-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NbBR1Z2H/Qhw0tLkBWxz4CK2Hs32cyFtXE0ggaKqFK4dD8WiMnHk6oHfpNzUVyvd VN6OQjcXVIMPJPcRNnSGrw== 0000950144-01-504858.txt : 20010727 0000950144-01-504858.hdr.sgml : 20010727 ACCESSION NUMBER: 0000950144-01-504858 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010726 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCK TENN CO CENTRAL INDEX KEY: 0000230498 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD CONTAINERS & BOXES [2650] IRS NUMBER: 620342590 STATE OF INCORPORATION: GA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12613 FILM NUMBER: 1689296 BUSINESS ADDRESS: STREET 1: 504 THRASHER ST CITY: NORCROSS STATE: GA ZIP: 30071 BUSINESS PHONE: 7704482193 MAIL ADDRESS: STREET 1: PO BOX 4098 CITY: NORCROSS STATE: GA ZIP: 30091 10-Q 1 g70705e10-q.txt ROCK-TENN COMPANY 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 JUNE 30, 2001 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----- ----- Commission File Number 0-23340 ------- 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 July 25, 2001 - ----------------------------------- ------------------------------- Class A Common Stock, .01 par value 22,899,706 Class B Common Stock, .01 par value 10,603,531
=============================================================================== 2 ROCK-TENN COMPANY INDEX
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Operations for the three months and nine months ended June 30, 2001 and 2000 1 Condensed Consolidated Balance Sheets at June 30, 2001 and September 30, 2000 2 Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2001 and 2000 3 Notes to Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 23
3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) ROCK-TENN COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- Net sales $ 357,065 $ 370,545 $ 1,069,644 $ 1,087,306 Cost of goods sold 281,716 300,915 854,530 871,842 ---------- ---------- ------------ ------------ Gross profit 75,349 69,630 215,114 215,464 Selling, general and administrative expenses 45,658 46,816 133,544 135,334 Amortization of goodwill 2,143 2,179 6,428 6,892 Plant closing and other costs 2,523 4,876 7,563 60,075 ---------- ---------- ------------ ------------ Income from operations 25,025 15,759 67,579 13,163 Interest and other income 123 120 420 308 Interest expense (8,072) (8,924) (27,466) (25,383) Minority interest in income of consolidated subsidiary (846) (1,371) (2,370) (3,806) ---------- ---------- ------------ ------------ Income (loss) before income taxes 16,230 5,584 38,163 (15,718) Provision for income taxes 7,110 2,979 17,220 6,323 ---------- ---------- ------------ ------------ Income (loss) before cumulative effect of a change in accounting principle 9,120 2,605 20,943 (22,041) Cumulative effect of a change in accounting principle (net of $179 income taxes) -- -- 286 -- ---------- ---------- ------------ ------------ Net income (loss) $ 9,120 $ 2,605 $ 21,229 $ (22,041) ========== ========== ============ ============ Weighted average number of common and common equivalent shares outstanding-diluted 33,582 34,769 33,348 34,838 ========== ========== ============ ============ Basic earnings (loss) per share $ 0.27 $ 0.08 $ 0.64 $ (0.63) ========== ========== ============ ============ Diluted earnings (loss) per share $ 0.27 $ 0.07 $ 0.64 $ (0.63) ========== ========== ============ ============ Cash dividends per common share $ 0.075 $ 0.075 $ 0.225 $ 0.225 ========== ========== ============ ============
See accompanying notes 1 4 ROCK-TENN COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, September 30, 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 2,964 $ 5,449 Accounts receivable (net of allowances of $4,420 and $3,732) 143,673 156,155 Inventories 102,411 99,589 Other current assets 9,832 8,050 ------------ ------------ TOTAL CURRENT ASSETS 258,880 269,243 Property, plant and equipment, at cost: Land and buildings 209,021 200,444 Machinery and equipment 888,818 855,714 Transportation equipment 11,949 13,222 Leasehold improvements 8,941 8,561 ------------ ------------ 1,118,729 1,077,941 Less accumulated depreciation and amortization (526,698) (485,403) ------------ ------------ Net property, plant and equipment 592,031 592,538 Goodwill, net 262,044 268,526 Other assets 34,946 28,656 ------------ ------------ $ 1,147,901 $ 1,158,963 ============ ============ - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 70,413 $ 77,852 Accrued compensation and benefits 33,481 35,403 Current maturities of debt 103,143 20,328 Other current liabilities 30,804 26,792 ------------ ------------ TOTAL CURRENT LIABILITIES 237,841 160,375 Long-term debt due after one year 407,743 514,492 Deferred income taxes 86,657 81,384 Other long-term items 18,724 16,409 Shareholders' equity: Preferred stock, $.01 par value; 50,000,000 shares authorized; no shares outstanding at June 30 and September 30 -- -- Class A common stock, $.01 par value; 175,000,000 shares authorized, 22,855,811 and 22,031,024 outstanding at June 30 and September 30, respectively; Class B common stock, $.01 par value; 60,000,000 shares authorized; 10,647,057 and 11,352,739 outstanding at June 30 and September 30, respectively 334 334 Capital in excess of par value 129,942 127,682 Deferred compensation (1,524) -- Retained earnings 275,341 262,872 Accumulated other comprehensive loss (7,157) (4,585) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 396,936 386,303 ------------ ------------ $ 1,147,901 $ 1,158,963 ============ ============
See accompanying notes 2 5 ROCK-TENN COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Nine Months Ended June 30, June 30, 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income (loss) $ 21,229 $ (22,041) Items in income (loss) not affecting cash: Depreciation and amortization 57,926 57,964 Deferred income taxes 5,273 (6,325) Deferred compensation expense 51 -- Gain on disposal of property, plant and equipment (369) (577) Minority interest in income of consolidated subsidiary 2,370 3,806 Impairment loss and other non-cash charges 288 49,721 Equity in loss from joint venture 1,423 -- Change in operating assets and liabilities: Accounts receivable 12,437 (8,706) Inventories (2,999) (14,247) Other assets (1,002) (4,819) Accounts payable (7,397) 4,465 Accrued and other liabilities 2,756 3,218 ----------- ---------- 3,795 (20,089) ----------- ---------- CASH PROVIDED BY OPERATING ACTIVITIES 91,986 62,459 INVESTING ACTIVITIES: Capital expenditures (51,799) (67,587) Proceeds from sale of property, plant and equipment 818 1,840 Decrease (increase) in unexpended industrial revenue bond proceeds 1,264 (3,247) Cash contributed to joint venture (8,656) -- ----------- ---------- CASH USED FOR INVESTING ACTIVITIES (58,373) (68,994) FINANCING ACTIVITIES: Net (repayments) additions to revolving credit facilities (104,000) 30,147 Additions to debt 110,716 5,440 Repayments of debt (30,650) (1,217) Debt issuance costs (757) (1,529) Sales of common stock 1,739 3,033 Purchases of common stock (2,324) (15,472) Cash dividends paid to shareholders (7,490) (7,860) Distribution to minority interest (3,500) (3,150) ----------- ---------- CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (36,266) 9,392 Effect of exchange rate changes on cash 168 (41) ----------- ---------- (Decrease) Increase in cash and cash equivalents (2,485) 2,816 Cash and cash equivalents at beginning of period 5,449 4,538 ----------- ---------- Cash and cash equivalents at end of period $ 2,964 $ 7,354 =========== ========== Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes (net of refunds) $ 7,585 $ 15,592 Interest (net of amounts capitalized) 24,333 24,749
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, 2000 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 nine month periods ended June 30, 2001 and 2000, the Company's financial position at June 30, 2001 and September 30, 2000, and the cash flows for the nine month periods ended June 30, 2001 and 2000. Certain notes and other information have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. The results for the three months and nine months ended June 30, 2001 are not necessarily indicative of results that may be expected for the full year. Certain reclassifications have been made to prior year amounts to conform with the current year presentation. NOTE 2. ACCOUNTING POLICIES The Company enters into a variety of derivative transactions. Generally, the Company designates at inception that derivatives hedge risks associated with specific assets, liabilities or future commitments and monitors each derivative to determine if it remains an effective hedge. The effectiveness of the derivative as a hedge is based on a high correlation between changes in its value and changes in the value of the underlying hedged item. The Company includes in operations amounts received or paid when the underlying transaction settles. As of June 30, 2001, derivatives are included in other long-term liabilities on the balance sheet. The Company does not enter into or hold derivatives for trading or speculative purposes. From time to time, the Company uses interest rate cap agreements and interest rate swap agreements to manage synthetically the interest rate characteristics of a portion of its outstanding debt and to limit the Company's exposure to rising interest rates. Amounts to be received or paid as a result of interest rate cap agreements and interest rate swap agreements are accrued and recognized as an adjustment to interest expense related to the designated debt. The cost of purchasing interest rate caps 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 related to the debt over the remaining term of the original contract life of terminated swap agreements. In the event of the early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in income at the time of extinguishment. 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 business. 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 7 NOTE 3. COMPREHENSIVE INCOME (LOSS) Total comprehensive income for the three and nine months ended June 30, 2001 was $11.7 million and $18.7 million, respectively. Total comprehensive income for the three months ended June 30, 2000 was $1.4 million and total comprehensive loss for the nine months ended June 30, 2000 was $22.3 million. The difference between total comprehensive income (loss) and net income (loss) was due to foreign currency translation adjustments and, for fiscal 2001, adjustments to the fair value of derivative instruments resulting from the adoption of Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" (See Note 9: New Accounting Standards), as detailed below (in thousands):
Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, 2001 2000 2001 2000 ---------- ---------- ------------ ------------ Net income (loss) $ 9,120 $ 2,605 $ 21,229 $ (22,041) Foreign currency translation 2,387 (1,167) (1,086) (305) Unrealized gain (loss) on derivative instruments 187 -- (1,486) -- ---------- ---------- ------------ ------------ Total other comprehensive income (loss) 2,574 (1,167) (2,572) (305) ---------- ---------- ------------ ------------ Comprehensive income (loss) $ 11,694 $ 1,438 $ 18,657 $ (22,346) ========== ========== ============ ============
NOTE 4. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results will differ from those estimates and the differences could be material. NOTE 5. INVENTORIES Substantially all U.S. inventories are stated at the lower of cost or market, with cost determined on the last-in, first-out (LIFO) basis. All other inventories are valued at lower of cost or market, with cost determined using methods which approximate cost computed on a first-in, first-out (FIFO) basis. An actual valuation of inventory under the LIFO method can only be made at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO estimates must necessarily be based on management's projection of expected year-end inventory levels and costs. Because these are subject to many factors beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. Inventories at June 30, 2001 and September 30, 2000 were as follows (in thousands):
June 30, September 30, 2001 2000 ---------- ------------- Finished goods and work in process $ 76,796 $ 74,422 Raw materials 39,078 40,353 Supplies 12,363 12,159 ---------- ----------- Inventories at first-in, first-out (FIFO) cost 128,237 126,934 LIFO reserve (25,826) (27,345) ---------- ----------- Net inventories $ 102,411 $ 99,589 ========== ===========
5 8 NOTE 6. PLANT CLOSING AND OTHER COSTS During the second quarter of fiscal 2001, the Company decided to consolidate the folding carton operations of its Augusta, Georgia folding carton plant into two other plants over a period of four to six months. This closing resulted in the termination of approximately 125 employees. As a result of this decision, the Company incurred pre-tax charges of approximately $1.4 million and $2.4 million, and made severance payments of approximately $0.5 million and $0.6 million, during the three and nine month periods ended June 30, 2001, respectively. During fiscal 2000, the Company closed a laminated paperboard products plant in Lynchburg, Virginia, and folding carton plants in Chicago, Illinois, Norcross, Georgia and Madison, Wisconsin. The closures resulted in the termination of approximately 550 employees. In connection with these closings, the Company made severance and other payments of $0.1 million and $2.0 million for the three and nine months ended June 30, 2001, respectively, and made an adjustment to reduce the liability by $0.1 million during the first quarter of fiscal 2001. The Company had a remaining liability of approximately $0.4 million at June 30, 2001. The Company has consolidated the operations of these closed plants into other existing facilities. During the remainder of fiscal 2001 and fiscal 2002, the Company expects to incur an additional $5.0 million of pre-tax expense related to the Augusta, Chicago, and Madison plant closings. NOTE 7. LONG-TERM DEBT On November 14, 2000, the Company entered into a $125 million receivables-backed financing transaction (the "Receivables Financing Facility"), the proceeds of which were used to repay borrowings outstanding under its revolving credit agreement. The Receivables Financing Facility was provided by Blue Ridge Asset Funding Corporation, a commercial paper issuer administered by Wachovia Bank, N.A., with a back-up liquidity facility provided by Wachovia Bank, N.A. Both the Receivables Financing Facility and the back-up liquidity facility are 364-day vehicles. During the second quarter of fiscal 2001, the Company amended its bank Revolving Credit and Term Loan Agreement. The amendment revised the financial covenants to exclude from earnings the cash costs of certain plant closings and reduced the amount of available borrowing capacity from $450 million to $400 million. The amendment did not change the interest rate for borrowings under the credit agreement. As of June 30, 2001, the Company was in compliance with all covenants stipulated in its revolving credit agreement. During July 2001, the participating banks agreed to amend the terms of the Company's revolving credit facility to eliminate certain scheduled adjustments to two of its financial covenants in the event the Company reduces the size of the facility to $300 million or less and permit the Company to enter into certain agreements restricting its ability to grant liens upon its assets and properties. In June 2001, the Company registered with the Securities and Exchange Commission (SEC) a total of $300 million in public debt securities for issuance in one or more series and with such specific terms as to be determined from time to time. As of June 30, 2001, none of these securities have been issued. 6 9 NOTE 8. INCOME TAXES The differences between the statutory federal income tax rate and the Company's effective income tax rate are as follows:
Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------------------------------- Statutory federal tax rate 35.0% 35.0% 35.0% 35.0% State taxes, net of federal benefit 3.6 3.8 3.6 3.1 Non-deductible amortization and write-off of goodwill 3.7 10.7 4.7 (74.5) Other, net (primarily non-taxable items) 1.5 3.8 1.8 (3.8) - -------------------------------------------------------------------------------------------------------------------------------- Effective tax rate 43.8% 53.3% 45.1% (40.2)% - --------------------------------------------------------------------------------------------------------------------------------
NOTE 9. NEW ACCOUNTING STANDARDS On October 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," as amended. This statement requires that the fair value of derivatives be recorded as assets or liabilities. Gains or losses resulting from changes in the fair value of derivatives would be accounted for currently in earnings or comprehensive income, depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment. The adoption of SFAS 133 impacts the accounting for the Company's OCC and medium hedges. The Company's results of operations can be significantly impacted by fluctuations in the price of its raw materials, especially OCC and corrugating medium. To manage the risks associated with changes in prices, the Company uses hedge contracts, which have maturities of up to 36 months. Upon the adoption of SFAS 133, the Company recorded the fair market value of its OCC and medium hedges on the consolidated balance sheet. On an ongoing basis, the Company will adjust the balance sheet to reflect the current fair market value of its hedge contracts. The related gains or losses on these contracts are deferred in shareholders' equity as a component of comprehensive income. These deferred gains and losses are recognized in income in the period in which the related OCC/medium purchases are consumed and recognized in expense. However, to the extent that the change in the value of the OCC/medium hedge contract does not perfectly offset the change in the value of the purchase being hedged, that ineffective portion of the hedge is immediately recognized in income. On June 29, 2001, the Financial Accounting Standards Board (FASB) approved statement No. 142 "Goodwill and Other Intangible Assets." This statement changes the accounting for goodwill from an amortization method to an impairment only approach. As of June 30, 2001, the Company has $262.0 million of recorded net goodwill which will be subject to this new standards. During fiscal 2001, the Company expects approximately $7.8 million of goodwill amortization expense, net of taxes. The Company expects to adopt this standard in the first quarter of fiscal 2002. The Company is currently evaluating this new pronouncement and has not yet determined the impact on its consolidated financial statements. NOTE 10. RESTRICTED STOCK PLANS Pursuant to the Company's 2000 Incentive Stock Plan, the Company can award up to 500,000 shares of restricted Class A common stock to employees. Vesting of the stock occurs in increments of one-third beginning on the third anniversary of the date of grant. Accelerated vesting of a portion of the grant may occur based on the Company's performance. During the quarter ended June 30, 2001, the Company awarded 140,000 shares of Class A common stock, which had a fair value at the date of grant of $1.6 million. Compensation under the plan is charged to earnings over the five-year vesting period and amounted to $0.1 million for the quarter ended June 30, 2001. There were no restricted stock grants as of June 30, 2000. 7 10 NOTE 11. COMMITMENTS AND CONTINGENCIES The Company is subject to various federal, state, local and foreign environmental laws and regulations, including those regulating the discharge, storage, handling and disposal of a variety of substances. These laws and regulations include, among others, the Comprehensive Environmental Response, Compensation and Liability Act, which the Company refers to as CERCLA, the Clean Air Act (as amended in 1990), the Clean Water Act, the Resource Conservation and Recovery Act (including amendments relating to underground tanks) and the Toxic Substances Control Act. These environmental regulatory programs are primarily administered by the U.S. Environmental Protection Agency. In addition, some states in which the Company operates have adopted equivalent or more stringent environmental laws and regulations or have enacted their own parallel environmental programs, which are enforced through various state administrative agencies. The Company does not believe that future compliance with these environmental laws and regulations will have a material adverse effect on its results of operations, financial condition or cash flows. However, environmental laws and regulations are becoming increasingly stringent. Consequently, the Company's compliance and remediation costs could increase materially. In addition, the Company cannot currently assess with certainty the impact that the future emissions standards and enforcement practices under the 1990 amendments to the Clean Air Act will have on its operations or capital expenditure requirements. However, the Company believes that any such impact or capital expenditures will not have a material adverse effect on its results of operations, financial condition or cash flows. Over the next twelve months, the Company will need to upgrade or replace a boiler at one of its facilities in Texas to comply with new state air pollution control requirements. The Company estimates the cost for upgrading or replacing that boiler to be in the range of $1.0 million to $3.5 million. In the event the Company is not able to upgrade or replace the boiler prior to the new air pollution control requirements going into effect, the Company may have to temporarily suspend a portion of its operations at its Dallas, Texas facility. The Company does not believe that such a disruption, if it were to occur, would have a material adverse effect on its results of operations. In addition, the Company may need to modify or replace the coal-fired boilers at two of its facilities in order to operate cost effectively while complying with emissions regulations under the Clean Air Act. The Company estimates these improvements could cost as much as $9.0 million. If required, the Company anticipates those costs to be incurred beginning in 2002. On February 9, 1999, the Company received a letter from the Michigan Department of Environmental Quality, which the Company refers to as MDEQ, in which the MDEQ alleged that the Company was in violation of the Michigan Natural Resources and Environmental Protection Act, as well as the facility's wastewater discharge permit at one of its Michigan facilities. The letter alleged that the Company exceeded several numerical limitations for chemical parameters outlined in the wastewater permit and violated other wastewater discharge criteria. The MDEQ further alleged that the Company was liable for contamination contained on the facility property as well as for contributing contamination to the Kalamazoo River Site. The letter requested that the Company commit, in the form of a binding agreement, to undertake the necessary and appropriate response activities and response actions to address contamination in both areas. The Company has entered into an administrative consent order pursuant to which improvements are being made to the facility's wastewater treatment system and the Company has paid a $75,000 settlement amount. The Company has also agreed to pay an additional $30,000 for past and future oversight costs incurred by the State of Michigan. This payment will be made in three equal installments over two years, the first of which has already been made. The cost of making upgrades to the wastewater treatment systems is estimated to be approximately $1.4 million. Nothing contained in the order constitutes an admission of liability or any factual finding, allegation or legal conclusion on the Company's part. The order was completed during the first quarter of fiscal 2001. To date, MDEQ has not made any other demand regarding the Company's alleged liability for contamination at the Kalamazoo River Site. The Company has been identified as a potentially responsible party, which the Company refers to as a PRP, at eight "superfund" sites pursuant to CERCLA or comparable state statutes. In all of these matters, the Company has either resolved its alleged liability for amounts that are not material to the Company, or believes that based on currently available information, although there can be no assurance, any liability that it might have at these other sites, 8 11 individually or in the aggregate, will not have a material adverse effect on its results of operations, financial condition or cash flows. NOTE 12. EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share data):
Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ Numerator: Income (loss) before cumulative effect of a change in accounting principle $ 9,120 $ 2,605 $ 20,943 $ (22,041) Cumulative effect of a change in accounting principle, net of tax -- -- 286 -- -------- -------- --------- ---------- Net income (loss) available to common shareholders $ 9,120 $ 2,605 $ 21,229 $ (22,041) ======== ======== ========= ========== Denominator: Denominator for basic earnings (loss) per share- weighted average shares 33,388 34,688 33,283 34,838 Effect of dilutive stock options and restricted stock awards 194 81 65 -- -------- -------- --------- ---------- Denominator for diluted earnings (loss) per share- weighted average shares and assumed conversions 33,582 34,769 33,348 34,838 Basic earnings (loss) per share Income (loss) before cumulative effect of a change in accounting principle $ 0.27 $ 0.08 $ 0.63 $ (0.63) Cumulative effect of a change in accounting principle -- -- 0.01 -- -------- -------- --------- ---------- Net income (loss) per share-basic $ 0.27 $ 0.08 $ 0.64 $ (0.63) ======== ======== ========= ========== Diluted earnings (loss) per share Income (loss) before cumulative effect of a change in accounting principle $ 0.27 $ 0.07 $ 0.63 $ (0.63) Cumulative effect of a change in accounting principle -- -- 0.01 -- -------- -------- --------- ---------- Net income (loss) per share-diluted $ 0.27 $ 0.07 $ 0.64 $ (0.63) ======== ======== ========= ==========
Common stock equivalents were anti-dilutive and therefore excluded from the calculation of weighted average shares used in computing diluted loss per share for the nine months ended June 30, 2000. 9 12 NOTE 13. SEGMENT INFORMATION The following table sets forth business segment information (in thousands):
Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------- Net sales (aggregate): Packaging Products $ 198,618 $ 202,827 $ 601,111 $ 590,833 Paperboard 130,506 148,874 395,119 447,912 Specialty Corrugated Packaging and Display 65,757 59,071 189,365 170,588 - ------------------------------------------------------------------------------------------------------------------------------- Total $ 394,881 $ 410,772 $ 1,185,595 $ 1,209,333 - ------------------------------------------------------------------------------------------------------------------------------- Less net sales (intersegment): Packaging Products $ 965 $ 2,507 $ 2,644 $ 4,171 Paperboard 35,493 36,194 109,083 113,777 Specialty Corrugated Packaging and Display 1,358 1,526 4,224 4,079 - ------------------------------------------------------------------------------------------------------------------------------- Total $ 37,816 $ 40,227 $ 115,951 $ 122,027 - ------------------------------------------------------------------------------------------------------------------------------- Net sales (unaffiliated customers): Packaging Products $ 197,653 $ 200,320 $ 598,467 $ 586,662 Paperboard 95,013 112,680 286,036 334,135 Specialty Corrugated Packaging and Display 64,399 57,545 185,141 166,509 - ------------------------------------------------------------------------------------------------------------------------------- Total $ 357,065 $ 370,545 $ 1,069,644 $ 1,087,306 - ------------------------------------------------------------------------------------------------------------------------------- Segment income: Packaging Products $ 11,035 $ 10,679 $ 30,370 $ 24,698 Paperboard 8,916 8,427 26,876 38,589 Specialty Corrugated Packaging and Display 7,437 7,229 17,571 21,270 - ------------------------------------------------------------------------------------------------------------------------------- 27,388 26,335 74,817 84,557 LIFO and intercompany profit 1,268 (3,429) 1,518 (6,094) Plant closing and other costs (2,523) (4,876) (7,563) (60,075) Other non-allocated expenses (1,108) (2,271) (1,193) (5,225) Interest and other income 120 420 308 123 Interest expense (8,072) (8,924) (27,466) (25,383) Minority interest in income of consolidated subsidiary (846) (1,371) (2,370) (3,806) - ------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes $ 16,230 $ 5,584 $ 38,163 $ (15,718) - -------------------------------------------------------------------------------------------------------------------------------
10 13 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, 2000 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) paperboard and (3) specialty corrugated packaging and display. No customer accounts for more than 5% of our consolidated net sales. The packaging products segment consists of facilities that produce folding cartons, solid fiber partitions and thermoformed plastic products. We compete with a significant number of national, regional and local packaging suppliers. During fiscal 2000, we sold packaging products to approximately 3,200 customers. We sell packaging products to several large national customers; however, the majority of our packaging products sales are to smaller national and regional customers. Net sales to the top ten customers of our folding carton division represented 33% of total folding carton sales and net sales to the top twenty-five customers represented 53% of total folding carton sales for the nine months ended June 30, 2001. The packaging business is highly competitive. As a result, we regularly bid for sales opportunities to customers for 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, which we refer to as medium; and laminated paperboard products. In our clay-coated and specialty paperboard divisions, we compete with integrated and non-integrated national, regional and local companies manufacturing various grades of paperboard. Our clay-coated paperboard division, excluding our corrugating medium mill, sold 265 thousand tons to internal customers and 270 thousand tons to external customers for the twelve months ended June 30, 2001. Our corrugating medium mill sold 166 thousand tons for the twelve months ended June 30, 2001 primarily to external customers. Our specialty paperboard division sold 112 thousand tons to our laminated products division, 68 thousand tons to our RTS packaging business, and 150 thousand tons to external customers during the twelve months ended June 30, 2001. In our laminated paperboard products division, we compete with a small number of national, regional and local companies offering highly specialized products. We also compete with foreign companies in the book cover market. Our recycled fiber division competes with national, regional and local companies. During fiscal 2000, we sold paperboard, corrugating medium, laminated paperboard products and recovered paper to approximately 1,800 customers. A significant percentage of our sales of paperboard is made to our packaging products and specialty corrugated packaging and display segments and to our laminated paperboard products division. Our paperboard segment's sales volumes may therefore be directly impacted by changes in demand for our packaging and laminated paperboard products. The specialty corrugated packaging and display segment consists of facilities that produce corrugated containers and displays manufactured from corrugated paperboard as well as other materials. We compete with a number of national, regional and local suppliers of those goods in this segment. During fiscal 2000, we sold corrugated containers and display products to approximately 1,100 customers. Due to the highly competitive nature of the specialty packaging and display business, we regularly bid for sales opportunities to customers for new business or for renewal of existing business. The loss of business or the award of new business from our larger customers may have a significant impact on our results of operations. 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 at the plant level. These items are reported as non-allocated expenses. These include adjustments to record inventory on the last-in, first-out, or "LIFO", method, elimination of intercompany profit, plant closing and related expenses and certain corporate expenses. 11 14 ROCK-TENN COMPANY INDUSTRY SEGMENT INFORMATION (UNAUDITED) (IN THOUSANDS EXCEPT FOR TONNAGE DATA)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED June 30, June 30, June 30, June 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------ NET SALES: Packaging Products Segment $ 198,618 $ 202,827 $ 601,111 $ 590,833 Paperboard Segment 130,506 148,874 395,119 447,912 Specialty Corrugated Packaging and Display Segment 65,757 59,071 189,365 170,588 Intersegment Eliminations (37,816) (40,227) (115,951) (122,027) - ------------------------------------------------------------------------------------------------------ TOTAL $ 357,065 $ 370,545 $ 1,069,644 $ 1,087,306 - ------------------------------------------------------------------------------------------------------ INCOME (LOSS) BEFORE INCOME TAXES: Packaging Products Segment $ 11,035 $ 10,679 $ 30,370 $ 24,698 Paperboard Segment 8,916 8,427 26,876 38,589 Specialty Corrugated Packaging and Display Segment 7,437 7,229 17,571 21,270 - ------------------------------------------------------------------------------------------------------ Segment Income 27,388 26,335 74,817 84,557 LIFO and Intercompany Profit 1,268 (3,429) 1,518 (6,094) Plant Closing and Other Costs (2,523) (4,876) (7,563) (60,075) Other Non-Allocated Expenses (1,108) (2,271) (1,193) (5,225) Interest and Other Income 123 120 420 308 Interest Expense (8,072) (8,924) (27,466) (25,383) Minority Interest in Income of Consolidated Subsidiary (846) (1,371) (2,370) (3,806) - ------------------------------------------------------------------------------------------------------ TOTAL $ 16,230 $ 5,584 $ 38,163 $ (15,718) ====================================================================================================== Paperboard Shipped (in tons) 265,417 282,898 785,764 877,425 ======================================================================================================
RESULTS OF OPERATIONS Net Sales (Unaffiliated Customers) Net sales for the quarter ended June 30, 2001 decreased 3.6% to $357.1 million from $370.5 million for the quarter ended June 30, 2000. Net sales for the nine months ended June 30, 2001 decreased 1.6% to $1,069.6 million from $1,087.3 million for the nine months ended June 30, 2000. Net sales decreased primarily as a result of weak market conditions in our paperboard businesses including a significant decline in recycled fiber prices in the quarter and nine months ended June 30, 2001 compared to the quarter and nine months ended June 30, 2000. Net Sales (Aggregate) - Packaging Products Segment
First Second Third Nine Months Fourth Fiscal (In Millions) Quarter Quarter Quarter Ended 6/30 Quarter Year ----------------------------------------------------------------------------------------------------------- 2000 $192.9 $195.1 $202.8 $590.8 $206.6 $797.4 2001 195.6 206.9 198.6 601.1 --- --- -----------------------------------------------------------------------------------------------------------
12 15 Net sales of packaging products before intersegment eliminations for the quarter ended June 30, 2001 decreased 2.1% to $198.6 million from $202.8 million for the quarter ended June 30, 2000. The decrease was due primarily to a decline in volume and selling prices in our folding carton division in comparison to the same quarter in the prior year. Net sales of packaging products before intersegment eliminations for the nine months ended June 30, 2001 increased 1.7% to $601.1 million from $590.8 million for the nine months ended June 30, 2000. The increase was mainly a result of increases in volume in our plastic packaging division offset by a decline in sales volume at our partition joint venture, RTS packaging. Net Sales (Aggregate) - Paperboard Segment
First Second Third Nine Months Fourth Fiscal (In Millions) Quarter Quarter Quarter Ended 6/30 Quarter Year ----------------------------------------------------------------------------------------------------------------- 2000 $144.3 $154.7 $148.9 $447.9 $140.6 $588.5 2001 131.5 133.1 130.5 395.1 --- --- -----------------------------------------------------------------------------------------------------------------
Net sales of paperboard before intersegment eliminations for the quarter ended June 30, 2001 decreased 12.4% to $130.5 million from $148.9 million for the quarter ended June 30, 2000. Net sales of paperboard before intersegment eliminations for the nine months ended June 30, 2001 decreased 11.8% to $395.1 million from $447.9 million for the nine months ended June 30, 2000. 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. Reduced sales volumes at our RTS packaging business also contributed to the decline in sales in our specialty paperboard division. The specialty paperboard division produced 17,400 fewer tons in the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000. Approximately 9,500 tons of the reduction was due to reduced shipments to the RTS packaging business and laminated paperboard products division. The recycled fiber division continued to experience lower sales due to significantly lower recovered fiber prices during the quarter and nine months ended June 30, 2001 compared to the quarter and nine months ended June 30, 2000. Net Sales (Aggregate) - Specialty Corrugated Packaging and Display Segment
First Second Third Nine Months Fourth Fiscal (In Millions) Quarter Quarter Quarter Ended 6/30 Quarter Year ----------------------------------------------------------------------------------------------------------------- 2000 $ 52.3 $ 59.2 $ 59.1 $170.6 $ 68.2 $238.8 2001 57.8 65.8 65.8 189.4 --- --- -----------------------------------------------------------------------------------------------------------------
Net sales within this segment before intersegment eliminations for the quarter ended June 30, 2001 increased 11.3% to $65.8 million from $59.1 million for the quarter ended June 30, 2000. Net sales within this segment before intersegment eliminations for the nine months ended June 30, 2001 increased 11.0% to $189.4 million from $170.6 million for the nine months ended June 30, 2000. The increase primarily resulted from continued growth in our Alliance division. Sales in our Alliance division increased 23% and 18% for the quarter and nine months ended June 30, 2001, respectively, compared to the corresponding periods last year. This increase was offset by lower volumes in our corrugated packaging business due to generally weaker market conditions. Cost of Goods Sold Cost of goods sold for the quarter ended June 30, 2001 decreased 6.4% to $281.7 million from $300.9 million for the quarter ended June 30, 2000. Cost of goods sold as a percentage of net sales for the quarter ended June 30, 2001 decreased to 78.9% from 81.2% for the quarter ended June 30, 2000. Cost of goods sold for the nine months ended June 30, 2001 decreased 2.0% to $854.5 million from $871.8 million for the nine months ended June 30, 2000. Cost of goods sold as a percentage of net sales for the nine months ended June 30, 2001 decreased to 79.9% from 80.2% for the nine months ended June 30, 2000. Cost of goods sold as a percentage of net sales was lower during the quarter and nine months ended June 30, 2001 compared to the quarter and nine months ended June 30, 2000 primarily due to the decrease in recycled fiber prices which were partially offset by increases in natural gas prices. 13 16 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 June 30, Nine months ended June 30, 2001 2000 2001 2000 -------------------- ----------------- ----------------- ------------------ (In Millions) LIFO FIFO LIFO FIFO LIFO FIFO LIFO FIFO ----------------------------------------------------------------------------------------------------------------- Cost of goods sold $281.7 $283.0 $300.9 $297.5 $854.5 $856.0 $871.8 $865.7 Net income (loss) 9.1 8.3 2.6 4.7 21.2 20.3 (22.0) (18.3) -----------------------------------------------------------------------------------------------------------------
Gross Profit
First Second Third Nine Months Fourth Fiscal (% of Net Sales) Quarter Quarter Quarter Ended 6/30 Quarter Year ------------------------------------------------------------------------------------------------------------- 2000 20.8% 19.9% 18.8% 19.8% 19.4% 19.7% 2001 19.1% 20.1% 21.1% 20.1% --- --- -------------------------------------------------------------------------------------------------------------
Gross profit for the quarter ended June 30, 2001 increased 8.2% to $75.3 million from $69.6 million for the quarter ended June 30, 2000. Gross profit for the nine months ended June 30, 2001 decreased 0.2% to $215.1 million from $215.5 million for the nine months ended June 30, 2000. Gross profit as a percentage of net sales was 21.1% and 18.8% for the quarters ended June 30, 2001 and 2000, respectively. Gross profit as a percentage of net sales was 20.1% and 19.8% for the nine months ended June 30, 2001 and 2000, respectively. See Cost of Goods Sold. Selling, General and Administrative Expenses Selling, general and administrative expenses for the quarter ended June 30, 2001 decreased 2.4% to $45.7 million from $46.8 million for the quarter ended June 30, 2000. Selling, general and administrative expenses for the nine months ended June 30, 2001 decreased 1.3% to $133.5 million from $135.3 million for the nine months ended June 30, 2000. Selling, general and administrative expenses as a percentage of net sales was 12.8% and 12.6% for the quarters ended June 30, 2001 and 2000, respectively. Selling, general and administrative expenses as a percentage of net sales was 12.5% and 12.4% for the nine months ended June 30, 2001 and June 30, 2000, respectively. Plant Closing and Other Costs During the second quarter of fiscal 2001, we decided to consolidate the folding carton operations of our Augusta, Georgia folding carton plant into two other plants over a period of four to six months. This closing resulted in the termination of approximately 125 employees. As a result of this decision, we incurred pre-tax charges of approximately $1.4 million and $2.4 million, and made severance payments of approximately $0.5 million and $0.6 million, during the three and nine month periods ended June 30, 2001, respectively. 14 17 During fiscal 2000, we closed a laminated paperboard products plant in Lynchburg, Virginia, and folding carton plants in Chicago, Illinois, Norcross, Georgia and Madison, Wisconsin. The closures resulted in the termination of approximately 550 employees. In connection with these closings, we made severance and other payments of $0.1 million and $2.0 million for the three and nine months ended June 30, 2001, respectively, and made an adjustment to reduce the liability by $0.1 million during the first quarter of fiscal 2001. We had a remaining liability of approximately $0.4 million at June 30, 2001. We have consolidated the operations of these closed plants into other existing facilities. During the remainder of fiscal 2001 and fiscal 2002, we expect to incur an additional $5.0 million of pre-tax expense related to the Augusta, Chicago, and Madison plant closings. Segment Operating Income. Operating Income - Packaging Products Segment
Net Sales Operating (In Millions, except Percentages) (Aggregate) Income Return on Sales - ------------------------------------------------------------------------------------------------------------------ First Quarter $ 192.9 $ 6.3 3.3% Second Quarter 195.1 7.7 3.9 Third Quarter 202.8 10.7 5.3 ------- ------ --- Nine Months Ended 6/30 590.8 24.7 4.2 Fourth Quarter 206.6 10.1 4.9 - ------------------------------------------------------------------------------------------------------------------ Fiscal 2000 $ 797.4 $ 34.8 4.4% - ------------------------------------------------------------------------------------------------------------------ FIRST QUARTER $ 195.6 $ 9.3 4.8% SECOND QUARTER 206.9 10.0 4.8 THIRD QUARTER 198.6 11.1 5.6 ------- ------ --- NINE MONTHS ENDED 6/30 601.1 30.4 5.1 FOURTH QUARTER --- --- --- - ------------------------------------ -------------------------- -------------------------- ----------------------- FISCAL 2001 --- --- --- - ------------------------------------ -------------------------- -------------------------- -----------------------
Operating income attributable to the packaging products segment for the quarter ended June 30, 2001 increased 3.7% to $11.1 million from $10.7 million for the quarter ended June 30, 2000. Operating income attributable to the packaging products segment for the nine months ended June 30, 2001 increased 23.1% to $30.4 million from $24.7 million for the nine months ended June 30, 2000. Operating margin for the quarter ended June 30, 2001 was 5.6% compared to 5.3% for the quarter ended June 30, 2000. Operating margin for the nine months ended June 30, 2001 was 5.1% compared to 4.2% for the nine months ended June 30, 2000. The increase in operating margin was primarily the result of operating efficiencies in our folding carton division gained through plant consolidations in fiscal 2000 Operating income for our folding carton division increased 74.2% to $16.2 million for the nine months ended June 30, 2001 from $9.3 million for the nine months ended June 30, 2000. Also contributing to the increase was a net sales increase in our plastic packaging business, which resulted in a corresponding increase in operating income. These increases were offset by a decrease in operating margin in our RTS packaging business due to lower sales volumes compared to the prior fiscal year. 15 18 Operating Income - Paperboard Segment
Net Sales Operating (In Millions, except Percentages) (Aggregate) Income Return on Sales - ------------------------------------------------------------------------------------------------------------------- First Quarter $ 144.3 $ 15.5 10.7% Second Quarter 154.7 14.7 9.5 Third Quarter 148.9 8.4 5.6 ------- ------ ---- Nine Months Ended 6/30 447.9 38.6 8.6 Fourth Quarter 140.6 9.0 6.4 - ------------------------------------------------------------------------------------------------------------------- Fiscal 2000 $ 588.5 $ 47.6 8.1% - ------------------------------------------------------------------------------------------------------------------- FIRST QUARTER $ 131.5 $ 9.1 6.9% SECOND QUARTER 133.1 8.9 6.7 THIRD QUARTER 130.5 8.9 6.8 ------- ------ ---- NINE MONTHS ENDED 6/30 395.1 26.9 6.8 FOURTH QUARTER --- --- --- - ------------------------------------------------------------------------------------------------------------------- FISCAL 2001 --- --- --- - -------------------------------------------------------------------------------------------------------------------
Operating income attributable to the paperboard segment for the quarter ended June 30, 2001 increased 6.0% to $8.9 million from $8.4 million for the quarter ended June 30, 2000. Operating margin for the quarter ended June 30, 2001 was 6.8% compared to 5.6% for the quarter ended June 30, 2000. The increase in operating margin in the quarter is due to unusual operating problems experienced at our Dallas coated mill during the third and fourth quarters of the prior fiscal year. However, this increase was offset by high energy costs which continue to be a significant factor for the paperboard group with average energy costs rising from $51 per ton to $65 per ton in the third quarter of fiscal 2001 compared to the same quarter last year. Operating income attributable to the paperboard segment for the nine months ended June 30, 2001 decreased 30.3% to $26.9 million from $38.6 million for the nine months ended June 30, 2000. Operating margin for the nine months ended June 30, 2001 was 6.8% compared to 8.6% for the nine months ended June 30, 2000. The decrease in operating margin resulted from higher energy costs and softer markets during the nine months ended June 30, 2001 compared to the nine months ended June 30, 2000. Sales of our laminated paperboard products declined due to a decrease in demand by customers in the book and ready to assemble furniture industries. In turn, the reduced sales volumes at our laminated paperboard products division, combined with a decline in sales to our RTS packaging business, reduced operating income in our specialty paperboard division. The decreases in operating margin of our mills were partially offset by lower recovered fiber prices. However, this 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.
Weighted Uncoated Coated Average Medium Average Total Average Average Tons Tons Paperboard Tons Medium Tons Price Recovered Shipped Shipped Price Shipped Price Shipped All Tons Paper Cost (In (In (Per (In (Per (In (Per (Per Thousands) Thousands) Ton) Thousands) Ton) Thousands) Ton) Ton) ---------------------------------------------------------------------------------------------------------------------- First Quarter 127.3 123.1 $420 42.4 $386 292.8 $415 $ 83 Second Quarter 129.5 127.6 426 44.7 403 301.8 423 91 Third Quarter 123.4 118.6 445 40.9 419 282.9 441 108 ----- ----- ----- ------- Nine Months Ended 6/30 380.2 369.3 430 128.0 403 877.5 426 94 Fourth Quarter 110.6 118.1 449 42.2 407 270.9 443 88 ---------------------------------------------------------------------------------------------------------------------- Fiscal 2000 490.8 487.4 $435 170.2 $403 1,148.4 $430 $ 92 ---------------------------------------------------------------------------------------------------------------------- FIRST QUARTER 97.9 118.8 $451 41.5 $393 258.2 $442 $ 65 SECOND QUARTER 102.8 119.6 445 39.8 385 262.2 435 58 THIRD QUARTER 105.8 117.6 437 42.0 369 265.4 426 53 ----- ----- ----- ------- NINE MONTHS ENDED 6/30 306.5 356.0 444 123.3 382 785.8 434 59 FOURTH QUARTER --- --- --- --- --- --- --- --- ---------------------------------------------------------------------------------------------------------------------- FISCAL 2001 --- --- --- --- --- --- --- --- ----------------------------------------------------------------------------------------------------------------------
16 19 Total operating capacity in our paperboard segment for the three months ended June 30, 2001 declined 3.2% to 311.1 thousand tons from 321.4 thousand tons for the three months ended June 30, 2000. Total operating capacity in our paperboard segment for the nine months ended June 30, 2001 declined 4.8% to 923.1 thousand tons from 969.8 thousand tons for the nine months ended June 30, 2000. The decrease in operating capacity is due to the contribution of one of our two paperboard machines at our Lynchburg, Virginia paperboard mill to Seven Hills Paperboard, LLC, an entity in which we own 49%. The machine is being converted to manufacture gypsum wallboard facing paper. Our St. Paul, Minnesota, Battle Creek, Michigan, Sheldon Springs, Vermont, Dallas, Texas, and Stroudsburg, Pennsylvania mills produce coated grades of paperboard. Total annual capacity of coated paperboard is 545.0 thousand tons. Our Chattanooga, Tennessee, Otsego, Michigan, Dallas, Texas, Lynchburg, Virginia, Eaton, Indiana, Cincinnati, Ohio, and Aurora, Illinois mills produce uncoated grades of specialty paperboard. Total annual capacity of uncoated specialty paperboard is 504.0 thousand tons. Our St. Paul, Minnesota facility produces recycled corrugating medium and has an annual capacity of 185.0 thousand tons. Operating Income - Specialty Corrugated Packaging and Display Segment
(In Millions, except Net Sales Operating Return Percentages) (Aggregate) Income on Sales ------------------------------------------------------------------------------------------------------------------ First Quarter $ 52.3 $ 6.2 11.9% Second Quarter 59.2 7.8 13.2 Third Quarter 59.1 7.2 12.2 ------- ------ ---- Nine Months Ended 6/30 170.6 21.2 12.4 Fourth Quarter 68.2 7.2 10.6 ------------------------------------------------------------------------------------------------------------------ Fiscal 2000 $ 238.8 $ 28.4 11.9% ------------------------------------------------------------------------------------------------------------------ FIRST QUARTER $ 57.8 $2.3 4.0% SECOND QUARTER 65.8 7.8 11.9 THIRD QUARTER 65.8 7.4 11.2 ------- ------ ---- NINE MONTHS ENDED 6/30 189.4 17.5 9.2 FOURTH QUARTER --- --- --- ------------------------------------------------------------------------------------------------------------------ FISCAL 2001 --- --- --- ------------------------------------------------------------------------------------------------------------------
Operating income attributable to this segment for the quarter ended June 30, 2001 increased 2.8% to $7.4 million from $7.2 million for the quarter ended June 30, 2000. Operating income attributable to this segment for the nine months ended June 30, 2001 was $17.5 million as compared to $21.2 million, a decrease of 17.5%, for the nine months ended June 30, 2000. Operating margin for the quarter ended June 30, 2001 decreased to 11.2% from 12.2% for the quarter ended June 30, 2000. Operating margin for the nine months ended June 30, 2001 decreased to 9.2% from 12.4% for the nine months ended June 30, 2000. The decrease in operating margin primarily resulted from lower sales volumes in our corrugating packaging division due to generally weaker market conditions as well as fixed costs associated with positioning the Alliance division for fiscal 2001 growth. Additionally, operating margin was higher for the nine months ended June 30, 2000 due to unusually strong sales and earnings in the display division during the first quarter of fiscal 2000 which adversely affects the comparison to the nine months ended June 30, 2001. Interest Expense Interest expense for the quarter ended June 30, 2001 decreased to $8.1 million from $8.9 million for the quarter ended June 30, 2000. The decline in interest expense for the quarter ended June 30, 2001 was primarily due to a decrease in our average outstanding borrowings and a decrease in interest rates. Interest expense for the nine months ended June 30, 2001 increased to $27.5 million from $25.4 million for the nine months ended June 30, 2000. The 17 20 increase in interest expense for the nine months ended June 30, 2001 was primarily due to an increase in our average outstanding borrowings and higher interest rates during the first quarter of fiscal 2001. Provision for Income Taxes The income tax expense for the quarter ended June 30, 2001 was $7.1 million compared to $3.0 million for the quarter ended June 30, 2000. Provision for income taxes increased to $17.2 million for the nine months ended June 30, 2001 from $6.3 million for the nine months ended June 30, 2000. The Company's effective tax expense rate was 43.8% for the quarter ended June 30, 2001 compared to 53.3% for the quarter ended June 30, 2000. The Company's effective tax rate increased to 45.1% for the nine months ended June 30, 2001 compared to an effective tax benefit rate of 40.2% for the nine months ended June 30, 2000. Differences between our effective tax rate and statutory rates relate primarily to the amortization and write-off of goodwill, which is not deductible for income tax purposes. Net Income (Loss) and Earnings (Loss) Per Common and Common Equivalent Share Net income for the quarter and nine months ended June 30, 2001 was $9.1 million and $21.2 million, respectively. Net income for the quarter ended June 30, 2000 was $2.6 million and net loss for the nine months ended June 30, 2000 was $22.0 million. Net income as a percentage of net sales was 2.6% and 2.0% for the quarter and nine months ended June 30, 2001, respectively. Net income as a percentage of net sales was 0.7% for the quarter ended June 30, 2000 and net loss as a percentage of net sales was 2.0% for the nine months ended June 30, 2000. Earnings per common and common equivalent share for the quarter and nine months ended June 30, 2001 was $0.27 and $0.64, respectively. Earnings per common and common equivalent share for the quarter ended June 30, 2000 was $0.07 and loss per common and common equivalent share for the nine months ended June 30, 2000 was $0.63. 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. During the second quarter of fiscal 2001, we amended the terms of our revolving credit facility under which we reduced our aggregate borrowing availability from $450 million to $400 million. During July 2001, the participating banks agreed to amend the terms of our revolving credit facility to eliminate certain scheduled adjustments to two of our financial covenants in the event we reduce the size of the facility to $300 million or less and permit us to enter into certain agreements restricting our ability to grant liens upon our assets and properties. At June 30, 2001, we had $289 million outstanding under our revolving credit facility. The revolving credit facility terminates in 2005. Cash and cash equivalents, $3.0 million at June 30, 2001, decreased from $5.4 million at September 30, 2000. Net cash provided by operating activities increased for the nine months ended June 30, 2001 to $92.0 million from $62.5 million for the nine months ended June 30, 2000. The increase was primarily a result of decreases in accounts receivable and inventory balances. Net cash used for financing activities aggregated $36.3 million for the nine months ended June 30, 2001 and consisted primarily of repayments of borrowings and dividend payments. Net cash provided by financing activities aggregated $9.4 million for the nine months ended June 30, 2000 and consisted primarily of additional borrowings under the revolving credit facility, partially offset by purchases of common stock and dividend payments. Net cash used for investing activities was $58.4 million for the nine months ended June 30, 2001 compared to $69.0 million for the nine months ended June 30, 2000 and consisted primarily of capital expenditures for the nine months ended June 30, 2001 and June 30, 2000. Capital expenditures during the nine months ended June 30, 2001 aggregated $51.8 million, excluding our capital contributions to our joint venture Seven Hills Paperboard, LLC, and were used primarily to purchase and upgrade machinery and equipment. To date, we have contributed cash of $14.6 million to the joint venture. We estimate that our capital expenditures will aggregate approximately $80.0 million for fiscal 2001 including our investment in Seven Hills Paperboard, LLC. These expenditures will be used to purchase and upgrade various machinery and equipment in all of our divisions and for building expansions and improvements in one of our divisions. 18 21 On November 15, 2000, the Executive Committee of our Board of Directors amended our stock repurchase plan to allow us to repurchase from time to time prior to July 31, 2003 up to 2,143,332 shares of common stock, including shares of Class A common stock, in open market transactions on the New York Stock Exchange or in private transactions, and shares of Class B common stock in private transactions, including repurchases pursuant to certain first-offer rights contained in our Restated and Amended Articles of Incorporation. Since the amendment, we have repurchased 4,300 shares of Class A common stock. 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. We include in operations amounts received or paid when the underlying transaction settles. As of June 30, 2001, derivatives are included in other long-term liabilities on the balance sheet. We do not enter into or hold derivatives for trading or speculative purposes. From time to time, we use interest rate cap agreements and interest rate swap agreements to manage synthetically the interest rate characteristics of a portion of our outstanding debt and to limit our exposure to rising interest rates. Amounts to be received or paid as a result of interest rate cap agreements and interest rate swap agreements are accrued and recognized as an adjustment to interest expense related to the designated debt. The cost of purchasing interest rate caps 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 related to the debt over the remaining term of the original contract life of terminated swap agreements. In the event of the early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in income at the time of the extinguishment. 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 business. 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. EXPENDITURES FOR ENVIRONMENTAL COMPLIANCE We are subject to various federal, state, local and foreign environmental laws and regulations, including those regulating the discharge, storage, handling and disposal of a variety of substances. These laws and regulations include, among others, the Comprehensive Environmental Response, Compensation and Liability Act, which we refer to as CERCLA, the Clean Air Act (as amended in 1990), the Clean Water Act, the Resource Conservation and Recovery Act (including amendments relating to underground tanks) and the Toxic Substances Control Act. These environmental regulatory programs are primarily administered by the U.S. Environmental Protection Agency. In addition, some states in which we operate have adopted equivalent or more stringent environmental laws and regulations or have enacted their own parallel environmental programs, which are enforced through various state administrative agencies. We do not believe that future compliance with these environmental laws and regulations will have a material adverse effect on our results of operations, financial condition or cash flows. However, environmental laws and regulations are becoming increasingly stringent. Consequently, our compliance and remediation costs could increase materially. In addition, we cannot currently assess with certainty the impact that the future emissions standards and enforcement 19 22 practices under the 1990 amendments to the Clean Air Act will have on our operations or capital expenditure requirements. However, we believe that any such impact or capital expenditures will not have a material adverse effect on our results of operations, financial condition or cash flows. We estimate that we will spend $1.0 to $2.0 million for capital expenditures during fiscal year 2001 in connection with matters relating to environmental compliance. Over the next twelve months, we will also need to upgrade or replace a boiler at one of our facilities in Texas to comply with new state air pollution control requirements. We estimate the cost for upgrading or replacing that boiler to be in the range of $1.0 million to $3.5 million. In the event we are not able to upgrade or replace the boiler prior to the new air pollution control requirements going into effect, we may have to temporarily suspend a portion of our operations at our Dallas, Texas facility. We do not believe that such a disruption, if it were to occur, would have a material adverse effect on our results of operations. In addition, we may need to modify or replace the coal-fired boilers at two of our facilities in order to operate cost effectively while complying with emissions regulations under the Clean Air Act. We estimate these improvements could cost as much as $9.0 million. If required, we anticipate those costs to be incurred beginning in 2002. On February 9, 1999, we received a letter from the Michigan Department of Environmental Quality, which we refer to as MDEQ, in which the MDEQ alleged that we were in violation of the Michigan Natural Resources and Environmental Protection Act, as well as the facility's wastewater discharge permit at one of our Michigan facilities. The letter alleged that we exceeded several numerical limitations for chemical parameters outlined in the wastewater permit and violated other wastewater discharge criteria. The MDEQ further alleged that we were liable for contamination contained on the facility property as well as for contributing contamination to the Kalamazoo River Site. The letter requested that we commit, in the form of a binding agreement, to undertake the necessary and appropriate response activities and response actions to address contamination in both areas. We have entered into an administrative consent order pursuant to which improvements are being made to the facility's wastewater treatment system and we have paid a $75,000 settlement amount. We have also agreed to pay an additional $30,000 for past and future oversight costs incurred by the State of Michigan. This payment will be made in three equal installments over two years, the first of which has already been made. The cost of making upgrades to the wastewater treatment systems is estimated to be approximately $1.4 million. Nothing contained in the order constitutes an admission of liability or any factual finding, allegation or legal conclusion on our part. The order was completed during the first quarter of fiscal 2001. To date, MDEQ has not made any other demand regarding our alleged liability for contamination at the Kalamazoo River Site. We have been identified as a potentially responsible party, which we refer to as a PRP, at eight "superfund" sites pursuant to CERCLA or comparable state statutes. In all of these matters, we have either resolved our alleged liability for amounts that are not material to us, or we believe that based on currently available information, although there can be no assurance, any liability that we might have at these other sites, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flows. 20 23 FORWARD-LOOKING STATEMENTS Statements herein regarding, among other things, estimated capital expenditures and the estimated costs of closing the Augusta, Chicago, and Madison facilities, 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 as well as estimated severance costs, the timing and cost of relocating equipment and the amount of asset writedowns in connection with closing of the Augusta, Chicago, and Madison facilities. 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. 21 24 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, 2000. There have been no significant developments with respect to derivatives or exposure to market risk. 22 25 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K None 23 26 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: July 26, 2001 By: /s/ STEVEN C. VOORHEES -------------------- -------------------------------------- Steven C. Voorhees Executive Vice-President Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer and duly authorized officer) 24 -----END PRIVACY-ENHANCED MESSAGE-----