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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________
Commission File Number 0-23340
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ROCK-TENN COMPANY
(Exact name of registrant as specified in its charter)
Georgia 62-0342590
- ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
504 Thrasher Street, Norcross, Georgia 30071
- ---------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 448-2193
--------------
N/A
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of February 13, 2002
- ----------------------------------- -----------------------------------
Class A Common Stock, .01 par value 23,219,138
Class B Common Stock, .01 par value 10,609,610
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ROCK-TENN COMPANY
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the three months
ended December 31, 2001 and 2000 1
Condensed Consolidated Balance Sheets at December 31, 2001 and
September 30, 2001 2
Condensed Consolidated Statements of Cash Flows for the three months
ended December 31, 2001 and 2000 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
December 31, December 31,
2001 2000
------------ ------------
Net sales $ 350,567 $ 345,169
Cost of goods sold 273,457 279,199
--------- ---------
Gross profit 77,110 65,970
Selling, general and administrative expenses 48,747 42,722
Amortization of goodwill -- 2,143
Plant closing and other one-time costs -- 1,865
--------- ---------
Income from operations 28,363 19,240
Interest expense (6,914) (10,024)
Interest and other income 280 196
Loss from unconsolidated joint venture (866) --
Minority interest in income of consolidated subsidiary (760) (747)
--------- ---------
Income before income taxes 20,103 8,665
Provision for income taxes 7,904 4,160
--------- ---------
Income before cumulative effect of a change in accounting principle 12,199 4,505
Cumulative effect of a change in accounting principle
(net of $179 income taxes) -- 286
--------- ---------
Net income $ 12,199 $ 4,791
========= =========
Weighted average number of common and
common equivalent shares outstanding 33,835 33,473
--------- ---------
Basic earnings per share $ 0.36 $ 0. 14
========= =========
Diluted earnings per share $ 0.36 $ 0. 14
========= =========
Cash dividends per common share $ 0.075 $ 0.075
========= =========
See accompanying notes
1
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31, September 30,
2001 2001
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,919 $ 5,191
Accounts receivable (net of allowances of
$5,670 and $5,400) 135,515 157,782
Inventories 105,713 102,011
Other current assets 11,767 6,098
----------- -----------
TOTAL CURRENT ASSETS 258,914 271,082
Property, plant and equipment, at cost:
Land and buildings 204,882 206,069
Machinery and equipment 913,284 902,769
Transportation equipment 11,038 11,526
Leasehold improvements 9,166 9,159
----------- -----------
1,138,370 1,129,523
Less accumulated depreciation and amortization (555,913) (540,870)
----------- -----------
Net property, plant and equipment 582,457 588,653
Goodwill, net 261,681 259,660
Other assets 38,600 45,018
----------- -----------
$ 1,141,652 $ 1,164,413
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 61,111 $ 79,596
Accrued compensation and benefits 30,886 35,863
Current maturities of debt 91,908 97,152
Other current liabilities 49,638 46,636
----------- -----------
TOTAL CURRENT LIABILITIES 233,543 259,247
Long-term debt due after one year 387,914 388,487
Adjustment for fair value hedge 2,463 8,603
----------- -----------
Total long-term debt, less current maturities 390,377 397,090
Deferred income taxes 90,863 87,993
Other long-term items 13,032 17,323
Shareholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized; no
shares outstanding -- --
Class A common stock, $.01 par value; 175,000,000 shares authorized,
23,055,291 and 22,968,317 outstanding at December 31 and September 30,
respectively; Class B common stock, $.01 par value; 60,000,000 shares
authorized; 10,600,533 and 10,601,346 outstanding at December 31
and September 30, respectively 335 335
Capital in excess of par value 131,469 130,640
Deferred compensation (902) (1,421)
Retained earnings 291,794 282,117
Accumulated other comprehensive loss (8,859) (8,911)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 413,837 402,760
----------- -----------
$ 1,141,652 $ 1,164,413
=========== ===========
See accompanying notes
2
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended
December 31, December 31,
2001 2000
------------ ------------
OPERATING ACTIVITIES:
Net income $ 12,199 $ 4,791
Items in income not affecting cash:
Depreciation and amortization 17,759 19,262
Loss on asset impairment -- 50
Deferred income taxes 2,870 (1,091)
Deferred compensation expense 518 --
Gain on disposal of plant and equipment and other, net (227) (15)
Equity in loss from joint venture 866 --
Minority interest in income of consolidated subsidiary 760 747
Change in operating assets and liabilities:
Accounts receivable 22,263 19,168
Inventories (2,367) (1,662)
Other assets (1,466) (1,004)
Accounts payable (18,478) (4,985)
Accrued liabilities (6,738) (8,315)
-------- --------
(6,786) 3,202
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 27,959 26,946
INVESTING ACTIVITIES:
Capital expenditures (11,078) (16,632)
Cash paid for purchase of business (8,988) --
Cash contributed to joint venture (358) (2,644)
Proceeds from sale of property, plant and equipment 804 182
-------- --------
CASH USED FOR INVESTING ACTIVITIES (19,620) (19,094)
FINANCING ACTIVITIES:
Net repayments of revolving credit facilities (6,000) (80,000)
Additions to debt 2,530 89,101
Repayments of debt (2,347) (7,879)
Debt issuance costs (46) (182)
Sales of common stock 829 417
Purchases of common stock -- (2,324)
Cash dividends paid to shareholders (2,522) (2,495)
Distribution to minority interest (525) (1,050)
-------- --------
CASH USED FOR FINANCING ACTIVITIES (8,081) (4,412)
Effect of exchange rate changes on cash 470 (14)
-------- --------
Increase in cash and cash equivalents 728 3,426
Cash and cash equivalents at beginning of period 5,191 5,449
-------- --------
Cash and cash equivalents at end of period $ 5,919 $ 8,875
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes (net of refunds) $ 6,098 $ 3,714
Interest (net of amounts capitalized) 1,030 6,594
See accompanying notes
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements of Rock-Tenn
Company and its subsidiaries (the "Company") have not been audited by
independent auditors. The condensed consolidated balance sheet at September 30,
2001 has been derived from the audited consolidated financial statements. In
the opinion of the Company's management, the condensed consolidated financial
statements reflect all adjustments, which are of a normal recurring nature,
necessary for a fair presentation of the results of operations for the three
month periods ended December 31, 2001 and 2000, the Company's financial
position at December 31, 2001 and September 30, 2001, and the cash flows for
the three month periods ended December 31, 2001 and 2000.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2001.
The results for the three months ended December 31, 2001 are not necessarily
indicative of results that may be expected for the full year.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
NOTE 2. ACCOUNTING POLICIES
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. 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 costs of purchasing interest rate caps are 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.
4
NOTE 3. COMPREHENSIVE INCOME
Total comprehensive income for the three months ended December 31, 2001 and
2000 was $12.3 million and $1.3 million, respectively. The difference between
total comprehensive income and net income was due to foreign currency
translation adjustments and adjustments to the fair value of derivative
instruments as detailed below (in thousands):
Three Months Ended
December 31, December 31,
2001 2000
------------ ------------
Net income $ 12,199 $ 4,791
Foreign currency translation (356) (261)
Unrealized gain (loss) on derivative instruments 408 (3,244)
-------- --------
Total other comprehensive income (loss) 52 (3,505)
Comprehensive income $ 12,251 $ 1,286
======== ========
NOTE 4. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results will differ from those estimates and the differences could be
material.
NOTE 5. INVENTORIES
Substantially all U.S. inventories are stated at the lower of cost or market,
with cost determined on the last-in, first-out (LIFO) basis. All other
inventories are valued at lower of cost or market, with cost determined using
methods which approximate cost computed on a first-in, first-out (FIFO) basis.
An actual valuation of inventory under the LIFO method can only be made at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO estimates must necessarily be based on management's
projection of expected year-end inventory levels and costs. Because these are
subject to many factors beyond management's control, interim results are
subject to the final year-end LIFO inventory valuation.
Inventories at December 31, 2001 and September 30, 2001 were as follows (in
thousands):
December 31, September 30,
2001 2001
------------ -------------
Finished goods and work in process $ 81,362 $ 79,357
Raw materials 36,406 35,488
Supplies 11,660 11,631
--------- ---------
Inventories at first-in, first-out (FIFO) cost 129,428 126,476
LIFO reserve (23,715) (24,465)
--------- ---------
Net inventories $ 105,713 $ 102,011
========= =========
5
NOTE 6. ACQUISITIONS AND PLANT CLOSINGS
In November 2001, the Company acquired certain assets of Advertising Display
Company, Inc., a leading producer of temporary and permanent point of purchase
displays, including its display operations in Memphis, Tennessee. The
acquisition is being accounted for under the purchase method of accounting,
which requires the Company to record the assets and liabilities of the
acquisition at their estimated fair value with the excess of the purchase price
over these amounts being recorded as goodwill. Total cash consideration paid
was $9.0 million. Additional contingent cash consideration may be paid based on
use of acquired inventories and collection of acquired receivables. Goodwill of
approximately $2.0 million was recorded in connection with the acquisition. The
pro forma impact of the acquisition is not material to the interim operating
results for the period ending December 31, 2001.
During fiscal 2001, the Company closed a folding carton plant in Augusta,
Georgia and an interior packaging plant in Eaton, Indiana. The closures
resulted in the termination of approximately 210 employees. In connection with
these closings, the Company made severance and other payments of $1.0 million
during the first quarter of fiscal 2002. The Company had a remaining liability
of approximately $0.5 million at December 31, 2001. The Company has
consolidated the operations of these closed plants into other existing
facilities.
During fiscal 2000, the Company closed a laminated paperboard products plant in
Lynchburg, Virginia, and folding carton plants in Chicago, Illinois, Norcross,
Georgia and Madison, Wisconsin. The closures resulted in the termination of
approximately 550 employees. In connection with these closings, the Company
made severance and other payments of $0.1 million during the first quarter of
fiscal 2002. The Company had a remaining liability of approximately $0.6
million at December 31, 2001. The Company has consolidated the operations of
these closed plants into other existing facilities.
NOTE 7. DEBT
During the first quarter of fiscal 2002, the Company amended its Liquidity
Asset Purchase Agreement to extend the term of its $125 million
receivables-backed financing transaction and back-up liquidity facility to
November 12, 2002. The proceeds of this transaction are used to repay
borrowings outstanding under the Company's revolving credit agreement.
NOTE 8. NEW ACCOUNTING STANDARDS
On October 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." Under
SFAS 142, goodwill is no longer amortized but reviewed for impairment annually,
or more frequently if certain indicators arise. The Company is required to
complete the initial step of a transitional impairment test within six months
of adoption of SFAS 142 and to complete the final step of the transitional
impairment test by the end of the fiscal year. Any impairment loss resulting
from the transitional impairment test will be recorded as a cumulative effect
of a change in accounting principle. (See also Note 9: Earnings per Share).
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supercedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The Company expects to adopt SFAS 144 as of October 1, 2002
and is currently assessing the impact of the pronouncement on the consolidated
financial statements.
6
NOTE 9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
Three Months Ended
December 31, December 31,
2001 2000
------------ ------------
Numerator:
Income before cumulative effect of a change
in accounting principle $ 12,199 $ 4,505
Cumulative effect of a change in accounting principle,
net of tax -- 286
---------- ----------
Reported net income available to common shareholders 12,199 4,791
Add: Goodwill amortization, net of tax -- 1,952
---------- ----------
Adjusted net income $ 12,199 $ 6,743
========== ==========
Denominator:
Denominator for basic earnings per share - weighted average shares 33,479 33,444
Effect of dilutive stock options and restricted stock awards 356 29
---------- ----------
Denominator for diluted earnings per share - weighted
average shares and assumed conversions 33,835 33,473
========== ==========
Basic earnings per share
Income before cumulative effect of a change
in accounting principle $ 0.36 $ 0.13
Cumulative effect of a change in accounting principle, net of tax -- 0.01
---------- ----------
Reported net income 0.36 0.14
Add: Goodwill amortization, net of tax -- 0.06
---------- ----------
Adjusted net income $ 0.36 $ 0.20
========== ==========
Diluted earnings per share
Income before cumulative effect of a change
in accounting principle $ 0.36 $ 0. 13
Cumulative effect of a change in accounting principle, net of tax -- 0.01
---------- ----------
Reported net income 0.36 0.14
Add: Goodwill amortization, net of tax -- 0.06
---------- ----------
Adjusted net income $ 0.36 $ 0.20
========== ==========
7
NOTE 10. SEGMENT INFORMATION
The following table sets forth business segment information (in thousands):
Three Months Ended
----------------------------------
December 31, December 31,
2001 2000
------------ ------------
Net sales (aggregate):
Packaging Products $ 194,511 $ 195,575
Merchandising Displays and Corrugated Packaging 72,453 57,830
Paperboard 125,081 131,455
--------- ---------
Total $ 392,045 $ 384,860
========= =========
Less net sales (intersegment):
Packaging Products $ 693 $ 733
Merchandising Displays and Corrugated Packaging 1,193 1,317
Paperboard 39,592 37,641
--------- ---------
Total $ 41,478 $ 39,691
========= =========
Net sales (unaffiliated customers):
Packaging Products $ 193,818 $ 194,842
Merchandising Displays and Corrugated Packaging 71,260 56,513
Paperboard 85,489 93,814
--------- ---------
Total $ 350,567 $ 345,169
========= =========
Segment income:
Packaging Products $ 11,554 $ 10,799
Merchandising Displays and Corrugated Packaging 11,389 2,751
Paperboard 6,287 10,336
--------- ---------
29,230 23,886
Goodwill amortization -- (2,143)
Plant closing and other costs -- (1,865)
Other non-allocated expenses (1,733) (638)
Interest expense (6,914) (10,024)
Interest and other income 280 196
Minority interest in income of consolidated subsidiary (760) (747)
--------- ---------
Income before income taxes $ 20,103 $ 8,665
========= =========
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto, included herein, and our
audited consolidated financial statements and notes thereto for the fiscal year
ended September 30, 2001, which have been filed with the Securities and
Exchange Commission as part of our Annual Report on Form 10-K.
SEGMENT AND MARKET INFORMATION
We report our results in three industry segments: (1) packaging products, (2)
merchandising displays and corrugated packaging, and (3) paperboard. No
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 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.
The following table shows certain operating data for our three industry
segments. Certain of our income and expenses are not allocated to our segments
and are thus not reflected in the information used by management to make
operating decisions and assess performance. These items are reported as
non-allocated expenses. These include elimination of intercompany profit, plant
closing and related expenses and certain corporate expenses.
9
ROCK-TENN COMPANY
INDUSTRY SEGMENT INFORMATION
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR TONNAGE DATA)
FOR THE THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
NET SALES:
Packaging Products Segment $ 194,511 $ 195,575
Merchandising Displays and Corrugated Packaging Segment 72,453 57,830
Paperboard Segment 125,081 131,455
Intersegment Eliminations (41,478) (39,691)
--------- ---------
TOTAL 350,567 345,169
========= =========
INCOME BEFORE INCOME TAXES:
Packaging Products Segment 11,554 10,799
Merchandising Displays and Corrugated Packaging Segment 11,389 2,751
Paperboard Segment 6,287 10,336
--------- ---------
Segment Income Before Income Taxes 29,230 23,886
Goodwill Amortization -- (2,143)
Plant Closing and Other Costs -- (1,865)
Other Non-Allocated Expenses (1,733) (638)
Interest Expense (6,914) (10,024)
Interest and Other Income 280 196
Minority Interest in Income of Consolidated Subsidiary (760) (747)
--------- ---------
TOTAL $ 20,103 $ 8,665
========= =========
Paperboard shipped (in tons) 256,704 258,164
========= =========
RESULTS OF OPERATIONS
Net Sales (Unaffiliated Customers)
Net sales for the quarter ended December 31, 2001 increased 1.6% to $350.6
million from $345.2 million for the quarter ended December 31, 2000. Net sales
increased primarily as a result of increased demand in our merchandising
displays business.
Net Sales (Aggregate) - Packaging Products Segment
(In Millions) First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
------------- -------------- ------------- -------------- -----------
2001 $195.6 $206.9 $198.6 $205.0 $806.1
2002 194.5 -- -- -- --
Net sales of packaging products before intersegment eliminations for the
quarter ended December 31, 2001 decreased 0.6% to $194.5 million from $195.6
million for the quarter ended December 31, 2000. The decrease for the quarter
ended December 31, 2001 was a result of volume declines in our plastic
packaging and interior packaging businesses partially offset by volume
increases in our folding carton business.
10
Net Sales (Aggregate) - Merchandising Displays and Corrugated Packaging Segment
(In Millions) First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
------------- -------------- ------------- -------------- -----------
2001 $57.8 $65.8 $65.8 $74.0 $263.4
2002 72.4 -- -- -- --
Net sales within this segment before intersegment eliminations for the quarter
ended December 31, 2001 increased 25.4% to $72.5 million from $57.8 million for
the quarter ended December 31, 2000. The increase was attributable to higher
volumes in our Alliance division including the benefit of two major product
launches on behalf of major national consumer products companies. These results
were offset by lower volumes and lower selling prices in our corrugated
packaging division.
Net Sales (Aggregate) - Paperboard Segment
(In Millions) First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
------------- -------------- ------------- -------------- -----------
2001 $131.5 $133.1 $130.5 $129.4 $524.5
2002 125.1 -- -- -- --
Net sales of paperboard before intersegment eliminations for the quarter ended
December 31, 2001 decreased 4.9% to $125.1 million from $131.5 million for the
quarter ended December 31, 2000. The decrease for the quarter ended December
31, 2001 was primarily due to a decrease in demand for our products by
customers in the furniture and book industries, adversely affecting volumes in
our laminated paperboard products and specialty paperboard divisions. Reduced
sales volumes at our RTS packaging division also contributed to the decline in
sales in our specialty paperboard division. These volume declines were slightly
offset by increased demand in our coated paperboard business.
Cost of Goods Sold
Cost of goods sold for the quarter ended December 31, 2001 decreased 2.0% to
$273.5 million from $279.2 million for the quarter ended December 31, 2000.
Cost of goods sold as a percentage of net sales for the quarter ended December
31, 2001 decreased to 78.0% from 80.9% for the quarter ended December 31, 2000.
The decrease in cost of goods sold resulted primarily from decreases in raw
material costs and lower natural gas prices over the first quarter of fiscal
2001.
Substantially all of our U.S. inventories are valued at the lower of cost or
market with cost determined on the last-in, first-out (LIFO) inventory
valuation method, which we believe generally results in a better matching of
current costs and revenues than under the first-in, first-out (FIFO) inventory
valuation method. In periods of decreasing costs, the LIFO method generally
results in lower cost of goods sold than under the FIFO method. In periods of
increasing costs, the results are generally the opposite. Our quarterly results
of operations reflect LIFO estimates based on management's projection of
expected year-end inventory levels and costs. Because these estimates are
subject to many factors beyond management's control, interim results are
subject to the final year-end LIFO inventory valuation.
11
The following table illustrates the comparative effect of LIFO and FIFO
accounting on our results of operations. These supplemental FIFO earnings
reflect the after-tax effect of eliminating the LIFO adjustment each year.
Three months ended December 31,
2001 2000
---------------------------- ---------------------------
(In Millions) LIFO FIFO LIFO FIFO
---- ---- ---- ----
Cost of goods sold $273.5 $274.2 $279.2 $278.9
Net income 12.2 11.8 4.8 5.0
Gross Profit
(% of Net Sales) First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
------------- -------------- ------------- -------------- -----------
2001 19.1% 20.1% 21.4% 21.6% 20.6%
2002 22.0% -- -- -- --
Gross profit for the quarter ended December 31, 2001 increased 16.8% to $77.1
million from $66.0 million for the quarter ended December 31, 2000. Gross
profit as a percentage of net sales was 22.0% and 19.1% for the quarters ended
December 31, 2001 and 2000, respectively. See Cost of Goods Sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended December 31,
2001 increased 14.1% to $48.7 million from $42.7 million for the quarter ended
December 31, 2000. Selling, general and administrative expenses as a percentage
of net sales was 13.9% and 12.4% for the quarters ended December 31, 2001 and
December 31, 2000, respectively. The increase in these expenses as a percentage
of net sales resulted primarily from additional compensation expense associated
with incentive compensation, higher insurance costs, bad debt expense and the
investment in start-up costs of our Six Sigma Program.
Acquisitions
In November 2001, we acquired certain assets of Advertising Display Company,
Inc., a leading producer of temporary and permanent point of purchase displays,
including its display operations in Memphis, Tennessee. The acquisition is
being accounted for under the purchase method of accounting, which requires
that we record the assets and liabilities of the acquisition at their estimated
fair value with the excess of the purchase price over these amounts being
recorded as goodwill. Total cash consideration paid was $9.0 million.
Additional contingent cash consideration may be paid based on use of acquired
inventories and collection of acquired receivables. Goodwill of approximately
$2.0 million was recorded in connection with the acquisition. The pro forma
impact of the acquisition is not material to the interim operating results for
the period ending December 31, 2001.
Plant Closings
During fiscal 2001, we closed a folding carton plant in Augusta, Georgia and an
interior packaging plant in Eaton, Indiana. The closures resulted in the
termination of approximately 210 employees. In connection with these closings,
we made severance and other payments of $1.0 million during the first quarter
of fiscal 2002. We had a remaining liability of approximately $0.5 million at
December 31, 2001. We have consolidated the operations of these closed plants
into other existing facilities.
During fiscal 2000, we closed a laminated paperboard products plant in
Lynchburg, Virginia, and folding carton plants in Chicago, Illinois, Norcross,
Georgia and Madison, Wisconsin. The closures resulted in the termination of
approximately 550 employees. In connection with these closings, we made
severance and other payments of $0.1 million during the first quarter of fiscal
2002. We had a remaining liability of approximately $0.6 million at December
31, 2001. We have consolidated the operations of these closed plants into other
existing facilities.
12
Segment Operating Income.
Operating Income - Packaging Products Segment
Net Sales Operating
(In Millions, except Percentages) (Aggregate) Income Return on Sales
----------- --------- ---------------
First Quarter $195.6 $10.8 5.5%
Second Quarter 206.9 11.7 5.7
Third Quarter 198.6 12.8 6.4
Fourth Quarter 205.0 12.8 6.2
------ ----- ---
Fiscal 2001 806.1 48.1 6.0
------ ----- ---
FIRST QUARTER $194.5 $11.5 5.9%
SECOND QUARTER -- -- --
THIRD QUARTER -- -- --
FOURTH QUARTER -- -- --
------ ----- ---
FISCAL 2002 -- -- --
------ ----- ---
Operating income attributable to the packaging products segment for the quarter
ended December 31, 2001 increased 6.5% to $11.5 million from $10.8 million for
the quarter ended December 31, 2000. Operating margin for the quarter ended
December 31, 2001 was 5.9% compared to 5.5% for the quarter ended December 31,
2000. The increase in operating margin was primarily the result of operating
efficiencies in our folding carton and interior packaging businesses gained
through plant consolidations in fiscal 2000 and 2001.
Operating Income - Merchandising Displays and Corrugated Packaging Segment
(In Millions, except Net Sales Operating Return
Percentages) (Aggregate) Income on Sales
----------- --------- --------
First Quarter $ 57.8 $ 2.8 4.8%
Second Quarter 65.8 8.5 12.9
Third Quarter 65.8 8.3 12.6
Fourth Quarter 74.0 10.6 14.3
------ ----- ----
Fiscal 2001 263.4 30.2 11.5%
------ ----- ----
FIRST QUARTER $ 72.4 $11.4 15.7%
SECOND QUARTER -- -- --
THIRD QUARTER -- -- --
FOURTH QUARTER -- -- --
------ ----- ----
FISCAL 2002 -- -- --
------ ----- ----
Operating income attributable to this segment for the quarter ended December
31, 2001 was $11.4 million compared to $2.8 million for the quarter ended
December 31, 2000. Operating margin for the quarter ended December 31, 2001
increased to 15.7% from 4.8% for the quarter ended December 31, 2000. The
increase in operating margin primarily resulted from a sales increase of over
50% in the Alliance division due to higher demand and two new product launches
on behalf of major national consumer products companies.
13
Operating Income - Paperboard Segment
Weighted
Recycled Average Corrugated Average Average
Paperboard Recycled Medium Corrugated Recovered
Net Sales Operating Tons Paperboard Tons Medium Paper
(Aggregate) Income Return Shipped Price Shipped Price Cost
(In Millions) (In Millions) on Sales (In Thousands) (Per Ton) (In Thousands) (Per Ton) (Per Ton)
------------- ------------- -------- -------------- ---------- -------------- ---------- ---------
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
FIRST QUARTER $125.1 $ 6.3 5.0% 213.1 $ 431 43.6 $360 $ 56
SECOND QUARTER -- -- -- -- -- -- -- --
THIRD QUARTER -- -- -- -- -- -- -- --
FOURTH QUARTER -- -- -- -- -- -- -- --
------ ------- ------- ----- ------ ----- ---- ----
FISCAL 2002 -- -- -- -- -- -- -- --
------ ------- ------- ----- ------ ----- ---- ----
Operating income attributable to the paperboard segment for the quarter ended
December 31, 2001 decreased 38.8% to $6.3 million from $10.3 million for the
quarter ended December 31, 2000. Operating margin for the quarter ended
December 31, 2001 was 5.0% compared to 7.8% for the quarter ended December 31,
2000. The decrease in operating margin resulted from softer markets. Sales of
our laminated paperboard products declined due to a decrease in demand by
customers in the book and furniture industries. The reduced sales volumes at
our laminated paperboard products division, combined with a decline in sales to
our RTS packaging division, reduced volumes and operating income in our
specialty paperboard division. The decreases in operating margin of our mills
were partially offset by lower recovered fiber and energy prices. The decline
in recovered fiber prices reduced operating margin of our recycled fiber
division, further contributing to the decrease in operating margin of our
paperboard segment.
Interest Expense
Interest expense for the quarter ended December 31, 2001 decreased to $6.9
million from $10.0 million for the quarter ended December 31, 2000. The
decrease in interest expense for the quarter ended December 31, 2001 was due to
a decrease in the average outstanding borrowings and lower interest rates.
Provision for Income Taxes
Provision for income taxes increased to $7.9 million for the quarter ended
December 31, 2001 from $4.2 million for the quarter ended December 31, 2000.
The Company's effective tax rate decreased to 39.3% for the quarter ended
December 31, 2001 compared to 48.0% for the quarter ended December 31, 2000. In
the prior year, differences between our effective tax rate and statutory rate
related primarily to the amortization of certain goodwill which is not
deductible for income tax purposes.
Net Income and Earnings Per Common and Common Equivalent Share
Net income for the quarter ended December 31, 2001 increased 154.2% to $12.2
million from $4.8 million for the quarter ended December 31, 2000. Net income
as a percentage of net sales increased to 3.5% for the quarter ended December
31, 2001 from 1.4% for the quarter ended December 31, 2000. Diluted earnings
per common and common equivalent share for the quarters ended December 31, 2001
and 2000 were $0.36 and $0.14, respectively.
14
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. We maintain a
revolving credit facility under which we have aggregate borrowing availability
of $300 million. At December 31, 2001, we had $2.0 million outstanding under
our revolving credit facility. The revolving credit facility terminates in
2005. Cash and cash equivalents, $5.9 million at December 31, 2001, increased
from $5.2 million at September 30, 2001.
Net cash provided by operating activities increased for the three months ended
December 31, 2001 to $28.0 million from $26.9 million for the quarter ended
December 31, 2000. The increase was primarily a result of higher earnings
offset by unfavorable working capital changes. Net cash used for investing
activities was $19.6 million for the quarter ended December 31, 2001 compared
to $19.1 million for the quarter ended December 31, 2000 and consisted
primarily of capital expenditures for the quarters ended December 31, 2001 and
December 31, 2000 as well as the purchase of a business during the first
quarter of fiscal 2002. Net cash used for financing activities aggregated $8.1
million for the quarter ended December 31, 2001 and consisted primarily of
dividend payments and net repayments of borrowings. Net cash provided by
financing activities aggregated $4.4 million for the quarter ended December 31,
2000 and consisted primarily of purchases of common stock and dividend payments
partially offset by net additional borrowings.
Capital expenditures during the quarter ended December 31, 2001 aggregated
$11.1 million and were used primarily for the purchase and upgrading of
machinery and equipment. We estimate that our capital expenditures will
aggregate approximately $70.0 million for fiscal 2002. These expenditures will
be used for the purchase and upgrading of machinery and equipment and for
building expansions and improvements.
We anticipate that we will be able to fund our capital expenditures, interest
payments, stock repurchases, dividends and working capital needs for the
foreseeable future from cash generated from operations, borrowings under our
revolving credit facility, proceeds from the issuance of debt or equity
securities or other additional long-term debt financing.
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 the
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. 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 costs of purchasing interest rate caps are 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 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.
15
We use commodity swap agreements to limit our exposure to falling sales 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.
NEW ACCOUNTING STANDARDS
On October 1, 2001, we adopted Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets." Under SFAS 142,
goodwill is no longer amortized but reviewed for impairment annually, or more
frequently if certain indicators arise. We are required to complete the initial
step of a transitional impairment test within six months of adoption of SFAS
142 and to complete the final step of the transitional impairment test by the
end of the fiscal year. Any impairment loss resulting from the transitional
impairment test will be recorded as a cumulative effect of a change in
accounting principle.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supercedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS 144 is effective for fiscal years beginning after
December 15, 2001. We expect to adopt SFAS 144 as of October 1, 2002 and are
currently assessing the impact of the pronouncement on the consolidated
financial statements.
FORWARD-LOOKING STATEMENTS
Statements herein regarding, among other things, estimated capital expenditures
for fiscal 2002 and interim LIFO estimates, constitute forward-looking
statements within the meaning of the Securities Act of 1933 and the Securities
Exchange Act of 1934. Such statements are subject to certain risks and
uncertainties that could cause actual amounts to differ materially from those
projected. With respect to these forward-looking statements, management has
made assumptions regarding, among other things, the amount and timing of
expected capital expenditures, expected year-end inventory levels and costs,
competitive conditions in our businesses and general economic conditions. These
forward-looking statements are subject to certain risks including, among
others, that the foregoing assumptions are incorrect. Further, these
forward-looking statements are subject to other general risks including, among
others, decreases in demand for our products, increases in energy and raw
material costs, fluctuations in selling prices, possible adverse actions of our
customers, our competitors and suppliers and adverse changes in general market
and industry conditions. We believe these forward-looking statements are
reasonable; however, undue reliance should not be placed on such estimates,
which are based on current expectations. Further, forward-looking statements
speak only as of the date they are made, and we undertake no obligation to
update publicly any of them in light of new information or future events.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of certain market risks related to the Company, see the
"Market Risk Sensitive Instruments and Positions" section in the Management's
Discussion and Analysis of Results of Operations and Financial Condition, in
the Company's Annual Report on Form 10-K for the fiscal year ended September
30, 2001. There have been no significant developments with respect to
derivatives or exposure to market risk.
17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCK-TENN COMPANY
(Registrant)
Date: February 14, 2002 By: /s/ STEVEN C. VOORHEES
----------------------- -------------------------------
STEVEN C. VOORHEES
Executive Vice-President,
Chief Financial Officer
(Principal Financial Officer,
Principal Accounting Officer
and duly authorized officer)
19