1
================================================================================
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, 1999
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
-------
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 May 3, 1999
----------------------------------- -----------------------------
Class A Common Stock, .01 par value 23,182,670
Class B Common Stock, .01 par value 11,619,114
================================================================================
2
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, 1999 and 1998 1
Condensed Consolidated Balance Sheets at March 31, 1999 and
September 30, 1998 2
Condensed Consolidated Statements of Cash Flows for the six months
ended March 31, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
Index to Exhibits 14
3
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,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------
Net sales $ 312,166 $ 327,854 $ 622,961 $ 644,329
Cost of goods sold 227,831 243,161 452,417 477,795
--------- --------- --------- ---------
Gross profit 84,335 84,693 170,544 166,534
Selling, general and administrative expenses 58,312 56,731 117,143 112,955
Plant closure and other costs 1,085 -- 3,138 --
--------- --------- --------- ---------
Income from operations 24,938 27,962 50,263 53,579
Interest and other income 104 80 215 178
Interest expense (7,780) (8,884) (16,094) (17,895)
Minority interest in income of consolidated subsidiary (1,488) (1,430) (2,929) (2,395)
--------- --------- --------- ---------
Income before income taxes 15,774 17,728 31,455 33,467
Provision for income taxes 6,968 7,942 13,891 15,004
--------- --------- --------- ---------
Net income $ 8,806 $ 9,786 $ 17,564 $ 18,463
========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding 35,245 35,208 35,133 35,210
========= ========= ========= =========
Basic earnings per share $ .25 $ .28 $ .51 $ .54
========= ========= ========= =========
Diluted earnings per share $ .25 $ .28 $ .50 $ .52
========= ========= ========= =========
Cash dividends per common share $ .075 $ .075 $ .15 $ .15
========= ========= ========= =========
See accompanying notes
1
4
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
March 31, September 30,
1999 1998
- ----------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 2,000 $ 5,769
Accounts receivable (net of allowance for
doubtful accounts of $3,695 and $3,817) 118,296 118,164
Inventories 87,672 88,019
Other current assets 11,351 4,200
----------- -----------
Total current assets 219,319 216,152
Property, plant and equipment at cost:
Land and buildings 185,670 178,168
Machinery and equipment 768,810 740,498
Transportation equipment 15,111 14,957
Leasehold improvements 5,593 4,386
----------- -----------
975,184 938,009
Less accumulated depreciation and amortization (402,098) (376,470)
----------- -----------
Net property, plant and equipment 573,086 561,539
Goodwill 312,797 317,389
Other assets 15,820 16,401
----------- -----------
$ 1,121,022 $ 1,111,481
=========== ===========
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 57,457 $ 45,924
Accrued compensation and benefits 31,317 42,040
Current maturities of long-term debt 34,564 43,462
Other current liabilities 18,769 21,054
----------- -----------
Total current liabilities 142,107 152,480
Long-term debt due after one year 466,115 464,876
Deferred income taxes 84,057 82,248
Other long-term items 16,153 14,462
Shareholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized; no
shares outstanding at March 31, 1999 and September 30, 1998 -- --
Class A common stock, $.01 par value; 175,000,000 shares authorized,
23,182,670 outstanding at March 31, 1999 and 22,851,838 outstanding
at September 30, 1998; Class B common stock, $.01 par value;
60,000,000 shares authorized; 11,619,114 outstanding
at March 31, 1999 and 11,724,972 outstanding at September 30, 1998 348 346
Capital in excess of par value 130,633 128,904
Retained earnings 286,285 274,039
Other (4,676) (5,874)
----------- -----------
Total shareholders' equity 412,590 397,415
----------- -----------
$ 1,121,022 $ 1,111,481
=========== ===========
See accompanying notes
2
5
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six Months Ended
March 31, March 31,
1999 1998
- ---------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 17,564 $ 18,463
Items in income not affecting cash:
Depreciation and amortization 36,173 34,971
Deferred income taxes 1,808 2,176
Gain on disposal of plant and equipment and other (271) (435)
Minority interest in income of consolidated subsidiary 2,929 2,395
Change in operating assets and liabilities:
Accounts receivable 20 2,231
Inventories 485 (3,872)
Other assets (6,815) (4,782)
Accounts payable 11,470 (5,681)
Accrued liabilities (11,552) (2,494)
Income taxes payable (145) --
Other (74) 115
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 51,592 43,087
FINANCING ACTIVITIES:
Net (repayments) additions to revolving credit facilities (2,954) 9,000
Repayments of long-term debt (4,704) (7,897)
Sales of common stock 1,625 1,993
Cash dividends paid to shareholders (5,212) (5,167)
Distribution to minority interest (2,625) (3,850)
-------- --------
CASH USED FOR FINANCING ACTIVITIES (13,870) (5,921)
INVESTING ACTIVITIES:
Capital expenditures (42,632) (37,232)
Proceeds from sale of property, plant and equipment 755 1,100
Decrease in unexpended industrial revenue bond proceeds -- 610
-------- --------
CASH USED FOR INVESTING ACTIVITIES (41,877) (35,522)
Effect of exchange rate changes on cash 386 9
(Decrease) increase in cash and cash equivalents (3,769) 1,653
Cash and cash equivalents at beginning of period 5,769 3,345
-------- --------
Cash and cash equivalents at end of period $ 2,000 $ 4,998
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 19,226 $ 13,098
Interest (net of amounts capitalized) 15,432 18,965
See accompanying notes
3
6
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,
1998 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, 1999 and 1998, the Company's
financial position at March 31, 1999 and September 30, 1998, and the cash flows
for the six month periods ended March 31, 1999 and 1998.
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,
1998.
The results for the three months and six months ended March 31, 1999 are not
necessarily indicative of results that may be expected for the full year.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
NOTE 2. USE OF ESTIMATES
The preparation of financial statements in conformity with 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 3. 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. 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, 1999 and September 30, 1998
were as follows (in thousands):
March 31, September 30,
1999 1998
---------- -------------
(Unaudited)
Finished goods and work in process $ 65,958 $ 68,735
Raw materials 30,947 29,139
Supplies 11,170 12,048
--------- ---------
Inventories at first-in, first-out (FIFO) cost 108,075 109,922
LIFO reserve (20,403) (21,903)
--------- ---------
Net inventories $ 87,672 $ 88,019
========= =========
NOTE 4. NEW ACCOUNTING STANDARDS
Effective, October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income. SFAS
130 establishes standards for the reporting and display of comprehensive income
and its components; however, the adoption of this statement had no impact on the
Company's net income or shareholders' equity. With respect to the Company, SFAS
130 requires foreign currency translation adjustments, which prior to adoption
were reported separately in shareholders' equity, to be included in other
comprehensive income.
4
7
For the three months ended March 31, 1999 and 1998, total comprehensive income
amounted to $9.7 million and $10.3 million, respectively. For the six months
ended March 31, 1999 and 1998, total comprehensive income amounted to $18.8
million and $17.1 million, respectively. The difference between total
comprehensive income and net income for the three months and six months ended
March 31, 1999 and 1998 was foreign currency translation adjustments. The
fluctuation in the exchange rates was greater during fiscal 1998 than during
fiscal 1999.
In 1997, the FASB issued Statement of Financial Accounting Standards No. 131
("SFAS 131"). SFAS 131 establishes standards for disclosures of segment
information which were not required by accounting standards previously used by
the Company. The Company is required to adopt this statement for its 1999 fiscal
year-end reporting. The Company is currently evaluating SFAS 131 and has not yet
determined its impact on the Company's consolidated financial statements.
In 1998, the FASB issued Statement of Financial Accounting Standards No. 133
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 is required to be
adopted in fiscal 2000. The Company is currently evaluating SFAS 133 and has not
yet determined its impact on the Company's consolidated financial statements.
NOTE 5. 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,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
Numerator:
Net income $ 8,806 $ 9,876 $17,564 $18,463
Denominator:
Denominator for basic earnings per share-
weighted average shares 34,768 34,524 34,709 34,469
Effect of dilutive stock options 477 684 424 741
------- ------- ------- -------
Denominator for diluted earnings per share -
weighted average shares and assumed
conversions 35,245 35,208 35,133 35,210
======= ======= ======= =======
Basic earnings per share $ .25 $ .28 $ .51 $ .54
======= ======= ======= =======
Diluted earnings per share $ .25 $ .28 $ .50 $ .52
======= ======= ======= =======
5
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 the
Company's audited consolidated financial statements and notes thereto for the
fiscal year ended September 30, 1998 which have been filed with the Securities
and Exchange Commission as part of the Company's Annual Report on Form 10-K.
SEGMENT AND MARKET INFORMATION
The Company operates principally in two industry segments:converted products and
paperboard. The converted products segment is comprised of facilities that
produce folding cartons, fiber partitions, corrugated containers, corrugated
displays, thermoformed plastic products and laminated paperboard products. In
the folding carton and corrugated container markets, the Company competes with a
significant number of national and regional packaging suppliers. In the fiber
partitions, corrugated displays, thermoformed plastic products and laminated
paperboard products markets, the Company competes with a smaller number of
national, regional and local companies offering highly specialized products.
During fiscal 1998, the Company sold converted products to over 5,000 customers
with no customer accounting for more than 10% of the Company's net sales. The
Company sells converted products to several large national customers which
annually purchase $25 to $45 million of converted products from the Company;
however, a majority of the Company's converted products sales are to customers
which annually purchase less than $10 million of converted products from the
Company. Within the converted products market, conditions have become highly
competitive as large national customers have begun consolidating their supplier
relationships. As a result of this trend, the Company regularly participates in
bidding for sales opportunities to national customers. The loss of business or
the award of new business from national customers may have a significant impact
on the Company's results of operations.
The paperboard segment consists of facilities that manufacture 100% recycled
clay-coated and uncoated paperboard (referred to herein as boxboard) and
corrugating medium (referred to herein as medium) and that collect recovered
paper. In the paperboard segment, the Company competes with integrated and
non-integrated national, regional and local companies manufacturing various
grades of paperboard. During fiscal 1998, the Company sold paperboard to over
1,000 customers. A significant percentage of the Company's sales of boxboard are
made to the Company's converted products segment. The current trend in the
paperboard industry is for a higher degree of integration between paperboard
production and converted products sales. The Company's paperboard segment's
sales volumes may therefore be directly impacted by changes in demand for the
Company's converted products.
6
9
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,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------
NET SALES:
Converted Products Segment $ 254,798 $ 267,999 $ 510,682 $ 528,587
Paperboard Segment 103,615 118,686 210,737 240,054
Intersegment Eliminations (46,247) (58,831) (98,458) (124,312)
- -----------------------------------------------------------------------------------------------
TOTAL $ 312,166 $ 327,854 $ 622,961 $ 644,329
- -----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES:
Converted Products Segment $ 16,319 $ 11,860 $ 30,193 $ 21,440
Paperboard Segment 11,052 18,298 24,476 36,302
Corporate Expense (2,433) (2,206) (4,406) (4,173)
Interest Expense (7,780) (8,874) (16,094) (17,885)
Interest and Other Income 104 80 215 178
Minority Interest in Income of
Consolidated Subsidiary (1,488) (1,430) (2,929) (2,395)
- -----------------------------------------------------------------------------------------------
TOTAL $ 15,774 $ 17,728 $ 31,455 $ 33,467
===============================================================================================
Paperboard Shipped (in tons) 262,018 281,843 528,922 568,831
===============================================================================================
RESULTS OF OPERATIONS
Net Sales (Unaffiliated Customers)
Net sales for the quarter ended March 31, 1999 decreased 4.8% to $312.2 million
from $327.9 million for the quarter ended March 31, 1998. Net sales for the six
months ended March 31, 1999 decreased 3.3% to $623.0 million from $644.3 million
for the six months ended March 31, 1998. Net sales decreased primarily as a
result of volume and price decreases.
Net Sales (Aggregate) - Converted Products Segment
First Second Six Months Third Fourth Fiscal
(In Millions) Quarter Quarter Ended 3/31 Quarter Quarter Year
----------------- -------------- ------------------ ---------------- --------------- --------------- --------------
1998 $260.6 $268.0 $528.6 $263.3 $271.8 $1,063.7
1999 255.9 254.8 510.7 --- --- ---
----------------- -------------- ------------------ ---------------- --------------- --------------- --------------
Net sales of converted products before intersegment eliminations for the quarter
ended March 31, 1999 decreased 4.9% to $254.8 million from $268.0 million for
the quarter ended March 31, 1998. Net sales of converted products before
intersegment eliminations for the six months ended March 31, 1999 decreased 3.4%
to $510.7 million from $528.6 million for the six months ended March 31,
1998. The decrease in net sales for the quarter and six months ended March 31,
1999 was primarily the result of volume decreases in folding cartons, partitions
and laminated paperboard products offset somewhat by higher volumes in
corrugated containers and displays. The volume decreases were partially
attributable to lower sales to two national customers during the quarter and six
months ended March 31, 1999. The Company currently believes that the impact of
lower volumes with these national customers will be offset by the award of new
business from other customers. However, there can be no assurance regarding the
amount or timing of any such awards. See Segment and Market Information.
7
10
Net Sales (Aggregate) - Paperboard Segment
First Second Six Months Third Fourth Fiscal
(In Millions) Quarter Quarter Ended 3/31 Quarter Quarter Year
-------------------- --------------- -------------- ---------------- ------------- --------------- ---------------
1998 $121.4 $118.7 $240.1 $111.8 $109.2 $461.1
1999 107.1 103.6 210.7 --- --- ---
-------------------- --------------- -------------- ---------------- ------------- --------------- ---------------
Net sales of paperboard before intersegment eliminations for the quarter ended
March 31, 1999 decreased 12.7% to $103.6 million from $118.7 million for the
quarter ended March 31, 1998. Net sales of paperboard before intersegment
eliminations for the six months ended March 31, 1999 decreased 12.2% to $210.7
million from $240.1 million for the six months ended March 31, 1998. The
decrease for the quarter and six months ended March 31, 1999 was the result of
volume and price decreases reflecting weakness in the markets for boxboard and
lower demand in the Company's converting businesses. In addition, the volume
decreases were partially attributable to lower volume with two national
customers within the converted products segment discussed above. The Company
currently believes that the impact of lower volumes with these national
customers will be offset by the award of new business from converted products
customers and from sales of boxboard to other converters. However, there can be
no assurance regarding the amount or timing of any such awards. See Segment and
Market Information.
Cost of Goods Sold
Cost of goods sold for the quarter ended March 31, 1999 decreased 6.3% to $227.8
million from $243.2 million for the quarter ended March 31, 1998. Cost of goods
sold as a percentage of net sales for the quarter ended March 31, 1999 decreased
to 73.0% from 74.2% for the quarter ended March 31, 1998. Cost of goods sold for
the six months ended March 31, 1999 decreased 5.3% to $452.4 million from $477.8
million for the six months ended March 31, 1998. Cost of goods sold as a
percentage of net sales for the six months ended March 31, 1999 decreased to
72.6% from 74.2% for the six months ended March 31, 1998. The decrease in cost
of goods sold as a percentage of net sales resulted from lower average recovered
paper, energy and workers compensation expenses and increased manufacturing
efficiencies, which were offset somewhat by increases in health insurance costs.
Substantially all U.S. inventories of the Company are valued at the lower of
cost or market with cost determined on the last-in, first-out (LIFO) inventory
valuation method, which management believes 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. The
Company's 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.
Since some of the Company's competitors principally use the FIFO method, the
following supplemental data is presented to illustrate the comparative effect of
LIFO and FIFO accounting on the Company's results of operations. Cost of goods
sold determined under the LIFO method was $0.7 million lower and $0.8 million
higher than it would have been under the FIFO method in the quarters ended March
31, 1999 and 1998, respectively. Cost of goods sold determined under the LIFO
method was $1.5 million lower than it would have been and $1.8 million higher
than it would have been under the FIFO method for the six months ended March 31,
1999 and 1998, respectively. Net income was $0.4 million higher and $0.5 million
lower than it would have been under the FIFO method in the quarters ended March
31, 1999 and 1998, respectively. Net income was $0.9 million higher and $1.1
lower than it would have been under the FIFO method for the six months ended
March 31, 1999 and 1998, respectively. These supplemental FIFO earnings reflect
the after tax effect of LIFO each year.
Gross Profit
First Second Six Months Third Fourth Fiscal
(% of Net Sales) Quarter Quarter Ended 3/31 Quarter Quarter Year
-----------------------------------------------------------------------------------------------------------
1998 25.8% 25.8% 25.8% 27.7% 26.8% 26.5%
1999 27.7% 27.0% 27.4% --- --- ---
-----------------------------------------------------------------------------------------------------------
Gross profit for the quarter ended March 31, 1999 decreased .5% to $84.3 million
from $84.7 million for the quarter ended March 31, 1998. Gross profit for the
six months ended March 31, 1999 increased 2.4% to $170.5 million from $166.5
million for the six months ended March 31, 1998. Gross profit as a percentage of
net sales was 27.0%
8
11
and 25.8% for the quarters ended March 31, 1999 and 1998. Gross profit as a
percentage of net sales was 27.4% and 25.8% for the six months ended March 31,
1999 and 1998. See Cost of Goods Sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended March 31,
1999 increased 2.8% to $58.3 million from $56.7 million for the quarter ended
March 31, 1998. Selling, general and administrative expenses for the six months
ended March 31, 1999 increased 3.6% to $117.1 million from $113.0 million for
the six months ended March 31, 1998. Selling, general and administrative
expenses as a percentage of net sales for the quarter ended March 31, 1999
increased to 18.7% from 17.3% for the quarter ended March 31, 1998. Selling,
general and administrative expenses as a percentage of net sales for the six
months ended March 31, 1999 increased to 18.8% from 17.5% for the six months
ended March 31, 1998. The increase in these expenses as a percentage of net
sales resulted primarily from increased compensation expenses and lower net
sales.
Plant Closing and Other Costs
During the fourth quarter of fiscal 1998, the Company began implementing certain
cost reduction initiatives designed to reduce overhead and production costs and
improve operating efficiency. In connection with these cost reduction
initiatives, the Company notified approximately 40 people of their termination
and recorded $2.0 million of costs related to these terminations during fiscal
1998. As of March 31, 1999, the Company had a remaining liability of $1.2
million, substantially all of which will be paid in fiscal 1999, related to
these terminations. The Company made payments of $0.6 and $0.8 during the
quarter and six months ended March 31, 1999, respectively. An adjustment of $0.2
million was made to reduce the liability during the second quarter of fiscal
1999. In addition, included in these initiatives are the closure of a folding
carton plant in Taylorsville, North Carolina and a laminated converted products
operation in Otsego, Michigan. In connection with these closings, the Company
incurred charges of $1.1 million and $3.1 million during the quarter and six
months ended March 31, 1999, respectively, which consisted primarily of employee
termination and related expenses. With respect to the plant closing costs, the
Company made payments of $2.2 million and $2.5 million during the quarter and
six months ended March 31, 1999, respectively. The Company plans to consolidate
these businesses into other existing facilities. The Company expects to incur an
additional $2.5 million of costs during fiscal 1999 in connection with these
plant closings and other cost reduction initiatives, principally for costs of
equipment and personnel relocation, which will be expensed as incurred.
Segment Operating Income.
Operating Income - Converted Products Segment
Net Sales Operating
(In Millions, except Percentages) (Aggregate) Income Return on Sales
- -------------------------------------------------------------------------------------------------------
First Quarter $ 260.6 $ 9.6 3.7%
Second Quarter 268.0 11.8 4.4
-------- ----- ---
Six Months Ended 3/31 528.6 21.4 4.0
Third Quarter 263.3 14.1 5.4
Fourth Quarter 271.8 17.7 6.5
- -------------------------------------------------------------------------------------------------------
Fiscal 1998 $1,063.7 $ 53.2 5.0%
=======================================================================================================
FIRST QUARTER $ 255.9 $13.9 5.4%
SECOND QUARTER 254.8 16.3 6.4
-------- ----- ---
SIX MONTHS ENDED 3/31 510.7 30.2 5.9
THIRD QUARTER -- -- --
FOURTH QUARTER -- -- --
- -------------------------------------------------------------------------------------------------------
FISCAL 1999 -- -- --
=======================================================================================================
Operating income attributable to the converted products segment for the quarter
ended March 31, 1999 increased 38.1% to $16.3 million from $11.8 million for the
quarter ended March 31, 1998. Operating income attributable to the converted
products segment for the six months ended March 31, 1999 increased 41.1% to
$30.2 million from $21.4 million for the six months ended March 31, 1998.
Excluding $1.1 million of plant closing and other related costs, operating
income attributable to the converted products segment for the quarter ended
March 31, 1999 increased 47.5% to $17.4 million from $11.8 million for the
quarter ended March 31, 1998. Excluding $3.1 million of plant closing and other
related costs, operating income attributable to the converted products segment
for the six months ended March 31, 1999 increased 55.6% to $33.3 million from
$21.4 million for the six months ended March
9
12
31, 1998. Excluding $1.1 million of plant closing and other related costs,
operating margin for the quarter ended March 31, 1999 was 6.8% compared to 4.4%
for the quarter ended March 31, 1998. Excluding $3.1 million of plant closing
and other related costs, operating margin for the six months ended March 31,
1999 was 6.5% compared to 4.0% for the six months ended March 31, 1998. The
increase in operating margin was the result of increased manufacturing
efficiencies and generally lower raw material costs which were partially offset
by reduced volumes in some product categories.
Operating Income - Paperboard Segment
Weighted
Boxboard Average Medium Average Average
Net Sales Operating Tons Boxboard Tons Medium Recovered
(Aggregate) Income Return Shipped Price Shipped Price Paper Cost
(In Millions) (In Millions) On Sales (In Thousands) (Per Ton) (In Thousands) (Per Ton) (Per Ton)
- ------------------------------------------------------------------------------------------------------------------------------------
First Quarter $ 121.4 $ 18.0 14.8% 242.0 $420 45.0 $330 $ 70
Second Quarter 118.7 18.3 15.4 236.2 420 45.6 347 68
-------- ------- ---- ----- -----
Six Months Ended 3/31 240.1 36.3 15.1 478.2 420 90.6 339 69
Third Quarter 111.8 18.3 16.4 225.3 417 40.8 338 59
Fourth Quarter 109.2 14.8 13.6 220.0 414 43.9 318 58
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal 1998 $ 461.1 $ 69.4 15.1% 923.5 $418 175.3 $332 $ 64
====================================================================================================================================
FIRST QUARTER $ 107.1 $ 13.4 12.5% 221.7 $403 45.2 $288 $ 53
SECOND QUARTER 103.6 11.1 10.7% 218.5 399 43.5 328 52
-------- ------- ---- ----- -----
SIX MONTHS ENDED 3/31 210.7 24.5 11.6% 440.2 401 88.7 308 52
THIRD QUARTER -- -- -- -- -- -- -- --
FOURTH QUARTER -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
FISCAL 1999 -- -- -- -- -- -- -- --
====================================================================================================================================
Operating income attributable to the paperboard segment for the quarter ended
March 31, 1999 decreased 39.3% to $11.1 million from $18.3 million for the
quarter ended March 31, 1998. Operating income attributable to the paperboard
segment for the six months ended March 31, 1999 decreased 32.5% to $24.5 million
from $36.3 million for the six months ended March 31, 1998. Operating margin for
the quarter ended March 31, 1999 was 10.7% compared to 15.4% for the quarter
ended March 31, 1998. Operating margin for the six months ended March 31, 1999
was 11.6% compared to 15.1% for the six months ended March 31, 1998.The decrease
in operating margin was primarily the result of lower selling prices and
volumes, which was partially offset by lower average recovered paper costs.
Interest Expense
Interest expense for the quarter ended March 31, 1999 decreased to $7.8 million
from $8.9 million for the quarter ended March 31, 1998. Interest expense for the
six months ended March 31, 1999 decreased to $16.1 million from $17.9 million
for the six months ended March 31, 1998. The decrease was primarily due to a
decrease in the average outstanding borrowings and lower interest rates.
Provision for Income Taxes
Provision for income taxes decreased to $7.0 million for the quarter ended March
31, 1999 from $7.9 million for the quarter ended March 31, 1998. Provision for
income taxes decreased to $13.9 million for the six months ended March 31, 1999
from $15.0 million for the six months ended March 31, 1998. The Company's
effective tax rate decreased to 44.3% for the quarter ended March 31, 1999
compared to 44.6% for the quarter ended March 31, 1998. The Company's effective
tax rate decreased to 44.1% for the six months ended March 31, 1999 compared to
44.8% for the six months ended March 31, 1998. This decrease in the effective
tax rate was primarily due to a decrease in the Company's effective state tax
rate.
Net Income and Earnings Per Common and Common Equivalent Share
Net income for the quarter ended March 31, 1999 decreased 10.2% to $8.8 million
from $9.8 million for the quarter ended March 31, 1998. Net income for the six
months ended March 31, 1999 decreased 4.9% to $17.6 million from $18.5 million
for the six months ended March 31, 1998. Net income as a percentage of net sales
decreased to 2.8% for the quarter ended March 31, 1999 from 3.0% for the quarter
ended March 31, 1998. Net income as a percentage of net sales decreased to 2.8%
for the six months ended March 31, 1999 from 2.9% for the six months ended March
31, 1998. Earnings per common and common equivalent share for the quarters ended
March 31, 1999 and 1998 was $0.25 and $0.28, respectively. Earnings per common
and common equivalent share for the six months ended March 31, 1999 and 1998 was
$0.50 and $0.52, respectively.
10
13
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Capital Expenditures
The Company has funded its 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. The Company maintains a revolving credit facility under which it has
aggregate borrowing availability of $450.0 million. At March 31, 1999, the
Company had $366.0 million outstanding under its revolving credit facility. The
revolving credit facility terminates in 2002. Cash and cash equivalents, $2.0
million at March 31, 1999, decreased from $5.8 million at September 30, 1998.
Net cash provided by operating activities for the six months ended March 31,
1999 was $51.6 million compared to $43.1 million for the six months ended March
31, 1998.This increase was primarily the result of decreases in net current
operating asset requirements. Net cash used for financing activities aggregated
$13.9 million for the six months ended March 31, 1999 and consisted primarily of
repayments under the revolving credit facility, repayments of long-term debt and
dividend payments. Net cash used for financing activities aggregated $5.9
million for the six months ended March 31, 1998 and consisted primarily of net
borrowings of long-term debt which was partially offset by dividend payments.
Net cash used for investing activities was $41.9 million for the six months
ended March 31, 1999 compared to $35.5 million for the six months ended March
31, 1998 and consisted primarily of capital expenditures for the six months
ended March 31, 1999 and 1998.
Capital expenditures for the six months ended March 31, 1999 aggregated $42.6
million and were used primarily for the purchase and upgrading of certain
machinery and equipment in essentially all of the Company's divisions. The
Company estimates that its capital expenditures will aggregate approximately
$34.4 million for the remainder of fiscal 1999. These expenditures will be used
for the purchase and upgrading of certain machinery and equipment in essentially
all of the Company's divisions and building expansions and improvements in one
of the Company's divisions.
The Company anticipates that it will be able to fund its capital expenditures,
acquisitions, interest expense, stock repurchases, dividends, and working
capital needs for the foreseeable future from cash generated from operations,
borrowings under its revolving credit facility, proceeds from the issuance of
debt or equity securities or other additional long-term debt financing.
Derivative Instruments
The Company enters into a variety of derivative transactions. Generally, the
Company designates at inception that derivatives are a hedge of 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 changes in its value being highly
correlated with changes in value of the underlying hedged item. The Company
includes amounts received or paid in operations when the underlying transaction
settles. The Company does not enter into or hold derivatives for trading or
speculative purposes.
The Company uses interest rate cap agreements and interest rate swap agreements
to manage synthetically the interest rate characteristics of a portion of its
outstanding debt and partially to limit the Company's exposure to rising
interest rates. Amounts to be received or paid as a result of interest rate cap
agreements and interest rate swap agreements are accrued and recognized as an
adjustment of interest expense related to the designated debt. Interest rate cap
purchase costs are amortized to interest expense ratably during the life of the
agreement.
The Company uses commodity swap agreements to manage synthetically the selling
prices and raw material costs of a portion of its medium business and to limit
the Company's exposure to falling prices and rising costs. 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.
11
14
YEAR 2000
The Company is utilizing both internal and external resources to evaluate the
potential impact of the situation commonly referred to as the "Year 2000
problem. "The Year 2000 problem, which is common to most businesses, concerns
the inability of computer systems and devices to properly recognize and process
date-sensitive information when the year changes to 2000. The Company depends
upon its information technology ("IT") and non-IT systems (used to run
manufacturing equipment that contain embedded hardware or software that must
handle dates and may not properly record dates after 1999) to conduct and manage
the Company's business. Unless remediated, Year 2000 related issues may
materially adversely affect the results of operations, financial condition and
cash flow of the Company and/or one or more of the Company's suppliers or
customers. While the Company obtains its raw materials, equipment and services
from a number of suppliers and sells its products to a number of customers for a
wide variety of applications, if a sufficient number of these suppliers or
customers experience Year 2000 problems that prevent or substantially impair
their ability to continue to transact business with the Company as they
currently do, the Company would be required to find alternative suppliers and/or
customers for its products. Any delay or inability in finding such alternatives
could have a material adverse effect on the Company's results of operations,
financial condition and cash flow.
The Company currently has a team dedicated to identifying, evaluating and
resolving the Company's potential Year 2000 issues. The Company's Year 2000
program includes six stages:education, inventory, assessment, remediation,
testing and implementation. The education stage involved identifying Year 2000
leaders at each of the Company's facilities and educating Company personnel on
the specific issues associated with the Year 2000 problem. During the inventory
stage, Company personnel identified any system (IT and non-IT) that could
potentially have a Year 2000 problem and developed software that is now being
used to centrally track these identified systems. The assessment stage involves
determining if there is a Year 2000 problem with the specific system (IT and
non-IT). Remediation involves deciding what action to take if there is a Year
2000 problem, such as modifying or replacing the system, and actually fixing the
problem. Testing is performed on the system once the remediation is complete.
When it is determined that the system is Year 2000 compliant, the system is
implemented.
The Company expects to have substantially completed all phases of its Year 2000
program by June 30, 1999, which will leave six months for additional internal
testing and troubleshooting prior to 2000. The Company is approximately 95% and
90% complete with the assessment stage relating to IT and non-IT systems,
respectively. With respect to IT systems that are known to have required
remediation, approximately 80% of such systems have been remediated, tested and
implemented and are currently Year 2000 compliant, and with respect to non-IT
systems that are known to have required remediation, approximately 75% of such
systems have been remediated, tested and implemented and are currently Year 2000
compliant. Based on the results of the Company's Year 2000 program, the Company
will develop contingency plans as necessary.
The Company currently believes that it will be able to modify, upgrade or
replace all of its IT and non-IT systems affected by the Year 2000 problem on a
timely basis. In the event that the Company does not remediate on a timely basis
any material Year 2000 problem, the Company may be unable to, among other
things, take customer orders, manufacture and ship products, invoice customers
or collect payments. Under a number of the Company's supply agreements, the
Company is required to indemnify and hold harmless customers for damages
incurred by such customers arising from the Company's failure to resolve its
Year 2000 problems. The amount of any potential liability and/or lost revenue
cannot be reasonably estimated at this time; however, such amounts could be
material.
The Company has also begun a program to assess the Year 2000 readiness of its
suppliers. This program has involved identifying suppliers that are critical to
the Company's operations as well as suppliers that would be hard to replace and
conducting a survey of such suppliers to begin assessing their Year 2000
readiness. Based upon the results of this assessment, the Company will develop
contingency plans as deemed necessary. The Company cannot reasonably estimate
the magnitude of the impact on the Company of the Year 2000 problems that may be
experienced by any of the Company's suppliers; however, the impact of any such
problems could have a material adverse effect on the Company's results of
operations, financial condition and cash flow. Further, the Company does not
propose to assess the Year 2000 problems, if any, of its customers. To the
extent customers experience Year 2000 problems that are not remediated on a
timely basis, the Company anticipates potential material fluctuations in the
demand for is products.
12
15
While the Company believes the occurrence of such a scenario is unlikely, a
possible worst case scenario might include the inadvertent failure of the
Company to remediate the process controllers (which are non-IT systems) on one
or more of the Company's paper machines. Depending on the number of machines
affected, such event could have an adverse impact on the Company's manufacture
of paperboard and its ability to supply its converting operations, which,
depending on its duration, could have a material adverse effect on the Company's
results of operations, financial condition and cash flow. The Company is in the
process of assessing the process controllers on all of its paper machines and
has involved external process controller vendors to assist the Company in
testing these systems.
Costs associated with the Year 2000 program (excluding costs relating to capital
improvements to IT and non-IT systems that are not directly related to
remediating Year 2000 problems in such systems) are being expensed as incurred.
Funding for the program is being provided through the Company's operating cash
flows. To date, the Company has spent approximately $2.0 million in connection
with the Year 2000 program and expects to spend an additional $3.0 million to
$5.0 million to complete the program. There can be no assurance that the cost of
the Company's Year 2000 program will not materially exceed expectations.
13
16
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on January 28, 1999 at which several
matters were submitted to a vote of the shareholders:
(a) Votes cast for or withheld regarding the five individuals elected as
directors of the Company for a term expiring in 2002 were as follows
(there were no abstentions or broker non-votes):
For Withheld
----------- ---------
J. Hyatt Brown 116,729,315 1,171,301
A. D. Frazier 115,174,278 2,726,338
Eugene U. Frey 110,849,980 7,050,636
C. Randolph Sexton 116,728,615 1,172,001
Jay Shuster 116,727,722 1,172,894
Additional directors, whose terms of office as directors continued
after the meeting, are as follows:
Term expiring in 2000 Term expiring in 2001
--------------------- ---------------------
Bradley Currey, Jr. Stephen G. Anderson
Mary Louise Morris Brown Robert B. Currey
John D. Hopkins John W. Spiegel
James W. Johnson L. L. Gellerstedt, III
(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
----------- ------- ------- ---------
Ratification of the
appointment of Ernst &
Young LLP as independent
auditors of the Company
to serve for the 1999 fiscal year 117,890,586 3,861 6,119 0
Approval of Amendments to 1993
Stock Option Plan 103,272,063 3,473,227 8,839,566 2,315,760
14
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of certain market risks related to the Company, See Part I,
Item 7A, "Quantitative and Qualitative Disclosures about Market Risk", in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1998. There have been no significant developments with respect to derivatives or
exposure to market risk.
15
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
16
19
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 5, 1999 By: /s/ DAVID C. NICHOLSON
-------------- -------------------------------------
David C. Nicholson, Senior Vice-President,
Chief Financial Officer, Secretary
(Principal Financial Officer, Principal
Accounting Officer and duly
authorized officer)
17
20
ROCK-TENN COMPANY
INDEX TO EXHIBITS
Page No.
Exhibit 27 Financial Data Schedule (For SEC use only)
18