EXHIBIT 13
ROCK-TENN COMPANY
2001 ANNUAL REPORT
In our 2000 annual report, we said that we planned to raise the bar on our own
expectations and performance. OUR 2001 RESULTS SPEAK FOR THEMSELVES:
STRONG EARNINGS: UP 15%
Our net income is up 15% before plant closing and other one-time costs.
EBITDA: $181 MILLION
EBITDA is up $8 million from last year.*
FOLDING CARTON OPERATING INCOME: UP 61%
We consolidated our operations and improved our business mix.
CONTINUED GROWTH AT ALLIANCE: SALES UP 19%
Alliance sales increases drove operating income of our Merchandising
Displays and Corrugated Packaging Segment up 9%
IMPRESSIVE PERFORMANCE IN PLASTICS: SALES UP 20%
Plastic Packaging achieved a 20% increase in sales.
REDUCED DEBT: $49 MILLION
We used our free cash flow to repay $49 million in debt.
OUTSTANDING SAFETY RECORD: 2.24
At 2.24 incidents per 200,000 man hours, our OSHA recordable incident
rate is now the lowest it has been in our history.
THIS IS RELENTLESS PERFORMANCE.
*EBITDA represents earnings before interest, taxes, depreciation and
amortization, and plant closing and other one-time charges.
[PHOTO - James A. Rubright Chairman and Chief Executive Officer]
Q&A with Jim Rubright
WHAT WAS ROCK-TENN'S MOST SIGNIFICANT ACHIEVEMENT IN 2001?
I believe the fact that we were able to continue our strong capital investment
program and still reduce debt by $49 million and pay $10 million in dividends
shows the significant financial strength of this company and that we can
generate substantial free cash flow.
Rock-Tenn 2001 Annual Report pg. 3
DEAR SHAREHOLDERS:
Satisfy our customers completely. Invest for competitive advantage. Empower
action and change. Commit to high performance. Simple but powerful fundamentals
that are driving our results.
Last year we announced our commitment to high performance and told you that we
saw encouraging evidence of improvement ahead for Rock-Tenn. At the time
we published our 2000 annual report, the signs of the economic downturn were all
around us, and we may have appeared optimistic. Nonetheless, in 2001 we made our
first down payment on our commitment. During a year when all of our markets
faced serious downturns, the U.S. entered a recession and we and our competitors
struggled with the effects of decreasing volumes and intense pressure on
margins, Rock-Tenn increased core earnings per share (excluding plant closing
costs) by 15%. We also significantly increased cash flow to continue our capital
expenditure program, repay $49 million in debt and pay our shareholders $10
million in dividends. These results encourage us to stay with our strategy in
2002.
This year, with the recession in full swing, we are committed to doing
even better. In this report we will trace the reasons we improved in 2001 and
mark the initiatives that we believe will lead to even better results in 2002.
RELENTLESS EFFORTS PROVIDE RESULTS
There are many specific achievements that contributed to the results of 2001,
some of which we detail in this report, but they all evidence one trait imbedded
in our culture -- we are relentless. Relentless in the pursuit of customer
satisfaction, relentless in the pursuit of product and process innovation,
relentless about lowering our costs and relentless in our commitment to high
performance. Our culture is not for everyone. We have lost good people, but our
culture has energized so many people and attracted so many more to our company
who thrive on our culture that we are a much stronger company today than we were
before. We are a home to people who are committed to working for a great company
and who will do all they can to make Rock-Tenn just that.
PACKAGING PRODUCTS SEGMENT LOGS SIGNIFICANT IMPROVEMENT
Rock-Tenn's commitment to performance means commitment to increasing the value
of our shares. That means growth in earnings power. Within our Packaging
Products Segment, the Folding Carton Division is Rock-Tenn's largest business,
with over $600 million in sales. Sales in 2001 were up 1% even though we closed
four plants and consolidated the business into other, more efficient operations.
To achieve this sales increase in the face of declining market conditions, we
needed to retain almost all of our existing business despite these plant
closings and deliver some strong new sales -- and we did it.
OPERATING CASH FLOW
(in millions of dollars)
1997 106
1998 126
1999 112
2000 102
2001 146
pg. 4
EBITDA
Excluding plant closing
and other one-time costs
(in millions of dollars)
1997 142
1998 181
1999 180
2000 174
2001 181
Doing so in a much more efficient operating environment drove folding carton
operating income up 61% in 2001, approaching our near-term goal of a return on
sales of 5% across this business.
This improving performance reflects the success of the consolidation
program we implemented over the past two years. We have reduced the number of
plants from 21 to 17 at a one-time cash cost of $13.5 million. The remaining
folding carton plants provide expanded capabilities to serve the needs of both
national and regional customers across the United States and Canada.
Our folding carton customer base includes over 1,100 customers with our
top 10 customers accounting for less than 30% of total folding carton sales. We
feel that we are now positioned to grow in the folding carton business as
opportunities arise, and we plan to invest approximately $10 million to add
high-speed capacity in two of our folding carton plants during fiscal 2002.
Rock-Tenn's relentless performance this past year was also evident in
our plastic packaging business. Earnings grew significantly as we completed the
transformation of this business to a low-cost leader in the high-end, custom
thermoformed plastics market. Our Plastic Packaging Division continued to grow
during fiscal 2001 to $77 million in annual sales. This increase reflects the
continued focus of this team on identifying specific customer market needs and
meeting them with high-value custom packaging products. This includes the
successful DuraFresh(TM) rigid case ready tray line, which continues to attract
new business from meat, poultry and seafood processors. In January of fiscal
2002, our expanded capacity will be 400 million trays per year, up from 300
million per year.
While we are pleased with the performance of these two divisions, the
results of our RTS Packaging joint venture with Sonoco were unsatisfactory.
Volumes declined 10% primarily due to our failure to retain the business of one
major glass producer with whom we have had a long-term contract. At the end of
the year we
CAN ROCK-TENN CONTINUE TO INCREASE EARNINGS IN 2002?
Many of the operating improvements and capital investments we made in 2001 will
gain traction in 2002. We also should see continuing growth at Alliance and in
the Folding Carton Division's results. With all of these drivers in place, our
employees should be able to produce even better results in 2002.
Rock-Tenn 2001 Annual Report pg. 5
OPERATING INCOME
Excluding plant closing
and other one-time costs
(in millions of dollars)
1997 80
1998 116
1999 114
2000 101
2001 108
further consolidated operations by eliminating one Midwestern plant, which we
believe will lead to stronger results in 2002.
MERCHANDISING DISPLAYS AND CORRUGATED PACKAGING SEGMENT: ALLIANCE GROWTH
STILL STRONG
Our focus on opportunities to expand our merchandising and display business led
to another year of growth at Alliance. In 2001, our sales grew 19% with a
comparable increase in earnings as the Alliance team continued to consolidate
their market leadership position. Alliance capitalizes on the shift of
promotional dollars into direct-to-consumer, in-store advertising. Alliance's
Concept-to-Consumer(R) strategy has proven to be highly attractive to consumer
products companies as they continue to seek more service from single-source
vendors. Our sales at Alliance increased from $153 million to $181 million
during fiscal 2001. We are excited about the prospects of continued expansion in
2002 as Alliance continues to find new avenues for meeting the growing
market-driven needs of consumer products companies.
Our Corrugated Packaging Division continues to provide outstanding
service to customers in the Southeast. While our sales and profits declined
somewhat during fiscal 2001, reflecting general conditions in the corrugated
packaging industry as a whole, we continue to earn attractive returns in this
business and are evaluating opportunities to expand these operations during
fiscal 2002.
PAPERBOARD SEGMENT: MIXED RESULTS
Our coated paperboard mills produced very good results in an extremely difficult
marketplace in 2001. In the face of weak demand for coated boxboard and intense
price pressure, our Coated Paperboard Division actually increased operating
income 24% to $37 million. Intense focus on operating excellence and product
quality and a favorable cost environment for recycled fiber combined to produce
these exceptional results.
Within the Specialty Paperboard Division, we had our challenges during
2001, with two areas of our business adversely affecting our performance. In our
laminated paperboard products converting business, very weak demand for
ready-to-assemble furniture components and for book covers led to poor operating
results for these converting operations, as well as adversely affecting our
specialty mills through lower demand for
DO YOU THINK INVESTING IN YOURSELVES IS STILL THE BEST STRATEGY?
We will invest in ourselves to achieve competitive advantage and be a market
leader in all of our businesses. Take that as a given. However, I think we have
achieved the financial capacity to take advantage of more of the opportunities
that may arise in the future. I see us being more outwardly focused on growth
opportunities over time as the improvements we have made at Rock-Tenn gain
momentum.
pg. 6
CAPITAL EXPENDITURES
(in millions of dollars)
1997 87
1998 82
1999 92
2000 95
2001 73
paperboard. In December 2000, we idled the No. 1 paper machine at our Lynchburg
Mill, which helped increase operating rates at our other specialty mills to 96%
for the fiscal year. However, the costs of idling this machine, as well as
higher than expected start-up costs at the rebuilt No. 2 machine, which we have
contributed to the Seven Hills joint venture, significantly reduced the
operating income for our specialty mills. During fiscal 2002 we expect to bring
our Seven Hills joint venture with Lafarge Corporation up to full production.
When production for Lafarge fully ramps up during 2002, we will produce over
70,000 tons per year of gypsum paperboard liner for Lafarge's United States
gypsum wallboard plants. We expect this venture to be accretive to earnings in
fiscal 2002.
NEW INITIATIVES FOR 2002
Over the past year, we have undertaken a number of initiatives that will support
our culture of relentless performance. For fiscal 2002, we have instituted a new
financial measure for all of our decision-making based on the concept of return
over capital costs. Stated simply, we assess a financial charge on all of our
operations for the assets they employ, and measure performance by comparing
operating income to the capital charge. We believe this new measure will foster
much greater long-term accountability all down the line for the decisions we
make in allocating capital expenditures and investing in our business.
During the past fiscal year, we also began an ongoing process of
systematically asking our customers how satisfied they are with our products and
services. The results of this initiative will give us an objective yardstick to
measure our performance. Even in its early days we have gathered a wealth of
data to improve our performance. Our goal is to satisfy our customers
completely, every time, and become our customers' unquestioned supplier of
choice. We are so committed to this measure of customer satisfaction that we
have added it to financial performance and safety performance as the measures
for our management incentive bonus plans. We are committed to continuously
improving our customer satisfaction.
DO YOU THINK ANY CHANGES IN ROCK-TENN'S CULTURE ARE NEEDED?
Our culture is our most important asset. As long as we stay committed to
empowering our employees in a decentralized environment and relentlessly
pursuing high performance, we will continue to retain and attract employees who
will deliver superior results.
Rock-Tenn 2001 Annual Report pg. 7
NET SALES
(in millions of dollars)
1997 1,114
1998 1,297
1999 1,313
2000 1,463
2001 1,442
During fiscal 2001 we also instituted the Six Sigma quality and process
improvement program as a company-wide initiative. We currently have 12 black
belts in training and will add 12 more in 2002. Each black belt will spend two
years exclusively devoted to quality and process improvement projects. This is a
very significant commitment of people and money for our company that we believe
will produce breakthrough gains in quality, productivity and process
effectiveness.
IN 2002 WE WILL STAY WITH OUR STRATEGY
Our results in fiscal 2001 confirm our commitment to our strategy for 2002. As
we said last year - our strategy is very straight-forward. We will invest in
ourselves for competitive advantage and growth. We will execute consistently
with a relentless pursuit of improvement, and create a culture of high
performance and innovation to maximize our return on invested capital and create
market leaders. We made progress on all fronts in 2001, but much remains to be
done in 2002, and we all look forward to the opportunities ahead for further
progress this year.
I want to thank Rock-Tenn's employees for their relentless efforts
during a difficult economic time and for proving that this company has what it
takes to be great. I look forward to working with all of you to make that goal a
reality.
Sincerely,
/s/ James A. Rubright
James A. Rubright
Chairman and Chief Executive Officer
RANDY SEXTON RETIRES FROM BOARD
At our January shareholders' meeting, Randy Sexton will retire as a director of
Rock-Tenn Company. Randy has been a director since 1967 and throughout that time
has been a highly valued advisor, thoughtful contributor to our decisions and
a good friend. We all thank Randy for his great service to Rock-Tenn Company.
pg. 8
[PHOTO]
"The growing number of magazines, television channels and other advertising
outlets means that ads featured in those mediums are reaching ever-smaller
individual audiences. As a result, a growing number of consumer products
companies are shifting their advertising dollars to in-store advertising, where
consumers really make up their minds. As that trend continues, we expect our
business to only get better."
Jim Einstein, Executive Vice
President and General Manager,
Alliance Division
Rock-Tenn 2001 Annual Report pg. 9
RELENTLESS
PERFORMANCE
MEANS
RELENTLESS
GROWTH
ALLIANCE SALES
(in millions of dollars)
1997 65
1998 72
1999 112
2000 153
2001 181
[GRAPHIC]
ALLIANCE CONTINUES GROWTH
Hard work. Excellent sales and marketing. Strong customer relationships.
Impeccable quality. Superb service. Those qualities, which are the essence of
Rock-Tenn's Alliance Division, helped Alliance realize significant increases in
volume, operating in a highly fragmented, $17 billion point-of-purchase market.
The division's growth has significantly outpaced the industry - 20% annually
vs. 7% for the industry.
Alliance provides a fully integrated, Concept-to-Consumer(R) point-of-sale
display solution with complete design, manufacturing, pack-out and distribution
services. In 2001, the division's design of a countertop display for Procter &
Gamble's "Visionary Light" line of Olay(R) cosmetics received the top award
among hundreds of entries at the Point of Purchase Advertising International's
annual meeting.
pg. 10
CONSOLIDATED
SHARPENS
PROFITS
1999 28
2000 19
2001 30
FOLDING CARTON OPERATING INCOME
(in millions of dollars)
FOLDING CARTON EXECUTES
During 2000 and 2001, Rock-Tenn's Folding Carton Division closed four plants in
order to optimize production in more efficient operations. Folding Carton, like
other Rock-Tenn business units, is focused on being the low-cost leader and on
specialty product categories that offer higher-than-average returns. And by
doing more with less - management and overhead - the Folding Carton Division
anticipates improving profit margins and strengthening its competitiveness in a
fragmented and highly competitive marketplace.
[GRAPHIC]
"There are three factors that typify the Folding Carton Division. One is a
high-performing culture. The second is a focus on technology, which has enabled
us to make giant leaps in productivity. And the third is innovative employees,
who have created ingenious products like the new MillMask(TM) System, a
patent-pending technological alternative fluorochemicals that prevents oil and
grease from staining the surface of folding cartons and other paperboard
substrates."
Nick George, Executive Vice
President and General Manager,
Folding Carton Division
[PHOTO]
pg. 12
"Our new joint venture with Lafarge Corporation produces the highest-quality
and lowest-cost gypsum paperboard liner available in North America."
Paul England, Executive Vice
President and General Manager,
Specialty Paperboard Division of
Rock-Tenn (left) and Tony Colak,
Vice President of Manufacturing,
Lafarge Gypsum Corporation
[PHOTO]
Rock-Tenn 2001 Annual Report pg. 13
PARTNERSHIPS
OPEN NEW
SPECIALITY
MARKETS
1997 961
1998 1,141
1999 1,138
2000 1,148
2001 1,059
PAPERBOARD TONS SHIPPED
(in thousands of tons)
[GRAPHIC]
JOINT VENTURE EXCELS
In 2001, Seven Hills Paperboard, LLC, a joint venture between Rock-Tenn and
Lafarge Corporation, a leading gypsum wallboard manufacturer, completed the
rebuilding of a paperboard machine at Rock-Tenn's Lynchburg, Virginia mill. The
new joint venture machine will produce lightweight gypsum paperboard liner for
sale to Lafarge's gypsum wallboard operations. Strategic joint ventures like
Seven Hills allow Rock-Tenn to enter new marketplaces with breakthrough
technologies to establish market-leading positions.
pg. 14
RETURN ON CAPITAL
PAYS OFF WITH
ENHANCED
VALUE
1997 45
1998 46
1999 49
2000 64
2001 77
PLASTIC PACKAGING SALES
(in millions of dollars)
PLASTIC PACKAGING EXPANDS
A leading provider of thermoformed plastic packaging and extruded plastic roll
stock, Rock-Tenn's Plastic Packaging Division is one of its smallest, yet
fastest-growing businesses. Sales from Plastic Packaging have grown more than
20% per year since 1999, while the growth rate of the industry as a whole has
been about 6%. Profits have risen along with sales over the same period. With
its emphasis on introducing new and innovative custom packaging solutions,
Plastic Packaging is becoming a significant contributor to Rock-Tenn's bottom
line.
[GRAPHIC]
"Our customers' markets demand that their products and our packaging solutions
be innovative and be delivered fast. Our exceptional technical teams swiftly
turn great packaging ideas into prototypes that we can quickly move into full
production. Our quick turnarounds are a big competitive advantage."
Vince D'Amelio, Executive Vice
President and General Manager,
Plastic Packaging Division
[PHOTO]
pg. 16
PACKAGING
TAKES OFF
Thousands of North American companies manufacture products that consumers buy
every day, from candy to cosmetics and from processed meat to medical supplies.
These companies demand inventive and cost-effective packaging for their
products. Recognizing Rock-Tenn's relentless pursuit of quality, innovation and
customer service, consumer products companies and manufacturers throughout North
America rely on Rock-Tenn to help bring their products to market with creative,
imaginative and attractively priced packaging and point-of-purchase displays.
PACKAGING PRODUCTS
Providing innovative solutions to customers' paperboard and plastic packaging
needs.
MERCHANDISING DISPLAYS AND CORRUGATED PACKAGING
Offering Concept-to-Consumer(R) services for in-store merchandising and displays
and corrugated packaging.
PAPERBOARD
Making it ourselves allows us to control the quality of the product that we use
throughout Rock-Tenn.
PACKAGING PRODUCTS
[GRAPHIC] [GRAPHIC]
[GRAPHIC] [GRAPHIC]
[GRAPHIC] [GRAPHIC]
[GRAPHIC] [GRAPHIC]
Rock-Tenn 2001 Annual Report pg. 17
MERCHANDISING DISPLAYS & CORRUGATED PACKAGING
[GRAPHIC] [GRAPHIC]
[GRAPHIC] [GRAPHIC]
[GRAPHIC] [GRAPHIC]
PAPERBOARD
[GRAPHIC]
[GRAPHIC]
[GRAPHIC]
[GRAPHIC]
pg. 18
"Safety is the ultimate people issue in a manufacturing company, and nothing is
more important than to be relentless about helping each person work safely.
People who work safely and are in an environment that encourages safe work
habits produce better quality products, have better productivity and take care
of customers better."
Star Evans, Human Resource
and Safety Director, Specialty
Paperboard Division, Lynchburg,
Virginia
[PHOTO]
Rock-Tenn 2001 Annual Report pg. 19
SAFETY
RULES
The relentless pursuit of a safe work environment began over a decade ago.
Rock-Tenn's focus is plain and simple: we do not believe that people have to get
hurt. This approach goes beyond compliance and is built on the strong belief
that all injuries are preventable. Efforts and initiatives are varied across the
business units, but a strong top down and bottom up accountability structure
assures continued success and even greater results. Rock-Tenn will continue to
focus its resources on the creation of a safe work environment for its
employees.
1990 11.64
1991 8.45
1992 9.00
1993 6.71
1994 5.98
1995 4.70
1996 3.58
1997 3.77
1998 3.77
1999 2.48
2000 2.52
2001 2.24
TOTAL RECORDABLE PERSONAL INJURY RATE
(incidents per 200,000 man hours)
pg. 20
ENVIRONMENT
RECYCLES
Preserving and conserving the environment concerns many consumers and businesses
alike as they enter the 21st century. Recovering and recycling paper plays an
important role in protecting the environment since recovered paper is diverted
from the solid waste stream and made into new products.
Rock-Tenn has turned an environmentally friendly activity into a vital part of
its business. Operating 14 paper-collecting facilities and twelve 100%-recycled
paperboard mills throughout the United States, each year the company handles
over one and a half million tons of recovered paper - including corrugated
containerboard, newsprint and office papers - to produce recycled paperboard for
its own divisions as well as for other companies. Products produced from
recovered paper range from packaging for pasta and overnight mailing envelopes
to coverboard for books, binders and notepads.
1999 1,709
2000 1,707
2001 1,632
WASTEPAPER SOURCED BY
ROCK-TENN COMPANY(*)
(in thousands of tons)
* Includes wastepaper purchased by Rock-Tenn mills and wastepaper sourced by
the Recycled Fiber Division for third parties.
[ROCK-TENN COMPANY LOGO]
Rock-Tenn Company
504 Thrasher Street
Norcross, GA 30071
770-448-2193
www.rocktenn.com
RELENTLESS
PERFORMANCE
[PHOTO]
ROCK-TENN COMPANY
2001 ANNUAL REPORT
CONTENTS 2. letter
8. growth
10. consolidation
12. partnerships
14. return on capital
16. at-a-glance
18. safety
20. environment
21. index to financials
ROCK-TENN is one of North America's leading manufacturers of packaging products,
merchandising displays and recycled paperboard. Since its founding in 1936,
Rock-Tenn has focused on developing packaging and paperboard products that bring
high value to its customers, employees and shareholders.
The Company operates over 70 manufacturing facilities throughout the United
States, Canada, Mexico and Chile, and employs approximately 8,600 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.
SHAREHOLDER INFORMATION
HOME OFFICE
504 Thrasher Street
Norcross, Georgia 30071
770-448-2193
TRANSFER AGENT AND REGISTRAR
SunTrust Bank
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, LLPP
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
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 25, 2002
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 6, 2001, there were approximately 501 Class A common shareholders
of record and 116 Class B common shareholders of record.
PRICE RANGE OF CLASS A COMMON STOCK
Fiscal 2001 Fiscal 2000
- -------------------------------------------------------------
High Low High Low
First Quarter $10.38 $6.31 $16.44 $13.56
Second Quarter $ 8.98 $7.13 14.94 8.56
Third Quarter $13.10 $6.75 10.00 8.44
Fourth Quarter $14.00 $8.70 11.44 8.44
- -------------------------------------------------------------
FORM 10-K REPORT
A copy of the Company's annual report on Form 10-K for the year ended September
30, 2001 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
Rock-Tenn 2001 Annual Report pg. 21
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 52
Management's Statement of Responsibility for Financial Information 53
Officers and Directors 54
pg. 22
FIVE-YEAR SELECTED FINANCIAL AND OPERATING HIGHLIGHTS
Year Ended September 30,
(In Thousands, Except Per Share Amounts) 2001 2000 1999 1998 1997(e)
- --------------------------------------------------------------------------------------------------------------
Net sales $1,441,632 $ 1,463,288 $1,313,371 $1,297,360 $1,113,883
Plant closing and other one-time costs 16,893 65,630 6,932 1,997 16,251
Income (loss) before income taxes 52,134 (4,346) 70,253 74,613 37,756
Net income (loss) 30,523 (15,916) 39,698 42,020 16,101
- --------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per
common share(a) 0.91 (0.46) 1.13 1.20 0.47
Diluted earnings per common share
excluding plant closing and other
one-time costs(a) 1.17 1.02 1.25 1.23 0.90
Dividends paid per common share(a) 0.30 0.30 0.30 0.30 0.30
Book value per common share(a) 12.00 11.57 12.36 11.49 10.80
- --------------------------------------------------------------------------------------------------------------
Total assets 1,164,413 1,158,963 1,161,470 1,111,481 1,113,686
Debt, including hedge
adjustment(b) 494,242 534,820 498,845 508,338 533,622
Shareholders' equity 402,760 386,303 432,164 397,415 371,212
- --------------------------------------------------------------------------------------------------------------
EBITDA(c) 181,418 173,502 180,448 181,487 142,193
Cash provided by operating activities 146,027 102,444 112,416 125,688 106,377
Goodwill amortization(d) 8,569 9,069 9,410 9,429 7,070
Capital expenditures 72,561 94,640 92,333 81,666 87,016
Cash contributed to joint
venture investment 9,627 7,133 -- -- --
Cash paid for purchases of businesses -- -- -- -- 301,287
- --------------------------------------------------------------------------------------------------------------
Notes:
(a) Gives effect to a 10% stock dividend paid on November 15, 1996.
(b) Includes adjustment for the fair value hedge in the amount of
$8,603,000 as of September 30, 2001.
(c) EBITDA represents earnings before interest, taxes, depreciation and
amortization, and plant closing and other one-time charges. EBITDA as
presented may not be comparable to similarly titled measures reported
by other companies.
(d) Amount not deductible for income tax purposes was $6,189,000,
$6,550,000, $6,900,000, $6,928,000 and $4,760,000 in fiscal 2001, 2000,
1999, 1998 and 1997, respectively.
(e) 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.
Rock-Tenn 2001 Annual Report pg. 23
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)
merchandising displays and corrugated packaging, and (3) paperboard. No customer
accounts for more than 5% of our consolidated net sales.
The packaging products segment consists of facilities that produce
folding cartons, interior packaging and thermoformed plastic packaging. We
compete with a significant number of national, regional and local packaging
suppliers. During fiscal 2001, we sold packaging products to approximately 3,100
customers. We sell packaging products to a number of 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 merchandising displays and corrugated packaging segment consists of
facilities that produce merchandising displays and flexographic and
litho-laminated corrugated packaging. We compete with a number of national,
regional and local suppliers of those goods and services in this segment. During
fiscal 2001, we sold display products and corrugated packaging to approximately
1,100 customers. Due to the highly competitive nature of the merchandising
displays and corrugated packaging business, we regularly bid for sales
opportunities to customers for new business or for renewal of existing business.
The loss of business or the award of new business from our larger customers may
have a significant impact on our results of operations.
The paperboard segment consists of facilities that collect recovered
paper and that manufacture 100% recycled clay-coated and specialty paperboard,
corrugating medium, and laminated paperboard products. In our clay-coated and
specialty paperboard divisions, we compete with integrated and non-integrated
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 2001, we sold recycled paperboard, corrugating medium,
laminated paperboard products and recovered paper to approximately 2,100
customers. A significant percentage of our sales of recycled paperboard is made
to our packaging products and merchandising displays and corrugated packaging
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.
Income and expenses that are not reflected in the information used by
management to make operating decisions and assess operating performance are
reported as non-allocated expenses. These include elimination of intersegment
profit and certain corporate expenses.
Previously reported segment income results have been restated for all
years presented in order to conform to changes in internal reporting measures
used by management. Segment operating income now reflects adjustments to record
inventory on the last-in, first-out, or "LIFO," method, reallocation of
corporate expenses due to a change in methodology and non-allocation of goodwill
amortization expense.
pg. 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
Fiscal Year Ended September 30,
(In Millions) 2001 2000 1999
- ------------------------------------------------------------------------------------
Net sales (aggregate):
Packaging Products $ 806.1 $ 797.4 $ 749.9
Merchandising Displays
and Corrugated
Packaging 263.4 238.8 180.9
Paperboard 524.5 588.5 529.0
- ------------------------------------------------------------------------------------
Total $ 1,594.0 $ 1,624.7 $ 1,459.8
====================================================================================
Net sales (intersegment):
Packaging Products $ 3.5 $ 5.3 $ 3.5
Merchandising Displays
and Corrugated
Packaging 5.6 5.3 4.3
Paperboard 143.3 150.8 138.6
- ------------------------------------------------------------------------------------
Total $ 152.4 $ 161.4 $ 146.4
====================================================================================
Net sales (unaffiliated customers):
Packaging Products $ 802.6 $ 792.1 $ 746.4
Merchandising Displays
and Corrugated
Packaging 257.8 233.5 176.6
Paperboard 381.2 437.7 390.4
- ------------------------------------------------------------------------------------
Total $ 1,441.6 $ 1,463.3 $ 1,313.4
====================================================================================
Segment income:
Packaging Products $ 48.1 $ 39.7 $ 48.6
Merchandising Displays
and Corrugated
Packaging 30.2 27.6 22.2
Paperboard 41.6 51.4 60.3
- ------------------------------------------------------------------------------------
119.9 118.7 131.1
Goodwill amortization (8.6) (9.1) (9.4)
Plant closing and
other one-time costs (16.9) (65.6) (6.9)
Non-allocated expenses (5.4) (8.2) (7.7)
Interest expense (35.0) (35.5) (31.2)
Interest and other
income 0.5 0.4 0.4
Minority interest in
income of
consolidated
subsidiary (2.4) (5.0) (6.0)
- ------------------------------------------------------------------------------------
Income (loss) before
income taxes $ 52.1 $ (4.3) $ 70.3
- ------------------------------------------------------------------------------------
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 2001 decreased 1.5% to $1,441.6 million from $1,463.3
million for fiscal 2000. Net sales decreased as a result of decreased volumes in
specialty paperboard and laminated paperboard products as well as price
decreases in recycled fiber. These price and volume declines were partially
offset by price and volume increases in displays and plastic packaging.
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 merchandising displays, corrugated
packaging and plastic packaging.
Net Sales (Aggregate) - Packaging Products Segment
First Second Third Fourth Fiscal
(In Millions) Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------
1999 $ 185.7 $ 180.7 $ 186.9 $ 196.6 $ 749.9
2000 192.9 195.1 202.8 206.6 797.4
2001 195.6 206.9 198.6 205.0 806.1
Net sales of the packaging products segment before intersegment
eliminations for fiscal 2001 increased 1.1% to $806.1 million from $797.4
million for fiscal 2000.
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 (Aggregate) by Division - Packaging Products Segment
Folding RTS Plastic
(In Millions) Carton Packaging Packaging
- -----------------------------------------------------------
1999 $ 565.3 $ 136.0 $ 48.6
2000 597.4 136.4 63.6
2001 602.7 126.5 76.9
The increase in net sales of the packaging products segment before
intersegment eliminations for fiscal 2001 as compared to fiscal 2000 was
primarily the result of increased prices and volumes in our plastic packaging
business offset by lower volumes in our interior packaging business.
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.
Rock-Tenn 2001 Annual Report pg. 25
Net Sales (Aggregate) - Merchandising Displays and Corrugated
Packaging Segment
First Second Third Fourth Fiscal
(In Millions) Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------------------
1999 $ 37.8 $ 41.4 $ 45.0 $ 56.7 $180.9
2000 52.3 59.2 59.1 68.2 238.8
2001 57.8 65.8 65.8 74.0 263.4
Net sales within this segment before intersegment eliminations for
fiscal 2001 increased 10.3% to $263.4 million from $238.8 million for fiscal
2000.
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 (Aggregate) by Division - Merchandising Displays and
Corrugated Packaging Segment
Alliance Corrugated
(In Millions) Display Packaging
- -------------------------------------------------
1999 $ 112.0 $ 68.9
2000 152.7 86.1
2001 181.1 82.3
The increase in net sales of the merchandising displays and corrugated
packaging segment before intersegment eliminations for fiscal 2001 as compared
to fiscal 2000 was the result of increased volumes and increases in pricing of
displays offset by lower volumes in our corrugated packaging business due to
generally weaker market conditions.
The increase in net sales of the merchandising displays and corrugated
packaging segment before intersegment eliminations for fiscal 2000 as compared
to fiscal 1999 was the result of increased volumes and increases in pricing of
merchandising displays and corrugated packaging.
Net Sales (Aggregate) - Paperboard Segment
First Second Third Fourth Fiscal
(In Millions) Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------
1999 $ 122.5 $ 127.0 $ 134.5 $ 145.0 $ 529.0
2000 144.3 154.7 148.9 140.6 588.5
2001 131.5 133.1 130.5 129.4 524.5
Net sales of the paperboard segment before intersegment eliminations
for fiscal 2001 decreased 10.9% to $524.5 million from $588.5 million for fiscal
2000.
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 (Aggregate) by Division - Paperboard Segment
Laminated
Coated Specialty Recycled Paperboard
(In Millions) Paperboard Paperboard Fiber Products
- ---------------------------------------------------------------------------
1999 $ 268.5 $ 85.6 $ 28.0 $ 146.9
2000 304.0 100.3 48.4 135.8
2001 295.4 83.2 33.0 112.9
The decrease in net sales of the paperboard segment before intersegment
eliminations for fiscal 2001 as compared to fiscal 2000 was the result of a
significant decline in recycled fiber prices as well as volume declines due to a
general weakening in the book and ready-to-assemble furniture industries.
Reduced volumes at our interior packaging business over fiscal 2000 further
contributed to the sales decline.
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.
COST OF GOODS SOLD
Cost of goods sold for fiscal 2001 decreased 2.6% to $1,144.8 million from
$1,174.8 million for fiscal 2000. Cost of goods sold as a percentage of net
sales for fiscal 2001 decreased to 79.4% from 80.3% for fiscal 2000. The
decrease in cost of goods sold as a percentage of net sales resulted from lower
average recovered paper costs offset by higher energy expenses.
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.
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.
pg. 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
2001 2000 1999
----------------------- ------------------------- --------------------------
(In Millions) LIFO FIFO LIFO FIFO LIFO FIFO
Cost of goods sold $1,144.8 $1,147.7 $ 1,174.8 $ 1,169.5 $ 1,019.2 $ 1,019.0
Net (loss) income 30.5 28.7 (15.9) (12.6) 39.7 39.8
GROSS PROFIT
(% of First Second Third Fourth Fiscal
Net Sales) Quarter Quarter Quarter Quarter Year
- ----------- ------- ------- ------- ------- ------
1999 23.0 22.1 22.3 22.3 22.4
2000 20.8 19.9 18.8 19.4 19.7
----- ----- ----- ----- -----
2001 19.1 20.1 21.4 21.6 20.6
===== ===== ===== ===== =====
Gross profit for fiscal 2001 increased 2.9% to $296.8 million from
$288.5 million for fiscal 2000. Gross profit as a percentage of net sales
increased to 20.6% for fiscal 2001 from 19.7% for fiscal 2000.
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 also Cost of
Goods Sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for fiscal 2001 increased 1.3% to
$180.3 million from $178.0 million for fiscal 2000. Selling, general and
administrative expenses as a percentage of net sales for fiscal 2001 increased
to 12.5% from 12.2% for fiscal 2000. The increase in selling, general and
administrative expenses as a percentage of net sales for fiscal 2001 resulted
primarily from increased compensation expenses in relation to net sales.
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.
PLANT CLOSING AND OTHER COSTS
During fiscal 2001, 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 folding carton plant in Augusta, Georgia
and an interior packaging plant in Eaton, Indiana.
The closures resulted in the termination of approximately 210 employees. In
connection with these closings, we incurred charges of $6.2 million during
fiscal 2001, which consisted mainly of asset impairment, severance, equipment
relocation, disposal costs and related expenses. Payments of $0.8 million were
made in fiscal 2001. The remaining liability at September 30, 2001 is $1.5
million. Plant closing and other costs are not allocated to the respective
segments for financial reporting purposes. Had these costs been allocated, $6.2
million would have been charged to the packaging products segment. We have
consolidated the operations of the Augusta folding plant and the Eaton interior
packaging plant into other existing facilities.
During fiscal 2000, we closed a laminated paperboard products plant in
Lynchburg, Virginia and folding carton plants in Chicago, Illinois, Norcross,
Georgia and Madison, Wisconsin. The closures resulted in the termination of
approximately 550 employees. In connection with these closings, we 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 represented asset impairment charges related to the
determination of material diminution in the value of assets, including goodwill
of $25.4 million (which is not deductible for tax purposes), relating to our two
folding carton plants that use web offset technology, as well as assets relating
to the other closed facilities. We made payments of $2.4 million and $12.6
million in fiscal 2001 and fiscal 2000, respectively, and made an accrual
adjustment of $0.6 million to increase the liability during fiscal 2001. The
remaining liability at September 30, 2001 is $0.7 million. 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 in fiscal
2000. 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 impairment charges of $4.6 million related to this
equipment.
Rock-Tenn 2001 Annual Report pg. 27
During fiscal 1999, we closed a folding carton plant in Taylorsville,
North Carolina, a laminated paperboard products operation in Otsego, Michigan
and an uncoated paper mill 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. We do not have any remaining
liability at September 30, 2001. 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.
SEGMENT OPERATING INCOME
Operating Income - Packaging Products Segment
(In Millions, Net Sales Operating Return
Except Percentages) (Aggregate) Income on Sales
- ------------------- ----------- --------- --------
First Quarter $ 185.7 $ 9.0 4.8%
Second Quarter 180.7 7.5 4.2
Third Quarter 186.9 13.6 7.3
Fourth Quarter 196.6 18.5 9.4
-------- ------- ----
Fiscal 1999 $ 749.9 $ 48.6 6.5%
======== ======= ====
First Quarter $ 192.9 $ 7.6 3.9%
Second Quarter 195.1 9.0 4.6
Third Quarter 202.8 10.9 5.4
Fourth Quarter 206.6 12.2 5.9
-------- ------- ----
Fiscal 2000 $ 797.4 $ 39.7 5.0%
======== ======= ====
First Quarter $ 195.6 $ 10.8 5.5%
Second Quarter 206.9 11.7 5.7
Third Quarter 198.6 12.8 6.4
Fourth Quarter 205.0 12.8 6.2
-------- ------- ----
Fiscal 2001 $ 806.1 $ 48.1 6.0%
======== ======= ====
Operating income attributable to the packaging products segment for
fiscal 2001 increased 21.2% to $48.1 million from $39.7 million for fiscal
2000. Operating margin for fiscal 2001 was 6.0% compared to 5.0%
for fiscal 2000. The increase in operating margin primarily resulted from
operational efficiencies in our folding carton operations gained through plant
consolidations in fiscal 2000 and 2001.
Operating income attributable to the packaging products segment for
fiscal 2000 decreased 18.3% to $39.7 million from $48.6 million for fiscal
1999. Operating margin for fiscal 2000 was 5.0% compared to 6.5% 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 - Merchandising Displays and Corrugated
Packaging Segment
(In Millions, Net Sales Operating Return
Except Percentages) (Aggregate) Income on Sales
- ------------------- ----------- --------- --------
First Quarter $ 37.8 $ 8.1 21.4%
Second Quarter 41.4 9.4 22.7
Third Quarter 45.0 2.3 5.1
Fourth Quarter 56.7 2.4 4.2
-------- ------- ----
Fiscal 1999 $ 180.9 $ 22.2 12.3%
======== ======= ====
First Quarter $ 52.3 $ 6.0 11.5%
Second Quarter 59.2 7.4 12.5
Third Quarter 59.1 6.4 10.8
Fourth Quarter 68.2 7.8 11.4
-------- ------- ----
Fiscal 2000 $ 238.8 $ 27.6 11.6%
======== ======= ====
First Quarter $ 57.8 $ 2.8 4.8%
Second Quarter 65.8 8.5 12.9
Third Quarter 65.8 8.3 12.6
Fourth Quarter 74.0 10.6 14.3
-------- ------- ----
Fiscal 2001 $ 263.4 $ 30.2 11.5%
======== ======= ====
Operating income attributable to this segment for fiscal 2001 increased
9.4% to $30.2 million from $27.6 million for fiscal 2000. Operating margin for
fiscal 2001 decreased to 11.5% from 11.6% in fiscal 2000. The decrease in
operating margin resulted from lower sales volumes in our corrugated packaging
business due to generally weaker market conditions.
Operating income attributable to this segment for fiscal 2000 increased
24.3% to $27.6 million from $22.2 million for fiscal 1999. Operating margin for
fiscal 2000 decreased to 11.6% from 12.3% in fiscal 1999. The decrease in
operating margin was primarily the result of higher raw material costs.
pg. 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating Income - Paperboard Segment
Recycled Average Corrugated Average Weighted
Paperboard Recycled Medium Corrugated Average
Net Sales Operating Tons Paperboard 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 $ 122.5 $ 14.6 11.9% 230.7 $ 403 45.2 $ 288 $ 53
Second Quarter 127.0 12.9 10.2 229.0 399 43.5 328 52
Third Quarter 134.5 17.3 12.9 249.4 398 45.3 340 58
Fourth Quarter 145.0 15.5 10.7 249.8 406 44.7 380 76
------- ------ ----- ------ ----- ------ ----- -----
Fiscal 1999 $ 529.0 $ 60.3 11.4% 958.9 $ 401 178.7 $ 336 $ 60
======= ====== ===== ====== ===== ====== ===== =====
First Quarter $ 144.3 $ 16.3 11.3% 250.4 $ 420 42.4 $ 386 $ 83
Second Quarter 154.7 15.5 10.0 257.1 426 44.7 403 91
Third Quarter 148.9 8.6 5.8 242.0 445 40.9 419 108
Fourth Quarter 140.6 11.0 7.8 228.7 449 42.2 407 88
------- ------ ----- ------ ----- ------ ----- -----
Fiscal 2000 $ 588.5 $ 51.4 8.7% 978.2 $ 435 170.2 $ 403 $ 92
======= ====== ===== ====== ===== ====== ===== =====
First Quarter $ 131.5 $ 10.3 7.8% 216.7 $ 451 41.5 $ 393 $ 65
Second Quarter 133.1 10.3 7.7 222.3 445 39.8 385 58
Third Quarter 130.5 10.5 8.0 223.4 437 42.0 369 53
Fourth Quarter 129.4 10.5 8.1 227.1 434 45.9 368 53
------- ------ ----- ------ ----- ------ ----- -----
Fiscal 2001 $ 524.5 $ 41.6 7.9% 889.5 $ 442 169.2 $ 378 $ 57
======= ====== ===== ====== ===== ====== ===== =====
Operating income attributable to the paperboard segment for fiscal 2001
decreased 19.1% to $41.6 million from $51.4 million for fiscal 2000. Operating
margin for fiscal 2001 decreased to 7.9% from 8.7% in fiscal 2000. The decrease
in operating margin was primarily the result of higher energy costs that were
not fully passed on to customers, as well as a general economic downturn in the
book and ready-to-assemble furniture industries. The significant decline in
recycled fiber prices further contributed to the decrease in operating margin
for the paperboard segment.
Operating income attributable to the paperboard segment for fiscal 2000
decreased 14.8% to $51.4 million from $60.3 million for fiscal 1999. Operating
margin for fiscal 2000 decreased to 8.7% from 11.4% 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 paper
mills.
INTEREST EXPENSE
Interest expense for fiscal 2001 decreased to $35.0 million from $35.5 million
for fiscal 2000 and increased to $35.5 million for fiscal 2000 from $31.2
million for fiscal 1999. The decrease for fiscal 2001 primarily resulted from a
decrease in the average outstanding borrowings and lower interest rates. The
increase in fiscal 2000 primarily resulted from an increase in average
outstanding borrowings and higher interest rates.
MINORITY INTEREST
Minority interest in income of our consolidated subsidiary for fiscal 2001
decreased 52.0% to $2.4 million from $5.0 million for fiscal 2000. The decline
was due to decreased income in the joint venture resulting from reduced volumes
in the interior packaging business primarily due to the loss of one large
customer with whom we have had a long-term contract.
Minority interest in income of our consolidated subsidiary for fiscal
2000 decreased 16.7% to $5.0 million from $6.0 million for fiscal 1999. The
decline was due to decreased income in the joint venture resulting from higher
raw material costs which were not fully passed on to customers.
Rock-Tenn 2001 Annual Report pg. 29
PROVISION FOR INCOME TAXES
Provision for income taxes for fiscal 2001 increased to $21.9 million from $11.6
million for fiscal 2000. Provision for income taxes for fiscal 2000 decreased to
$11.6 million from $30.6 million for fiscal 1999. 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, our effective tax rate
decreased to 42.0% for fiscal 2001 compared to 54.9% for fiscal 2000 and
increased to 54.9% for fiscal 2000 compared to 43.5% for fiscal 1999. The
decrease in the effective tax rate in fiscal 2001 primarily resulted from
non-tax-deductible goodwill amortization comprising a lower percentage of
pre-tax net income. The increase in the effective tax rate in fiscal 2000 was
primarily due to higher non-tax-deductible goodwill amortization as a percentage
of pretax net income.
NET INCOME (LOSS) AND DILUTED EARNINGS (LOSS) PER
COMMON SHARE
Net income for fiscal 2001 was $30.5 million compared to a net loss of $15.9
million for fiscal 2000. Net income as a percentage of net sales was 2.1% for
fiscal 2001 compared to net loss as a percentage of net sales of 1.1% for fiscal
2000. Diluted earnings per share for fiscal 2001 was $0.91 compared to diluted
loss per share of $0.46 for fiscal 2000.
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.
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. Ineffectiveness related to our derivative
transactions is not material. We include in operations amounts received or paid
when the underlying transaction settles. Derivatives are included in other
long-term liabilities and other assets on the balance sheet. We do not enter
into or hold derivatives for trading or speculative purposes.
From time to time, 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.
From time to time, 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 production. 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. From
time to time, we use interest rate agreements effectively to cap the LIBOR rate
on portions of the amount outstanding under our revolving credit facility. If
market interest rates averaged 1% more than actual rates in 2001, our interest
expense, after considering the effects of interest rate swap agreements, would
have increased and income before taxes would have decreased by approximately
$4.1 million. Comparatively, if market interest rates averaged 1% more than
actual rates in fiscal 2000, our interest expense, after considering the effects
pg. 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
of interest rate swap and cap agreements, would have increased and income before
taxes would have decreased by approximately $4.7 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.
FOREIGN CURRENCY
We are exposed to changes in foreign currency rates with respect to our foreign
currency-denominated operating revenues and expenses. We principally use forward
contracts to limit exposure to fluctuations in Canadian foreign currency rates,
our largest exposure. For fiscal 2001, a uniform 10% 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 $0.5 million for fiscal
2001. Comparatively, for fiscal 2000, a uniform 10% 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.
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 make use of swap agreements to limit our exposure to falling selling
prices and rising raw material costs of a portion of our recycled medium
business. We estimate market risk as a hypothetical 10% decrease in selling
prices or a 10% increase in raw material costs. Without the effect of our medium
swaps, such a decrease would have resulted in lower sales of $3.1 million during
fiscal 2001. Without the effect of our OCC swaps, such an increase would have
resulted in higher costs of purchases of $0.3 million during fiscal 2001.
In 2000, we estimated market risk as a hypothetical 10% decrease in
selling prices or a 10% increase in raw material costs. Without the effect of
our medium swaps, such a decrease would have resulted in lower sales of $2.9
million during fiscal 2000. Without the effect of our OCC swaps, such an
increase would have resulted in higher costs of purchases of $0.9 million
during fiscal 2000.
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 2001, we
sold $250 million of 8.20% notes due in 2011. The proceeds from the sale were
used to repay borrowings outstanding under our revolving credit agreement. In
conjunction with the issuance of these notes, we amended our revolving credit
facility to reduce the aggregate borrowing availability to $300 million through
fiscal 2005. At September 30, 2001, we had $8.0 million outstanding under our
revolving credit facility. Cash and cash equivalents, $5.2 million at September
30, 2001, decreased from $5.4 million at September 30,2000.
Net cash provided by operating activities for fiscal 2001 was
$146.0 million compared to $102.4 million for fiscal 2000. This increase was
primarily the result of increased earnings before depreciation and amortization
and a positive change in operating assets and liabilities during fiscal 2001
over fiscal 2000. Net cash used for investing activities was $79.9 million for
fiscal 2001 compared to $101.3 million for fiscal 2000 and consisted primarily
of capital expenditures in both years. Net cash used for financing activities
aggregated $66.6 million for fiscal 2001 and consisted primarily of net
repayments of debt and quarterly dividend payments.
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, non-cash impairment charges and a larger change
Rock-Tenn 2001 Annual Report pg. 31
in operating assets and liabilities during fiscal 2000 than fiscal 1999. 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 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.
Our capital expenditures aggregated $72.6 million for fiscal 2001.
We used these expenditures primarily for the purchase and upgrading of machinery
and equipment.
We currently estimate that our capital expenditures will aggregate
approximately $70 million in fiscal 2002. We intend to use these expenditures
for the purchase and upgrading of machinery and equipment and for building
expansions and improvements. We believe that our financial position would
support higher levels of capital expenditures, if justified by opportunities to
increase revenues or reduce costs, and we continuously review new investment
opportunities. Accordingly, it is possible that our capital expenditures in
fiscal 2002 could be higher than currently anticipated.
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 operates a paperboard
machine located a tour Lynchburg, Virginia mill. We have contributed a portion
of our existing Lynchburg assets valued at approximately $4 million to the
venture and contributed cash of $16.8 million, which was used primarily to
rebuild the paperboard machine. Lafarge owns 51% and we own 49% of the joint
venture. During fiscal 2001,our share of the operating loss incurred at Seven
Hills Paperboard amounted to $2.0 million.
STOCK REPURCHASE PROGRAM
In November 2000, the Executive Committee of 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 2.1 million shares of common stock, including shares of
Class A common stock, in open market transactions on the New York Stock Exchange
or in private transactions, and 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. During fiscal
2001, we repurchased 0.3 million shares of Class A common stock, of which 4,300
shares were repurchased since the amendment. We repurchased 2.1 million and zero
shares of Class A common stock during fiscal 2000 and 1999, respectively. We did
not repurchase any shares of Class B common stock during fiscal 2001, 2000 or
1999.
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.
pg. 32
MANAGEMENT'S DISCUSSION AND ANALYSIS
We estimate that we will spend $1.0 to $2.0 million for capital
expenditures during fiscal year 2002 in connection with matters relating to
environmental compliance. Over the next twelve months, we will also need to
upgrade or replace a boiler at one of our facilities in Texas to comply with new
state air pollution control requirements. We estimate the cost for upgrading or
replacing that boiler to be in the range of $0.3 million to $3.5 million. In the
event we are not able to upgrade or replace the boiler prior to the new air
pollution control requirements going into effect, we may have to temporarily
suspend a portion of our operations at our Dallas, Texas facility. We do not
believe that such a disruption, if it were to occur, would have a material
adverse effect on our results of operations.
In addition, we may need to modify or replace the coal-ored 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
could cost from $4.0 to $9.0 million. If required, we anticipate those costs to
be incurred within the next three years.
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 alleged
that we were 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 alleged that we exceeded several numerical
limitations for chemical parameters outlined in the wastewater permit and
violated other wastewater discharge criteria. The MDEQ further alleged that we
are liable for contamination contained on the facility property as well as for
contributing contamination to the Kalamazoo River site. The letter requested
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 entered into an administrative consent
order pursuant to which improvements are being made to the facility's wastewater
treatment system and we have paid a $75,000 settlement amount. We have also
agreed to pay an additional $30,000 for past and future oversight costs incurred
by the State of Michigan. This payment will be made in three equal installments
over the next two years, the first of which has already been made. The cost of
making upgrades to the wastewater treatment systems is estimated to be
approximately $1.4 million, of which we have incurred $0.5 million as of
September 30, 2001. Nothing contained in the order constitutes an admission of
liability or any factual finding, allegation or legal conclusion on our part.
The order was completed during the first quarter of fiscal 2001. To date, the
MDEQ has not made any other demand regarding our alleged liability for
contamination at the Kalamazoo River site.
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.
New Accounting Standards
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS 144 is effective for fiscal years beginning after December 15, 2001.
We expect to adopt SFAS 144 as of October 1, 2002 and are currently assessing
the impact of the pronouncement on the consolidated financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations." This
statement eliminates the pooling method of accounting for all business
combinations initiated after June 30, 2001 and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. We will adopt this accounting standard for business combinations
initiated after June 30, 2001.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets." This statement changes the accounting for goodwill from an amortization
method to an impairment-only approach. During fiscal 2001, we incurred $7.8
million of goodwill amortization expense, net of taxes. We have elected to adopt
this statement in the first quarter of fiscal 2002 and are currently evaluating
the impact of the pronouncement on the consolidated financial statements.
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
Rock-Tenn 2001 Annual Report pg. 33
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 special
hedge accounting treatment. SFAS 133 was adopted in the first quarter of fiscal
2001 and resulted in a $0.3 million charge, net of tax, from a cumulative effect
of a change in accounting principle.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition." This bulletin provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. This bulletin was adopted in fiscal 2001 and did not have a material
impact on our consolidated financial statements.
Forward-Looking Statements
Statements herein regarding, among other things, estimated capital expenditures
for fiscal 2002 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.
pg. 34
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30,
(In Thousands, Except Per Share Data) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
Net sales $ 1,441,632 $ 1,463,288 $ 1,313,371
Cost of goods sold 1,144,801 1,174,837 1,019,214
- --------------------------------------------------------------------------------------------------------------
Gross profit 296,831 288,451 294,157
Selling, general and administrative expenses 180,280 177,961 170,779
Amortization of goodwill 8,569 9,069 9,410
Plant closing and other one-time costs 16,893 65,630 6,932
- --------------------------------------------------------------------------------------------------------------
Income from operations 91,089 35,791 107,036
Interest expense (35,042) (35,575) (31,179)
Interest and other income 530 418 391
Loss from unconsolidated joint venture (2,004) -- --
Minority interest in income of consolidated subsidiary (2,439) (4,980) (5,995)
- --------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 52,134 (4,346) 70,253
Provision for income taxes (Note 7) 21,897 11,570 30,555
- --------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a change in
accounting principle 30,237 (15,916) 39,698
Cumulative effect of a change in accounting principle
(net of $179 income taxes) 286 -- --
- --------------------------------------------------------------------------------------------------------------
Net income (loss) $ 30,523 $ (15,916) $ 39,698
==============================================================================================================
Basic earnings (loss) per share (Note 1) $ 0.92 $ (0.46) $ 1.14
==============================================================================================================
Diluted earnings (loss) per share (Note 1) $ 0.91 $ (0.46) $ 1.13
==============================================================================================================
See accompanying notes.
Rock-Tenn 2001 Annual Report pg. 35
CONSOLIDATED BALANCE SHEETS
September 30,
(In Thousands, Except Share and Per Share Data) 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 5,191 $ 5,449
Accounts receivable (net of allowances of $5,400 and $3,732) 157,782 156,155
Inventories (Note 1) 102,011 99,589
Other current assets 6,098 8,050
- -----------------------------------------------------------------------------------------------------------------
Total current assets 271,082 269,243
Property, plant and equipment, at cost (Note 1):
Land and buildings 206,069 200,444
Machinery and equipment 902,769 855,714
Transportation equipment 11,526 13,222
Leasehold improvements 9,159 8,561
- -----------------------------------------------------------------------------------------------------------------
1,129,523 1,077,941
Less accumulated depreciation and amortization (540,870) (485,403)
- -----------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 588,653 592,538
Goodwill, net 259,660 268,526
Other assets 45,018 28,656
- -----------------------------------------------------------------------------------------------------------------
$ 1,164,413 $ 1,158,963
=================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 79,596 $ 77,852
Accrued compensation and benefits 35,863 35,403
Current maturities of debt (Note 4) 97,152 20,328
Other current liabilities 46,636 26,792
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 259,247 160,375
Long-term debt due after one year (Note 4) 388,487 514,492
Adjustment for fair value hedge (Note 4) 8,603 --
- -----------------------------------------------------------------------------------------------------------------
Total long-term debt, less current maturities 397,090 514,492
Deferred income taxes (Note 7) 87,993 81,384
Other long-term items 17,323 16,409
Commitments and contingencies (Notes 6 and 10)
Shareholders' equity (Note 3):
Preferred stock, $.01 par value; 50,000,000 shares authorized;
no shares outstanding -- --
Class A common stock, $.01 par value; 175,000,000 shares authorized;
22,968,317 and 22,031,024 outstanding at September 30, 2001
and 2000, respectively. Class B common stock, $.01 par value;
60,000,000 shares authorized; 10,601,346 and 11,352,739
outstanding at September 30, 2001 and 2000, respectively 335 334
Capital in excess of par value 130,640 127,682
Deferred compensation (1,421) --
Retained earnings 282,117 262,872
Accumulated other comprehensive loss (8,911) (4,585)
- -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 402,760 386,303
- -----------------------------------------------------------------------------------------------------------------
$ 1,164,413 $ 1,158,963
=================================================================================================================
See accompanying notes.
pg. 36
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Class A and Class B Other
Common Stock Capital in Comprehensive
(In Thousands, ------------------- Excess of Deferred Retained (Loss)
Except Share and Per Share Data) Shares Amount Par Value Compensation Earnings Income Total
- --------------------------------------------------------------------------------------------------------------------------
Balance at October 1, 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)
Issuance 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)
Issuance 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
Comprehensive income:
Net income -- -- -- -- 30,523 -- 30,523
Foreign currency
translation adjustments -- -- -- -- -- (3,587) (3,587)
Net unrealized loss on
derivative instruments -- -- -- -- -- (274) (274)
Minimum pension liability -- -- -- -- -- (465) (465)
----------
Comprehensive income 26,197
Income tax benefit from
exercise of stock options -- -- 60 -- -- -- 60
Shares granted under
restricted stock plan 140,000 1 1,574 (1,575) -- -- --
Compensation expense under
restricted stock plan -- -- -- 154 -- -- 154
Cash dividends - $.30 per share -- -- -- -- (10,007) -- (10,007)
Issuance of common stock 320,200 3 2,374 -- -- -- 2,377
Purchases of Class A
common stock (274,300) (3) (1,050) -- (1,271) -- (2,324)
Balance at September 30, 2001 33,569,663 $ 335 $ 130,640 $ (1,421) $ 282,117 $ (8,911) $ 402,760
See accompanying notes.
Rock-Tenn 2001 Annual Report pg. 37
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
(In Thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income (loss) $ 30,523 $ (15,916) $ 39,698
Items in income (loss) not affecting cash:
Depreciation and amortization 77,593 77,061 72,475
Deferred income taxes 6,609 316 3,383
Deferred compensation expense 154 -- --
(Gain) loss on disposal of plant and equipment and other, net (432) (517) 746
Minority interest in income of consolidated subsidiary 2,439 4,980 5,995
Impairment loss and other non-cash charges 6,443 49,700 --
Equity in loss from joint venture 2,004 -- --
Change in operating assets and liabilities:
Accounts receivable (2,218) (17,374) (20,469)
Inventories (3,565) (5,362) (6,102)
Other assets 2,971 (2,151) (2,883)
Accounts payable 1,976 11,690 20,180
Accrued liabilities 21,530 17 (607)
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 146,027 102,444 112,416
INVESTING ACTIVITIES:
Capital expenditures (72,561) (94,640) (92,333)
Cash contributed to joint venture (9,627) (7,133) --
Proceeds from sale of property, plant and equipment 1,034 2,209 1,127
Decrease (increase) in unexpended industrial revenue bond proceeds 1,264 (1,779) --
- ----------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (79,890) (101,343) (91,206)
FINANCING ACTIVITIES:
Proceeds from issuance of public bonds 250,000 -- --
Net (repayments) additions to revolving credit facilities (385,000) 32,147 (7,000)
Additions to debt 120,540 5,454 3,034
Repayments of debt (34,720) (1,626) (5,527)
Debt issuance costs (2,936) (1,811) (80)
Sales of common stock 2,377 3,748 3,148
Purchases of common stock (2,324) (22,245) --
Cash dividends paid to shareholders (10,007) (10,384) (10,450)
Distribution to minority interest (4,480) (5,425) (5,950)
- ----------------------------------------------------------------------------------------------------------------------------
Cash used for financing activities (66,550) (142) (22,825)
Effect of exchange rate changes on cash 155 (48) 384
- ----------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (258) 911 (1,231)
Cash and cash equivalents at beginning of year 5,449 4,538 5,769
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,191 $ 5,449 $ 4,538
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds $ 7,138 $ 16,655 $ 28,899
Interest, net of amounts capitalized 31,676 36,228 31,190
See accompanying notes.
pg 38
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 interior packaging, plastic packaging, corrugated containers,
merchandising displays, laminated paperboard products, 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.
INVESTMENT IN CORPORATE JOINT VENTURE
The Company uses the equity method to account for its 49% investment in Seven
Hills Paperboard, LLC, a joint venture with Lafarge Corporation. Under the
equity method, the investment is initially recorded at cost, then reduced by
distributions and increased or decreased by the investor's proportionate share
of the investee's net earnings or loss.
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 may 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. Ineffectiveness
related to the Company's derivative transactions is not material. The Company
includes in operations amounts received or paid when the underlying transaction
settles. Derivatives are included in other long-term liabilities and other
assets on the balance sheet. 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 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.
From time to time, 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 production. 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 12.8% and 13.6% of FIFO cost at
September 30, 2001 and 2000, respectively.
Rock-Tenn 2001 Annual Report pg 39
Inventories at September 30, 2001 and 2000 are as follows:
September 30,
(In Thousands) 2001 2000
- -------------------------------------------------------------
Finished goods and work
in process $ 79,357 $ 74,422
Raw materials 35,488 40,353
Supplies 11,631 12,159
- -------------------------------------------------------------
Inventories at FIFO cost 126,476 126,934
LIFO reserve (24,465) (27,345)
- -------------------------------------------------------------
Net inventories $ 102,011 $ 99,589
- -------------------------------------------------------------
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. During fiscal 2001, 2000 and 1999,the Company capitalized
interest of approximately $1,541,000, $1,097,000 and $931,000, 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 2001, 2000 and 1999 was approximately
$67,020,000, $66,267,000 and $61,435,000, respectively.
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Year Ended September 30,
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Numerator:
Income (loss) before cumulative effect of a change
in accounting principle $30,237,000 $(15,916,000) $39,698,000
Cumulative effect of a change in accounting principle, net of tax 286,000 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $30,523,000 $(15,916,000) $39,698,000
============================================================================================================================
Denominator:
Denominator for basic earnings (loss)
per share - weighted average shares 33,297,123 34,523,827 34,801,541
Effect of dilutive stock options and restricted stock awards 132,082 -- 405,929
- ----------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings (loss) per share -
weighted average shares and assumed conversions 33,429,205 34,523,827 35,207,470
============================================================================================================================
Basic earnings (loss) per share
Income (loss) before cumulative effect of a
change in accounting principle $ 0.91 $ (0.46) $ 1.14
Cumulative effect of a change in accounting principle, net of tax 0.01 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share - basic $ 0.92 $ (0.46) $ 1.14
============================================================================================================================
Diluted earnings (loss) per share
Income (loss) before cumulative effect of a
change in accounting principle $ 0.90 $ (0.46) $ 1.13
Cumulative effect of a change in accounting principle, net of tax 0.01 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share - diluted $ 0.91 $ (0.46) $ 1.13
============================================================================================================================
pg 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common stock equivalents were antidilutive in fiscal 2000 and,
therefore, were 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 22.3% and 23.2% at September 30, 2001 and
2000, respectively. Net goodwill as a percentage of shareholders' equity was
64.5% and 69.5% at September 30, 2001 and 2000, respectively. Accumulated
amortization relating to goodwill at September 30, 2001 and 2000 was $44,454,000
and $36,057,000, 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 $8,405,000 and $6,483,000 at September 30, 2001 and 2000,
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" ("SFAS 121").
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.
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 August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets."
This statement addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supercedes SFAS 121. SFAS 144 is effective
for fiscal years beginning after December 15, 2001. The Company expects to adopt
SFAS 144 as of October 1, 2002 and is currently assessing the impact of the
pronouncement on the consolidated financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
This statement eliminates the pooling method of accounting for all business
combinations initiated after June 30, 2001 and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. SFAS 141 will be adopted for business combinations initiated after
June 30, 2001.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets." This statement changes the accounting for goodwill from an amortization
method to an impairment-only approach. During fiscal 2001, the Company incurred
$7.8 million of goodwill amortization expense, net of taxes. The Company has
elected to adopt this statement in the first quarter of fiscal 2002 and is
currently evaluating the impact of the pronouncement on the consolidated
financial statements.
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," as amended. 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 was adopted in the first quarter of fiscal 2001 and resulted
in a $286,000 charge, net of tax, from a cumulative effect of a change in
accounting principle.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition." This bulletin provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. This bulletin was adopted in fiscal 2001 and did not have a material
impact on the Company's consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
Rock-Tenn 2001 Annual Report pg 41
NOTE 2
PLANT CLOSINGS, JOINT VENTURE AND OTHER MATTERS
During fiscal 2001, 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. These plant closing
costs include the closing of a folding carton plant in Augusta, Georgia and an
interior packaging plant in Eaton, Indiana. The closures resulted in the
termination of approximately 210 employees. In connection with these closings,
the Company incurred charges of $6,191,000 during fiscal 2001, which consisted
mainly of asset impairment, severance, equipment relocation, disposal costs and
related expenses. Payments of $792,000 were made in fiscal 2001. The remaining
liability at September 30, 2001 is $1,474,000. Facilities closed during fiscal
2001 had combined revenues of $24,623,000, $36,943,000 and $39,359,000, for
fiscal years 2001, 2000 and 1999, respectively. Operating losses incurred at the
Augusta folding plant amounted to $288,000, $326,000 and $691,000 for fiscal
2001, 2000 and 1999, respectively. Operating income at the Eaton partition plant
was $646,000, $1,909,000, and $2,675,000 for fiscal years 2001, 2000 and 1999,
respectively. The Company has consolidated the operations of the Augusta folding
plant and the Eaton interior packaging plant into other existing facilities.
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
operates a paperboard machine located at the Company's Lynchburg, Virginia mill.
The Company has contributed a portion of its existing Lynchburg assets valued at
approximately $4,000,000 to the venture and cash of $16,760,000, which was used
primarily to rebuild the paperboard machine. Lafarge owns 51% and the Company
owns 49% of the joint venture. During fiscal 2001, the Company's share of the
operating loss incurred at Seven Hills Paperboard amounted to $2,004,000.
During fiscal 2000, the Company closed a laminated paperboard products
plant in Lynchburg, Virginia and folding carton plants in Chicago, Illinois,
Norcross, Georgia and Madison, Wisconsin. The closures resulted in the
termination of approximately 550 employees. In connection with these closings,
the Company 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 represented asset impairment
charges related to the determination of material diminution in the value of
assets, including goodwill of $25,432,000 (which is not deductible for tax
purposes), relating to the Company's two folding carton plants that use web
offset technology, as well as assets relating to the other closed facilities.
The Company made payments of $2,380,000 and $12,593,000 in fiscal 2001 and
fiscal 2000, respectively, and made an accrual adjustment of $597,000 to
increase the liability during fiscal 2001. The remaining liability at September
30, 2001 is $717,000. Facilities closed during fiscal 2000 had combined revenues
and operating losses of $72,037,000 and $5,587,000, respectively, in fiscal 2000
and $98,314,000 and $5,814,000, respectively, in fiscal 1999. 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 paper mill 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. The Company does not have
any remaining liability at September 30, 2001. Facilities closed during fiscal
1999 had combined revenues and operating losses of $16,585,000 and $1,501,000,
respectively, in fiscal 1999.
pg 42
NOTES TO CONSOLIDATED FINANCIAL 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 ten 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 2001, 2000 and 1999,
respectively, approximately 752,000, 285,000, and 213,000 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 REPURCHASE PLAN
In November 2000, the Executive Committee of the Board of Directors amended the
Company's current stock repurchase plan to allow for the repurchase from time to
time prior to July 31, 2003 of a maximum of 2,143,332 shares in aggregate of
Class A Common or Class B Common. During fiscal 2001 the Company repurchased
274,300 shares of Class A Common of which 4,300 were purchased under this
amended plan. The Company repurchased 2,125,268 and no shares of Class A Common
during fiscal 2000 and 1999, respectively.
STOCK OPTION PLANS
The Company's 2000 Incentive Stock Plan, approved in January 2001, allows for
the granting of options to certain key employees for the purchase of a maximum
of 2,200,000 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
ten-year terms.
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 ten-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 2001, 2000 and 1999, respectively: risk-free
interest rate of 3.5%, 5.9% and 4.8%, a dividend yield of 3.0% for fiscal 2001
and 2.0% for fiscal 2000 and 1999, volatility factor of the expected market
price of the Company's common stock of 42.2%, 41.4% and 40.0%, and an expected
life of the option of eight years for fiscal 2001 and ten years for fiscal 2000
and 1999.
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 are amortized to expense over the options' vesting period. The Company's
pro forma information follows:
(In Thousands, Except
for Earnings Per
Share Information) 2001 2000 1999
- -------------------------------------------------------------
Pro forma net
income (loss) $27,028 $(19,609) $37,339
Pro forma earnings
(loss) per share
Basic 0.81 (0.57) 1.07
Diluted 0.81 (0.57) 1.06
- -------------------------------------------------------------
Rock-Tenn 2001 Annual Report pg 43
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, 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
Exercised or forfeited (6,600) $6.09-7.45 $ 6.77 (864,856) $ 6.06-20.31 $ 14.25
Granted -- -- -- 866,450 $ 0.00-11.90 $ 9.63
- ----------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING AT
SEPTEMBER 30, 2001 38,940 $6.09-7.45 $ 6.78 3,518,874 $ 0.00-20.31 $ 12.34
OPTIONS EXERCISABLE AT
SEPTEMBER 30, 2001 38,940 $6.09-7.45 $ 6.78 1,873,903 $ 6.06-20.31 $ 14.29
OPTIONS AVAILABLE FOR FUTURE
GRANT AT SEPTEMBER 30, 2001 -- -- -- 2,283,750 -- --
- ----------------------------------------------------------------------------------------------------------------------
The following table summarizes information concerning options outstanding and
exercisable at September 30, 2001:
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 38,940 $ 6.78 93,060 $ 6.80 93,060 $ 6.80 0.9
$ 8.00- 8.94 -- -- 686,264 $ 8.91 211,226 $ 8.94 8.4
$10.25-11.90 -- -- 1,252,450 $11.20 361,417 $11.12 8.5
$14.25-16.59 -- -- 1,014,100 $14.96 735,200 $15.04 6.0
$18.30-20.31 -- -- 473,000 $19.43 473,000 $19.43 4.9
- ---------------------------------------------------------------------------------------------------------------------------
38,940 $ 6.78 3,518,874 $12.83 1,873,903 $14.29 7.0
===========================================================================================================================
The estimated weighted average fair value of options granted during
fiscal 2001, 2000 and 1999 with option prices equal to the market price on the
date of grant was $4.21, $4.41, and $6.72, respectively.
pg 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESTRICTED STOCK PLAN
Pursuant to the Company's 2000 Incentive Stock Plan, the Company can award up to
500,000 shares of restricted Class A Common stock to employees. Sales of the
stock awarded is restricted for two to five years from the date of grant,
depending on vesting. Vesting of the stock occurs in increments of one-third
beginning on the third anniversary of the date of grant. Accelerated vesting of
a portion of the grant may occur based on the Company's performance. For the
year ended September 30, 2001, the Company awarded 140,000 shares of Class A
Common stock, which had a fair value at the date of grant of $1,575,000.
Compensation under the plan is charged to earnings over the restriction period
and amounted to $154,000 for the year.
EMPLOYEE STOCK PURCHASE PLAN
During fiscal 2001, the 1993 Employee Stock Purchase Plan was amended to
increase by 1,000,000 the number of shares of Class A Common available for grant
under the plan. Under the Amended and Restated 1993 Employee Stock Purchase
Plan, 765,865 and 59,419 shares of Class A Common were available for purchase
as of September 30, 2001 and 2000, respectively. In fiscal 2001, 2000 and 1999,
approximately 294,000, 314,000 and 284,000 shares, respectively, were purchased
by employees under this plan.
NOTE 4
DEBT
Debt at September 30, 2001 and 2000 consists of the following:
September 30,
(In Thousands) 2001 2000
- -------------- --------- ---------
8.20% notes, due August 2011,
net of unamortized discount
of $672(a) $ 249,328 $ --
7.25% notes, due August 2005,
net of unamortized discount of
$53 and $67(b) 99,947 99,933
Asset securitization facility(c) 88,600 --
Industrial revenue bonds,
bearing interest at variable rates
(3.70% at September 30, 2001),
due through October 2036(d) 37,500 40,000
Revolving credit facility(e) 8,000 393,000
Other notes 2,264 1,887
--------- ---------
485,639 534,820
Less current maturities of debt 97,152 20,328
--------- ---------
Long-term debt due after one year $ 388,487 $ 514,492
========= =========
(a) In August 2001, the Company sold $250,000,000 in aggregate
principal amount of its 8.20% notes due August 15, 2011 (the "2011 Notes"), the
proceeds of which were used to repay borrowings outstanding under its revolving
credit agreement. The 2011 Notes are not redeemable prior to maturity and are
not subject to any sinking fund requirements. The 2011 Notes are unsubordinated,
unsecured obligations. The indenture related to the 2011 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. The
2011 Notes were issued at a discount of $682,500 which is being amortized over
its term. Debt issuance costs of approximately $2,136,000 are also being
amortized over its term. Giving effect to the amortization of the original issue
discount and the debt issuance costs, the effective interest rate of the 2011
Notes is approximately 8.31%.
(b) In August 1995, the Company sold $100,000,000 in aggregate
principal amount of its 7.25% notes due August 1, 2005 (the "2005 Notes"). The
2005 Notes are not redeemable prior to maturity and are not subject to any
sinking fund requirements. The 2005 Notes are unsubordinated, unsecured
obligations. The indenture related to the 2005 Notes restricts the Company and
its subsidiaries from incurring certain liens and entering into certain sale and
lease back transactions, subject to a number of exceptions. Debt issuance costs
of approximately $908,000 are being amortized over the term of the 2005 Notes.
In May 1995, the Company entered into an interest rate adjustment transaction in
order to effectively fix the interest rate on the 2005 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 2005 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 2005 Notes is approximately
7.51%.
(c) In November 2000, the Company entered into a $125 million
receivables-backed financing transaction (the "Receivables Financing Facility"),
the proceeds of which were used to repay borrowings outstanding under its
revolving credit agreement. A bank provides a back-up liquidity facility. The
effective interest rate was 3.53% as of September 30, 2001. Both the Receivables
Financing Facility and the back-up liquidity facility are 364-day vehicles.
(d) 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 (e) below 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.
(e) The Company has a revolving credit facility, provided by a
syndicate of banks, which provides aggregate borrowing availability of up to
$300,000,000 through 2005. Borrowings outstanding under the facility bear
interest based upon LIBOR plus an applicable margin. Annual facility fees range
from .125% to .375% of the aggregate borrowing availability, based on the
Company's consolidated funded debt to EBITDA ratio. The all-in rate was 4.81%
and 8.04% at September 2001 and 2000, respectively. Under the agreements
covering this loan, restrictions exist as to the maintenance of financial
ratios, creation of additional
Rock-Tenn 2001 Annual Report pg. 45
long-term and short-term debt, certain leasing arrangements, mergers,
acquisitions, disposals and other matters. The Company is in compliance with
such restrictions.
In August 2001, the Company entered into two interest rate swap
agreements to convert $100 million of the 2011 Notes fixed obligations to a
floating rate. This floating rate is three-month LIBOR plus an average of
2.28%. In August 2001, the Company entered into an interest rate swap agreement
to convert all of the fixed rate 2005 Notes to a floating rate. This floating
rate is three-month LIBOR plus 2.035%. The fair value of the interest rate swap
agreements was $8,603,000 at September 30, 2001.
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.
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.
Unrealized gains on derivative instruments recorded in other
comprehensive income related to interest rate swap terminations amounted to
$1,201,000, net of tax, at September 30, 2001.
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.
As of September 30, 2001, the aggregate maturities of debt for the
succeeding five years are as follows:
(In Thousands)
- --------------
2002 $ 97,152
2003 858
2004 286
2005 100,272
2006 6,032
Thereafter 281,039
----------
Total debt $ 485,639
==========
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, 2001 and 2000,
there were no amounts outstanding under this facility.
NOTE 5
FINANCIAL INSTRUMENTS
At September 30, 2001 and 2000, the fair market value of the 2005 Notes was
approximately $101,546,000 and $97,550,000, respectively, based on quoted market
prices. At September 30, 2001, the fair market value of the 2011 Notes was
approximately $250,113,000 based on quoted market price. At September 30, 2001
and 2000, the carrying amount for variable rate long-term debt approximates fair
market value since the interest rates on these instruments are reset
periodically.
The Company has swap agreements to limit its exposure to falling prices
and rising costs for a portion of its recycled corrugating medium business. Some
agreements hedge the selling prices on a total of 21,000 tons of recycled
corrugating medium each quarter and expire during fiscal 2002 and fiscal 2003.
Other agreements hedge the raw material costs on a total of 12,000 tons of old
corrugated containers, or "OCC," each quarter and expire during fiscal 2002 and
fiscal 2003. At September 30, 2001, the fair value of these swap agreements was
a liability of $2,399,000.
Unrealized losses on derivative instruments recorded in other
comprehensive income related to the fair market value of commodity swaps
outstanding amounted to $1,475,000, net of tax, at September 30, 2001.
NOTE 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, 2001, future minimum lease payments, including
certain maintenance charges on transportation equipment, under all noncancelable
leases, are as follows:
(In Thousands)
- --------------
2002 $ 8,096
2003 7,094
2004 4,932
2005 2,504
2006 1,782
Thereafter 5,946
----------
Total future minimum lease payments $ 30,354
==========
Rental expense for the years ended September 30, 2001, 2000 and 1999
was approximately $16,670,000, $16,157,000 and $13,685,000, respectively,
including lease payments under cancelable leases.
pg 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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) 2001 2000 1999
- -------------- -------- -------- --------
Current income taxes:
Federal $ 12,470 $ 8,259 $ 23,824
State 1,196 1,228 2,383
Foreign 1,622 1,767 965
-------- -------- --------
Total current 15,288 11,254 27,172
-------- -------- --------
Deferred income taxes:
Federal 5,861 96 2,791
State 503 8 239
Foreign 245 212 353
-------- -------- --------
Total deferred 6,609 316 3,383
-------- -------- --------
Provision for
income taxes $ 21,897 $ 11,570 $ 30,555
======== ======== ========
The differences between the statutory federal income tax rate and the
Company's effective income tax rate are as follows:
Year Ended September 30,
2001 2000 1999
----- ------- -----
Statutory federal
tax rate 35.0% 35.0% 35.0%
State taxes, net of
federal benefit 2.9 (1.0) 3.5
Non-deductible
amortization and
write-off of goodwill
(See Note 2) 4.1 (283.3) 3.7
Other, net (primarily
non-taxable items) -- (16.9) 1.3
----- ------- -----
Effective tax rate 42.0% (266.2%) 43.5%
===== ======= =====
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) 2001 2000
- -------------- -------- --------
Deferred income tax assets:
Accruals and allowances $ 8,723 $ 9,996
Other 2,498 1,790
-------- --------
Total 11,221 11,786
-------- --------
Deferred income tax liabilities:
Property, plant and equipment 84,898 80,882
Deductible intangibles 3,146 2,822
Inventory and other 11,170 9,466
-------- --------
Total 99,214 93,170
-------- --------
Net deferred income tax liability $ 87,993 $ 81,384
======== ========
The Company has not recorded any valuation allowances for deferred
income tax assets.
The components of the income (loss) before income taxes are:
Year Ended September 30,
(In Thousands) 2001 2000 1999
- -------------- -------- -------- --------
United States $ 46,319 $(10,516) $ 66,173
Cumulative effect
of a change in
accounting principle (465) -- --
45,854 (10,516) 66,173
-------- -------- --------
Foreign 6,280 6,170 4,080
-------- -------- --------
Income (loss) before
income taxes $ 52,134 $ (4,346) $ 70,253
======== ======== ========
Rock-Tenn 2001 Annual Report pg 47
NOTE 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 includes the following components:
Year Ended September 30,
(In Thousands) 2001 2000
- -------------- --------- ---------
Projected benefit obligation
at beginning of year $ 175,093 $ 168,653
Service cost 6,044 6,358
Interest cost on projected
benefit obligations 14,358 13,268
Amendments 1,933 163
Acquisitions (90) --
Actuarial loss (gain) 2,113 (6,433)
Benefits paid (8,006) (6,916)
--------- ---------
Projected benefit obligation
at end of year $ 191,445 $ 175,093
========= =========
Fair value of assets at
beginning of year $ 201,245 $ 209,871
Actual loss on plan assets (11,824) (2,332)
Employer contribution 1,310 622
Benefits paid (8,006) (6,916)
--------- ---------
Fair value of assets at end of year $ 182,725 $ 201,245
========= =========
Funded status $ (8,720) $ 26,152
Net unrecognized asset -- (201)
Net unrecognized loss (gain) 6,741 (25,921)
Unrecognized prior service
cost (income) 174 (834)
--------- ---------
Net accrued pension cost included
in consolidated balance sheets $ (1,805) $ (804)
========= =========
The amounts required to be recognized in the consolidated statements of
operations are as follows:
Year Ended September 30,
(In Thousands) 2001 2000 1999
- -------------- --------- --------- ---------
Service cost $ 6,044 $ 6,358 $ 7,592
Interest cost on
projected benefit
obligations 14,358 13,268 12,487
Expected return on
plan assets (17,822) (18,595) (17,169)
Net amortization of
the initial asset (198) (330) (378)
Net amortization
of loss (gain) (403) (1,867) (222)
Net amortization of
prior service cost
(income) (54) (97) (105)
Curtailment loss 386 -- --
--------- --------- ---------
Total Company
defined benefit plan
expense (income) 2,311 (1,263) 2,205
Multi-employer plans
for collective
bargaining
employees 255 254 239
--------- --------- ---------
Net periodic pension
cost (income) $ 2,566 $ (1,009) $ 2,444
========= ========= =========
The discount rate used in determining the actuarial present value of
the projected benefit obligations was 7.8%, 8.0% and 7.8% as of September 30,
2001, 2000 and 1999, 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, 2001, 2000 and 1999. The expected
long-term rate of return on assets used in determining pension expense was 9.0%
for all years presented. The projected benefit obligations, accumulated benefit
obligation and fair value of assets for underfunded plans was $35,770,000,
$32,064,000, and $27,768,000, respectively, as of September 30, 2001. As a
result, the Company recorded an intangible asset in the amount of $1,528,000 and
made an adjustment to accumulated other comprehensive income of $465,000, net of
tax. There were no underfunded plans as of September 30, 2000.
pg. 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
2001, 2000 and 1999, the Company recorded matching expense, net of forfeitures,
of $4,169,000, $3,357,000 and $3,982,000, respectively, related to the plan.
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 $148,000, $161,000 and $137,000
was recorded for the years ended September 30, 2001, 2000 and 1999,
respectively. Amounts accrued as of September 30, 2001 and 2000 related to the
plan were $1,113,000 and $976,000, respectively.
NOTE 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,
2001, 2000 and 1999, payments were approximately $2,923,000, $2,565,000 and
$4,458,000, respectively.
NOTE 10
COMMITMENTS AND CONTINGENCIES
CAPITAL ADDITIONS
Estimated costs for completion of authorized capital additions under
construction as of September 30, 2001 total approximately $10,000,000.
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 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.
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 alleged that the Company was 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 alleged
that the Company exceeded several numerical limitations for chemical parameters
outlined in the wastewater permit and violated other wastewater discharge
criteria. The MDEQ further alleged 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 requested that the Company commit, in the
form of a binding agreement, to undertake the necessary and appropriate response
activities and
Rock-Tenn 2001 Annual Report pg. 49
response actions to address contamination in both areas. The Company has entered
into an administrative consent order pursuant to which improvements are being
made to the facility's wastewater treatment system and the Company has paid a
$75,000 settlement amount. The Company has also agreed to pay an additional
$30,000 for past and future oversight costs incurred by the State of Michigan.
This payment will be made in three equal installments over the next two years,
the first of which has already been made. The cost of making upgrades to the
wastewater treatment systems is estimated to be approximately $1,400,000.
Nothing contained in the order constitutes an admission of liability or any
factual finding, allegation or legal conclusion on the part of the Company. The
order was completed during the first quarter of fiscal 2001. To date, the MDEQ
has not made any other demand regarding our alleged liability for contamination
at the Kalamazoo Riversite.
The Company has been identified as a potentially responsible party,
which it refers 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 its results of
operations, financial condition or cash flows.
NOTE 11
SEGMENT INFORMATION
The Company reports three business segments. The packaging products
segment consists of facilities that produce folding cartons, interior packaging
and thermoformed plastic products. The merchandising displays and corrugated
packaging segment consists of facilities that produce displays and corrugated
containers. The paperboard segment consists of facilities that manufacture 100%
recycled clay-coated and specialty paperboard, corrugating medium and laminated
paperboard products and that collect recovered paper. Certain operations
included in the packaging products and paperboard segments are located in
foreign countries and had operating income of $7,411,000, $7,179,000 and
$5,620,000 for fiscal years ended September 30,2001,2000 and 1999, respectively.
For fiscal 2001,foreign operations represented approximately 5.6%, 6.2% and 5.9%
of total net sales to unaffiliated customers, total income from operations and
total identifiable assets, 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. As of
September 30, 2001, 2000 and 1999,the Company had foreign long-lived assets of
$34,578,000, $33,756,000 and $34,556,000, 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. Intersegment
sales are accounted for at prices that approximate market prices. Intercompany
profit is eliminated at the consolidated level.
Reported segment results have been restated for all years presented in
order to conform to changes in internal reporting measures used by management.
These changes reflect the following: (1) segment level adjustments to record
inventory on the last-in, first-out, or "LIFO," method, (2) a corporate charge
reallocation due to a change in methodology made to better focus on the drivers
of certain corporate expenses, and (3) non-allocation of goodwill amortization
expense in order to provide more comparative information given the impending
adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets."
pg. 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) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Net sales (aggregate):
Packaging Products $ 806,107 $ 797,399 $ 749,850
Merchandising Displays and Corrugated Packaging 263,395 238,822 180,892
Paperboard 524,551 588,489 529,014
- -----------------------------------------------------------------------------------------------------
Total $ 1,594,053 $ 1,624,710 $ 1,459,756
=====================================================================================================
Less net sales (intersegment):
Packaging Products $ 3,474 $ 5,294 $ 3,424
Merchandising Displays and Corrugated Packaging 5,615 5,334 4,338
Paperboard 143,332 150,794 138,623
- -----------------------------------------------------------------------------------------------------
Total $ 152,421 $ 161,422 $ 146,385
=====================================================================================================
Net sales (unaffiliated customers):
Packaging Products $ 802,633 $ 792,105 $ 746,426
Merchandising Displays and Corrugated Packaging 257,780 233,488 176,554
Paperboard 381,219 437,695 390,391
- -----------------------------------------------------------------------------------------------------
Total $ 1,441,632 $ 1,463,288 $ 1,313,371
=====================================================================================================
Segment income:
Packaging Products $ 48,074 $ 39,724 $ 48,641
Merchandising Displays and Corrugated Packaging 30,246 27,629 22,178
Paperboard 41,633 51,380 60,257
- -----------------------------------------------------------------------------------------------------
119,953 118,733 131,076
Goodwill amortization (8,569) (9,069) (9,410)
Plant closing and other costs (16,893) (65,630) (6,932)
Other non-allocated expenses (5,406) (8,243) (7,698)
Interest expense (35,042) (35,575) (31,179)
Interest and other income 530 418 391
Minority interest in consolidated subsidiary (2,439) (4,980) (5,995)
- -----------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 52,134 $ (4,346) $ 70,253
=====================================================================================================
Identifiable assets:
Packaging Products $ 423,041 $ 429,422 $ 459,933
Merchandising Displays and Corrugated Packaging 132,122 130,126 107,267
Paperboard 582,364 585,985 585,138
Corporate 26,886 13,430 9,132
- -----------------------------------------------------------------------------------------------------
Total $ 1,164,413 $ 1,158,963 $ 1,161,470
=====================================================================================================
Depreciation and amortization (excluding goodwill):
Packaging Products $ 28,819 $ 29,868 $ 27,841
Merchandising Displays and Corrugated Packaging 8,658 7,702 6,486
Paperboard 28,627 27,246 25,505
Corporate 2,920 3,176 3,233
- -----------------------------------------------------------------------------------------------------
Total $ 69,024 $ 67,992 $ 63,065
=====================================================================================================
Goodwill amortization:
Packaging Products $ 1,138 $ 1,537 $ 1,878
Merchandising Displays and Corrugated Packaging 1,425 1,425 1,425
Paperboard 6,006 6,107 6,107
- -----------------------------------------------------------------------------------------------------
Total $ 8,569 $ 9,069 $ 9,410
Capital expenditures:
Packaging Products $ 33,983 $ 48,094 $ 37,059
Merchandising Displays and Corrugated Packaging 10,097 14,238 11,544
Paperboard 26,784 29,815 40,473
Corporate 1,697 2,493 3,257
- -----------------------------------------------------------------------------------------------------
Total $ 72,561 $ 94,640 $ 92,333
=====================================================================================================
Rock-Tenn 2001 Annual Report pg. 51
NOTE 12
FINANCIAL RESULTS BY QUARTER (UNAUDITED)
(In Thousands, Except Per Share Data)
First Second Third Fourth
2001 Quarter(a) Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------
Net sales $ 345,169 $ 367,410 $ 357,065 $ 371,988
Gross profit 65,970 74,010 76,557 80,294
Plant closing and other one-time costs 1,865 3,175 2,523 9,330
Income before cumulative effect of a change in
accounting principle 4,505 7,318 9,120 9,294
Net income 4,791 7,318 9,120 9,294
Basic earnings per share 0.14 0.22 0.27 0.28
Diluted earnings per share 0.14 0.22 0.27 0.28
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
Plant closing and other one-time costs 2,474 52,725 4,876 5,555
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
Plant closing and other one-time costs 2,053 1,085 2,763 1,031
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
The interim earnings (loss) per common and common equivalent share
amounts were computed as if each quarter was a discrete period. As a result, the
sum of the basic and diluted earnings (loss) per share by quarter will not
necessarily total the annual basic and diluted earnings (loss) per share.
(a) Includes income of $286,000, net of tax, or $0.01 per diluted
share, cumulative effect of a change in accounting principle from the adoption
of Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended.
pg. 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, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended September 30, 2001. 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, 2001 and 2000, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended September 30, 2001, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Atlanta, Georgia
October 23, 2001
Rock-Tenn 2001 Annual Report pg. 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 in the United States. 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, 2001, 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
pg. 54
BOARD OF DIRECTORS
Stephen G. Anderson, M.D.(2) L.L. Gellerstedt III(3) James A. Rubright(1)
Winston-Salem, North Carolina Chairman Chairman and Chief Executive Officer
L.G. III Group Rock-Tenn Company
J. Hyatt Brown(1) Atlanta, Georgia Norcross, Georgia
Chairman and Chief Executive Officer
Brown & Brown, Inc. John D. Hopkins(1)(3) Charles R. Sexton
Daytona Beach, Florida Senior Vice President and General Counsel Principal
Jefferson-Pilot Corporation Sexton-Talbert Products
Bradley Currey Jr.(1) Greensboro, North Carolina Vero Beach, Florida
Retired Chairman
Rock-Tenn Company Lou Brown Jewell(3) John W. Spiegel(1)(2)
Atlanta, Georgia Private Investor Vice Chairman and
Atlanta, Georgia Chief Financial Officer
Robert B. Currey SunTrust Banks, Inc.
Chief Executive Officer James W. Johnson(3) Atlanta, Georgia
Currey & Company, Inc. President
Atlanta, Georgia McCranie Tractor Company (1) Executive Committee
Unadilla, Georgia (2) Audit Committee
G. Stephen Felker(2) (3) Compensation and Options Committee
Chairman and Chief Executive Officer
Avondale Mills, Inc.
Monroe, Georgia
OFFICERS
James A. Rubright PACKAGING PRODUCTS SEGMENT PAPERBOARD SEGMENT
Chairman and Chief Executive Officer Vincent J. D'Amelio David E. Dreibelbis
Executive Vice President and Executive Vice President and
Steven C. Voorhees General Manager General Manager
Executive Vice President and Plastic Packaging Division Paperboard Group
Chief Financial Officer
Nicholas G. George Terry W. Durham
Robert B. McIntosh Executive Vice President and Executive Vice President and
Senior Vice President, General Manager General Manager
General Counsel and Secretary Folding Carton Division Laminated Paperboard Products Division
Thomas H. King Richard E. Steed Paul J. England
Vice President of Finance and Control President and Chief Executive Officer Executive Vice President and
RTS Packaging, LLC General Manager
Jodi Littlestone Specialty Paperboard Division
Vice President of Employee and MERCHANDISING DISPLAYS AND CORRUGATED
Organizational Effectiveness PACKAGING SEGMENT Stephen P. Flanagan
Russell M. Currey Executive Vice President and
Larry S. Shutzberg Executive Vice President and General Manager
Vice President of Information Systems General Manager Recycled Fiber Division
Corrugated Packaging Division
David T. Jones James K. Hansen
Controller James L. Einstein Executive Vice President and
Executive Vice President and General Manager
Suzanne G. Smith General Manager Coated Paperboard Division
Treasurer Alliance Division