal 1998. Net sales increased primarily as a result of
increased volumes of promotional displays and price increases implemented during
the fourth quarter of fiscal 1999.
Net Sales (Aggregate) - Packaging Products Segment
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------------------------------------------
1998 $ 194.0 $ 194.6 $ 192.6 $ 193.2 $ 774.4
1999 185.7 180.7 186.9 196.6 749.9
2000 192.9 195.1 202.8 206.6 797.4
- ------------------------------------------------------------------------
Net sales of the packaging products segment before intersegment
eliminations for fiscal 2000 increased 6.3% to $797.4 million from $749.9
million for fiscal 1999.
Net sales of the packaging products segment before intersegment
eliminations for fiscal 1999 decreased 3.2% to $749.9 million from $774.4
million for fiscal 1998.
Net Sales (Aggregate) by Division - Packaging Products Segment
FOLDING RTS PLASTIC
(IN MILLIONS) CARTON PACKAGING PACKAGING
- ----------------------------------------------------------------
1998 $ 588.6 $ 140.1 $ 45.7
1999 565.3 136.0 48.6
2000 597.4 136.4 63.6
The increase in net sales of the packaging products segment before
intersegment eliminations for fiscal 2000 as compared to fiscal 1999 was
primarily the result of increased volumes in our plastic packaging division and
increased prices and volumes in our folding carton group.
The decrease in net sales of the packaging products segment before
intersegment eliminations for fiscal 1999 as compared to fiscal 1998 primarily
resulted from volume decreases in folding cartons. In order to better utilize
capacity, we aggressively pursued additional long-term folding carton volume
during fiscal 1999, which resulted in lower average selling prices for the
folding carton division. The volume decreases were partially attributable to
lower sales to two national customers.
Net Sales (Aggregate) - Paperboard Segment
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------------------------------------------
1998 $ 142.2 $ 144.9 $ 135.2 $ 133.1 $ 555.4
1999 122.5 127.0 134.5 145.0 529.0
2000 144.3 154.7 148.9 140.6 588.5
- ------------------------------------------------------------------------
Net sales of the paperboard segment before intersegment eliminations
for fiscal 2000 increased 11.2% to $588.5 million from $529.0 million for fiscal
1999.
Net sales of the paperboard segment before intersegment eliminations
for fiscal 1999 decreased 4.8% to $529.0 million from $555.4 million for fiscal
1998.
Net Sales (Aggregate) by Division - Paperboard Segment
LAMINATED
COATED SPECIALTY RECYCLED PAPERBOARD
(IN MILLIONS) PAPERBOARD PAPERBOARD FIBER PRODUCTS
- ---------------------------------------------------------------------
1998 $ 289.0 $ 76.6 $ 26.6 $ 163.2
1999 268.5 85.6 28.0 146.9
2000 304.0 100.3 48.4 135.8
- ---------------------------------------------------------------------
The increase in net sales of the paperboard segment before intersegment
eliminations for fiscal 2000 as compared to fiscal 1999 was the result of
increased volumes and prices in the recycled fiber and coated and specialty
paperboard divisions. See Operating Income -- Paperboard Segment.
The decrease in net sales of the paperboard segment before intersegment
eliminations for fiscal 1999 as compared to fiscal 1998 was the result of price
decreases reflecting weakness in the markets for boxboard. In order to better
utilize our capacity, we aggressively pursued additional long-term paperboard
volume during fiscal 1999, which resulted in lower average selling prices for
the paperboard segment. See Operating Income -- Paperboard Segment.
24
ROCK-TENN COMPANY
27
management's discussion and analysis
Net Sales (Aggregate) - Specialty Corrugated
Packaging and Display Segment
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER YEAR
- ---------------------------------------------------------------------
1998 $ 29.4 $ 32.9 $ 34.4 $ 41.3 $ 138.0
1999 37.8 41.4 45.0 56.7 180.9
2000 52.3 59.2 59.1 68.2 238.8
- ---------------------------------------------------------------------
Net sales within this segment before intersegment eliminations for
fiscal 2000 increased 32.0% to $238.8 million from $180.9 million for fiscal
1999.
Net sales within this segment before intersegment eliminations for
fiscal 1999 increased 31.1% to $180.9 million from $138.0 million for fiscal
1998.
Net Sales (Aggregate) by Division - Specialty Corrugated
Packaging and Display Segment
CORRUGATED
(IN MILLIONS) PACKAGING ALLIANCE
- ------------------------------------------------
1998 65.9 72.1
1999 68.9 112.0
2000 86.1 152.7
The increase in net sales of the specialty corrugated packaging and
display segment before intersegment eliminations for fiscal 2000 as compared to
fiscal 1999 was the result of increased volumes and increases in pricing of
promotional displays and specialty corrugated packaging.
The increase in net sales of the specialty corrugated packaging and
display segment before intersegment eliminations for fiscal 1999 as compared to
fiscal 1998 was the result of increased volumes of promotional displays.
Cost of Goods Sold
Cost of goods sold for fiscal 2000 increased 15.3% to $1,174.8 million from
$1,019.2 million for fiscal 1999. Cost of goods sold as a percentage of net
sales for fiscal 2000 increased to 80.3% from 77.6% for fiscal 1999. The
increase in cost of goods sold as a percentage of net sales resulted from higher
average recovered paper costs and higher operating costs at several plants, some
of which were related to the start-up of certain new equipment and higher energy
and freight costs.
Cost of goods sold for fiscal 1999 increased 1.1% to $1,019.2 million
from $1,008.6 million for fiscal 1998. Cost of goods sold as a percentage of net
sales for fiscal 1999 decreased to 77.6% from 77.7% for fiscal 1998. The
decrease in cost of goods sold as a percentage of net sales resulted from lower
average recovered paper costs, energy and workers' compensation expenses and
increased manufacturing efficiencies, which were offset somewhat by increases in
health insurance costs.
Substantially all of our U.S. inventories are valued at the lower of
cost or market with cost determined on the 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, or "FIFO," inventory valuation
method. In periods of increasing costs, the LIFO method generally results in
higher cost of goods sold than under the FIFO method. In periods of decreasing
costs, the results are generally the opposite.
The following table illustrates the comparative effect of LIFO and FIFO
accounting on our results of operations. These supplemental FIFO earnings
reflect the after-tax effect of eliminating the LIFO adjustment each year.
2000 1999 1998
----------------------- ---------------------
(IN MILLIONS) LIFO FIFO LIFO FIFO LIFO FIFO
- ------------------------------------------------------------------------------------------------------
Cost of goods sold $1,174.8 $1,169.5 $ 1,019.2 $ 1,019.0 $1,008.6 $1,007.4
Net (loss) income (15.9) (12.6) 39.7 39.8 42.0 42.7
25
2000 ANNUAL REPORT
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
Gross Profit
(% OF FIRST SECOND THIRD FOURTH FISCAL
NET SALES) QUARTER QUARTER QUARTER QUARTER YEAR
- --------------------------------------------------------------------
1998 21.2% 21.4% 23.5% 23.0% 22.3%
1999 23.0 22.1 22.3 22.3 22.4
2000 20.8 19.9 18.8 19.4 19.7
- --------------------------------------------------------------------
Gross profit for fiscal 2000 decreased 1.9% to $288.5 million from $294.2
million for fiscal 1999. Gross profit as a percentage of net sales decreased to
19.7% for fiscal 2000 from 22.4% for fiscal 1999. See Cost of Goods Sold.
Gross profit for fiscal 1999 increased 1.9% to $294.2 million from
$288.8 million for fiscal 1998. Gross profit as a percentage of net sales
increased to 22.4% for fiscal 1999 from 22.3% for fiscal 1998. See Cost of Goods
Sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal 2000 increased
4.2% to $178.0 million from $170.8 million for fiscal 1999. Selling, general and
administrative expenses as a percentage of net sales for fiscal 2000 decreased
to 12.2% from 13.0% for fiscal 1999. The decrease in selling, general and
administrative expenses as a percentage of net sales for fiscal 2000 resulted
primarily from decreased compensation expenses in relation to net sales.
Selling, general and administrative expenses for fiscal 1999 increased
4.5% to $170.8 million from $163.4 million for fiscal 1998. Selling, general and
administrative expenses as a percentage of net sales for fiscal 1999 increased
to 13.0% from 12.6% for fiscal 1998. The increase in selling, general and
administrative expenses as a percentage of net sales for fiscal 1999 resulted
primarily from increased compensation expenses.
Plant Closings and Other Costs
During fiscal 2000, we incurred plant closing and other costs related to
announced facility closings. We generally accrue the cost of employee
terminations at the time of notification to the employees. Certain other costs,
such as moving and relocation costs, are expensed as incurred. These plant
closing costs include the closing of 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 and certain other plant
closings, we incurred charges of $61.1 million during fiscal 2000, which
consisted mainly of asset impairment, severance, equipment relocation, lease
write-downs and other related expenses, including business interruption and
other inefficiencies. Of the $61.1 million, $46.0 million was asset impairment
charges related to the determination that material diminution in the value of
assets had occurred at our two folding carton plants that use web offset
technology and at the other closed facilities. This includes $25.4 million of
goodwill which is not deductible for tax purposes. As a result of the asset
impairment and goodwill charges, depreciation and amortization expense in fiscal
year 2001 will be lower by $3.9 million and $0.6 million, respectively. Payments
of $12.6 million were made in fiscal 2000, leaving a remaining liability of $2.5
million at September 30, 2000. Plant closing and other costs are not allocated
to the respective segments for financial reporting purposes. Had these costs
been allocated, $50.2 million would have been charged to the packaging products
segment, $9.3 million would have been charged to the paperboard segment and $1.6
million would have been non-allocated. We have consolidated the operations of
these closed plants into other existing facilities.
During fiscal 2000, we decided to remove certain equipment from service
primarily in our laminated paperboard products division. As a result of this
decision, we incurred asset impairment charges of $4.6 million related to this
equipment.
26
ROCK-TENN COMPANY
29
management's discussion and analysis
During fiscal 1999, we closed a folding carton plant in Taylorsville,
North Carolina, a laminated paperboard products operation in Otsego, Michigan
and an uncoated papermill serving our coverboard converting operations in Jersey
City, New Jersey. The closures resulted in the termination of approximately 280
employees. In connection with these closings, we incurred charges of $6.3
million during fiscal 1999, which consisted mainly of severance, equipment
relocation, expected losses on the disposition of the facility and related
expenses. We made payments of $0.3 million and $4.1 million in fiscal 2000 and
1999, respectively, incurred losses of $0.2 million and $0.8 million in
connection with the disposal of inventory and other assets during fiscal 2000
and 1999, respectively, made an adjustment of $0.1 million to reduce the
liability during fiscal 2000 and reduced the carrying value of the Jersey City
facility by $1.0 million during fiscal 1999, leaving a nominal remaining
liability at September 30, 2000. Plant closing and other costs are not allocated
to the respective segments for financial reporting purposes. Had these costs
been allocated, $3.9 million would have been charged to the paperboard segment
in fiscal 1999 and $2.4 million of expense would have been charged to the
packaging products segment in fiscal 1999. We have consolidated the operations
of these closed plants into other existing facilities.
During fiscal 1998, we began implementing certain cost reduction
initiatives designed to reduce overhead and production costs and improve
operating efficiency. In connection with these cost reduction initiatives, we
terminated approximately 40 employees and recorded $0.6 million and $2.0 million
of costs related to these terminations during fiscal 1999 and 1998,
respectively. We made payments of approximately $0.5 million, $1.2 million and a
nominal amount during fiscal 2000, 1999 and 1998, respectively, related to these
terminations and made an adjustment to reduce the liability by $0.3 million
during fiscal 2000. The remaining liability at September 30, 2000 is
approximately $0.5 million, which is expected to be paid during fiscal 2001.
Segment Operating Income
Operating Income - Packaging Products Segment
(IN MILLIONS, NET SALES OPERATING RETURN
EXCEPT PERCENTAGES) (AGGREGATE) INCOME ON SALES
- ----------------------------------------------------------------------
First Quarter $ 194.0 $ 6.6 3.4%
Second Quarter 194.6 6.5 3.3
Third Quarter 192.6 8.4 4.4
Fourth Quarter 193.2 11.0 5.7
- ----------------------------------------------------------------------
Fiscal 1998 $ 774.4 $ 32.5 4.2%
======================================================================
First Quarter $ 185.7 $ 10.8 5.8%
Second Quarter 180.7 9.0 5.0
Third Quarter 186.9 9.4 5.0
Fourth Quarter 196.6 11.3 5.7
- ----------------------------------------------------------------------
Fiscal 1999 $ 749.9 $ 40.5 5.4%
======================================================================
First Quarter $ 192.9 $ 6.3 3.3%
Second Quarter 195.1 7.7 3.9
Third Quarter 202.8 10.7 5.3
Fourth Quarter 206.6 10.1 4.9
- ----------------------------------------------------------------------
Fiscal 2000 $ 797.4 $ 34.8 4.4%
======================================================================
Operating income attributable to the packaging products segment for fiscal 2000
decreased 14.1% to $34.8 million from $40.5 million for fiscal 1999. Operating
margin for fiscal 2000 was 4.4% compared to 5.4% for fiscal 1999. The decrease
in operating margin resulted from higher raw material costs, significant losses
in our web offset folding carton operations and operational inefficiencies
attributable in part to the start-up of new equipment.
Operating income attributable to the packaging products segment for
fiscal 1999 increased 24.6% to $40.5 million from $32.5 million for fiscal 1998.
Operating margin for fiscal 1999 was 5.4% compared to 4.2% for fiscal 1998. The
increase in operating margin was the result of increased manufacturing
efficiencies from improved operating rates and higher sales in the second half
of fiscal 1999. This increase was offset somewhat by lower average selling
prices for certain business in the folding carton division.
27
2000 ANNUAL REPORT
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating Income - Paperboard Segment
WEIGHTED
BOXBOARD AVERAGE MEDIUM AVERAGE AVERAGE
NET SALES OPERATING TONS BOXBOARD TONS MEDIUM RECOVERED
(AGGREGATE) INCOME RETURN SHIPPED PRICE SHIPPED PRICE PAPER COST
(IN MILLIONS) (IN MILLIONS) ON SALES (IN THOUSANDS) (PER TON) (IN THOUSANDS) (PER TON) (PER TON)
- --------------------------------------------------------------------------------------------------------------------------
First Quarter $ 142.2 $ 17.0 12.0% 252.6 $ 420 45.0 $ 330 $ 70
Second Quarter 144.9 19.9 13.7 246.8 420 45.6 347 68
Third Quarter 135.2 19.7 14.6 235.1 417 40.8 338 59
Fourth Quarter 133.1 15.8 11.9 231.0 414 43.9 318 58
- --------------------------------------------------------------------------------------------------------------------------
Fiscal 1998 $ 555.4 $ 72.4 13.0% 965.5 $ 418 175.3 $ 332 $ 64
==========================================================================================================================
First Quarter $ 122.5 $ 13.0 10.6% 230.7 $ 403 45.2 $ 288 $ 53
Second Quarter 127.0 11.5 9.1 229.0 399 43.5 328 52
Third Quarter 134.5 16.2 12.0 249.4 398 45.3 340 58
Fourth Quarter 145.0 14.9 10.3 249.8 406 44.7 380 76
- --------------------------------------------------------------------------------------------------------------------------
Fiscal 1999 $ 529.0 $ 55.6 10.5% 958.9 $ 401 178.7 $ 336 $ 60
==========================================================================================================================
First Quarter $ 144.3 $ 15.5 10.7% 250.4 $ 420 42.4 $ 386 $ 83
Second Quarter 154.7 14.7 9.5 257.1 426 44.7 403 91
Third Quarter 148.9 8.4 5.6 242.0 445 40.9 419 108
Fourth Quarter 140.6 9.0 6.4 228.7 449 42.2 407 88
- --------------------------------------------------------------------------------------------------------------------------
Fiscal 2000 $ 588.5 $ 47.6 8.1% 978.2 $ 435 170.2 $ 403 $ 92
==========================================================================================================================
Operating income attributable to the paperboard segment for fiscal 2000
decreased 14.4% to $47.6 million from $55.6 million for fiscal 1999. Operating
margin for fiscal 2000 decreased to 8.1% from 10.5% in fiscal 1999. The decrease
in operating margin was primarily the result of raw material, energy and freight
cost increases that were not fully passed on to customers, costs associated with
the start-up of new equipment and operational inefficiencies at certain
papermills.
Operating income attributable to the paperboard segment for fiscal 1999
decreased 23.2% to $55.6 million from $72.4 million for fiscal 1998. Operating
margin for fiscal 1999 decreased to 10.5% from 13.0% in fiscal 1998. The
decrease in operating margin primarily resulted from lower average selling
prices and volumes of boxboard, which were partially offset by lower average
recovered paper costs. Beginning in the latter part of fiscal 1999, recovered
paper costs increased and we began implementing price increases to recover these
costs.
Operating Income - Specialty Corrugated Packaging and Display Segment
(IN MILLIONS, NET SALES OPERATING RETURN
EXCEPT PERCENTAGES) (AGGREGATE) INCOME ON SALES
- --------------------------------------------------------------------
First Quarter $ 29.4 $ 2.8 9.5%
Second Quarter 32.9 3.3 10.0
Third Quarter 34.4 3.4 9.9
Fourth Quarter 41.3 6.1 14.8
- --------------------------------------------------------------------
Fiscal 1998 $ 138.0 $ 15.6 11.3%
====================================================================
First Quarter $ 37.8 $ 3.9 10.3%
Second Quarter 41.4 5.7 13.8
Third Quarter 45.0 5.1 11.3
Fourth Quarter 56.7 9.1 16.0
- --------------------------------------------------------------------
Fiscal 1999 $ 180.9 $ 23.8 13.2%
====================================================================
First Quarter $ 52.3 $ 6.2 11.9%
Second Quarter 59.2 7.8 13.2
Third Quarter 59.1 7.2 12.2
Fourth Quarter 68.2 7.2 10.6
- --------------------------------------------------------------------
Fiscal 2000 $ 238.8 $ 28.4 11.9%
====================================================================
28
ROCK-TENN COMPANY
31
management's discussion and analysis
Operating income attributable to this segment for fiscal 2000 increased
19.3% to $28.4 million from $23.8 million for fiscal 1999. Operating margin for
fiscal 2000 decreased to 11.9% from 13.2% in fiscal 1999. The decrease in
operating margin was primarily the result of higher raw material costs.
Operating income attributable to this segment for fiscal 1999 increased
52.6% to $23.8 million from $15.6 million for fiscal 1998. Operating margin for
fiscal 1999 increased to 13.2% from 11.3% in fiscal 1998. The increase in
operating margin was primarily the result of lower raw material costs.
Interest Expense
Interest expense for fiscal 2000 increased to $35.5 million from $31.2 million
for fiscal 1999 and decreased to $31.2 million for fiscal 1999 from $35.0
million for fiscal 1998. The increase for fiscal 2000 primarily resulted from an
increase in the average outstanding borrowings and higher interest rates. The
decrease in fiscal 1999 primarily resulted from a decrease in average
outstanding borrowings and lower interest rates.
Provision for Income Taxes
Provision for income taxes for fiscal 2000 decreased to $11.6 million from $30.6
million for fiscal 1999. Provision for income taxes for fiscal 1999 decreased to
$30.6 million from $32.6 million for fiscal 1998. Excluding the effect of the
$25.4 million non-cash write-off during fiscal 2000 of the goodwill associated
with the impairment of assets at two facilities acquired in the Waldorf
acquisition, which is non-deductible for tax purposes, the Company's effective
tax rate increased to 54.9% for fiscal 2000 compared to 43.5% for fiscal 1999
and decreased to 43.5% for fiscal 1999 compared to 43.7% for fiscal 1998. The
increase in the effective tax rate in fiscal 2000 was primarily due to higher
non-tax deductible goodwill amortization as a percentage of pre-tax net income.
The decrease in the effective tax rate in fiscal 1999 primarily resulted from a
decrease in our effective state tax rate.
Net (Loss) Income and Diluted (Loss) Earnings Per Common Share
Net loss for fiscal 2000 was $15.9 million compared to net income of $39.7
million for fiscal 1999. Net loss as a percentage of net sales was 1.1% for
fiscal 2000 compared to net income as a percentage of net sales of 3.0% for
fiscal 1999. Diluted loss per share for fiscal 2000 was $0.46 compared to
diluted earnings per share of $1.13 for fiscal 1999.
Net income for fiscal 1999 decreased 5.5% to $39.7 million from $42.0
million for fiscal 1998. Net income as a percentage of net sales decreased to
3.0% for fiscal 1999 from 3.2% for fiscal 1998. Diluted earnings per share for
fiscal 1999 decreased to $1.13 from $1.20 for fiscal 1998.
Market Risk-Sensitive Instruments and Positions
We are exposed to market risk from changes in interest rates, foreign exchange
rates and commodity prices. To mitigate these risks, we enter into various
hedging transactions. The sensitivity analyses presented below do not consider
the effect of possible adverse changes in the economy generally, nor do they
consider additional actions management may take to mitigate its exposure to
such changes.
Derivative Instruments
We enter into a variety of derivative transactions. Generally, we designate at
inception that derivatives hedge risks associated with specific assets,
liabilities or future commitments and monitor each derivative to determine if it
remains an effective hedge. The effectiveness of the derivative as a hedge is
based on a high correlation between changes in its value and changes in value of
the underlying hedged item. We include in operations amounts received or paid
when the underlying transaction settles. We do not enter into or hold
derivatives for trading or speculative purposes.
We use interest rate cap agreements and interest rate swap agreements
to manage synthetically the interest rate characteristics of a portion of our
outstanding debt and to limit our exposure to rising interest rates. Amounts to
be received or paid as a result of interest rate cap agreements and interest
rate swap agreements are accrued and recognized as an adjustment to interest
expense related to the designated debt. The cost of purchasing interest rate
caps is amortized to interest expense ratably during the life of the agreement.
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 terminated
swap agreements. In the event of the early extinguishment of a designated debt
obligation, any realized or unrealized gain or loss from the swap would be
recognized in income at the time of the extinguishment.
We use forward contracts to limit our exposure to fluctuations in
Canadian foreign currency rates with respect to our receivables denominated in
Canadian dollars. The forward contracts are settled monthly and resulting gains
or losses are recognized at the time of settlement.
We use commodity swap agreements to limit our exposure to falling
selling prices and rising raw material costs for a portion of our recycled
corrugating medium and recycled fiber businesses. Amounts to be received or paid
as a result of these swap agreements are recognized in the period in which the
related sale is made.
Interest Rate
We are exposed to changes in interest rates, primarily as a result of our
short-term and long-term debt with both fixed and floating interest rates. We
use interest rate agreements to effectively cap the LIBOR rate on
29
2000 ANNUAL REPORT
32
Management's Discussion and Analysis
portions of the amount outstanding under our revolving credit facility. If
market interest rates averaged 1.0% more than actual rates in 2000, our interest
expense after considering the effects of interest rate swap and cap agreements
would have increased, and income before taxes would have decreased, by
approximately $4.7 million. Comparatively, if market interest rates averaged
1.0% more than actual rates in fiscal 1999, our interest expense, after
considering the effects of interest rate swap and cap agreements, would have
increased, and income before taxes would have decreased by approximately $3.0
million. These amounts are determined by considering the impact of the
hypothetical interest rates on our borrowing costs and interest rate swap and
cap agreements. These analyses do not consider the effects of the reduced level
of overall economic activity that could exist in such an environment. As of
September 30, 2000, we had one cap agreement, expiring October 7, 2000, and no
swap agreements in place.
Foreign Currency
We are exposed to changes in foreign currency rates with respect to our foreign
currency-denominated operating revenues and expenses. We use forward contracts
to limit exposure to fluctuations in Canadian foreign currency rates, our
largest exposure to foreign currency rates. For fiscal 2000, a uniform 10.0%
strengthening in the value of the dollar relative to the currency in which our
sales are denominated would have resulted in an increase in gross profit of $0.6
million for fiscal 2000. Comparatively, for fiscal 1999, a uniform 10.0%
strengthening in the value of the dollar relative to the currency in which our
sales are denominated would have resulted in an increase in gross profit of $0.4
million for fiscal 1999. This calculation assumes that each exchange rate would
change in the same direction relative to the U.S. dollar.
In addition to the direct effect of changes in exchange rates on the
dollar value of the resulting sales, changes in exchange rates also affect the
volume of sales or the foreign currency sales price as competitors' products
become more or less attractive. Our sensitivity analysis of the effects of
changes in foreign currency exchange rates does not factor in a potential change
in sales levels or local currency prices.
Commodities
We sell recycled medium to various customers. The principal raw material used in
the production of medium is old corrugated containers, or "OCC. Medium prices
and OCC costs fluctuate widely due to changing market forces. As a result, we
use swap agreements to limit our exposure to falling selling prices and rising
raw material costs of a portion of our recycled medium and recycled fiber
businesses. We estimate market risk as a hypothetical 10.0% decrease in selling
prices or a 10% increase in raw material costs. Based on 2000 medium sales
prices, such a decrease would have resulted in lower sales of $2.9 million
during fiscal 2000 including the effect of our swaps on medium prices. Based on
2000 OCC costs, such an increase would have resulted in higher costs of
purchases of $0.9 million during fiscal 2000.
In 1999, we estimated market risk as a hypothetical 10% increase in
selling prices or a 10% decrease in raw material costs. Based on 1999 medium
sales prices, such an increase would have resulted in lower sales of $1.7
million during fiscal 1999 because of our swaps on medium prices. Based on 1999
OCC costs, such a decrease would have resulted in higher costs of purchases of
$0.7 million during fiscal 1999 because of our swaps on OCC costs.
We purchase and sell a variety of commodities that are not subject to
derivative commodity instruments, including OCC, paperboard and recovered paper.
Fluctuations in market prices of these commodities could have a material effect
on our results of operations. Such fluctuations are not reflected in the results
above.
Liquidity and Capital Resources
Working Capital and Capital Expenditures
We have funded our working capital requirements and capital expenditures from
net cash provided by operating activities, borrowings under term notes and bank
credit facilities and proceeds received in connection with the issuance of
industrial revenue bonds and debt and equity securities. During fiscal 2000, we
replaced our revolving credit agreement with a new five-year agreement that
terminates in fiscal 2005, under which we have aggregate borrowing availability
of $450.0 million. At September 30, 2000, we had $393.0 million outstanding
under our revolving credit facility. Cash and cash equivalents, $5.4 million at
September 30, 2000, increased from $4.5 million at September 30, 1999.
30
ROCK-TENN COMPANY
33
management's discussion and analysis
Net cash provided by operating activities for fiscal 2000 was $102.4
million compared to $112.4 million for fiscal 1999. This decrease was primarily
the result of decreased earnings before depreciation and amortization and a
larger change in operating assets and liabilities during fiscal 2000 than fiscal
1999. Net cash used for financing activities aggregated $0.1 million for fiscal
2000 and consisted primarily of purchases of common stock and quarterly dividend
payments, offset by additional borrowings under our revolving credit facility.
Net cash used for financing activities aggregated $22.8 million for fiscal 1999
and consisted primarily of repayments of debt and quarterly dividend payments.
Net cash used for investing activities was $101.3 million for fiscal 2000
compared to $91.2 million for fiscal 1999 and consisted primarily of capital
expenditures in both years.
Net cash provided by operating activities for fiscal 1999 was $112.4
million compared to $125.7 million for fiscal 1998. This decrease primarily
resulted from a larger change in operating assets and liabilities during fiscal
1999 than fiscal 1998. Net cash used for financing activities aggregated $22.8
million for fiscal 1999 and consisted primarily of repayments of debt and
quarterly dividend payments. Net cash used for financing activities aggregated
$44.7 million for fiscal 1998 and consisted primarily of repayments of debt and
quarterly dividend payments. Net cash used for investing activities was $91.2
million for fiscal 1999 compared to $78.4 million for fiscal 1998 and consisted
primarily of capital expenditures in both years.
Our capital expenditures aggregated $94.6 million for fiscal 2000. We
expanded our operations through an ongoing capital improvements program and
management's efforts to optimize the productive output of our manufacturing
facilities. In addition, we also redeployed capital by closing certain
manufacturing facilities and, in some cases, moving manufacturing equipment to
other locations. Our capital improvements program during fiscal 2000 included
investments in the following: a new gypsum facing paper machine in Lynchburg,
Virginia; rebuilding of a large uncoated machine by adding a new wet end to the
mill in Otsego, Michigan; adding extrusion and thermoforming capacity to our
Plastics division; and building additional capacity and opening a new contract
packing facility in our Alliance division.
We currently estimate that our capital expenditures will aggregate
approximately $90.0 million in fiscal 2001, including our investment in our
Seven Hills joint venture. We intend to use these expenditures for the purchase
and upgrading of machinery and equipment and for building expansions and
improvements. We anticipate that we will be able to fund our capital
expenditures, 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.
Joint Venture
On February 18, 2000, we formed a joint venture with Lafarge Corporation to
produce gypsum paperboard liner for Lafarge's U.S. drywall manufacturing plants.
The joint venture, Seven Hills Paperboard, LLC, owns and will operate a
paperboard machine located at our Lynchburg, Virginia manufacturing site. We
have contributed a portion of our existing Lynchburg assets to the venture,
which will manufacture gypsum paperboard liner using Lafarge's state-of-the-art
proprietary processes. As of September 30, 2000, we have contributed cash of
$7.1 million for purposes of rebuilding the paperboard machine, and we
anticipate contributing an additional $6.8 million to the venture over the next
several quarters. Lafarge owns 51% and we own 49% of the joint venture.
Stock Repurchase Program
During fiscal 2000, the Board of Directors amended our stock repurchase plan to
allow for the repurchase from time to time prior to July 31, 2003 of up to 2.0
million shares of Class A common stock in open market transactions on the New
York Stock Exchange or in private transactions. In addition, the Board
authorized the repurchase from time to time of shares of Class B common stock in
private transactions, including repurchases pursuant to certain first-offer
rights contained in our Restated and Amended Articles of Incorporation, provided
that the aggregate number of shares of Class A and Class B common stock
purchased after approval of this amended plan may not exceed 2.0 million shares.
During fiscal 2000, we repurchased 1.6 million shares of Class A common stock
and no Class B common stock under our amended plan. Under previously authorized
plans, we repurchased 0.5 million, zero and 0.3 million shares of Class A common
stock during fiscal 2000, 1999 and 1998, respectively.
31
2000 ANNUAL REPORT
34
Management's Discussion and Analysis
Year 2000
During 1999, we completed all readiness work towards the Year 2000 issue. We
have not experienced any material problems resulting from Year 2000 issues,
either with our internal computer systems or the products or services supplied
by third parties.
Expenditures for Environmental Compliance
We are subject to various federal, state, local and foreign environmental laws
and regulations, including those regulating the discharge, storage, handling and
disposal of a variety of substances. These laws and regulations include, among
others, the Comprehensive Environmental Response, Compensation and Liability
Act, which we refer to as CERCLA, the Clean Air Act (as amended in 1990), the
Clean Water Act, the Resource Conservation and Recovery Act (including
amendments relating to underground tanks) and the Toxic Substances Control Act.
These environmental regulatory programs are primarily administered by the U.S.
Environmental Protection Agency. In addition, some states in which we operate
have adopted equivalent or more stringent environmental laws and regulations or
have enacted their own parallel environmental programs, which are enforced
through various state administrative agencies.
We do not believe that future compliance with these environmental laws
and regulations will have a material adverse effect on our results of
operations, financial condition or cash flows. However, environmental laws and
regulations are becoming increasingly stringent. Consequently, our compliance
and remediation costs could increase materially. In addition, we cannot
currently assess with certainty the impact that the future emissions standards
and enforcement practices under the 1990 amendments to the Clean Air Act will
have on our operations or capital expenditure requirements. However, we believe
that any such impact or capital expenditures will not have a material adverse
effect on our results of operations, financial condition or cash flows.
We estimate that we will spend $1.0 to $2.0 million for capital
expenditures during fiscal year 2001 in connection with matters relating to
environmental compliance.
In addition, we may choose to modify or replace the coal-fired boilers
at two of our facilities in order to operate cost effectively while complying
with emissions regulations under the Clean Air Act. We estimate these
improvements will cost approximately $9.0 million.
We have been identified as a potentially responsible party, which we
refer to as a PRP, at eight active "superfund" sites pursuant to CERCLA or
comparable state statutes. No remediation costs or allocations have been
determined with respect to such sites other than costs that were not material to
us. Based upon currently available information and the opinions of our
environmental compliance managers and general counsel, although there can be no
assurance, we believe that any liability we may have at any site will not have a
material adverse effect on our results of operations, financial condition or
cash flows.
On February 9, 1999, we received a letter from the Michigan Department
of Environmental Quality, which we refer to as MDEQ, in which the MDEQ alleges
that we are in violation of the Michigan Natural Resources and Environmental
Protection Act, as well as the facility's wastewater discharge permit at one of
our Michigan facilities. The letter alleges that we exceeded several numerical
limitations for chemical parameters outlined in the wastewater permit and
violated other wastewater discharge criteria. The MDEQ further alleges that we
are liable for contamination contained on the facility property as well as for
contributing contamination to the Kalamazoo River site. The letter requests that
we commit, in the form of a binding agreement, to undertake the necessary and
appropriate response activities and response actions to address contamination in
both areas. We have agreed to enter into an administrative consent order
pursuant to which improvements will be made to the facility's wastewater
treatment system and we will pay a $75,000 one for the alleged violations. We
have also agreed to pay an additional $30,000 for past and future oversight
costs incurred by the State of Michigan. Once the final order has been executed,
we expect to pay this additional amount in three equal payments over the next
three years. The cost of making upgrades to the process waste system and
wastewater treatment systems is estimated to be approximately $1,000,000.
Nothing contained in the order will constitute an admission of liability or any
factual finding, allegation or legal conclusion on our part. The order is
expected to be completed during the first quarter of fiscal 2001.
32
ROCK-TENN COMPANY
35
management's discussion and analysis
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." This statement requires the fair value of
derivatives to be recorded as assets or liabilities. Gains or losses resulting
from changes in the fair values of derivatives would be accounted for currently
in earnings or comprehensive income depending on the purpose of the derivatives
and whether they qualify for hedge accounting treatment. SFAS 133 is required to
be adopted in the first quarter of fiscal 2001. The adoption of SFAS 133 will
result in an insignficant charge, net of tax, from a cumulative effect of a
change in accounting principle, and a $7.8 million decrease in shareholders'
equity in our financial statements for the quarter ending December 31, 2000.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition." This bulletin
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements. This bulletin will be effective in fiscal 2001. We do not
anticipate that SAB 101 will have a material impact on our consolidated
financial statements.
Forward-Looking Statements
Statements herein regarding, among other things, estimated capital expenditures
for fiscal 2001 and expected expenditures for environmental compliance,
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, the estimated cost of
compliance with environmental laws, the expected resolution of various pending
environmental matters and competitive conditions in our businesses and general
economic conditions. These forward-looking statements are subject to certain
risks including, among others, that the amount of capital expenditures has been
underestimated and that the impact on our results of those capital expenditures
has been overestimated; the cost of compliance with environmental laws has been
underestimated; and expected outcomes of various pending environmental matters
are inaccurate. In addition, our performance in future periods is subject to
other risks including, among others, decreases in demand for our products,
increases in raw material costs, fluctuations in selling prices and adverse
changes in general market and industry conditions. We believe these estimates
are reasonable; however, undue reliance should not be placed on such estimates,
which are based on current expectations.
33
2000 ANNUAL REPORT
36
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Net sales $ 1,463,288 $ 1,313,371 $ 1,297,360
Cost of goods sold 1,174,837 1,019,214 1,008,594
- ------------------------------------------------------------------------------------------------------------
Gross profit 288,451 294,157 288,766
Selling, general and administrative expenses 177,961 170,779 163,404
Amortization of goodwill 9,069 9,410 9,429
Plant closing and other costs 65,630 6,932 1,997
- ------------------------------------------------------------------------------------------------------------
Income from operations 35,791 107,036 113,936
Interest expense (35,575) (31,179) (35,024)
Interest and other income 418 391 974
Minority interest in income of consolidated subsidiary (4,980) (5,995) (5,273)
- ------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (4,346) 70,253 74,613
Provision for income taxes (Note 7) 11,570 30,555 32,593
- ------------------------------------------------------------------------------------------------------------
Net (loss) income $ (15,916) $ 39,698 $ 42,020
============================================================================================================
Basic (loss) earnings per share (Note 1) $ (0.46) $ 1.14 $ 1.21
============================================================================================================
Diluted (loss) earnings per share (Note 1) $ (0.46) $ 1.13 $ 1.20
============================================================================================================
See accompanying notes.
34
ROCK-TENN COMPANY
37
statements >>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 2000 1999
- --------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 5,449 $ 4,538
Accounts receivable (net of allowances of $3,732 and $3,610) 156,155 139,034
Inventories (Note 1) 99,589 94,501
Other current assets 8,050 5,308
- --------------------------------------------------------------------------------------------------------------
Total current assets 269,243 243,381
Property, plant and equipment, at cost (Note 1):
Land and buildings 200,444 194,903
Machinery and equipment 855,714 805,537
Transportation equipment 13,222 14,738
Leasehold improvements 8,561 7,242
- --------------------------------------------------------------------------------------------------------------
1,077,941 1,022,420
Less accumulated depreciation and amortization (485,403) (429,681)
- --------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 592,538 592,739
Goodwill, net 268,526 308,283
Other assets 28,656 17,067
- --------------------------------------------------------------------------------------------------------------
$ 1,158,963 $ 1,161,470
==============================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 77,852 $ 66,271
Accrued compensation and benefits 35,403 36,977
Current maturities of long-term debt (Note 4) 20,328 41,435
Other current liabilities 26,792 24,227
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 160,375 168,910
Long-term debt due after one year (Note 4) 514,492 457,410
Deferred income taxes (Note 7) 81,384 85,631
Other long-term items 16,409 17,355
Commitments and contingencies (Notes 6 and 10)
Shareholders' equity (Note 3):
Preferred stock, $.01 par value; 50,000,000 shares authorized;
no shares outstanding at September 30, 2000 and 1999 -- --
Class A common stock, $.01 par value; 175,000,000 shares authorized;
22,031,024 outstanding at September 30, 2000 and 23,411,395 outstanding at
September 30, 1999. Class B common stock, $.01 par value; 60,000,000 shares
authorized; 11,352,739 outstanding at September 30, 2000 and
11,546,187 outstanding at September 30, 1999 334 350
Capital in excess of par value 127,682 132,048
Retained earnings 262,872 303,287
Accumulated other comprehensive loss (4,585) (3,521)
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity 386,303 432,164
- --------------------------------------------------------------------------------------------------------------
$ 1,158,963 $ 1,161,470
==============================================================================================================
See accompanying notes.
35
2000 ANNUAL REPORT
38
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CLASS A AND CLASS B ACCUMULATED
COMMON STOCK CAPITAL IN OTHER
EXCESS OF RETAINED COMPREHENSIVE
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) SHARES AMOUNT PAR VALUE EARNINGS (LOSS) INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
Balance at October 1, 1997 34,374,326 $ 344 $ 126,363 $ 245,592 $(1,087) $ 371,212
Comprehensive income:
Net income -- -- -- 42,020 -- 42,020
Foreign currency translation adjustments -- -- -- -- (4,787) (4,787)
---------
Comprehensive income 37,233
Cash dividends - $.30 per share -- -- -- (10,388) -- (10,388)
Sales of common stock 532,584 5 3,771 -- -- 3,776
Purchases of Class A common stock (330,100) (3) (1,230) (3,185) -- (4,418)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 34,576,810 346 128,904 274,039 (5,874) 397,415
Comprehensive income:
Net income -- -- -- 39,698 -- 39,698
Foreign currency translation adjustments -- -- -- -- 2,353 2,353
---------
Comprehensive income 42,051
Cash dividends - $.30 per share -- -- -- (10,450) -- (10,450)
Sales of common stock 380,772 4 3,144 -- -- 3,148
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 34,957,582 350 132,048 303,287 (3,521) 432,164
Comprehensive loss:
Net loss -- -- -- (15,916) -- (15,916)
Foreign currency translation adjustments -- -- -- -- (1,064) (1,064)
---------
Comprehensive loss (16,980)
Cash dividends - $.30 per share -- -- -- (10,384) -- (10,384)
Sales of common stock 551,449 5 3,743 -- -- 3,748
Purchases of Class A common stock (2,125,268) (21) (8,109) (14,115) -- (22,245)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 33,383,763 $ 334 $ 127,682 $ 262,872 $(4,585) $ 386,303
===============================================================================================================================
See accompanying notes.
36
ROCK-TENN COMPANY
39
statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Operating activities:
Net (loss) income $ (15,916) $ 39,698 $ 42,020
Items in (loss) income not affecting cash:
Depreciation and amortization 77,061 72,475 70,827
Deferred income taxes 316 3,383 3,974
(Gain) loss on disposal of plant and equipment and other, net (517) 746 604
Minority interest in income of consolidated subsidiary 4,980 5,995 5,273
Impairment loss and other non-cash charges 49,700 -- --
Change in operating assets and liabilities:
Accounts receivable (17,374) (20,469) (3,866)
Inventories (5,362) (6,102) 5,223
Other assets (2,151) (2,883) 1,219
Accounts payable 11,690 20,180 (8,224)
Accrued liabilities 17 (607) 8,638
- --------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 102,444 112,416 125,688
Financing activities:
Net additions (repayments) to revolving credit facilities 32,147 (7,000) (17,000)
Additions to long-term debt 5,454 3,034 --
Repayments of long-term debt (1,626) (5,527) (8,285)
Debt issuance costs (1,811) (80) --
Sales of common stock 3,748 3,148 3,776
Purchases of common stock (22,245) -- (4,418)
Cash dividends paid to shareholders (10,384) (10,450) (10,388)
Distribution to minority interest (5,425) (5,950) (8,400)
- --------------------------------------------------------------------------------------------------------------------
Cash used for financing activities (142) (22,825) (44,715)
Investing activities:
Cash contributed to joint venture (7,133) -- --
Capital expenditures (94,640) (92,333) (81,666)
Proceeds from sale of property, plant and equipment 2,209 1,127 2,700
(Increase) decrease in unexpended industrial revenue bond proceeds (1,779) -- 61
- --------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (101,343) (91,206) (78,356)
Effect of exchange rate changes on cash (48) 384 (193)
- --------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 911 (1,231) 2,424
Cash and cash equivalents at beginning of year 4,538 5,769 3,345
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,449 $ 4,538 $ 5,769
====================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds $ 16,655 $ 28,899 $ 25,916
Interest, net of amounts capitalized 36,228 31,190 37,258
See accompanying notes.
37
2000 ANNUAL REPORT
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Description of Business and Summary of Significant Accounting Policies
Description of Business
Rock-Tenn Company ("the Company") manufactures and distributes folding cartons,
solid fiber partitions, corrugated containers and displays, laminated
paperboard products, plastic packaging, 100% recycled clay-coated and specialty
paperboard and recycled corrugating medium primarily to nondurable goods
producers. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Receivables
generally are due within 30 days. The Company serves a diverse customer base
primarily in North America and, therefore, has limited exposure from credit loss
to any particular customer or industry segment.
Consolidation
The consolidated financial statements include the accounts of the Company and
all of its majority-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 will differ from those estimates and the differences could be
material.
Revenue Recognition
The Company generally recognizes revenue at the time of shipment. In limited
circumstances, the Company ships goods on a consignment basis and recognizes
revenue when title to the goods passes to the buyer.
Derivatives
The Company enters into a variety of derivative transactions. Generally, the
Company designates at inception that derivatives hedge risks associated with
specific assets, liabilities or future commitments and monitors each derivative
to determine if it remains an effective hedge. The effectiveness of the
derivative as a hedge is based on a high correlation between changes in its
value and changes in the value of the underlying hedged item. The Company
includes in operations amounts received or paid when the underlying transaction
settles. The Company does not enter into or hold derivatives for trading or
speculative purposes.
From time to time, the Company uses interest rate cap agreements and
interest rate swap agreements to manage synthetically the interest rate
characteristics of a portion of its outstanding debt and to limit the Company's
exposure to rising interest rates. Amounts to be received or paid as a result of
interest rate cap agreements and interest rate swap agreements are accrued and
recognized as an adjustment to interest expense related to the designated debt.
The cost of purchasing interest rate caps are amortized to interest expense
ratably during the life of the agreement. Gains or losses terminations of
interest rate swap agreements are deferred and amortized as an adjustment to
interest expense related to the debt instrument over the remaining term of the
original contract life of terminated swap agreements. In the event of the early
extinguishments of a designated debt obligation, any realized or unrealized gain
or loss from the swap would be recognized in income at the time of the
extinguishment. As of September 30, 2000, the Company had one cap agreement,
expiring October 7, 2000, and no swap agreements in place.
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 forward contracts are settled monthly and resulting gains
or losses are recognized at the time of settlement.
The Company uses commodity swap agreements to limit the Company's
exposure to falling sales prices and rising raw material costs for a portion of
its recycled corrugating medium and recycled fiber businesses. Amounts to be
received or paid as a result of these swap agreements are recognized in the
period in which the related sale is made.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less from the date of purchase to be cash equivalents. The carrying
amounts reported in the consolidated balance sheets for cash and cash
equivalents approximate fair market values.
Inventories
Substantially all U.S. inventories are valued 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.
These other inventories represent approximately 13.6% and 12.6% of FIFO cost at
September 30, 2000 and 1999, respectively.
Inventories at September 30, 2000 and 1999 are as follows:
SEPTEMBER 30,
(IN THOUSANDS) 2000 1999
- --------------------------------------------------------------------
Finished goods and work in process $ 74,422 $ 67,934
Raw materials 40,353 37,029
Supplies 12,159 11,608
- -----------------------------------------------------------------
Inventories at FIFO cost 126,934 116,571
LIFO reserve (27,345) (22,070)
- -----------------------------------------------------------------
Net inventories $ 99,589 $ 94,501
=================================================================
38
ROCK-TENN COMPANY
41
notes
It is impracticable to segregate the LIFO reserve between raw
materials, finished goods and work in process.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Cost includes major
expenditures for improvements and replacements which extend useful lives or
increase capacity and interest costs associated with significant capital
additions. During fiscal 2000, 1999 and 1998, the Company capitalized interest
of approximately $1,097,000, $931,000 and $888,000, respectively. For financial
reporting purposes, depreciation and amortization are provided on both the
declining balance and straight-line methods over the estimated useful lives of
the assets as follows:
- -----------------------------------------------------------------
Buildings and building improvements 15-40 years
Machinery and equipment 3-20 years
Transportation equipment 3-8 years
Leasehold improvements Term of lease
- -----------------------------------------------------------------
Depreciation expense for fiscal 2000, 1999 and 1998 was approximately
$66,267,000, $61,435,000 and $59,525,000, respectively.
Basic and Diluted (Loss) Earnings Per Share
The following table sets forth the computation of basic and diluted (loss)
earnings per share:
YEAR ENDED SEPTEMBER 30,
2000 1999 1998
- ----------------------------------------------------------------------------------------------
Numerator:
Net (loss) income $ (15,916,000) $ 39,698,000 $ 42,020,000
Denominator:
Denominator for basic
(loss) earnings per
share - weighted
average shares 34,523,827 34,801,541 34,595,662
Effect of dilutive
stock options -- 405,929 547,880
Denominator for
diluted (loss) earnings
per share - weighted
average shares and
assumed conversions 34,523,827 35,207,470 35,143,542
==============================================================================================
Basic (loss) earnings
per share $ (0.46) $ 1.14 $ 1.21
==============================================================================================
Diluted (loss)
earnings per share $ (0.46) $ 1.13 $ 1.20
==============================================================================================
Common stock equivalents were antidilutive in fiscal 2000 and,
therefore, excluded from the computation of weighted average shares used in
computing diluted loss per share.
Goodwill and Other Intangible Assets
The Company has classified as goodwill the excess of the acquisition cost over
the fair values of the net assets of businesses acquired. Goodwill is amortized
on a straight-line basis over periods ranging from 20 to 40 years. Net goodwill
as a percentage of total assets was 23.2% and 26.5% at September 30, 2000 and
1999, respectively. Net goodwill as a percentage of shareholders' equity was
69.5% and 71.3% at September 30, 2000 and 1999, respectively. Accumulated
amortization relating to goodwill at September 30, 2000 and 1999 was $36,057,000
and $29,259,000, respectively.
Other intangible assets primarily represent costs allocated to
non-compete agreements, financing costs and patents. These assets are amortized
on a straight-line basis over their estimated useful lives. Accumulated
amortization relating to intangible assets, excluding goodwill, was
approximately $6,483,000 and $5,660,000 at September 30, 2000 and 1999,
respectively.
Asset Impairment
The Company generally accounts for long-lived asset impairment under Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement
requires that long-lived assets and certain identifiable intangibles to be held
and used be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
performing the review for recoverability, the Company estimates the future cash
flows expected to result from the use of the asset. If the sum of the estimated
expected future cash flows is less than the carrying amount of the asset, an
impairment loss is recognized. Otherwise, an impairment loss is not recognized.
Measurement of an impairment loss is based on the estimated fair value of the
asset. Long-lived assets to be disposed of are generally recorded at the lower
of their carrying amount or estimated fair value less cost to sell. See Note 2
for further discussion of fiscal 2000 impairment charges.
Foreign Currency Translation
Assets and liabilities of the Company's foreign operations are generally
translated from the foreign currency at the rate of exchange in effect as of the
balance sheet date. Earnings from foreign operations are indefinitely
reinvested in the respective operations. Revenues and expenses are generally
translated at average monthly exchange rates prevailing during the year.
Resulting translation adjustments are reflected in shareholders' equity.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." This statement requires the fair
value of derivatives to be recorded as assets or liabilities. Gains or losses
resulting from changes in the fair values of derivatives would be accounted for
currently in earnings or comprehensive income depending on the purpose of the
derivatives and
39
2000 ANNUAL REPORT
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
whether they qualify for hedge accounting treatment. SFAS 133 is required to be
adopted in the first quarter of fiscal 2001. The adoption of SFAS 133 will
result in an insignificant charge, net of tax, from a cumulative effect of a
change in accounting principle, and a $7,814,000 decrease in shareholders'
equity in the Company's financial statements for the quarter ending December 31,
2000.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition." This bulletin
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements. This bulletin will be effective in fiscal 2001. The
Company does not anticipate that SAB 101 will have a material impact on the
Company's consolidated financial statements.
In July 2000, the FASB issued Emerging Issues Task Force Issue 00-10
("EITF 00-10"), "Accounting for Shipping and Handling Costs." This issue
provides guidance regarding how shipping and handling costs incurred by the
seller and billed to a customer should be treated. EITF 00-10 concludes that all
amounts billed to a customer in a sales transaction related to shipping and
handling should be classified as revenue, and the costs incurred by the seller
for shipping and handling should be classified as cost of goods sold. Prior year
financial statements have been reclassified to conform to the requirements of
EITF 00-10.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
NOTE 2 Joint Venture and Other Matters
On February 18, 2000, the Company formed a joint venture with
Lafarge Corporation to produce gypsum paperboard liner for Lafarge's U.S.
drywall manufacturing plants. The joint venture, Seven Hills Paperboard, LLC,
owns and will operate a paperboard machine located at the Company's Lynchburg,
Virginia manufacturing site. The Company has contributed a portion of its
existing Lynchburg assets to the venture, which will manufacture gypsum
paperboard liner using Lafarge's state-of-the-art proprietary processes. As of
September 30, 2000 the Company has contributed cash of $7,133,000 for purposes
of rebuilding the paperboard machine and anticipates contributing an additional
$6,767,000 million to the venture over the next several quarters. Lafarge owns
51 percent and the Company owns 49 percent of the joint venture.
During fiscal 2000, the Company incurred plant closing and other costs
related to announced facility closings. The cost of employee terminations is
generally accrued at the time of notification to the employees. Certain other
costs, such as moving and relocation costs, are expensed as incurred. Included
in these plant closing costs are the closing of 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 and certain
other plant closings, the Company incurred charges of $61,130,000 during fiscal
2000, which consisted mainly of asset impairment, severance, equipment
relocation, lease write-downs and other related expenses, including business
interruption and other inefficiencies. Of the $61,130,000, $46,037,000 was asset
impairment charges related to the determination that material diminution in the
value of assets had occurred at the Company's two folding carton plants that use
web offset technology and at the other closed facilities. This includes $25.4
million of goodwill which is not deductible for tax purposes. As a result of the
asset impairment and goodwill charges, depreciation and amortization expense in
fiscal year 2001 will be lower by $3,941,000 and $636,000, respectively.
Payments of $12,593,000 were made in fiscal 2000, leaving a remaining liability
of $2,500,000 at September 30, 2000. Facilities closed during fiscal 2000 had
combined revenues and operating losses of $72,037,000 and $5,587,000,
respectively, in fiscal 2000, $98,314,000 and $5,814,000, respectively, in
fiscal 1999 and $119,746,000 and $4,801,000, respectively, in fiscal 1998. The
Company has consolidated the operations of these closed plants into other
existing facilities.
During fiscal 2000, the Company decided to remove certain equipment
from service primarily in its laminated paperboard products division. As a
result of this decision, the Company incurred impairment charges of $4,622,000
related to this equipment.
During fiscal 1999, the Company closed a folding carton plant in
Taylorsville, North Carolina, a laminated paperboard products operation in
Otsego, Michigan and an uncoated papermill serving its coverboard converting
operations in Jersey City, New Jersey. The closures resulted in the termination
of approximately 280 employees. In connection with these closings, the Company
incurred charges of $6,357,000 during fiscal 1999, which consisted mainly of
severance, equipment relocation, expected losses on the disposition of the
facility and related expenses. The Company made payments of $310,000 and
$4,134,000 in fiscal 2000 and 1999, respectively, incurred losses of $186,000
and $764,000 in connection with the disposal of inventory and other assets
during fiscal 2000 and 1999, respectively, made an adjustment of $122,000 to
reduce the liability during fiscal 2000 and reduced the carrying value of the
Jersey City facility by $1,000,000 during fiscal 1999, leaving a nominal
remaining liability at September 30, 2000. Facilities closed during fiscal 1999
had combined revenues and operating losses of $16,585,000 and $1,501,000,
respectively, in fiscal 1999 and $63,323,000 and $745,000, respectively, in
fiscal 1998.
During fiscal 1998, the Company began implementing certain cost
reduction initiatives designed to reduce overhead and production costs and
improve operating efficiency. In connection with these cost reduction
40
ROCK-TENN COMPANY
43
initiatives, the Company terminated approximately 40 employees and recorded no
amount, $575,000 and $1,997,000 of costs related to these terminations during
fiscal 2000, 1999 and 1998, respectively. The Company made payments of
approximately $514,000, $1,246,000 and $23,000 during fiscal 2000, 1999 and
1998, respectively, related to these terminations and made an adjustment to
reduce the liability by $302,000 during fiscal 2000. The remaining liability at
September 30, 2000 is $487,000, which is expected to be paid during fiscal 2001.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward-Looking Statements."
NOTE 3 Shareholders' Equity
Capitalization
The Company's capital stock consists of Class A common stock ("Class A Common")
and Class B common stock ("Class B Common"). Holders of Class A Common have one
vote per share and holders of Class B Common have 10 votes per share. Holders of
Class B Common are entitled to convert their shares into Class A Common at any
time on a share-for-share basis, subject to certain rights of first refusal by
the Company and its management committee. During fiscal 2000, 1999 and 1998,
respectively, approximately 285,000, 213,000 and 157,000 Class B Common shares
were converted to Class A Common shares.
The Company also has authorized preferred stock, of which no shares
have been issued. The terms and provisions of such shares will be determined by
the Board of Directors upon any issuance of such shares.
Stock Option Plans
The Company's 1993 Stock Option Plan allows for the granting of options to
certain key employees for the purchase of a maximum of 3,700,000 shares of Class
A Common. Options which have been granted under this plan vest in increments
over a period of up to three years and have 10-year terms.
The Incentive Stock Option Plan, the 1987 Stock Option Plan and the
1989 Stock Option Plan provided for the granting of options to certain key
employees for an aggregate of 4,320,000 shares of Class A Common and 1,440,000
shares of Class B Common. The Company will not grant any additional options
under the Incentive Stock Option Plan, the 1987 Stock Option Plan or the 1989
Stock Option Plan.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, generally no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
which also requires that the information be determined as if the Company had
accounted for its employee stock options granted subsequent to September 30,
1995 under the fair value method of that Statement. The fair values for the
options granted subsequent to September 30, 1995 were estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions for fiscal 2000, 1999 and 1998, respectively: risk-free
interest rate of 5.9%, 4.8% and 4.8%, a dividend yield of 2.0% for all three
years, volatility factor of the expected market price of the Company's common
stock of 41.4%, 40.0% and 32.0%, and an expected life of the option of 10 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair values estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair values of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
(IN THOUSANDS
EXCEPT FOR EARNINGS
PER SHARE INFORMATION) 2000 1999 1998
- ---------------------------------------------------------------
Pro forma net
(loss) income $(19,609) $37,339 $40,395
Pro forma (loss)
earnings per share:
Basic (0.57) 1.07 1.17
Diluted (0.57) 1.06 1.15
- ---------------------------------------------------------------
41
2000 ANNUAL REPORT
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes the changes in all stock options during the
periods indicated:
CLASS B COMMON CLASS A COMMON
---------------------------------------- ----------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE RANGE PRICE SHARES PRICE RANGE PRICE
- ----------------------------------------------------------------------------------------------------------------------------------
Options outstanding at
October 1, 1997 301,879 $ 2.52-7.45 $ 4.87 1,977,660 $ 2.50-20.31 $ 13.60
Exercised or forfeited (99,660) $ 2.52-7.45 $ 3.62 (246,420) $ 2.50-18.30 $ 3.71
Granted -- -- -- 519,200 $11.13-18.75 $ 11.48
- ---------------------------------------------------------------------------------------------------------------------------------
Options outstanding at
September 30, 1998 202,219 $ 3.27-7.45 $ 5.49 2,250,440 $ 3.26-20.31 $ 14.19
Exercised or forfeited (36,300) $ 3.27-4.33 $ 3.60 (72,400) $ 3.26-20.31 $ 4.95
Granted -- -- -- 822,200 $11.44-15.19 $ 14.59
- ---------------------------------------------------------------------------------------------------------------------------------
Options outstanding at
September 30, 1999 165,919 $ 4.33-7.45 $ 5.90 3,000,240 $ 4.32-20.31 $ 14.52
Exercised or forfeited 120,379 $ 4.33-7.45 $ 5.57 486,560 $ 4.32-20.31 $ 9.83
Granted -- -- -- 1,003,600 $ 8.93-14.25 $ 9.19
Options outstanding at
September 30, 2000 45,540 $ 6.09-7.45 $ 6.78 3,517,280 $ 6.06-20.31 $ 13.65
Options exercisable at
September 30, 2000 45,540 $ 6.09-7.45 $ 6.78 1,811,180 $ 6.06-20.31 $ 15.72
Options available for future
grant at September 30, 2000 -- -- -- 297,100 -- --
=================================================================================================================================
The following table summarizes information concerning options
outstanding and exercisable at September 30, 2000:
CLASS B COMMON CLASS A COMMON
----------------------------- ----------------------------------------------------------
WEIGHTED
WEIGHTED WEIGHTED WEIGHTED AVERAGE
NUMBER AVERAGE AVERAGE AVERAGE REMAINING
RANGE OF OUTSTANDING EXERCISE NUMBER EXERCISE NUMBER EXERCISE CONTRACTUAL LIFE
EXERCISE PRICES AND EXERCISABLE PRICE OUTSTANDING PRICE EXERCISABLE PRICE (BOTH CLASSES)
- --------------------------------------------------------------------------------------------------------------------------------
$ 6.06- 7.45 45,540 $ 6.78 133,980 $ 6.77 133,980 $ 6.77 2.0
$ 8.94-10.25 -- -- 858,600 $ 9.01 -- -- 9.6
$ 11.13-11.44 -- -- 477,200 $ 11.16 249,000 $ 11.14 7.0
$ 14.25-17.50 -- -- 1,324,400 $ 15.06 715,400 $ 15.25 6.4
$ 18.30-20.31 -- -- 723,100 $ 19.47 712,800 $ 19.48 5.3
- ------------------------------------------------------------------------------------------------------------------------------
45,540 $ 6.78 3,517,280 $ 13.65 1,811,180 $ 15.72 6.8
==============================================================================================================================
The estimated weighted average fair value of options granted during
fiscal 2000, 1999 and 1998 with option prices equal to the market price on the
date of grant was $4.41, $6.72, and $4.46, respectively.
Employee Stock Purchase Plan
Under the Amended and Restated 1993 Employee Stock Purchase Plan,
1,320,000 shares of Class A Common are reserved for purchase by substantially
all qualifying employees of the Company. In fiscal 2000, 1999 and 1998,
approximately 314,000, 284,000 and 207,000 shares respectively, were purchased
by employees under this plan.
42
ROCK-TENN COMPANY
45
4 Long-Term Debt
Long-term debt at September 30, 2000 and 1999 consists of the
following:
SEPTEMBER 30,
(IN THOUSANDS) 2000 1999
- -------------------------------------------------------------------------------
Revolving credit facility (a) $393,000 $362,000
7.25% notes, due August 2005,
net of unamortized
discount of $67 and $81(b) 99,933 99,919
Industrial revenue bonds,
bearing interest at variable rates
(6.95% at September 30, 2000),
due through October 2036(c) 40,000 34,650
Other notes 1,887 2,276
- -------------------------------------------------------------------------------
534,820 498,845
Less current maturities of long-term debt 20,328 41,435
- -------------------------------------------------------------------------------
Long-term debt due after one year $514,492 $457,410
===============================================================================
(a) The Company has a revolving credit facility, provided by a
syndicate of banks, which provides aggregate borrowing availability of up to
$450,000,000 through 2005. Borrowings outstanding under the facility bear
interest based upon LIBOR plus an applicable margin This rate was 8.04% and
6.18% at September 30, 2000 and 1999, respectively. Annual facility fees range
from .125% to .375% of the aggregate borrowing availability, based on the
Company's consolidated funded debt to EBITDA ratio. Under the agreements
covering this loan, restrictions exist as to the maintenance of financial
ratios, creation of additional long-term and short-term debt, certain leasing
arrangements, mergers, acquisitions, disposals and other matters. The Company is
in compliance with such restrictions.
As of September 30, 2000, the Company had an interest rate agreement to
effectively cap the LIBOR rate on portions of the amount outstanding under the
revolving credit facility. Under the agreement, $75,000,000 is capped at 8.00%
annum until its expiration on October 7, 2000. The costs associated with this
interest rate agreement are being amortized over the term of the agreement.
In April 1998, the Company entered into an interest rate swap agreement
to effectively fix the LIBOR rate on $100,000,000 of variable rate borrowings at
5.79% per annum until April 2005. In May 1999, the Company terminated this swap
agreement. The resulting gain of $1,034,000 is being amortized over the original
contract life as a reduction of interest expense.
In May 1999, the Company entered into an interest rate swap agreement
to effectively fix the LIBOR rate on $100,000,000 of variable rate borrowings at
5.84% per annum until May 2002. In January 2000, the Company terminated this
swap agreement. The resulting gain of $2,136,170 is being amortized over the
original contract life as a reduction of interest expense.
The Company is exposed to counterparty credit risk for nonperformance
and, in the unlikely event of nonperformance, to market risk for changes in
interest rates. The Company manages exposure to counterparty credit risk
through minimum credit standards, diversification of counterparties and
procedures to monitor concentrations of credit risk. The Company does not
anticipate nonperformance of the counterparties.
(b) In August 1995, the Company sold $100,000,000 in aggregate
principal amount of its 7.25% notes due August 1, 2005 (the "Notes"). The Notes
are not redeemable prior to maturity and are not subject to any sinking fund
requirements. The Notes are unsubordinated, unsecured obligations. The indenture
related to the Notes restricts the Company and its subsidiaries from incurring
certain liens and entering into certain sale and leaseback transactions, subject
to a number of exceptions. Debt issuance costs of approximately $908,000 are
being amortized over the term of the Notes. In May 1995, the Company entered
into an interest rate adjustment transaction in order to effectively fix the
interest rate on the Notes subsequently issued in August 1995. The costs
associated with the interest rate adjustment transaction of $1,530,000 are being
amortized over the term of the Notes. Giving effect to the amortization of the
original issue discount, the debt issuance costs and the costs associated with
the interest rate adjustment transaction, the effective interest rate on the
Notes is approximately 7.51%.
(c) Payments of principal and interest on these industrial revenue
bonds are guaranteed by a letter of credit issued by a bank. Restrictions on the
Company similar to those described in (a) above exist under the terms of the
agreements. The bonds are remarketed periodically based on the interest rate
period selected by the Company. In the event the bonds cannot be remarketed, the
bank has agreed to extend long-term financing to the Company in an amount
sufficient to retire the bonds.
As of September 30, 2000, $373,000,000 of the $393,000,000 outstanding
under the revolving credit facility has been classified as long-term debt since
the Company has the ability to continue to finance this amount pursuant to the
terms of the revolving credit facility and does not intend to repay this amount
with cash from operations during the ensuing year. As of September 30, 2000, the
aggregate maturities of long-term debt for the succeeding five years are as
follows:
(IN THOUSANDS)
- ----------------------------------------------------------------
2001 $ 20,328
2002 348
2003 358
2004 286
2005 473,204
Thereafter 40,296
- ----------------------------------------------------------------
Total long-term debt $ 534,820
================================================================
One of the Company's Canadian subsidiaries has a revolving
credit facility with a Canadian bank. The facility provides borrowing
availability of up to Canadian $2,000,000 and can be renewed on an annual basis.
There are no facility fees related to this arrangement. As of September 30, 2000
and 1999, there were no amounts outstanding under this facility.
43
ROCK-TENN COMPANY
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5 Financial Instruments
At September 30, 2000 and 1999, the fair market value of the Notes was
approximately $97,550,000 and $96,003,000, respectively, based on quoted market
prices. At September 30, 2000, the carrying amount for variable rate long-term
debt approximates fair market value since the interest rates on these
instruments are reset periodically.
At September 30, 2000 and 1999, the fair value of interest rate cap
agreements was immaterial. There were no carrying amounts associated with these
instruments.
The Company has swap agreements to limit its exposure to falling prices
and rising costs for a portion of its recycled corrugating medium and recycled
fiber businesses. Some agreements hedge the selling prices on a total of 17,700
tons of recycled corrugating medium and the cost of related OCC each quarter and
expire during fiscal 2002 and fiscal 2003. Other agreements hedge the selling
prices on a total of 15,000 tons of recycled corrugating medium each quarter and
expire during fiscal 2003. At September 30, 2000, the fair value of these swap
agreements was $10,115,000. There were no carrying amounts associated with these
instruments.
6 Leases and Other Agreements
The Company leases certain manufacturing and warehousing facilities and
equipment (primarily transportation equipment) under various operating leases.
Some leases contain escalation clauses and provisions for lease renewal.
As of September 30, 2000, future minimum lease payments, including
certain maintenance charges on transportation equipment, under all noncancelable
leases, are as follows:
(IN THOUSANDS)
- ------------------------------------------------------------------
2001 $ 8,272
2002 6,735
2003 5,893
2004 3,981
2005 1,547
Thereafter 3,839
- ------------------------------------------------------------------
Total future minimum lease payments $ 30,267
==================================================================
Rental expense for the years ended September 30, 2000, 1999 and 1998
was approximately $16,157,000, $13,685,000 and $12,264,000, respectively,
including lease payments under cancelable leases.
NOTE 7 INCOME TAXES
The Company accounts for income taxes under the liability method, which
requires the recognition of deferred tax assets and liabilities for the future
tax consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. The recognition of future tax benefits is required to the extent that
realization of such benefits is more likely than not.
The provisions for income taxes consist of the following components:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 2000 1999 1998
- ------------------------------------------------------------------------------
Current income taxes:
Federal $ 8,259 $23,824 $25,360
State 1,228 2,383 2,498
Foreign 1,767 965 761
- ------------------------------------------------------------------------------
Total current 11,254 27,172 28,619
- ------------------------------------------------------------------------------
Deferred income taxes:
Federal 96 2,791 3,359
State 8 239 265
Foreign 212 353 350
- ------------------------------------------------------------------------------
Total deferred 316 3,383 3,974
- ------------------------------------------------------------------------------
Provision for income taxes $11,570 $30,555 $32,593
==============================================================================
The differences between the statutory federal income tax rate and the
Company's effective income tax rate are as follows:
YEAR ENDED SEPTEMBER 30,
2000 1999 1998
- ------------------------------------------------------------------------------
Statutory federal tax rate 35.0% 35.0% 35.0%
State taxes, net of
federal benefit (1.0) 3.5 3.7
Non-deductible amortization
and write-off of goodwill
(See Note 2) (283.3) 3.7 3.5
Other, net (primarily
non-taxable items) (16.9) 1.3 1.5
- ------------------------------------------------------------------------------
Effective tax rate (266.2%) 43.5% 43.7%
==============================================================================
44
ROCK-TENN COMPANY
47
The tax effects of temporary differences that give rise to significant
portions of deferred income tax assets and liabilities consist of the following:
SEPTEMBER 30,
(IN THOUSANDS) 2000 1999
- --------------------------------------------------------------------
Deferred income tax assets:
Accruals and allowances $ 9,996 $ 9,843
Other 1,790 2,829
- -------------------------------------------------------------------
Total 11,786 12,672
- -------------------------------------------------------------------
Deferred income tax liabilities:
Property, plant and equipment 80,882 82,586
Deductible intangibles 2,822 2,550
Inventory and other 9,466 13,167
- -------------------------------------------------------------------
Total 93,170 98,303
- -------------------------------------------------------------------
Net deferred income tax liability $81,384 $85,631
===================================================================
The Company has not recorded any valuation allowances for deferred
income tax assets.
The components of the (loss) income before income taxes are:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 2000 1999 1998
- -------------------------------------------------------------------------
United States $(10,516) $66,173 $71,356
Foreign 6,170 4,080 3,257
- -------------------------------------------------------------------------
(Loss) income before
income taxes $ (4,346) $70,253 $74,613
=========================================================================
8 Retirement Plans
The Company has a number of defined benefit pension plans covering
essentially all employees who are not covered by certain collective bargaining
agreements. The benefits are based on years of service and, for certain plans,
compensation. The Company's practice is to fund amounts deductible for federal
income tax purposes.
In addition, under several labor contracts the Company makes payments
based on hours worked into multi-employer pension plan trusts established for
the benefit of certain collective bargaining employees.
The Company's projected benefit obligation, fair value of assets and
net periodic pension cost include the following components:
YEAR ENDED
SEPTEMBER 30,
(IN THOUSANDS) 2000 1999
- ---------------------------------------------------------------------------------
Projected benefit obligation
at beginning of year $ 168,653 $ 166,189
Service cost 6,358 7,592
Interest cost on projected
benefit obligations 13,268 12,487
Amendments 163 3,829
Actuarial gain (6,433) (15,266)
Benefits paid (6,916) (6,178)
- --------------------------------------------------------------------------------
Projected benefit obligation
at end of year $ 175,093 $ 168,653
================================================================================
Fair value of assets at beginning of year $ 209,871 $ 195,062
Actual (loss) return on plan assets (2,332) 20,987
Employer contribution 622 --
Benefits paid (6,916) (6,178)
- --------------------------------------------------------------------------------
Fair value of assets at end of year $ 201,245 $ 209,871
================================================================================
Funded status $ 26,152 $ 41,218
Net unrecognized asset (201) (531)
Net unrecognized gain (25,921) (42,282)
Unrecognized prior service income (834) (1,095)
- --------------------------------------------------------------------------------
Net accrued pension cost included
in consolidated balance sheets $ (804) $ (2,690)
================================================================================
45
2000 ANNUAL REPORT
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts required to be recognized in the consolidated statements of
operations are as follows:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 2000 1999 1998
- --------------------------------------------------------------------------------
Service cost $ 6,358 $ 7,592 $ 7,460
Interest cost on projected
benefit obligations 13,268 12,487 11,008
Expected return on
plan assets (18,595) (17,169) (14,870)
Net amortization of the
initial asset (330) (378) (385)
Net amortization of gain (1,867) (222) (110)
Net amortization of prior
service income (97) (105) (436)
- ----------------------------------------------------------------------------------
Total Company defined
benefit plan
(income) expense (1,263) 2,205 2,667
Multi-employer plans
for collective
bargaining employees 254 239 237
- ----------------------------------------------------------------------------------
Net periodic pension
(income) cost $ (1,009) $ 2,444 $ 2,904
==================================================================================
The discount rate used in determining the actuarial present value of
the projected benefit obligations was 8.0%, 7.8% and 7.0% as of September 30,
2000, 1999 and 1998, respectively. The expected increase in compensation levels
used in determining the actuarial present value of the projected benefit
obligations was 4.0% as of September 30, 2000, 1999 and 1998. The expected
long-term rate of return on assets used in determining pension expense was 9.0%
for all years presented. There were no underfunded plans as of September 30,
2000 or September 30, 1999.
The Company maintains an employee savings plan which permits
participants to make contributions by salary reduction pursuant to Section
401(k) of the Internal Revenue Code. The Company matches 50% of contributions up
to a maximum of 6% of compensation as defined by the plan. During fiscal 2000,
1999 and 1998, the Company recorded matching expense, net of forfeitures, of
$3,357,000, $3,982,000 and $4,001,000, respectively, related to the plan,
including matching expense related to employees of the former Waldorf
operations. As a result of the new employee savings plan effective January 1,
1998, the Company amended its defined benefit plans to lower pension benefits.
Net periodic pension cost was approximately $1,600,000 lower during fiscal 1998
as a result of the reduced benefits.
The Company has a Supplemental Executive Retirement Plan ("SERP") which
provides unfunded supplemental retirement benefits to certain executives of the
Company. The SERP provides for incremental pension payments to partially offset
the reduction in amounts that would have been payable from the Company's
principal pension plan if it were not for limitations imposed by federal income
tax regulations.
Expense relating to the plan of $161,000, $137,000 and $219,000 was
recorded for the years ended September 30, 2000, 1999 and 1998, respectively.
Amounts accrued as of September 30, 2000 and 1999 related to the plan were
$976,000 and $821,000, respectively.
9 Related Party Transactions
A director of the Company is the chairman and a significant shareholder
of the insurance agency that brokers a portion of insurance for the Company. The
insurance premiums paid by the Company may vary significantly from year to year
with the claims arising during such years. For the years ended September 30,
2000, 1999 and 1998, payments were approximately $2,565,000, $4,458,000 and
$4,898,000, respectively.
A director of the Company is the former Chairman of the construction
company that built a new building for the Company. There were no material
payments for the year ended September 30, 2000. For the years ended September
30, 1999 and 1998, payments approximated $118,000 and $2,733,000, respectively,
and were capitalized as property, plant and equipment.
10 Commitments and Contingencies
Capital Additions
Estimated costs for completion of authorized capital additions under
construction as of September 30, 2000 total approximately $11,000,000.
Stock Repurchase Plan
On April 28, 2000, the Board of Directors amended the Company's current stock
repurchase plan to allow for the repurchase of a maximum of 2,000,000 shares in
aggregate of Class A Common or Class B Common prior to July 31, 2003. During
fiscal 2000, the Company repurchased 1,586,668 shares of Class A Common under
this amended plan. Under previously authorized plans, the Company repurchased
538,600, zero and 330,100 shares of Class A Common during fiscal 2000, 1999 and
1998, respectively.
Environmental and Other Matters
The Company is subject to various federal, state, local and foreign
environmental laws and regulations, including those regulating the discharge,
storage, handling and disposal of a variety of substances. These laws and
regulations include, among others, the Comprehensive Environmental Response,
Compensation and Liability act, which the Company refers to as CERCLA, the Clean
Air Act (as amended in 1990), the Clean Water Act, the Resource Conservation and
Recovery Act (including amendments relating to underground tanks) and the Toxic
Substances Control Act. These environmental regulatory programs are primarily
administered by the U.S. Environmental Protection Agency. In addition, some
states in which the Company operates have adopted
46
ROCK-TENN COMPANY
49
equivalent or more stringent environmental laws and regulations or have enacted
their own parallel environmental programs, which are enforced through various
state administrative agencies.
The Company does not believe that future compliance with these
environmental laws and regulations will have a material adverse effect on its
results of operations, financial condition or cash flows. However, environmental
laws and regulations are becoming increasingly stringent. Consequently, the
Company's compliance and remediation costs could increase materially. In
addition, the Company cannot currently assess with certainty the impact that the
future emissions standards and enforcement practices under the 1990 amendments
to the Clean Air Act will have on its operations or capital expenditure
requirements. However, the Company believes that any such impact or capital
expenditures will not have a material adverse effect on its results of
operations, financial condition or cash flows.
The Company has been identified as a potentially responsible party,
which we refer to as a PRP, at eight active "superfund" sites pursuant to CERCLA
or comparable state statutes. No remediation costs or allocations have been
determined with respect to such sites other than costs that were not material to
the Company. Based upon currently available information and the opinions of the
Company's environmental compliance managers and general counsel, although there
can be no assurance, the Company believes that any liability it may have at any
site will not have a material adverse effect on the Company's results of
operations, financial condition or cash flows.
On February 9, 1999, the Company received a letter from the Michigan
Department of Environmental Quality, which the Company refers to as MDEQ, in
which the MDEQ alleges that the Company is in violation of the Michigan Natural
Resources and Environmental Protection Act, as well as the facility's wastewater
discharge permit at one of the Company's Michigan facilities. The letter alleges
that the Company exceeded several numerical limitations for chemical parameters
outlined in the wastewater permit and violated other wastewater discharge
criteria. The MDEQ further alleges that the Company is liable for contamination
contained on the facility property as well as for contributing contamination to
the Kalamazoo River site. The letter requests that the Company commit, in the
form of a binding agreement, to undertake the necessary and appropriate response
activities and response actions to address contamination in both areas. The
Company has agreed to enter into an administrative consent order pursuant to
which improvements will be made to the facility's waste-water treatment system
and the Company will pay a $75,000 fine for the alleged violations. The Company
has also agreed to pay an additional $30,000 for past and future oversight costs
incurred by the State of Michigan. Once the final order has been executed, the
Company expects to pay this additional amount in three equal payments over the
next three years. The cost of making upgrades to the process waste system and
wastewater treatment systems is estimated to be approximately $1,000,000.
Nothing contained in the order will constitute an admission of liability or any
factual finding, allegation or legal conclusion on the part of the Company. The
order is expected to be completed during the first quarter of fiscal 2001.
11 Segment Information
At the end of fiscal 2000, the Company evaluated the composition of its
segments. As a result, corresponding segment information has been restated to
reflect the new presentation.
The Company reports three business segments. The packaging products
segment consists of facilities that produce folding cartons, solid fiber
partitions and thermoformed plastic products. 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. The specialty corrugated packaging and display segment
consists of facilities that produce corrugated containers and displays. Certain
operations included in the packaging products segment are located in foreign
countries and had operating income of $7,179,000, $5,620,000 and $4,651,000 for
fiscal years ended September 30, 2000, 1999 and 1998, respectively. For fiscal
2000, foreign operations represented approximately 5.1%, 19.7% and 5.9% of total
net sales to unaffiliated customers, total income from operations and total
identifiable assets, respectively. For fiscal 1999, foreign operations
represented approximately 4.6%, 5.1% and 5.5% of total net sales to unaffiliated
customers, total income from operations and total identifiable assets,
respectively. In fiscal 1998, these operations represented approximately 4.1%,
3.8% and 5.4% of total net sales to unaffiliated customers, total income from
operations and total identifiable assets, respectively. As of September 30,
2000, 1999 and 1998, the Company had foreign long-lived assets of $33,756,000,
$34,556,000 and $28,545,000, respectively.
The Company evaluates performance and allocates resources based, in
part, on profit or loss from operations before income taxes, interest and other
items. The accounting policies of the reportable segments are the same as those
described in the Summary of Significant Accounting Policies except that the
Company accounts for inventory on the FIFO basis at the segment level compared
to a LIFO basis at the consolidated level. Intersegment sales are accounted for
at prices that approximate market prices. Intercompany profit is eliminated at
the consolidated level.
Following is a tabulation of business segment information for each of
the past three fiscal years:
47
2000 ANNUAL REPORT
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a tabulation of business segment information for each of the past
three fiscal years:
YEARS ENDED SEPTEMBER 30,
(IN THOUSANDS) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Net sales (aggregate):
Packaging Products $ 797,399 $ 749,850 $ 774,355
Paperboard 588,489 529,014 555,402
Specialty Corrugated Packaging and Display 238,822 180,892 138,046
- ------------------------------------------------------------------------------------------------------------
Total $ 1,624,710 $ 1,459,756 $ 1,467,803
============================================================================================================
Less net sales (intersegment):
Packaging Products $ 5,294 $ 3,424 $ 1,196
Paperboard 150,794 138,623 164,449
Specialty Corrugated Packaging and Display 5,334 4,338 4,798
- ------------------------------------------------------------------------------------------------------------
Total $ 161,422 $ 146,385 $ 170,443
============================================================================================================
Net sales (unaffiliated customers):
Packaging Products $ 792,105 $ 746,426 $ 773,159
Paperboard 437,695 390,391 390,953
Specialty Corrugated Packaging and Display 233,488 176,554 133,248
- ------------------------------------------------------------------------------------------------------------
Total $ 1,463,288 $ 1,313,371 $ 1,297,360
============================================================================================================
Segment (loss) income:
Packaging Products $ 34,767 $ 40,455 $ 32,564
Paperboard 47,585 55,551 72,422
Specialty Corrugated Packaging and Display 28,468 23,805 15,581
- ------------------------------------------------------------------------------------------------------------
110,820 119,811 120,567
LIFO and intercompany profit (5,275) (167) (1,213)
Plant closing and other costs (65,630) (6,932) (1,997)
Other non-allocated expenses (4,124) (5,676) (3,421)
- ------------------------------------------------------------------------------------------------------------
Income from operations 35,791 107,036 113,936
Minority interest in consolidated subsidiary (4,980) (5,995) (5,273)
Interest expense (35,575) (31,179) (35,024)
Interest and other income 418 391 974
- ------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes $ (4,346) $ 70,253 $ 74,613
============================================================================================================
Identifiable assets:
Packaging Products $ 429,422 $ 459,933 $ 436,425
Paperboard 585,985 585,138 569,824
Specialty Corrugated Packaging and Display 130,126 107,267 90,426
Corporate 13,430 9,132 14,806
- ------------------------------------------------------------------------------------------------------------
Total $ 1,158,963 $ 1,161,470 $ 1,111,481
============================================================================================================
Depreciation and amortization:
Packaging Products $ 31,405 $ 29,719 $ 29,531
Paperboard 33,353 31,612 30,818
Specialty Corrugated Packaging and Display 9,127 7,911 7,187
Corporate 3,176 3,233 3,291
- ------------------------------------------------------------------------------------------------------------
Total $ 77,061 $ 72,475 $ 70,827
=============================================================================================================
Capital expenditures:
Packaging Products $ 48,094 $ 37,059 $ 34,120
Paperboard 29,815 40,473 31,784
Specialty Corrugated Packaging and Display 14,238 11,544 9,161
Corporate 2,493 3,257 6,601
- ------------------------------------------------------------------------------------------------------------
Total $ 94,640 $ 92,333 $ 81,666
============================================================================================================
48
ROCK-TENN COMPANY
51
notes
NOTE 12 Financial Results by Quarter (Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH
2000 QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------------------------------------------------
Net sales $346,821 $ 369,940 $370,545 $375,982
Gross profit 72,197 73,637 69,630 72,987
Net income (loss) 8,610 (33,256) 2,605 6,125
Basic earnings (loss) per share 0.25 (0.96) 0.08 0.18
Diluted earnings (loss) per share 0.24 (0.96) 0.07 0.18
- -------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
1999 QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------------------------------------------------
Net sales $311,442 $ 312,718 $330,477 $358,734
Gross profit 71,587 68,955 73,788 79,827
Net income 8,758 8,806 9,920 12,214
Basic earnings per share 0.25 0.25 0.28 0.35
Diluted earnings per share 0.25 0.25 0.28 0.35
- -------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------------------------------------------------
Net sales $317,745 $ 328,748 $320,988 $329,879
Gross profit 67,348 70,248 75,317 75,853
Net income 8,677 9,786 11,800 11,757
Basic earnings per share 0.25 0.28 0.34 0.34
Diluted earnings per share 0.25 0.28 0.34 0.34
In accordance with the adoption of Emerging Issues Task Force issue
00-10 ("EITF00-10"), "Accounting for Shipping and Handling Costs," the Company
reclassfied its shipping costs, which were previously reported under selling,
general, and administrative expenses, to cost of goods sold in the third quarter
of fiscal 2000. Additionally, amounts billed to a customer in a sales
transaction related to shipping and handling were reclassified to revenue rather
than reducing shipping costs. These reclassifications resulted in a net increase
in revenue of $1,982,000, $3,003,000 and $3,754,000 for the first two quarters
of fiscal 2000 and for fiscal 1999 and 1998, respectively. The reclass of
shipping costs to cost of goods sold along with the reclass to revenue of
shipping costs billed to customers resulted in a net decrease in gross profit of
$37,556,000, $65,356,000 and $59,754,000 for the first two quarters of fiscal
2000 and for fiscal 1999 and 1998, respectively. There was no impact on net
(loss) income as a result of the adoption of EITF00-10.
The interim (loss) earnings per common and common equivalent share
amounts were computed as if each quarter were a discrete period. As a result,
the sum of the basic and diluted (loss) earnings per share by quarter will not
necessarily total the annual basic and diluted (loss) earnings per share.
The results of operations for the first, second, third and fourth
quarters of fiscal 2000 include expenses of approximately $2,474,000,
$52,725,000, $4,876,000 and $5,555,000, respectively, incurred by the Company as
a result of the facility closings (see Note 2).
The results of operations for the first, second, third and fourth quarters
of fiscal 1999 include expenses of approximately $2,053,000, $1,085,000,
$2,763,000 and $1,031,000, respectively, incurred by the Company as a result of
the facility closings and related items (see Note 2).
The results of operations for the fourth quarter of fiscal 1998 includes
expenses of approximately $1,997,000 incurred by the Company as a result of the
facility closing (see Note 2).
49
2000 ANNUAL REPORT
52
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Rock-Tenn Company
We have audited the accompanying consolidated balance sheets of Rock-Tenn
Company as of September 30, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended September 30, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Rock-Tenn Company at September 30, 2000 and 1999, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended September 30, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
October 25, 2000
50
ROCK-TENN COMPANY
53
MANAGEMENT'S STATEMENT OF RESPONSIBILITY FOR FINANCIAL INFORMATION
Rock-Tenn Company
The management of Rock-Tenn Company has the responsibility for preparing the
accompanying consolidated financial statements and for their integrity and
objectivity. The statements were prepared in accordance with generally accepted
accounting principles. The financial statements include amounts that are based
on management's best estimates and judgments. Management also prepared the other
information in the annual report and is responsible for its accuracy and
consistency with the financial statements.
Rock-Tenn Company has established and maintains a system of internal
control to safeguard assets against loss or unauthorized use and to ensure the
proper authorization and accounting for all transactions. This system includes
appropriate reviews by the Company's internal audit department and management as
well as written policies and procedures that are communicated to employees with
significant roles in the financial reporting process and updated as necessary.
The Board of Directors, through its Audit Committee, is responsible for
ensuring that both management and the independent auditors fulfill their
respective responsibilities with regard to the financial statements. The Audit
Committee, composed entirely of directors who are not officers or employees of
the Company, meets periodically with both management and the independent
auditors to assure that each is carrying out its responsibilities. The
independent auditors and the Company's internal audit department have full and
free access to the Audit Committee and meet with it, with and without management
present, to discuss auditing and financial reporting matters.
The Company's financial statements have been audited by Ernst & Young
LLP, independent auditors. The opinion of the independent auditors, based upon
their audits of the consolidated financial statements, is contained in this
Annual Report.
As part of its audit of the Company's financial statements, Ernst &
Young LLP considered the Company's internal control structure in determining the
nature, timing and extent of audit tests to be applied. Management has
considered Ernst & Young LLP's recommendations concerning the Company's system
of internal control and has taken actions that we believe are cost-effective in
the circumstances to respond appropriately to these recommendations. Management
believes that, as of September 30, 2000, the Company's system of internal
control is adequate to accomplish the objectives discussed herein.
/s/ Steven C. Voorhees
Steven C. Voorhees
Executive Vice President and
Chief Financial Officer
51
2000 ANNUAL REPORT
54
OFFICERS AND DIRECTORS
Officers Paul J. England Bradley Currey, Jr. (1)
Executive Vice President and Retired Chairman
James A. Rubright General Manager Rock-Tenn Company
Chairman and Chief Executive Officer Specialty Paperboard Division Atlanta, Georgia
Steven C. Voorhees Stephen P. Flanagan Robert B. Currey
Executive Vice President and Executive Vice President and Chief Executive Ofocer
Chief Financial Officer General Manager Currey & Company, Inc.
Recycled Fiber Division Atlanta, Georgia
Russell M. Currey
Senior Vice President James K. Hansen A.D. Frazier, Jr. (2)
Marketing & Planning Executive Vice President and President and Chief Executive Officer
General Manager Invesco, Inc.
Coated Paperboard Division Atlanta, Georgia
Robert B. McIntosh
Senior Vice President,
General Counsel and Secretary L.L. Gellerstedt III (3)
Specialty Packaging & Display Group Chairman
R. Evan Hardin L.G. III Group
Vice President of Finance and Treasurer Edward E. Bowns Atlanta, Georgia
Executive Vice President and
Bradley P. Newman General Manager John D. Hopkins (1) (3)
Vice President of Risk Management Specialty Packaging and Display Group Senior Vice President and General Counsel
and Administration Jefferson-Pilot Corporation
Greensboro, North Carolina
Vincent J. D'Amelio
Larry S. Shutzberg Executive Vice President and
Vice President of Information Systems General Manager Lou Brown Jewell (3)
Plastic Packaging Division Private Investor
Atlanta, Georgia
Amanda F. Portnell
Controller
James L. Einstein
Executive Vice President and James W. Johnson (3)
General Manager President
Alliance Division McCranie Tractor Company
Unadilla, Georgia
Folding Carton Group
Nicholas G. George John H. Morrison
Executive Vice President and Executive Vice President and James A. Rubright (1)
General Manager General Manager Chairman and Chief Executive Officer
Folding Carton Group Corrugated Packaging Division Rock-Tenn Company
Norcross, Georgia
Richard E. Steed
Paperboard Group President and Chief Executive Officer Charles R. Sexton
RTS Packaging, LLC Principal
Sexton-Talbert Products
Vero Beach, Florida
David E. Dreibelbis
Executive Vice President and
General Manager Board of Directors John W. Spiegel (1) (2)
Paperboard Group Executive Vice President and
Chief Financial Officer
SunTrust Banks, Inc.
Stephen G. Anderson, M.D.(2) Atlanta, Georgia
Terry W. Durham Winston-Salem, North Carolina
Executive Vice President and
General Manager
Laminated Paperboard Products Division
J. Hyatt Brown (1)
Chairman and Chief Executive Officer
Brown & Brown, Inc.
Daytona Beach, Florida (1) Executive Committee
(2) Audit Committee
(3) Compensation and Options Committee
52
ROCK-TENN COMPANY
55
shareholder information
SHAREHOLDER INFORMATION
HOME OFFICE
504 Thrasher Street
Norcross, Georgia 30071
770-448-2193
TRANSFER AGENT AND REGISTRAR
SunTrust Bank, Atlanta
Mail Code 258
P.O. Box 4625
Atlanta, Georgia 30302
800-568-3476
INVESTOR RELATIONS
Investor Relations Department
Rock-Tenn Company
P.O. Box 4098
Norcross, Georgia 30091
770-448-2193
Fax: 770-263-3582
AUDITORS
Ernst & Young, LLP
600 Peachtree Street
Suite 2800
Atlanta, Georgia 30308
DIRECT DEPOSIT OF DIVIDENDS
Rock-Tenn shareholders may have their quarterly cash dividends automatically
deposited to checking, savings or money market accounts through the automatic
clearinghouse system. If you wish to participate in the program, please contact:
SunTrust Bank, Atlanta
Mail Code 258
P.O. Box 4625
Atlanta, Georgia 30302
800-568-3476
ANNUAL MEETING
Northeast Atlanta Hilton
5993 Peachtree Industrial Boulevard
Norcross, Georgia 30092
Friday, January 26, 2001
9:00 A.M.
COMMON STOCK
Rock-Tenn Class A common stock trades on the New York Stock Exchange under the
symbol RKT. There is not an established public trading market for the Company's
Class B common stock.
As of December 7, 2000, there were approximately 5,299 Class A common
shareholders of record and 120 Class B common shareholders of record.
PRICE RANGE OF CLASS A COMMON STOCK
FISCAL 2000 FISCAL 1999
- --------------------------------------------------
HIGH LOW HIGH LOW
First Quarter $16.44 $13.56 $17.25 $10.25
Second Quarter 14.94 8.56 19.00 12.38
Third Quarter 10.00 8.38 17.13 12.19
Fourth Quarter 11.44 8.44 18.38 13.69
- --------------------------------------------------
FORM 10-K REPORT
A copy of the Company's annual report on Form 10-K for the year ended September
30, 2000 as filed with the Securities and Exchange Commission is available at no
charge to shareholders of record, by writing to:
Investor Relations Department
Rock-Tenn Company
P.O. Box 4098
Norcross, Georgia 30091
53
2000 ANNUAL REPORT