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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 MARCH 31, 2002
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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 No.)
504 Thrasher Street, Norcross, Georgia 30071
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 448-2193
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N/A
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(Former name, former address and former fiscal year
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of May 10, 2002
- ----------------------------------- ------------------------------
Class A Common Stock, .01 par value 24,457,937
Class B Common Stock, .01 par value 9,632,901
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ROCK-TENN COMPANY
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the three months
and six months ended March 31, 2002 and 2001 1
Condensed Consolidated Balance Sheets at March 31, 2002 and
September 30, 2001 2
Condensed Consolidated Statements of Cash Flows for the six months
ended March 31, 2002 and 2001 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Index to Exhibits 23
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 Six Months Ended
March 31, March 31, March 31, March 31,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 348,119 $ 367,410 $ 698,686 $ 712,579
Cost of goods sold 275,585 293,400 549,042 572,599
--------- --------- --------- ---------
Gross profit 72,534 74,010 149,644 139,980
Selling, general and administrative expenses 46,919 45,164 95,666 87,886
Amortization of goodwill -- 2,142 -- 4,285
Plant closing and other costs -- 3,175 -- 5,040
--------- --------- --------- ---------
Income from operations 25,615 23,529 53,978 42,769
Interest expense (6,182) (9,370) (13,096) (19,394)
Interest and other income 88 101 368 297
Income (loss) from unconsolidated joint venture 172 (215) (694) (215)
Minority interest in income of consolidated subsidiary (760) (777) (1,520) (1,524)
--------- --------- --------- ---------
Income before income taxes 18,933 13,268 39,036 21,933
Provision for income taxes 7,349 5,950 15,253 10,110
--------- --------- --------- ---------
Income before cumulative effect of a
change in accounting principle 11,584 7,318 23,783 11,823
Cumulative effect of a change in accounting
principle (net of $179 income taxes) -- -- -- 286
--------- --------- --------- ---------
Net income $ 11,584 $ 7,318 $ 23,783 $ 12,109
========= ========= ========= =========
Weighted average number of common and common
equivalent shares outstanding 34,353 33,250 34,061 33,259
========= ========= ========= =========
Basic earnings per share $ 0.34 $ 0.22 $ 0.71 $ 0.36
========= ========= ========= =========
Diluted earnings per share $ 0.34 $ 0. 22 $ 0.70 $ 0. 36
========= ====== == ========= ====== ==
Cash dividends per common share $ 0.075 $ 0.075 $ 0.15 $ 0.15
========= ========= ========= =========
See accompanying notes
1
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
March 31, September 30,
2002 2001
- ------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,310 $ 5,191
Accounts receivable (net of allowances of
$5,002 and $5,400) 151,945 157,782
Inventories 109,027 102,011
Other current assets 10,997 6,098
----------- -----------
TOTAL CURRENT ASSETS 275,279 271,082
Property, plant and equipment, at cost:
Land and buildings 204,125 206,069
Machinery and equipment 923,761 902,769
Transportation equipment 10,739 11,526
Leasehold improvements 8,868 9,159
----------- -----------
1,147,493 1,129,523
Less accumulated depreciation and amortization (566,477) (540,870)
----------- -----------
Net property, plant and equipment 581,016 588,653
Goodwill, net 270,073 259,660
Other assets 35,625 45,018
----------- -----------
$ 1,161,993 $ 1,164,413
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 65,147 $ 79,596
Accrued compensation and benefits 34,379 35,863
Current maturities of debt 107,276 97,152
Other current liabilities 37,798 46,636
----------- -----------
TOTAL CURRENT LIABILITIES 244,600 259,247
Long-term debt due after one year 387,868 388,487
Adjustment for fair value hedge (305) 8,603
----------- -----------
Total long-term debt, less current maturities 387,563 397,090
Deferred income taxes 92,754 87,993
Other long-term items 10,335 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,
24,259,167 and 22,968,317 outstanding at March 31 and September 30,
respectively; Class B common stock, $.01 par value; 60,000,000 shares
authorized; 9,739,447 and 10,601,346 outstanding
at March 31 and September 30, respectively 339 335
Capital in excess of par value 135,356 130,640
Deferred compensation (844) (1,421)
Retained earnings 300,846 282,117
Accumulated other comprehensive loss (8,956) (8,911)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 426,741 402,760
----------- -----------
$ 1,161,993 $ 1,164,413
=========== ===========
See accompanying notes
2
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six Months Ended
March 31, March 31,
2002 2001
- ------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 23,783 $ 12,109
Items in income not affecting cash:
Depreciation and amortization 36,142 38,264
Deferred income taxes 4,761 1,328
Deferred compensation expense 577 --
Gain on disposal of property, plant and equipment (317) (209)
Equity in loss from joint venture 694 215
Minority interest in income of consolidated subsidiary 1,520 1,524
Impairment loss and other non-cash charges 8 310
Change in operating assets and liabilities:
Accounts receivable 5,835 317
Inventories (4,226) 1,310
Other assets 3,122 2,421
Accounts payable (14,513) (183)
Accrued and other liabilities (18,051) 1,342
-------- ---------
(27,833) 5,207
-------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES 39,335 58,748
INVESTING ACTIVITIES:
Capital expenditures (28,649) (34,147)
Cash paid for purchase of businesses (21,760) --
Cash contributed to joint venture (1,650) (7,532)
Proceeds from sale of property, plant and equipment 2,548 456
Decrease in unexpended industrial revenue bond proceeds -- 261
-------- ---------
CASH USED FOR INVESTING ACTIVITIES (49,511) (40,962)
FINANCING ACTIVITIES:
Net additions (repayments) to revolving credit facilities 12,000 (104,000)
Additions to debt 11,794 110,713
Repayments of debt (14,289) (18,367)
Debt issuance costs (70) (189)
Issuances of common stock 4,719 1,015
Purchases of common stock -- (2,324)
Cash dividends paid to shareholders (5,054) (4,997)
Distribution to minority interest (1,645) (2,100)
-------- ---------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 7,455 (20,249)
Effect of exchange rate changes on cash 840 89
-------- ---------
Decrease in cash and cash equivalents (1,881) (2,374)
Cash and cash equivalents at beginning of period 5,191 5,449
-------- ---------
Cash and cash equivalents at end of period $ 3,310 $ 3,075
======== =========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Income taxes (net of refunds) $ 17,109 $ 5,171
Interest (net of amounts capitalized) 13,948 14,513
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 and six month periods ended March 31, 2002 and 2001, the Company's
financial position at March 31, 2002 and September 30, 2001, and the cash flows
for the six month periods ended March 31, 2002 and 2001.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2001.
The results for the three months and six months ended March 31, 2002 are not
necessarily indicative of results that may be expected for the full year.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
NOTE 2. 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 and six months ended March 31, 2002 was
$11.5 million and $23.7 million, respectively. Total comprehensive income for
the three and six months ended March 31, 2001 was $5.7 million and $7.0 million,
respectively. The difference between total comprehensive income and net income
was due to foreign currency translation adjustments, adjustments to the fair
value of derivative instruments, and a minimum pension liability, as detailed
below (in thousands):
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
2002 2001 2002 2001
--------- --------- --------- ---------
Net income $ 11,584 $ 7,318 $ 23,783 $ 12,109
Foreign currency translation (240) (3,212) (596) (3,473)
Unrealized (loss) gain on derivative instruments (214) 1,571 194 (1,673)
Minimum pension liability 357 -- 357 --
-------- -------- -------- --------
Total other comprehensive loss (97) (1,641) (45) (5,146)
Comprehensive income $ 11,487 $ 5,677 $ 23,738 $ 6,963
======== ======== ======== ========
NOTE 4. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and the
differences could be material.
NOTE 5. INVENTORIES
Substantially all U.S. inventories are stated at the lower of cost or market,
with cost determined on the last-in, first-out (LIFO) basis. All other
inventories are valued at the lower of cost or market, with cost determined
using methods which approximate cost computed on a first-in, first-out (FIFO)
basis. An actual valuation of inventory under the LIFO method can only be made
at the end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO estimates must necessarily be based on management's
projection of expected year-end inventory levels and costs. Because these are
subject to many factors beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
Inventories at March 31, 2002 and September 30, 2001 were as follows (in
thousands):
March 31, September 30,
2002 2001
--------- -------------
Finished goods and work in process $ 82,623 $ 79,357
Raw materials 36,998 35,488
Supplies 12,496 11,631
--------- ---------
Inventories at first-in, first-out (FIFO) cost 132,117 126,476
LIFO reserve (23,090) (24,465)
--------- ---------
Net inventories $ 109,027 $ 102,011
========= =========
5
NOTE 6. ACQUISITIONS AND PLANT CLOSINGS
Acquisitions
In March 2002, the Company acquired substantially all of the assets of Athena
Industries, Inc., a leading designer and manufacturer of custom and stock
point-of-purchase displays and fixtures with expertise in wire and metal
fabrication. Athena Industries operates display manufacturing and assembly
facilities in Burr Ridge, Illinois.
In November 2001, the Company acquired certain assets of Advertising Display
Company, Inc., a leading producer of temporary and permanent point of purchase
displays, including its display operations in Memphis, Tennessee.
These acquisitions are 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 $21.8 million. Additional contingent cash consideration of up to an
aggregate of $1.25 million may be paid based on the achievement of gross profit
goals through calendar year 2003. Final adjustments to the purchase price will
be made based on finalization of the amount of working capital acquired.
Estimated goodwill of approximately $10.4 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 March 31, 2002.
Plant Closings
During fiscal 2001, the Company closed a folding carton plant in Augusta,
Georgia and an interior packaging plant in Eaton, Indiana. The closures resulted
in the termination of approximately 210 employees. In connection with these
closings, the Company made severance and other payments of $0.2 million and $1.2
million for the three and six months ended March 31, 2002, respectively. The
Company had a remaining liability of approximately $0.3 million at March 31,
2002. 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 $0.2 million and $0.3 million for the three and
six months ended March 31, 2002, respectively. The Company had a remaining
liability of approximately $0.4 million at March 31, 2002. The Company has
consolidated the operations of these closed plants into other existing
facilities.
NOTE 7. DEBT
During the first quarter of fiscal 2002, the Company amended its Liquidity Asset
Purchase Agreement to extend the term of its $125 million receivables-backed
financing transaction and back-up liquidity facility to November 12, 2002. The
proceeds of this transaction are used to repay borrowings outstanding under the
Company's revolving credit agreement.
6
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. Although the Company is still
evaluating the impact of SFAS 142, completion of the initial step indicates that
goodwill associated with its Laminated Paperboard Products division may be
impaired. The total goodwill of the division is $13 million, representing the
maximum potential impairment charge. 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.
The Company expects to adopt SFAS 144 as of October 1, 2002 and is currently
assessing the impact of the pronouncement on the consolidated financial
statements.
7
NOTE 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 Six Months Ended
March 31, March 31, March 31, March 31,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Numerator:
Income before cumulative effect
of a change in accounting principle $11,584 $ 7,318 $23,783 $11,823
Cumulative effect of a change in
accounting principle, net of tax -- -- -- 286
------- -------- ------- -------
Net income available to common
shareholders 11,584 7,318 23,783 12,109
Add: Goodwill amortization, net of tax -- 1,950 -- 3,902
------- -------- ------- -------
Adjusted net income $11,584 $ 9,268 $23,783 $16,011
======= ======== ======= =======
Denominator:
Denominator for basic earnings per share -
weighted average shares 33,678 33,222 33,577 33,231
Effect of dilutive stock options and
restricted stock awards 675 28 484 28
------- -------- ------- --------
Denominator for diluted earnings per share -
weighted average shares and
assumed conversions 34,353 33,250 34,061 33,259
======= ======== ======= ========
Basic earnings per share:
Income before cumulative effect of a
change in accounting principle $ 0.34 $ 0. 22 $ 0.71 $ 0. 35
Cumulative effect of a change in
accounting principle -- -- -- 0.01
------- ------- ------- --------
Net income per share-basic 0.34 0.22 0.71 0.36
Add: Goodwill amortization, net of tax -- 0.06 -- 0.12
------- ------- ------- --------
Adjusted net income $ 0.34 $ 0.28 $ 0.71 $ 0.48
======= ======= ======= ========
Diluted earnings per share:
Income before cumulative effect
of a change in accounting principle $ 0.34 $ 0.22 $ 0.70 $ 0.35
Cumulative effect of a change in
accounting principle -- -- -- 0.01
------- ------- ------- --------
Net income per share-diluted 0.34 0.22 0.70 0.36
Add: Goodwill amortization, net of tax -- 0.06 -- 0.12
------- ------- ------- --------
Adjusted net income $ 0.34 $ 0.28 $ 0.70 $ 0.48
======= ======= ======= ========
8
NOTE 10. SEGMENT INFORMATION
The following table sets forth business segment information (in thousands):
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Net sales (aggregate):
Packaging Products $ 192,004 $ 206,918 $ 386,515 $ 402,493
Merchandising Displays and Corrugated Packaging 70,104 65,778 142,557 123,608
Paperboard 123,743 133,158 248,824 264,613
- -----------------------------------------------------------------------------------------------------------------
Total $ 385,851 $ 405,854 $ 777,896 $ 790,714
=================================================================================================================
Less net sales (intersegment):
Packaging Products $ 875 $ 946 $ 1,568 $ 1,679
Merchandising Displays and Corrugated Packaging 1,331 1,549 2,524 2,866
Paperboard 35,526 35,949 75,118 73,590
- -----------------------------------------------------------------------------------------------------------------
Total $ 37,732 $ 38,444 $ 79,210 $ 78,135
=================================================================================================================
Net sales (unaffiliated customers):
Packaging Products $ 191,129 $ 205,972 $ 384,947 $ 400,814
Merchandising Displays and Corrugated Packaging 68,773 64,229 140,033 120,742
Paperboard 88,217 97,209 173,706 191,023
- -----------------------------------------------------------------------------------------------------------------
Total $ 348,119 $ 367,410 $ 698,686 $ 712,579
=================================================================================================================
Segment income:
Packaging Products $ 12,830 $ 11,719 $ 24,384 $ 22,518
Merchandising Displays and Corrugated Packaging 7,849 8,525 19,238 11,276
Paperboard 6,347 10,275 12,634 20,611
- -----------------------------------------------------------------------------------------------------------------
27,026 30,519 56,256 54,405
Goodwill amortization -- (2,142) -- (4,285)
Plant closing and other costs -- (3,175) -- (5,040)
Other non-allocated expenses (1,239) (1,888) (2,972) (2,526)
Interest expense (6,182) (9,370) (13,096) (19,394)
Interest and other income 88 101 368 297
Minority interest in income of consolidated subsidiary (760) (777) (1,520) (1,524)
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes $ 18,933 $ 13,268 $ 39,036 $ 21,933
=================================================================================================================
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto, included herein, and our
audited consolidated financial statements and notes thereto for the fiscal year
ended September 30, 2001 which have been filed with the Securities and Exchange
Commission as part of our Annual Report on Form 10-K.
SEGMENT AND MARKET INFORMATION
We report our results in three industry segments: (1) packaging products, (2)
merchandising displays and corrugated packaging, and (3) paperboard. No single
external customer accounts for more than 10% of our consolidated net sales.
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 customers in a variety of industries including
customers in the food and beverage industries and to manufacturers of other
non-durable goods. The packaging business is highly competitive. As a result, we
regularly bid for sales opportunities to customers for new business or for
renewal of existing business. The loss of business or the award of new business
from our larger customers may have a significant impact on our results of
operations.
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.
10
ROCK-TENN COMPANY
INDUSTRY SEGMENT INFORMATION
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR TONNAGE DATA)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
March 31, March 31, March 31, March 31,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------
NET SALES:
Packaging Products Segment $ 192,004 $ 206,918 $ 386,515 $ 402,493
Merchandising Displays and
Corrugated Packaging Segment 70,104 65,778 142,557 123,608
Paperboard Segment 123,743 133,158 248,824 264,613
Intersegment Eliminations (37,732) (38,444) (79,210) (78,135)
- ---------------------------------------------------------------------------------------------
TOTAL $ 348,119 $ 367,410 $ 698,686 $ 712,579
- ---------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES:
Packaging Products Segment $ 12,830 $ 11,719 $ 24,384 $ 22,518
Merchandising Displays and
Corrugated Packaging Segment 7,849 8,525 19,238 11,276
Paperboard Segment 6,347 10,275 12,634 20,611
- ---------------------------------------------------------------------------------------------
Segment Income 27,026 30,519 56,256 54,405
Goodwill Amortization -- (2,142) -- (4,285)
Plant Closing and Other Costs -- (3,175) -- (5,040)
Other Non-Allocated Expenses (1,239) (1,888) (2,972) (2,526)
Interest Expense (6,182) (9,370) (13,096) (19,394)
Interest and Other Income 88 101 368 297
Minority Interest in Income of
Consolidated Subsidiary (760) (777) (1,520) (1,524)
- ---------------------------------------------------------------------------------------------
TOTAL $ 18,933 $ 13,268 $ 39,036 $ 21,933
=============================================================================================
Paperboard Shipped (in tons) 272,762 262,183 540,238 520,347
=============================================================================================
RESULTS OF OPERATIONS
Net Sales (Unaffiliated Customers)
Net sales for the quarter ended March 31, 2002 decreased 5.3% to $348.1 million
from $367.4 million for the quarter ended March 31, 2001. Net sales for the six
months ended March 31, 2002 decreased 2.0% to $698.7 million from $712.6 million
for the six months ended March 31, 2001. Net sales decreased primarily as a
result of softer market conditions in our paperboard businesses and the related
impact of lower paperboard prices on our converting businesses. Further
information is provided in the segment discussions that follow.
Net Sales (Aggregate) - Packaging Products Segment
First Second Six Months Third Fourth Fiscal
(In Millions) Quarter Quarter Ended 3/31 Quarter Quarter Year
- -------------------------------------------------------------------------------------------
2001 $195.6 $206.9 $402.5 $198.6 $205.0 $806.1
2002 194.5 192.0 386.5 -- -- --
- -------------------------------------------------------------------------------------------
11
Net sales of packaging products before intersegment eliminations for the quarter
ended March 31, 2002 decreased 7.2% to $192.0 million from $206.9 million for
the quarter ended March 31, 2001. Net sales of packaging products before
intersegment eliminations for the six months ended March 31, 2002 decreased 4.0%
to $386.5 million from $402.5 million for the six months ended March 31, 2001.
The decrease was a result of decreases in volume and selling prices in our
plastic packaging and folding carton divisions. The decline in sales prices
reflected in part the pass through of lower costs for paperboard.
Net Sales (Aggregate) - Merchandising Displays and Corrugated Packaging Segment
First Second Six Months Third Fourth Fiscal
(In Millions) Quarter Quarter Ended 3/31 Quarter Quarter Year
- -------------------------------------------------------------------------------------------
2001 $ 57.8 $ 65.8 $123.6 $ 65.8 $ 74.0 $263.4
2002 72.4 70.1 142.5 -- -- --
- -------------------------------------------------------------------------------------------
Net sales within this segment before intersegment eliminations for the quarter
ended March 31, 2002 increased 6.5% to $70.1 million from $65.8 million for the
quarter ended March 31, 2001. Net sales within this segment before intersegment
eliminations for the six months ended March 31, 2002 increased 15.3% to $142.5
million from $123.6 million for the six months ended March 31, 2001. 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 in our corrugated
packaging business due to generally weaker market conditions.
Net Sales (Aggregate) - Paperboard Segment
First Second Six Months Third Fourth Fiscal
(In Millions) Quarter Quarter Ended 3/31 Quarter Quarter Year
- -------------------------------------------------------------------------------------------
2001 $131.5 $133.1 $264.6 $130.5 $129.4 $524.5
2002 125.1 123.7 248.8 -- -- --
- -------------------------------------------------------------------------------------------
Net sales of paperboard before intersegment eliminations for the quarter ended
March 31, 2002 decreased 7.1% to $123.7 million from $133.1 million for the
quarter ended March 31, 2001. Net sales of paperboard before intersegment
eliminations for the six months ended March 31, 2002 decreased 6.0% to $248.8
million from $264.6 million for the six months ended March 31, 2001. The
decrease was primarily due to a decrease in demand for our products by customers
in the book and ready to assemble furniture industries, adversely affecting
volumes in our laminated paperboard products and specialty paperboard divisions.
Slightly reduced sales volumes at our RTS packaging division also contributed to
the decline in sales in our specialty paperboard division.
Cost of Goods Sold
Cost of goods sold for the quarter ended March 31, 2002 decreased 6.1% to $275.6
million from $293.4 million for the quarter ended March 31, 2001. Cost of goods
sold as a percentage of net sales for the quarter ended March 31, 2002 decreased
to 79.2% from 79.9% for the quarter ended March 31, 2001. Cost of goods sold for
the six months ended March 31, 2002 decreased 4.1% to $549.0 million from $572.6
million for the six months ended March 31, 2001. Cost of goods sold as a
percentage of net sales for the six months ended March 31, 2002 decreased to
78.6% from 80.4% for the six months ended March 31, 2001. The decrease in cost
of goods sold as a percentage of net sales resulted primarily from decreases in
raw material costs and natural gas prices compared to the prior year.
12
Substantially all of our U.S. inventories are valued at the lower of cost or
market with cost determined on the last-in, first-out (LIFO) inventory valuation
method, which we believe generally results in a better matching of current costs
and revenues than under the first-in, first-out (FIFO) inventory valuation
method. In periods of decreasing costs, the LIFO method generally results in
lower cost of goods sold than under the FIFO method. In periods of increasing
costs, the results are generally the opposite. Our quarterly results of
operations reflect LIFO estimates based on management's projection of expected
year-end inventory levels and costs. Because these estimates are subject to many
factors beyond management's control, interim results are subject to the final
year-end LIFO inventory valuation.
The following table illustrates the comparative effect of LIFO and FIFO
accounting on our results of operations. These supplemental FIFO earnings
reflect the after-tax effect of eliminating the LIFO adjustment each year.
Three months ended March 31, Six months ended March 31,
2002 2001 2002 2001
-------------------- -------------------- -------------------- --------------------
(In Millions) LIFO FIFO LIFO FIFO LIFO FIFO LIFO FIFO
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold $275.6 $276.2 $293.4 $293.9 $549.0 $550.4 $572.6 $572.9
Net income 11.6 11.2 7.3 7.0 23.8 22.9 12.1 11.9
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit
First Second Six Months Third Fourth Fiscal
(% of Net Sales) Quarter Quarter Ended 3/31 Quarter Quarter Year
- ----------------------------------------------------------------------------------------------------------------------
2001 19.1% 20.1% 19.6% 21.4% 21.6% 20.6%
2002 22.0% 20.8% 21.4% -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Gross profit for the quarter ended March 31, 2002 decreased 2.0% to $72.5
million from $74.0 million for the quarter ended March 31, 2001. Gross profit
for the six months ended March 31, 2002 increased 6.9% to $149.6 million from
$140.0 million for the six months ended March 31, 2001. Gross profit as a
percentage of net sales was 20.8% and 20.1% for the quarters ended March 31,
2002 and 2001, respectively. Gross profit as a percentage of net sales was 21.4%
and 19.6% for the six months ended March 31, 2002 and 2001, respectively. See
Cost of Goods Sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended March 31,
2002 increased 3.8% to $46.9 million from $45.2 million for the quarter ended
March 31, 2001. Selling, general and administrative expenses for the six months
ended March 31, 2002 increased 8.9% to $95.7 million from $87.9 million for the
six months ended March 31, 2001. Selling, general and administrative expenses as
a percentage of net sales was 13.5% and 12.3% for the quarters ended March 31,
2002 and March 31, 2001, respectively. Selling, general and administrative
expenses as a percentage of net sales was 13.7% and 12.3% for the six months
ended March 31, 2002 and 2001, 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, the investment
in start-up costs of our Six Sigma Program and bad debt expense.
Acquisitions
In March 2002, we acquired substantially all of the assets of Athena Industries,
Inc., a leading designer and manufacturer of custom and stock point-of-purchase
displays and fixtures with expertise in wire and metal fabrication. Athena
Industries operates display manufacturing and assembly facilities in Burr Ridge,
Illinois.
In November 2001, we acquired certain assets of Advertising Display Company,
Inc., a leading producer of temporary and permanent point of purchase displays,
including its display operations in Memphis, Tennessee.
These acquisitions are 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
$21.8 million. Additional contingent cash consideration of up to an aggregate of
$1.25 million may be paid based on the achievement of gross profit goals through
calendar year 2003. Final adjustments to the purchase price will be made based
on finalization of the amount of working capital we acquired. Estimated goodwill
of approximately $10.4 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 March 31, 2002.
13
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 $0.2 million and $1.2 million for the
three and six months ended March 31, 2002, respectively. We had a remaining
liability of approximately $0.3 million at March 31, 2002. We have consolidated
the operations of these closed plants into other existing facilities.
During fiscal 2000, we closed a laminated paperboard products plant in
Lynchburg, Virginia, and folding carton plants in Chicago, Illinois, Norcross,
Georgia and Madison, Wisconsin. The closures resulted in the termination of
approximately 550 employees. In connection with these closings, we made
severance and other payments of $0.2 million and $0.3 million for the three and
six months ended March 31, 2002, respectively. We had a remaining liability of
approximately $0.4 million at March 31, 2002. We have consolidated the
operations of these closed plants into other existing facilities.
Segment Operating Income.
Operating Income - Packaging Products Segment
Net Sales Operating
(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
------ ------ ------
Six Months Ended 3/31 402.5 22.5 5.6
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 192.0 12.9 6.7
------ ------ ------
SIX MONTHS ENDED 3/31 386.5 24.4 6.3
THIRD QUARTER -- -- --
FOURTH QUARTER -- -- --
- ------------------------------------------------------------------------------------
FISCAL 2002 -- -- --
====================================================================================
Operating income attributable to the packaging products segment for the quarter
ended March 31, 2002 increased 10.3% to $12.9 million from $11.7 million for the
quarter ended March 31, 2001. Operating income attributable to the packaging
products segment for the six months ended March 31, 2002 increased 8.4% to $24.4
million from $22.5 million for the six months ended March 31, 2001. Operating
margin for the quarter ended March 31, 2002 was 6.7% compared to 5.7% for the
quarter ended March 31, 2001. Operating margin for the six months ended March
31, 2002 was 6.3% compared to 5.6% for the six months ended March 31, 2001. The
increase in operating margin was primarily the result of operating efficiencies
in our folding carton and interior packaging businesses gained through plant
consolidations in fiscal 2000 and 2001.
14
Operating Income - Merchandising Displays and Corrugated Packaging Segment
Net Sales Operating Return
(In Millions, except Percentages) (Aggregate) Income on Sales
- ---------------------------------------------------------------------------------------
First Quarter $ 57.8 $ 2.8 4.8%
Second Quarter 65.8 8.5 12.9
------ ------ ------
Six Months Ended 3/31 123.6 11.3 9.1
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 70.1 7.8 11.1
------ ------ ------
SIX MONTHS ENDED 3/31 142.5 19.2 13.5
THIRD QUARTER -- -- --
FOURTH QUARTER -- -- --
- --------------------------------------------------------------------------------------
FISCAL 2002 -- -- --
======================================================================================
Operating income attributable to this segment for the quarter ended March 31,
2002 decreased 8.2% to $7.8 million from $8.5 million in the quarter ended March
31, 2001. Operating margin for the quarter ended March 31, 2002 decreased to
11.1% from 12.9% for the quarter ended March 31, 2001. The decrease in operating
margin for the quarter primarily resulted from lower sales volumes in our
corrugating packaging division due to generally weaker market conditions.
Operating income attributable to this segment for the six months ended March 31,
2002 was $19.2 million as compared to $11.3 million for the six months ended
March 31, 2001, an increase of 69.9%. Operating margin for the six months ended
March 31, 2002 increased to 13.5% from 9.1% for the six months ended March 31,
2001. The increase in operating margin for the six months ended March 31, 2002
is attributable to increased sales volumes in our Alliance division due to
higher demand and two new product launches during the first quarter of fiscal
2002.
Operating Income - Paperboard Segment
Net Sales Operating
(In Millions, except Percentages) (Aggregate) Income Return on Sales
- ---------------------------------------------------------------------------------------------
First Quarter $131.5 $ 10.3 7.8%
Second Quarter 133.1 10.3 7.7
------ ------ ---
Six Months Ended 3/31 264.6 20.6 7.8
Third Quarter 130.5 10.5 8.0
Fourth Quarter 129.4 10.5 8.1
- ---------------------------------------------------------------------------------------------
Fiscal 2001 $524.5 $ 41.6 7.9%
=============================================================================================
FIRST QUARTER $125.1 $ 6.3 5.0%
SECOND QUARTER 123.7 6.3 5.1
------ ------ ---
SIX MONTHS ENDED 3/31 248.8 12.6 5.1
THIRD QUARTER -- -- --
FOURTH QUARTER -- -- --
- ---------------------------------------------------------------------------------------------
FISCAL 2002 -- -- --
=============================================================================================
Operating income attributable to the paperboard segment for the quarter ended
March 31, 2002 decreased 38.8% to $6.3 million from $10.3 million for the
quarter ended March 31, 2001. Operating income attributable to the paperboard
segment for the six months ended March 31, 2002 decreased 38.8% to $12.6 million
from $20.6 million for the six months ended March 31, 2001. Operating margin for
the quarter ended March 31, 2002 was 5.1% compared to 7.7% for the quarter ended
March 31, 2001. Operating margin for the six months ended March 31, 2002 was
5.1% compared to 7.8% for the six months ended March 31, 2001. The decrease in
operating margin resulted
15
from softer markets. Sales of our laminated paperboard products declined due to
a decrease in demand by customers in the book and ready to assemble furniture
industries. The reduced sales volumes at our laminated paperboard products
division reduced operating income in our specialty paperboard division but was
partially offset by improvements resulting from our Seven Hills joint venture.
Operating income in our coated paperboard division declined due to lower pricing
and a longer and more costly than expected capital improvement shutdown of our
Battle Creek mill. The decreases in operating margin of our mills were 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.
Average Corrugated Average Weighted
Specialty Coated Recycled Medium Corrugated Total Average Average
Tons Tons Paperboard Tons Medium Tons Price Recovered
Shipped* Shipped Price* Shipped Price Shipped All Tons Paper Cost
(In Thousands) (In Thousands) (Per Ton) (In Thousands) (Per Ton) (In Thousands) (Per Ton) (Per Ton)
- ------------------------------------------------------------------------------------------------------------------------------------
First Quarter 97.9 118.8 $ 451 41.5 $ 393 258.2 $ 442 $ 65
Second Quarter 102.7 119.6 445 39.8 385 262.1 435 58
----- ----- ----- -------
Six Months Ended 3/31 200.6 238.4 448 81.3 389 520.3 439 62
Third Quarter 109.1 117.6 433 42.0 369 268.7 422 53
Fourth Quarter 104.7 126.0 431 45.9 368 276.6 420 53
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal 2001 414.4 482.0 $ 440 169.2 $ 378 1,065.6 $ 430 $ 57
====================================================================================================================================
FIRST QUARTER 98.5 125.4 $ 426 43.6 $ 360 267.5 $ 415 $ 56
SECOND QUARTER 112.4 117.8 412 42.5 357 272.7 404 55
----- ----- ----- -------
SIX MONTHS ENDED 3/31 210.9 243.2 419 86.1 359 540.2 410 56
THIRD QUARTER -- -- -- -- -- -- -- --
FOURTH QUARTER -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
FISCAL 2002 -- -- -- -- -- -- -- --
====================================================================================================================================
* Specialty Tons Shipped and Average Recycled Paperboard Price Per Ton include
tons shipped by Seven Hills Paperboard, LLC, our joint venture with LaFarge
Corporation.
Interest Expense
Interest expense for the quarter ended March 31, 2002 decreased to $6.2 million
from $9.4 million for the quarter ended March 31, 2001. Interest expense for the
six months ended March 31, 2002 decreased to $13.1 million from $19.4 million
for the six months ended March 31, 2001. The decrease in interest expense for
the quarter and six months ended March 31, 2002 was primarily due to lower
interest rates and a decrease in our average outstanding borrowings.
Provision for Income Taxes
Income tax expense for the quarter ended March 31, 2002 was $7.3 million
compared to income tax expense of $6.0 million for the quarter ended March 31,
2001. Provision for income taxes increased to $15.3 million for the six months
ended March 31, 2002 from $10.1 million for the six months ended March 31, 2001.
The Company's effective tax expense rate was 38.8% for the quarter ended March
31, 2002 compared to an effective tax expense rate of 44.8% for the quarter
ended March 31, 2001. The Company's effective tax rate decreased to 39.1% for
the six months ended March 31, 2002 compared to 46.1% for the six months ended
March 31, 2001. In the prior year, differences between our effective tax rate
and statutory rates relate primarily to the amortization of goodwill which is
not deductible for income tax purposes.
Net Income and Earnings Per Common and Common Equivalent Share
Net income for the quarter ended March 31, 2002 was $11.6 million compared to
$7.3 million for the quarter ended March 31, 2001. Net income for the six months
ended March 31, 2002 and 2001 was $23.8 million and $12.1 million, respectively.
Net income for the three months and six months ended March 31, 2002 included
$3.9 million and $7.0 million, respectively, of plant closing costs and goodwill
amortization. Net income as a percentage of net sales was 3.3% and 2.0% for the
quarter ended March 31, 2002 and 2001, respectively. Net income as a percentage
of net sales was 3.4% and 1.7% for the six months ended March 31, 2002 and 2001,
respectively. Earnings per common and common equivalent share for the quarter
ended March 31, 2002 were $0.34 compared to $0.22 for the same period last year.
Earnings per common and common equivalent share for the six months ended March
31, 2002 and 2001 were $0.70 and $0.36, respectively.
16
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Capital Expenditures
We have funded our working capital requirements and capital expenditures,
including acquisitions, from net cash provided by operating activities,
borrowings under term notes 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 March 31, 2002, we had $20
million outstanding under our revolving credit facility. The revolving credit
facility terminates in 2005. Cash and cash equivalents, $3.3 million at March
31, 2002, decreased from $5.2 million at September 30, 2001.
Net cash provided by operating activities decreased for the six months ended
March 31, 2002 to $39.3 million from $58.7 million for the six months ended
March 31, 2001. The decrease was primarily a result of decreases in accounts
payable and accrued liabilities balances. Net cash used for investing activities
was $49.5 million for the six months ended March 31, 2002 compared to $41.0
million for the six months ended March 31, 2001 and consisted primarily of
capital expenditures for the six months ended March 31, 2002 and March 31, 2001
as well as the purchase of two businesses during the six months ended March 31,
2002. Net cash provided by financing activities aggregated $7.5 million for the
six months ended March 31, 2002 and consisted primarily of net additional
borrowings and issuance of common stock offset by dividend payments. Net cash
used for financing activities aggregated $20.2 million for the six months ended
March 31, 2001 and consisted primarily of net repayments of borrowings,
purchases of common stock and dividend payments.
Capital expenditures during the six months ended March 31, 2002 aggregated $28.6
million and were used primarily to purchase and upgrade machinery and equipment.
We estimate that our capital expenditures will aggregate approximately $70.0
million for fiscal 2002. These expenditures will be used to purchase and upgrade
various machinery and equipment in all of our divisions and for building
expansions and improvements.
We anticipate that we will be able to fund our capital expenditures,
acquisitions, interest payments, stock repurchases, dividends and working
capital needs for the foreseeable future from cash generated from operations,
borrowings under our revolving credit facility, proceeds from the issuance of
debt or equity securities or other additional long-term debt financing.
Derivative Instruments
We enter into a variety of derivative transactions. 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 cost 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.
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.
17
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. Although we are still evaluating the impact of SFAS 142,
completion of the initial step indicates that goodwill associated with our
Laminated Paperboard Products division may be impaired. The total goodwill of
the division is $13 million, representing the maximum potential impairment
charge. 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.
18
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.
19
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on January 25, 2002 at which several
matters were submitted to a vote of the shareholders:
(a) Votes cast for or withheld regarding the two individuals elected as
directors of the Company for a term expiring in 2005 were as follows
(there were no abstentions or broker non-votes):
FOR WITHELD
--- -------
J. Hyatt Brown 99,994,066 357,891
G. Stephen Felker 99,916,418 435,539
Additional directors, whose terms of office as directors continued
after the meeting, are as follows:
Term expiring in 2003 Term expiring in 2004
--------------------- ---------------------
Bradley Currey, Jr. Stephen G. Anderson
John D. Hopkins Robert B. Currey
Lou Brown Jewell L.L. Gellerstedt, III
James W. Johnson John W. Spiegel
James A. Rubright
(b) Votes cast for or against and the number of abstentions regarding each
other matter voted upon at the meeting were as follows:
Broker
Description of Matter For Against Abstain Non-Votes
--------------------- --- ------- ------- ---------
Approval of Material
Terms of Annual
Executive Bonus Program 93,404,290 6,897,896 49,771 --
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 - Material Terms of Annual Executive Bonus Program
(incorporated by reference to the Company's definitive Proxy
Statement for the 2002 Annual Meeting of Shareholders filed
with the SEC on December 19, 2001)
(b) Reports on Form 8-K
None
21
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: May 13, 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)
22
ROCK-TENN COMPANY
INDEX TO EXHIBITS
Exhibit 10 Material Terms of Annual Executive Bonus Program (incorporated
by reference to the Company's definitive Proxy Statement for
the 2002 Annual Meeting of Shareholders filed with the SEC on
December 19, 2001)
23