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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
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 August 4, 1998
- ----------------------------------- --------------------------------
Class A Common Stock, .01 par value 23,071,676
Class B Common Stock, .01 par value 11,716,732
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ROCK-TENN COMPANY
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the three months and
nine months ended June 30, 1998 and 1997 1
Condensed Consolidated Balance Sheets at June 30, 1998 and
September 30, 1997 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended June 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Index to Exhibits 14
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 320,078 $ 300,302 $ 964,407 $ 784,017
Cost of goods sold 231,266 226,484 709,061 590,862
--------- --------- --------- ---------
Gross profit 88,812 73,818 255,346 193,155
Selling, general and administrative expenses 58,709 51,606 171,685 140,006
Plant closure and other costs -- 2,700 -- 15,484
--------- --------- --------- ---------
Income from operations 30,103 19,512 83,661 37,665
Interest and other income 682 82 860 689
Interest expense (8,640) (8,596) (26,514) (17,842)
Minority interest in income of consolidated
subsidiary (1,533) -- (3,928) --
--------- --------- --------- ---------
Income before income taxes 20,612 10,998 54,079 20,512
Provision for income taxes 8,812 4,786 23,816 14,092
--------- --------- --------- ---------
Net income $ 11,800 $ 6,212 $ 30,263 $ 6,420
========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding 35,181 34,085 35,199 34,102
Basic earnings per share $ 0.34 $ 0.19 $ 0.88 $ 0.19
========= ========= ========= =========
Diluted earnings per share $ 0.34 $ 0.18 $ 0.86 $ 0.19
========= ========= ========= =========
Cash dividends per common share $ 0.075 $ 0.075 $ 0.225 $ 0.225
========= ========= ========= =========
</TABLE>
See accompanying notes
1
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ROCK-TENN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
- ---------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,592 $ 3,345
Accounts receivable (net of allowance for
doubtful accounts of $3,376 and $3,632 ) 111,476 115,162
Inventories 97,001 94,035
Other current assets 4,665 5,073
----------- -----------
TOTAL CURRENT ASSETS 220,734 217,615
Property, plant and equipment at cost:
Land and buildings 172,801 163,528
Machinery and equipment 735,439 696,039
Leasehold improvements 4,246 13,636
Transportation equipment 14,643 4,117
----------- -----------
927,129 877,320
Less accumulated depreciation and amortization (361,598) (326,146)
----------- -----------
Net property, plant and equipment 565,531 551,174
Goodwill 318,386 325,697
Other assets 16,106 19,200
----------- -----------
$ 1,120,757 $ 1,113,686
=========== ===========
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 48,651 $ 54,471
Accrued compensation and benefits 38,186 34,500
Current maturities of long-term debt 37,506 41,282
Other current liabilities 21,428 21,892
----------- -----------
TOTAL CURRENT LIABILITIES 145,771 152,145
Long-term debt due after one year 483,964 492,340
Deferred income taxes 80,917 78,288
Other liabilities 5,049 6,296
Commitments and contingencies
Minority interest 11,621 13,405
Shareholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized; no
shares outstanding at June 30, 1998 and September 30, 1997 -- --
Class A common stock, $.01 par value; 175,000,000 shares authorized,
23,071,476 outstanding at June 30, 1998 and 22,582,976 outstanding at
September 30, 1997; Class B common stock, $.01 par value; 60,000,000 shares
authorized; 11,697,132 outstanding
at June 30, 1998 and 11,791,350 outstanding at September 30, 1997 348 344
Capital in excess of par value 129,053 126,363
Retained earnings 268,080 245,592
Other (4,046) (1,087)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 393,435 371,212
----------- -----------
$ 1,120,757 $ 1,113.686
=========== ===========
</TABLE>
See accompanying notes
2
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ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
June 30, June 30,
1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 30,263 $ 6,420
Items in income not affecting cash:
Depreciation and amortization 52,821 44,261
Plant closure and other costs -- 14,337
Deferred income taxes 2,629 5,017
Gain on sale of property, plant and equipment (587) (404)
Loss on currency translation 131 --
Minority interest in income of consolidated subsidiary 3,928 --
Change in operating assets and liabilities (excluding acquisitions):
Accounts receivable 3,167 529
Inventories (3,466) (278)
Other assets 1,023 (6,276)
Accounts payable (5,598) (6,495)
Accrued liabilities 2,300 (6,784)
Income taxes payable -- 2,470
Other (389) (767)
-------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES 86,222 52,030
FINANCING ACTIVITIES:
Net (repayments) additions to revolving credit facilities (4,000) 415,058
Additions to long-term debt -- 1,500
Repayments of long-term debt (8,152) (145,482)
Sales of common stock 2,694 2,969
Cash dividends paid to shareholders (7,775) (7,492)
Cash dividends paid to minority interest (5,775) --
-------- ---------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (23,008) 266,553
INVESTING ACTIVITIES:
Cash paid for purchases of businesses -- (299,114)
Capital expenditures (61,157) (67,049)
Proceeds from sale of building, equipment and other 1,666 1,175
Cash paid for intangibles -- (290)
Decrease in unexpended industrial revenue bond proceeds 610 --
-------- ---------
CASH USED FOR INVESTING ACTIVITIES (58,881) (365,278)
Effect of exchange rate changes on cash (86) (8)
Increase (decrease) in cash and cash equivalents 4,247 (46,703)
Cash and cash equivalents at beginning of period 3,345 50,876
-------- ---------
Cash and cash equivalents at end of period $ 7,592 $ 4,173
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes (net of refunds) $ 19,918 $ 12,247
Interest (net of amounts capitalized) 26,366 14,807
Supplemental disclosure of noncash investing and financing activities:
Indebtedness assumed in connection with acquisition -- 143,706
</TABLE>
See accompanying notes
3
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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,
1997 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, 1998 and 1997, the Company's
financial position at June 30, 1998 and September 30, 1997, and the cash flows
for the nine-month periods ended June 30, 1998 and 1997.
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,
1997.
The results for the nine months ended June 30, 1998 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 uses interest cap agreements to synthetically manage the interest
rate characteristics of a portion of its outstanding debt and to partially limit
the Company's exposure to rising interest rates. Interest rate differentials to
be received as a result of interest rate cap agreements are accrued and
recognized as an adjustment of interest expense related to the designated debt.
Interest rate cap purchase expenses are amortized to interest expense ratably
during the life of the agreement.
The Company uses swap agreements to synthetically manage the selling prices of
certain of its board and to limit the Company's exposure to falling board
prices. Board price differentials to be paid or received as a result of the
board swap agreements are recognized as an adjustment to sales in the period in
which the sale is made.
NOTE 3. 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 4. 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.
4
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Inventories at June 30, 1998 and September 30, 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
-------- -------------
(Unaudited)
<S> <C> <C>
Finished goods and work in process $ 73,914 $ 64,933
Raw materials 33,682 37,474
Supplies 11,895 12,318
--------- ---------
Inventories at first-in, first-out (FIFO) cost 119,491 114,725
LIFO reserve (22,490) (20,690)
--------- ---------
Net inventories $ 97,001 $ 94,035
========= =========
</TABLE>
NOTE 5. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128 ("SFAS 128") establishes
accounting standards for computation, presentation and disclosure requirements
for earnings per share for entities with publicly held common stock. The Company
adopted SFAS 128 effective October 1, 1997. This adoption did not have a
material impact on the Company's consolidated financial statements.
In October 1996, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 96-1 ("SOP 96-1"). SOP 96-1 provides accounting
guidance on issues relating to the recognition, measurement and disclosure of
environmental liabilities. The Company adopted SOP 96-1 effective October 1,
1997. This adoption did not have a material impact on the Company's consolidated
financial statements.
NOTE 6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $11,800 $ 6,212 $30,263 $ 6,420
Denominator:
Denominator for basic earnings per share-
weighted average shares 34,746 33,357 34,561 33,265
Effect of dilutive stock options 435 728 638 837
------- ------- ------- -------
Denominator for diluted earnings per share-
weighted average shares and assumed
conversions 35,181 34,085 35,199 34,102
======= ======= ======= =======
Basic earnings per share $ 0.34 $ .19 $ 0.88 $ .19
======= ======= ======= =======
Diluted earnings per share $ 0.34 $ .18 $ 0.86 $ .19
======= ======= ======= =======
</TABLE>
5
<PAGE> 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 Company's
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, 1997 which have been filed with the
Securities and Exchange Commission as part of the Company's Annual Report on
Form 10-K for the year ended September 30, 1997.
GENERAL
On January 21, 1997, the Company acquired all of the outstanding capital stock
of the parent of Waldorf Corporation ("Waldorf"), a manufacturer of folding
cartons and 100% recycled paperboard and a manufacturer of 100% recycled
corrugating medium (the "Waldorf Acquisition"). On June 9, 1997, the Company
acquired substantially all of the assets of Rite Paper Products, Inc., a
manufacturer of laminated paperboard components primarily for the
ready-to-assemble furniture industry. On July 9, 1997, the Company acquired
substantially all of the assets and certain of the liabilities of The Davey
Company, a manufacturer of recycled paperboard used by the book manufacturing
industry for book covers. On September 5, 1997, the Company and Sonoco Products
Company combined their respective fiber partition businesses into a new entity
named RTS Packaging, LLC ("RTS") which is owned 65% by the Company.
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 1997, 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, however, a majority of the Company's
converted products sales are to customers which annually purchase less than $10
million 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 and corrugating 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 1997 the Company sold paperboard to over
1,000 customers. A significant percentage of the Company's sales of coated and
uncoated recycled paperboard 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 segments sales volumes may therefore be directly impacted
by changes in demand for the Company's converted products.
6
<PAGE> 9
ROCK-TENN COMPANY
INDUSTRY SEGMENT INFORMATION
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR TONNAGE DATA)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES:
Converted Products $ 263,341 $ 251,657 $ 791,928 $ 667,614
Paperboard 111,828 109,262 351,882 276,204
Intersegment Eliminations (55,091) (60,617) (179,403) (159,801)
- -------------------------------------------------------------------------------------------------
TOTAL $ 320,078 $ 300,302 $ 964,407 $ 784,017
- -------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES:
Converted Products $ 14,068 $ 9,064 $ 35,508 $ 9,423
Paperboard 18,237 12,415 54,539 35,606
Corporate Expense (2,202) (1,967) (6,386) (6,534)
Intersegment Eliminations -- -- -- (830)
Interest Expense (8,640) (8,596) (26,514) (17,842)
Interest Income 682 82 860 689
Minority Interest in Income of
Consolidated Subsidiary (1,533) -- (3,928) --
- -------------------------------------------------------------------------------------------------
TOTAL $ 20,612 $ 10,998 $ 54,079 $ 20,512
- -------------------------------------------------------------------------------------------------
Paperboard Shipped (in tons) 266,141 271,155 834,972 677,847
- -------------------------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
Net Sales (Unaffiliated Customers). Net sales for the quarter ended June 30,
1998 increased 6.6% to $320.1 million from $300.3 million for the quarter ended
June 30, 1997. Net sales for the nine months ended June 30, 1998 increased 23.0%
to $964.4 million from $784.0 million for the nine months ended June 30, 1997.
Net sales increased for the quarter and for the nine months ended June 30, 1998
as a result of acquisitions completed during fiscal 1997 and price increases
offset by lower volumes.
Net Sales (Aggregate) - Converted Products Segment. Net sales of converted
products before intersegment eliminations for the quarter ended June 30, 1998
increased 4.6% to $263.3 million from $251.7 million for the quarter ended June
30, 1997. Net sales of converted products before intersegment eliminations for
the nine months ended June 30, 1998 increased 18.6% to $791.9 million from
$667.6 million for the nine months ended June 30, 1997. The increase for the
quarter ended and for the nine months ended June 30, 1998 was primarily the
result of the acquisitions completed during fiscal 1997 and price increases
offset by lower volumes. The decrease in volume was partially attributable to
lower sales to a national customer. The Company has been notified that another
national customer will phase out purchases during the next two fiscal quarters.
The Company currently believes that the impact of lower volume with these
national customers will be offset in future periods 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
<PAGE> 10
Net Sales (Aggregate) - Paperboard Segment. Net sales of paperboard before
intersegment eliminations for the quarter ended June 30, 1998 increased 2.3% to
$111.8 million from $109.3 million for the quarter ended June 30, 1997. Net
sales of paperboard before intersegment eliminations for the nine months ended
June 30, 1998 increased 27.4% to $351.9 million from $276.2 million for the nine
months ended June 30, 1997. The increase for the nine months ended June 30, 1998
was the result of the Waldorf Acquisition on January 21, 1997, significant price
increases on recycled medium paperboard and price increases on other grades of
paperboard offset by lower volumes. The decrease in volume was partially
attributable to lower volume with one national customer within the converted
products segment discussed above. The phase out of a national customer's
purchases within the converted products segment during the next two fiscal
quarters will also result in a reduction in paperboard volumes during such
quarters. The Company currently believes that the impact of the lower volume
with these national customers will be offset in the future by the awards of new
business from other customers and from sales of paperboard 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 June 30, 1998
increased 2.1% to $231.3 million from $226.5 million for the quarter ended June
30, 1997. Cost of goods sold as a percentage of net sales for the quarter ended
June 30, 1998 decreased to 72.3% from 75.4% for the quarter ended June 30, 1997.
Cost of goods sold for the nine months ended June 30, 1998 increased 20.0% to
$709.1 million from $590.9 million for the nine months ended June 30, 1997. Cost
of goods sold as a percentage of net sales for the nine months ended June 30,
1998 decreased to 73.5% from 75.4% for the nine months ended June 30, 1997. The
average cost of recovered paper, the Company's primary raw material, increased
to $59 per ton for the quarter ended June 30, 1998 compared to $50 per ton for
the quarter ended June 30, 1997. The average cost of recovered paper for the
nine months ended June 30, 1998 increased to approximately $66 per ton from $53
per ton for the nine months ended June 30, 1997. Higher average selling prices
and increased manufacturing efficiencies which were partially offset by
increased costs of recovered paper and lower volumes of paperboard shipped and
converted products sold resulted in a decrease in cost of goods sold as a
percentage of net sales for the quarter and nine months ended June 30, 1998.
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 increasing costs, the LIFO method
generally results in higher cost of goods sold than under the FIFO method. In
periods of decreasing costs, the results are generally the opposite. 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 the same as it would have been under
the FIFO method in the quarters ended June 30, 1998 and 1997. Cost of goods sold
determined under the LIFO method was $1.8 million higher than it would have been
and the same as it would have been under the FIFO method for the nine months
ended June 30, 1998 and 1997, respectively. Net income was the same as it would
have been under the FIFO method in the quarters ended June 30, 1998 and 1997.
Net income was $1.1 million lower than it would have been and the same as it
would have been under the FIFO method for the nine months ended June 30, 1998
and 1997, respectively. These supplemental FIFO earnings reflect the after tax
effect of LIFO each year.
Gross Profit. Gross profit for the quarter ended June 30, 1998 increased 20.3%
to $88.8 million from $73.8 million for the quarter ended June 30, 1997. Gross
profit for the nine months ended June 30, 1998 increased 32.1% to $255.3 million
from $193.2 million for the nine months ended June 30, 1997. Gross profit as a
percentage of net sales increased to 27.7% for the quarter ended June 30, 1998
from 24.6% for the quarter ended June 30, 1997. Gross profit as a percentage of
net sales increased to 26.5% for the nine months ended June 30, 1998 from 24.6%
for the nine months ended June 30, 1997. See Cost of Goods Sold.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the quarter ended June 30, 1998 increased 13.8% to
$58.7 million from $51.6 million for the quarter ended June 30, 1997. Selling,
general and administrative expenses for the nine months ended June 30, 1998
increased 22.6% to $171.7 million from $140.0 million for the nine months ended
June 30, 1997. Selling, general and administrative expenses as a percentage of
net sales for the quarter ended June 30, 1998 increased to 18.3% from 17.2% for
the quarter ended June 30, 1997. Selling, general and administrative expenses as
a
8
<PAGE> 11
percentage of net sales for the nine months ended June 30, 1998 decreased to
17.8% from 17.9% for the nine months ended June 30, 1997. The increase in
selling, general and administrative expenses as a percentage of net sales for
the quarter ended June 30, 1998 resulted from increased incentive compensation
expenses.
Plant Closure and Other Costs. In connection with the Waldorf Acquisition, the
Company reviewed the combined operations of Rock-Tenn and Waldorf in order to
most efficiently serve its markets, eliminate geographic overlap and coordinate
production. In connection with this review, management decided to close the
Company's existing folding carton plant at Mundelein, Illinois. The Mundelein
facility was acquired in the acquisition of Olympic Packaging in 1995. In
connection with this closing and considering the impact of the Waldorf
Acquisition, the Company incurred a charge to net income of $12.8 million during
the second quarter of fiscal 1997 which consisted primarily of the non-cash
write-off of goodwill associated with the Company's Olympic Packaging
subsidiary. The write-off of goodwill was required based upon the decision to
close the Mundelein facility and the determination that such goodwill would not
be recoverable. The Company incurred additional costs of approximately $1.6
million ($1.0 million after tax) during the third and fourth quarters of fiscal
1997 principally for employee termination and related charges associated with
closing the Mundelein facility.
In June 1997, management decided to close a plastics recycling facility located
in Indianapolis, Indiana. As a result, in the third and fourth quarters of
fiscal 1997, the Company recorded charges of approximately $1.8 million ($1.1
million after tax) related to the estimated losses on disposal of the machinery
and equipment.
The Company may consider closing and/or consolidating certain facilities within
the converted products segment to more efficiently align production capacity
with product demand. While the Company has not yet determined which if any
alternative it may pursue, the cost of some alternatives may have a significant
one-time negative effect on a fiscal quarter's results of operations.
Segment Operating Income
Operating Income - Converted Products Segment. Excluding $2.7 million of plant
closure and other related costs during the quarter ended June 30, 1997,
operating income attributable to the converted products segment for the quarter
ended June 30, 1998 increased 19.5% to $14.1 million from $11.8 million for the
quarter ended June 30, 1997. Excluding $15.5 million of plant closure and other
related costs during the nine months ended June 30, 1997, operating income
attributable to the converted products segment for the nine months ended June
30, 1998 increased 42.6% to $35.5 million from $24.9 million for the nine months
ended June 30, 1997. Excluding the effect of $2.7 million of plant closure and
other related costs during the quarter ended June 30, 1997, operating margin for
the quarter ended June 30, 1998 was 5.4% compared to 4.7% for the quarter ended
June 30, 1997. Excluding the effect of $15.5 million of plant closure and other
related costs during the nine months ended June 30, 1997, operating margin for
the nine months ended June 30, 1998 was 4.5% compared to 3.7% for the nine
months ended June 30, 1997. The increase in operating margin for the quarter and
nine months ended June 30, 1998, excluding the effect of $2.7 million and $15.5
million of plant closure and other related costs for the quarter and nine months
ended June 30, 1997, respectively, was the result of price increases and
increased operating efficiencies, which were partially offset by lower volumes.
Operating Income - Paperboard Segment. Operating income attributable to the
paperboard segment for the quarter ended June 30, 1998 increased 46.8% to $18.2
million from $12.4 million for the quarter ended June 30, 1997. Operating margin
for the quarter ended June 30, 1998 was 16.3% compared to 11.3% for the quarter
ended June 30, 1997. Operating income attributable to the paperboard segment for
the nine months ended June 30, 1998 increased 53.1% to $54.5 million from $35.6
million for the nine months ended June 30, 1997. Operating margin for the nine
months ended June 30, 1998 was 15.5% compared to 12.9% for the nine months ended
June 30, 1997. Average paperboard selling prices (excluding corrugating medium)
increased to $417 per ton for the quarter ended June 30, 1998 and $419 per ton
for the nine months ended June 30, 1997 from $397 per ton for the quarter ended
June 30, 1997 and $395 per ton for the nine months ended June 30, 1997. Average
corrugating medium selling prices increased to $338 per ton for the quarter
ended June 30, 1998 and $338 for the nine months ended June 30, 1998 compared to
$217 per ton for the quarter ended June 30, 1997 and $226 per ton for the nine
months ended June 30, 1997. The Company's weighted average cost per ton of
recovered paper during the quarter ended June 30, 1998 increased to $59 per ton
compared to $50 per ton during the quarter ended June 30, 1997. The Company's
weighted average cost per ton of recovered paper for the nine months ended June
30, 1998 increased to $66 per ton compared
9
<PAGE> 12
to $53 per ton for the nine months ended June 30, 1997. Tons of paperboard
shipped decreased to 266,141 for the quarter ended June 30, 1998 from 283,496
for the quarter ended June 30, 1997. Tons of paperboard shipped increased to
834,972 for the nine months ended June 30, 1998 compared to 677,847 for the nine
months ended June 30, 1997. The increase in operating income and margin for the
quarter ended June 30, 1998 was primarily the result of significant increases in
average selling prices for the Company's corrugating medium, which were
partially offset by an increase in the average cost of recovered paper and lower
volumes shipped. The increase in operating income and margin for the nine months
ended June 30, 1998 was a result of the additional volume from the Waldorf
Acquisition as well as the increase in selling price for corrugated medium
offset somewhat by higher recovered paper costs.
Interest Expense. Interest expense was $8.6 million for the quarters ended June
30, 1998 and June 30, 1997. Interest expense for the nine months ended June 30,
1998 increased to $26.5 million from $17.8 million for the nine months ended
June 30, 1997. The increase in interest expense for the nine months ended June
30, 1998 was primarily due to an increase in the average outstanding borrowings
during such period resulting from the Waldorf Acquisition.
Provision for Income Taxes. Provision for income taxes increased to $8.8 million
for the quarter ended June 30, 1998 from $4.8 million for the quarter ended June
30, 1997. Provision for income taxes for the nine months ended June 30, 1998
increased to $23.8 million from $14.1 million for the nine months ended June 30,
1997. Excluding the effect of the non-cash write-off of the goodwill associated
with the Olympic Packaging acquisition, which is not deductible for income tax
purposes, the Company's effective tax rate increased to 44.0% for the nine
months ended June 30, 1998 compared to 42.3% for the nine months ended June 30,
1997. This increase in the effective tax rate was primarily due to the effect of
amortization of goodwill associated with the Waldorf Acquisition that is not
deductible for income tax purposes.
Net Income and Earnings Per Common and Common Equivalent Share. Net income for
the quarter ended June 30, 1998 increased 90.3% to $11.8 million from $6.2
million for the quarter ended June 30, 1997. Net income for the nine months
ended June 30, 1998 increased 373.4% to $30.3 million from $6.4 million for the
nine months ended June 30, 1997. Net income as a percentage of net sales
increased to 3.7% for the quarter ended June 30, 1998 from 2.1% for the quarter
ended June 30, 1997. Net income as a percentage of net sales increased to 3.1%
for the nine months ended June 30, 1998 from 0.8% for the nine months ended June
30, 1997. Earnings per common and common equivalent share for the quarter ended
June 30, 1998 increased 88.9% to $0.34 from $0.18 for the quarter ended June 30,
1997. Earnings per common and common equivalent share for the nine months ended
June 30, 1998 increased to $0.86 from $0.19 for the nine months ended June 30,
1997.
LIQUIDITY AND CAPITAL RESOURCES
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. In 1997, the Company entered into a new credit facility under which
it has aggregate borrowing availability of $450.0 million, which replaced the
Company's then existing revolving credit facilities, under which it had
aggregate borrowing availability of $100.0 million. At June 30, 1998, the
Company had $382.0 million outstanding under its new revolving credit facility.
Cash and cash equivalents, $7.6 million at June 30, 1998, increased from $3.3
million at September 30, 1997.
Net cash provided by operating activities for the nine months ended June 30,
1998 was $86.2 million compared to $52.0 million for the nine months ended June
30, 1997. This increase was primarily the result of increased earnings before
depreciation and amortization and a smaller increase in operating assets and
liabilities. Net cash used for financing activities aggregated $23.0 million for
the nine months ended June 30, 1998 and consisted primarily of repayments of
debt and dividend payments. Net cash provided by financing activities aggregated
$266.6 million for the nine months ended June 30, 1997 and consisted primarily
of borrowings under the Company's revolving credit facility net of scheduled
repayments of long term debt and certain acquired indebtedness of Waldorf and
dividend payments. Net cash used for investing activities was $58.9 million for
the nine months ended June 30, 1998 compared to $365.3 million for the nine
months ended June 30, 1997 and consisted primarily of capital expenditures for
the nine months ended June 30, 1998 and cash paid for the Waldorf Acquisition
and capital expenditures for the nine months ended June 30, 1997.
10
<PAGE> 13
The Company estimates that its capital expenditures will aggregate approximately
$10 million for the remainder of fiscal 1998. These expenditures will be used
primarily for the purchase and upgrading of certain machinery and equipment in
essentially all of the Company's divisions and warehouse expansions in two of
the Company's divisions.
The Company historically has expanded its business through the acquisition of
other related businesses. The recycled paperboard and converted paperboard
products industries have undergone significant consolidation in recent years,
and the Company believes it may be able to capitalize on this trend in the
future. The Company, however, is currently in the process of integrating the
operations it acquired during fiscal 1997 into the Company's other operations
and rationalizing the operations contributed to RTS Packaging. Consequently,
although the Company cannot predict the extent to which it will pursue future
acquisitions, the Company currently expects that it will be less likely to
pursue additional acquisitions in the near term.
On July 24, 1998 the Board of Directors authorized a new stock repurchase
program under which the Company is authorized to repurchase from time to time
prior to July 31, 2003 up to 1.5 million shares of Class A common stock in open
market transactions on the New York Stock Exchange. This repurchase program
replaces the Company's existing stock repurchase program which expired on July
31, 1998. The Company is also authorized to repurchase from time to time shares
of Class B common stock pursuant to certain first offer rights contained in the
Company's Restated and Amended Articles of Incorporation, provided that the
aggregate number of shares of Class A and Class B common stock purchased under
these programs may not exceed 1.5 million shares. During the nine months ended
June 30, 1998, the Company did not repurchase any shares of Class A or Class B
common stock. As of June 30, 1998, an aggregate of 716,500 shares had been
repurchased under these programs.
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 facilities, proceeds from the issuance of debt or
equity securities or other additional long-term debt financing.
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 devises to properly recognize and process
date-sensitive information when the year changes to 2000. The Company currently
believes it will be able to modify, upgrade or replace its affected systems and
devices in time to minimize any detrimental effects on operations. While it is
not possible at present to give an accurate estimate of the cost of this work,
the Company expects that such costs may be material to the Company's results of
operations in one or more fiscal quarters or years, but will not have a material
adverse impact on the long-term results of operations, liquidity or financial
position of the Company.
11
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(A) Exhibits
27 - Financial Data Schedule (for Sec use only)
(B) Reports on Form 8-K
None
</TABLE>
12
<PAGE> 15
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 AUGUST 5, 1998 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)
13
<PAGE> 16
ROCK-TENN COMPANY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Exhibit 27 Financial Data Schedule (For Sec Use Only)
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF
INCOME FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 7,592
<SECURITIES> 0
<RECEIVABLES> 114,852
<ALLOWANCES> 3,376
<INVENTORY> 97,001
<CURRENT-ASSETS> 220,734
<PP&E> 0
<DEPRECIATION> 361,598
<TOTAL-ASSETS> 1,120,757
<CURRENT-LIABILITIES> 145,771
<BONDS> 0
0
0
<COMMON> 348
<OTHER-SE> 393,087
<TOTAL-LIABILITY-AND-EQUITY> 1,120,757
<SALES> 964,407
<TOTAL-REVENUES> 964,407
<CGS> 709,061
<TOTAL-COSTS> 709,061
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,514
<INCOME-PRETAX> 54,079
<INCOME-TAX> 23,816
<INCOME-CONTINUING> 30,263
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,263
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.86
</TABLE>
