<PAGE> 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, 1999
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-23340
-------
ROCK-TENN COMPANY
(Exact name of registrant as specified in its charter)
Georgia 62-0342590
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
504 Thrasher Street, Norcross, Georgia 30071
---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 448-2193
-------------
N/A
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding as of August 10, 1999
----------------------------------- ---------------------------------
<S> <C>
Class A Common Stock, .01 par value 23,411,395
Class B Common Stock, .01 par value 11,546,187
</TABLE>
<PAGE> 2
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, 1999 and 1998 1
Condensed Consolidated Balance Sheets at June 30, 1999 and
September 30, 1998 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended June 30, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Index to Exhibits 17
</TABLE>
<PAGE> 3
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,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 329,629 $ 320,078 $ 952,590 $ 964,407
Cost of goods sold 239,318 231,266 691,735 709,061
--------- --------- --------- ---------
Gross profit 90,311 88,812 260,855 255,346
Selling, general and administrative expenses 60,930 58,698 178,073 171,653
Plant closure and other costs 2,763 -- 5,901 --
--------- --------- --------- ---------
Income from operations 26,618 30,114 76,881 83,693
Interest and other income 85 682 300 860
Interest expense (7,528) (8,651) (23,622) (26,546)
Minority interest in income of
consolidated subsidiary (1,634) (1,533) (4,563) (3,928)
--------- --------- --------- ---------
Income before income taxes 17,541 20,612 48,996 54,079
Provision for income taxes 7,621 8,812 21,512 23,816
--------- --------- --------- ---------
Net income $ 9,920 $ 11,800 $ 27,484 $ 30,263
========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding 35,232 35,181 35,166 35,199
Basic earnings per share $ 0.28 $ 0.34 $ 0.79 $ 0.88
========= ========= ========= =========
Diluted earnings per share $ 0.28 $ 0.34 $ 0.78 $ 0.86
========= ========= ========= =========
Cash dividends per common share $ 0.075 $ 0.075 $ 0.225 $ 0.225
========= ========= ========= =========
</TABLE>
See accompanying notes
1
<PAGE> 4
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 3,119 $ 5,769
Accounts receivable (net of allowances
of $3,230 and $3,817) 128,354 118,164
Inventories 98,255 88,019
Other current assets 7,021 4,200
----------- -----------
TOTAL CURRENT ASSETS 236,749 216,152
Property, plant and equipment at cost:
Land and buildings 191,823 178,168
Machinery and equipment 785,757 740,498
Transportation equipment 14,871 14,957
Leasehold improvements 5,804 4,386
----------- -----------
998,255 938,009
Less accumulated depreciation and amortization (415,807) (376,470)
----------- -----------
Net property, plant and equipment 582,448 561,539
Goodwill 310,614 317,389
Other assets 16,207 16,401
----------- -----------
$ 1,146,018 $ 1,111,481
=========== ===========
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 61,468 $ 45,924
Accrued compensation and benefits 36,270 42,040
Current maturities of long-term debt 25,480 43,462
Other current liabilities 23,219 21,054
----------- -----------
TOTAL CURRENT LIABILITIES 146,437 152,480
Long-term debt due after one year 475,980 464,876
Deferred income taxes 85,093 82,248
Other long-term items 17,017 14,462
Shareholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized; no
shares outstanding at June 30, 1999 and September 30, 1998 -- --
Class A common stock, $.01 par value; 175,000,000 shares authorized,
23,275,685 outstanding at June 30, 1999 and 22,851,838 outstanding at
September 30, 1998; Class B common stock, $.01 par value; 60,000,000 shares
authorized; 11,605,480 outstanding
at June 30, 1999 and 11,724,972 outstanding at September 30, 1998 349 346
Capital in excess of par value 131,337 128,904
Retained earnings 293,589 274,039
Accumulated other comprehensive loss (3,784) (5,874)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 421,491 397,415
----------- -----------
$ 1,146,018 $ 1,111,481
=========== ===========
</TABLE>
See accompanying notes
2
<PAGE> 5
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
June 30, June 30,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 27,484 $ 30,263
Items in income not affecting cash:
Depreciation and amortization 54,150 52,821
Deferred income taxes 2,845 2,629
Gain on disposal of plant and equipment and other (314) (456)
Minority interest in income of consolidated subsidiary 4,563 3,928
Change in operating assets and liabilities:
Accounts receivable (9,817) 3,167
Inventories (9,893) (3,466)
Other assets (2,928) 1,023
Accounts payable 15,407 (5,598)
Accrued liabilities (1,022) 2,300
Income taxes payable (126) --
Other (308) (389)
----------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES 80,041 86,222
FINANCING ACTIVITIES:
Net repayments to revolving credit facilities (2,000) (4,000)
Additions to long-term debt 529 --
Repayments of long-term debt (5,407) (8,152)
Sales of common stock 2,330 2,694
Cash dividends paid to shareholders (7,828) (7,775)
Distribution to minority interest (4,725) (5,775)
----------- -----------
CASH USED FOR FINANCING ACTIVITIES (17,101) (23,008)
INVESTING ACTIVITIES:
Capital expenditures (66,883) (61,157)
Proceeds from sale of building, equipment and other 923 1,666
Decrease in unexpended industrial revenue bond proceeds -- 610
----------- -----------
CASH USED FOR INVESTING ACTIVITIES (65,960) (58,881)
Effect of exchange rate changes on cash 370 (86)
(Decrease) increase in cash and cash equivalents (2,650) 4,247
Cash and cash equivalents at beginning of period 5,769 3,345
----------- -----------
Cash and cash equivalents at end of period $ 3,119 $ 7,592
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes (net of refunds) $ 20,667 $ 19,918
Interest (net of amounts capitalized) 21,452 26,366
</TABLE>
See accompanying notes
3
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements of Rock-Tenn
Company and its subsidiaries (the "Company") have not been audited by
independent auditors. The condensed consolidated balance sheet at September 30,
1998 has been derived from the audited consolidated financial statements. In
the opinion of the Company's management, the condensed consolidated financial
statements reflect all adjustments, which are of a normal recurring nature,
necessary for a fair presentation of the results of operations for the
three-month and nine-month periods ended June 30, 1999 and 1998, the Company's
financial position at June 30, 1999 and September 30, 1998, and the cash flows
for the nine-month periods ended June 30, 1999 and 1998.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1998.
The results for the nine months ended June 30, 1999 are not necessarily
indicative of results that may be expected for the full year.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
NOTE 2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results will differ from those estimates and the differences could be
material.
NOTE 3. INVENTORIES
Substantially all U.S. inventories are stated at the lower of cost or market,
with cost determined on the last-in, first-out (LIFO) basis. An actual
valuation of inventory under the LIFO method can only be made at the end of
each year based on the inventory levels and costs at that time. Accordingly,
interim LIFO estimates must necessarily be based on management's projection of
expected year-end inventory levels and costs. Because these are subject to many
factors beyond management's control, interim results are subject to the final
year-end LIFO inventory valuation.
Inventories at June 30, 1999 and September 30, 1998 were as follows (in
thousands):
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
---------- ------------
(Unaudited)
<S> <C> <C>
Finished goods and work in process $ 70,678 $ 68,735
Raw materials 37,204 29,139
Supplies 11,276 12,048
--------- ---------
Inventories at first-in, first-out (FIFO) cost 119,158 109,922
LIFO reserve (20,903) (21,903)
--------- ---------
Net inventories $ 98,255 $ 88,019
========= =========
</TABLE>
4
<PAGE> 7
NOTE 4. NEW ACCOUNTING STANDARDS
Effective, October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income. SFAS
130 establishes standards for the reporting and display of comprehensive income
and its components; however, the adoption of this statement had no impact on
the Company's net income or shareholders' equity. With respect to the Company,
SFAS 130 requires foreign currency translation adjustments, which prior to
adoption were reported separately in shareholders' equity, to be included in
other comprehensive income.
For the three months ended June 30, 1999 and 1998, total comprehensive income
amounted to $10.8 million and $10.2 million, respectively. For the nine months
ended June 30, 1999 and 1998, total comprehensive income amounted to $29.6
million and $27.3 million, respectively. The difference between total
comprehensive income and net income for the three months and nine months ended
June 30, 1999 and 1998 was foreign currency translation adjustments. The
fluctuation in the exchange rates was greater during fiscal 1998 than during
fiscal 1999.
In 1997, the FASB issued Statement of Financial Accounting Standards No. 131
("SFAS 131"). SFAS 131 establishes standards for disclosures of segment
information which were not required by accounting standards previously used by
the Company. The Company is required to adopt this statement for its 1999
fiscal year-end reporting. The Company is currently evaluating SFAS 131 and has
not yet determined its impact on the Company's consolidated financial
statements.
In 1998, the FASB issued Statement of Financial Accounting Standards No. 133
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 is required to be
adopted in fiscal 2001. The Company is currently evaluating SFAS 133 and has
not yet determined its impact on the Company's consolidated financial
statements.
NOTE 5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 9,920 $ 11,800 $ 27,484 $ 30,263
Denominator:
Denominator for basic earnings per share-
weighted average shares 34,854 34,746 34,758 34,561
Effect of dilutive stock options 378 435 408 638
--------- --------- --------- ---------
Denominator for diluted earnings per share -
weighted average shares and assumed
conversions 35,232 35,181 35,166 35,199
========= ========= ========= =========
Basic earnings per share $ 0.28 $ .34 $ 0.79 $ .88
========= ========= ========= =========
Diluted earnings per share $ 0.28 $ .34 $ 0.78 $ .86
========= ========= ========= =========
</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 condensed
consolidated financial statements and notes thereto, included herein, and the
Company's audited consolidated financial statements and notes thereto for the
fiscal year ended September 30, 1998 which have been filed with the Securities
and Exchange Commission as part of the Company's Annual Report on Form 10-K.
SEGMENT AND MARKET INFORMATION
The Company operates principally in two industry segments: converted products
and paperboard. The converted products segment is comprised of facilities that
produce folding cartons, fiber partitions, corrugated containers, corrugated
displays, thermoformed plastic products and laminated paperboard products. In
the folding carton and corrugated container markets, the Company competes with
a significant number of national and regional packaging suppliers. In the fiber
partitions, corrugated displays, thermoformed plastic products and laminated
paperboard products markets, the Company competes with a smaller number of
national, regional and local companies offering highly specialized products.
During fiscal 1998, the Company sold converted products to over 5,000 customers
with no customer accounting for more than 10% of the Company's net sales. The
Company sells converted products to several large national customers which
annually purchase $25 to $45 million of converted products from the Company;
however, a majority of the Company's converted products sales are to customers
which annually purchase less than $10 million of converted products from the
Company. Within the converted products market, conditions have become highly
competitive as large national customers have begun consolidating their supplier
relationships. As a result of this trend, the Company regularly participates in
bidding for sales opportunities to national customers. The loss of business or
the award of new business from national customers may have a significant impact
on the Company's results of operations.
The paperboard segment consists of facilities that manufacture 100% recycled
clay-coated and uncoated paperboard (referred to herein as boxboard) and
corrugating medium (referred to herein as medium) and that collect recovered
paper. In the paperboard segment, the Company competes with integrated and
non-integrated national, regional and local companies manufacturing various
grades of paperboard. During fiscal 1998, the Company sold paperboard to over
1,000 customers. A significant percentage of the Company's sales of boxboard
are made to the Company's converted products segment. The current trend in the
paperboard industry is for a higher degree of integration between paperboard
production and converted products sales. The Company's paperboard segment's
sales volumes may therefore be directly impacted by changes in demand for the
Company's converted products.
6
<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,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES:
Converted Products Segment $ 265,888 $ 263,341 $ 776,570 $ 791,928
Paperboard Segment 113,968 111,828 324,705 351,882
Intersegment Eliminations (50,227) (55,091) (148,685) (179,403)
- -----------------------------------------------------------------------------------------------------------------
TOTAL $ 329,629 $ 320,078 $ 952,590 $ 964,407
- -----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES:
Converted Products Segment $ 12,052 $ 14,068 $ 42,245 $ 35,508
Paperboard Segment 16,269 18,237 40,745 54,539
Corporate Expense (1,703) (2,191) (6,109) (6,354)
Interest Expense (7,528) (8,651) (23,622) (26,546)
Interest and Other Income 85 682 300 860
Minority Interest in Income of
Consolidated Subsidiary (1,634) (1,533) (4,563) (3,928)
- -----------------------------------------------------------------------------------------------------------------
TOTAL $ 17,541 $ 20,612 $ 48,996 $ 54,079
- -----------------------------------------------------------------------------------------------------------------
Paperboard Shipped (in tons) 283,794 266,141 812,716 834,972
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
Net Sales (Unaffiliated Customers)
Net sales for the quarter ended June 30,1999 increased 3.0% to $329.6 million
from $320.1 million for the quarter ended June 30, 1998. Net sales for the nine
months ended June 30, 1999 decreased 1.2% to $952.6 million from $964.4 million
for the nine months ended June 30, 1998. The increase in net sales for the
quarter ended June 30, 1999 resulted from increases in both selling price and
volume. The decrease in net sales for the nine months ended June 30, 1999
resulted from volume and selling price decreases during the first half of the
year.
Net Sales (Aggregate) - Converted Products Segment
<TABLE>
<CAPTION>
First Second Third Nine Months Fourth Fiscal
(In Millions) Quarter Quarter Quarter Ended 6/30 Quarter Year
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 $260.6 $268.0 $263.3 $791.9 $271.8 $1,063.7
1999 255.9 254.8 265.9 776.6 -- --
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Net sales of converted products before intersegment eliminations for the quarter
ended June 30, 1999 increased 1.0% to $265.9 million from $263.3 million for the
quarter ended June 30, 1998. Net sales of converted products before intersegment
eliminations for the nine months ended June 30, 1999 decreased 1.9% to $776.6
million from $791.9 million for the nine months ended June 30, 1998. The
increase in net sales for the quarter ended June 30, 1999 was primarily the
result of increased sales to small and medium size national customers. The
decrease in net sales for the nine months ended June 30, 1999 was primarily the
result of volume decreases during the first half of the year in folding cartons,
partitions and laminated paperboard products offset somewhat by higher volumes
in corrugated containers and displays. The volume decreases were partially
attributable to lower sales to two large national customers. The Company
currently believes that the impact of lower volumes with these large national
customers will be offset by the award of new business from other customers.
However, there can be no assurance regarding the amount or timing of any such
awards. See Segment and Market Information.
7
<PAGE> 10
Net Sales (Aggregate) - Paperboard Segment
<TABLE>
<CAPTION>
First Second Third Nine Months Fourth Fiscal
(In Millions) Quarter Quarter Quarter Ended 6/30 Quarter Year
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 $121.4 $118.7 $111.8 $351.9 $109.2 $461.1
1999 107.1 103.6 114.0 324.7 -- --
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Net sales of paperboard before intersegment eliminations for the quarter ended
June 30, 1999 increased 2.0% to $114.0 million from $111.8 million for the
quarter ended June 30, 1998. Net sales of paperboard before intersegment
eliminations for the nine months ended June 30, 1999 decreased 7.7% to $324.7
million from $351.9 million for the nine months ended June 30, 1998. The
increase for the quarter ended June 30, 1999 was due to increased shipments to
external customers of boxboard and medium. The decrease for the nine months
ended June 30, 1999 was the result of volume and price decreases reflecting
weakness in the markets for boxboard and lower demand in the Company's
converting businesses during the first half of the year. In addition, the
volume decreases for the year were partially attributable to lower volume
during the first half of the year with two large national customers within the
converted products segment discussed above. The Company currently believes that
the impact of lower volumes with these large national customers will be offset
by the award of new business from converted products customers and from sales
of boxboard to other converters. However, there can be no assurance regarding
the amount or timing of any such awards. See Segment and Market Information.
Cost of Goods Sold
Cost of goods sold for the quarter ended June 30, 1999 increased 3.5% to $239.3
million from $231.3 million for the quarter ended June 30, 1998. Cost of goods
sold as a percentage of net sales for the quarter ended June 30, 1999 increased
to 72.6% from 72.3% for the quarter ended June 30, 1998. The increase in cost
of goods sold as a percentage of net sales for the quarter ended June 30, 1999
was attributable to higher average recovered paper costs as a percentage of net
sales. Cost of goods sold for the nine months ended June 30, 1999 decreased
2.5% to $691.7 million from $709.1 million for the nine months ended June 30,
1998. Cost of goods sold as a percentage of net sales for the nine months ended
June 30, 1999 decreased to 72.6% from 73.5% for the nine months ended June 30,
1998. The decrease in cost of goods sold as a percentage of net sales for the
nine months ended June 30, 1999 resulted from lower average recovered paper,
energy and workers compensation expenses and increased manufacturing
efficiencies, which were offset somewhat by increases in health insurance
costs.
Substantially all U.S. inventories of the Company are valued at the lower of
cost or market with cost determined on the last-in, first-out (LIFO) inventory
valuation method, which management believes generally results in a better
matching of current costs and revenues than under the first-in, first-out
(FIFO) inventory valuation method. In periods of 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 $0.5 million higher and the
same as it would have been under the FIFO method in the quarters ended June 30,
1999 and 1998. Cost of goods sold determined under the LIFO method was $1.0
million lower than it would have been and $1.8 million higher than it would
have been under the FIFO method for the nine months ended June 30, 1999 and
1998, respectively. Net income was $0.3 million lower and the same as it would
have been under the FIFO method in the quarters ended June 30, 1999 and 1998.
Net income was $0.6 million higher than it would have been and $1.1 million
lower than it would have been under the FIFO method for the nine months ended
June 30, 1999 and 1998, respectively. These supplemental FIFO earnings reflect
the after tax effect of LIFO each year.
8
<PAGE> 11
Gross Profit
<TABLE>
<CAPTION>
First Second Third Nine Months Fourth Fiscal
(% of Net Sales) Quarter Quarter Quarter Ended 6/30 Quarter Year
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 25.8% 25.8% 27.7% 26.5% 26.8% 26.5%
1999 27.7% 27.0% 27.4% 27.4% -- --
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross profit for the quarter ended June 30, 1999 increased 1.7% to $90.3
million from $88.8 million for the quarter ended June 30, 1998. Gross profit
for the nine months ended June 30, 1999 increased 2.2% to $260.9 million from
$255.3 million for the nine months ended June 30, 1998. Gross profit as a
percentage of net sales decreased to 27.4% for the quarter ended June 30, 1999
from 27.7% for the quarter ended June 30, 1998. Gross profit as a percentage of
net sales increased to 27.4% for the nine months ended June 30, 1999 from 26.5%
for the nine months ended June 30, 1998. See Cost of Goods Sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended June 30,
1999 increased 3.7% to $60.9 million from $58.7 million for the quarter ended
June 30, 1998. Selling, general and administrative expenses for the nine months
ended June 30, 1999 increased 3.7% to $178.1 million from $171.7 million for
the nine months ended June 30, 1998. Selling, general and administrative
expenses as a percentage of net sales for the quarter ended June 30, 1999
increased to 18.5% from 18.3% for the quarter ended June 30, 1998. Selling,
general and administrative expenses as a percentage of net sales for the nine
months ended June 30, 1999 increased to 18.7% from 17.8% for the nine months
ended June 30, 1998. The increase in these expenses as a percentage of net
sales resulted from increased incentive compensation expenses and shipping
costs.
Plant Closing and Other Costs
During the fourth quarter of fiscal 1998, the Company began implementing
certain cost reduction initiatives designed to reduce overhead and production
costs and improve operating efficiency. In connection with these cost reduction
initiatives, the Company notified approximately 40 people of their termination
and recorded $2.0 million and $0.5 million of costs related to these
terminations during fiscal 1998 and the third quarter of fiscal 1999,
respectively. As of June 30, 1999, the Company had a remaining liability of
$1.5 million, substantially all of which will be paid in fiscal 1999, related
to these terminations. The Company made payments of $0.2 million and $1.0
million during the quarter and nine months ended June 30, 1999, respectively.
Also, during the third fiscal quarter and nine months ended June 30, 1999 the
Company expensed an additional $2.3 million and $5.4 million, respectively, of
plant closing and other costs, which comprise the items discussed below.
Included in these initiatives are the closure of a folding carton plant in
Taylorsville, North Carolina and a laminated converted products operation in
Otsego, Michigan. In connection with these closings, the Company incurred
charges of $1.5 million and $4.6 million during the quarter and nine months
ended June 30, 1999, respectively, which consisted primarily of employee
termination, equipment relocation and related expenses. The cost of employee
terminations is generally accrued at the time of notification to the employees.
Certain other costs, such as moving and relocation costs, are expensed as
incurred. During the third quarter of fiscal 1999, the Company announced its
intent to close its Jersey City uncoated papermill serving the Company's
bookcover converting operations. The Company charged an additional $0.8 million
during the quarter ended June 30, 1999, primarily for termination and related
expenses.
With respect to all plant closures, the Company has a remaining liability of
$2.3 million at June 30, 1999. In addition, the Company made payments of $1.2
million and $3.7 million during the quarter and nine months ended June 30,
1999, respectively. The Company plans to consolidate these businesses into
other existing facilities. The Company expects to incur an additional $0.1
million of costs during fiscal 1999 in connection with these plant closings and
other cost reduction initiatives, principally for costs of equipment and
personnel relocation, which will be expensed as incurred.
9
<PAGE> 12
Segment Operating Income
Operating Income - Converted Products Segment
<TABLE>
<CAPTION>
Net Sales Operating
(In Millions, except Percentages) (Aggregate) Income Return on Sales
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $ 260.6 $ 9.6 3.7%
Second Quarter 268.0 11.8 4.4
Third Quarter 263.3 14.1 5.4
----- ---- ---
Nine Months Ended 6/30 791.9 35.5 4.5
Fourth Quarter 271.8 17.7 6.5
- ---------------------------------------------------------------------------------------------
Fiscal 1998 $1,063.7 $ 53.2 5.0%
- ---------------------------------------------------------------------------------------------
FIRST QUARTER $ 255.9 $ 13.9 5.4%
SECOND QUARTER 254.8 16.3 6.4
THIRD QUARTER 265.9 12.0 4.5
----- ---- ---
NINE MONTHS ENDED 6/30 776.6 42.2 5.4
FOURTH QUARTER -- -- --
- ---------------------------------------------------------------------------------------------
FISCAL 1999 -- -- --
- ---------------------------------------------------------------------------------------------
</TABLE>
Operating income attributable to the converted products segment for the quarter
ended June 30, 1999 decreased 14.9% to $12.0 million from $14.1 million for the
quarter ended June 30, 1998. Operating income attributable to the converted
products segment for the nine months ended June 30, 1999 increased 18.9% to
$42.2 million from $35.5 million for the nine months ended June 30, 1998.
Excluding $2.8 million of plant closing and other related costs, operating
income attributable to the converted products segment for the quarter ended
June 30, 1999 increased 5.0% to $14.8 million from $14.1 million for the
quarter ended June 30, 1998. Excluding $5.9 million of plant closing and other
related costs, operating income attributable to the converted products segment
for the nine months ended June 30, 1999 increased 35.5% to $48.1 million from
$35.5 million for the nine months ended June 30, 1998. Excluding $2.8 million
of plant closing and other related costs, operating margin for the quarter
ended June 30, 1999 was 5.6% compared to 5.4% for the quarter ended June 30,
1998. Excluding $5.9 million of plant closing and other related costs,
operating margin for the nine months ended June 30, 1999 was 6.2% compared to
4.5% for the nine months ended June 30, 1998. The increase in operating margin,
excluding plant closing and other related costs, was the result of increased
manufacturing efficiencies and generally lower raw material costs which were
partially offset by reduced volumes in some product categories.
Operating Income - Paperboard Segment
<TABLE>
<CAPTION>
Weighted
Boxboard Average Medium Average Average
Net Sales Operating Tons Boxboard Tons Medium Recovered
(Aggregate) Income Return Shipped Price Shipped Price Paper Cost
(In Millions) (In Millions) On Sales (In Thousands) (Per Ton) (In Thousands) (Per Ton) (Per Ton)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $121.4 $ 18.0 14.8% 242.0 $ 420 45.0 $ 330 $ 70
Second Quarter 118.7 18.3 15.4 236.2 420 45.6 347 68
Third Quarter 111.8 18.3 16.4 225.3 417 40.8 338 59
------ ------ ------ ------ ------
Nine Months Ended 6/30 351.9 54.6 15.5 703.5 419 131.4 338 66
Fourth Quarter 109.2 14.8 13.6 220.0 414 43.9 318 58
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal 1998 $461.1 $ 69.4 15.1% 923.5 $ 418 175.3 $ 332 $ 64
- -----------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER $107.1 $ 13.4 12.5% 221.7 $ 403 45.2 $ 288 $ 53
SECOND QUARTER 103.6 11.1 10.7 218.5 399 43.5 328 52
THIRD QUARTER 114.0 16.3 14.3 238.5 398 45.3 340 58
------ ------ ------ ------ ------
NINE MONTHS ENDED 6/30 324.7 40.8 12.6 678.7 400 134.0 319 54
FOURTH QUARTER -- -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
FISCAL 1999 -- -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Operating income attributable to the paperboard segment for the quarter ended
June 30, 1999 decreased 10.9% to $16.3 million from $18.3 million for the
quarter ended June 30, 1998. Operating income attributable to the paperboard
segment for the nine months ended June 30, 1999 decreased 25.3% to $40.8
million from $54.6 million for the nine months ended June 30, 1998. Operating
margin for the quarter ended June 30, 1999 was 14.3% compared to 16.4% for the
quarter ended June 30, 1998. Operating margin for the nine months ended June
30, 1999 was 12.6% compared to 15.5% for the nine months ended June 30, 1998.
The decrease in operating margin for the quarter ended June 30,
10
<PAGE> 13
1999 was primarily the result of lower selling prices, which were partially
offset by an increase in volumes. The decrease in operating margin for the nine
months ended June 30, 1999 was primarily the result of lower selling prices and
volumes, which was partially offset by lower average recovered paper costs.
Interest Expense
Interest expense for the quarter ended June 30, 1999 decreased to $7.5 million
from $8.7 million for the quarter ended June 30, 1998. Interest expense for the
nine months ended June 30, 1999 decreased to $23.6 million from $26.5 million
for the nine months ended June 30, 1998. The decrease was primarily due to a
decrease in the average outstanding borrowings and lower interest rates.
Provision for Income Taxes
Provision for income taxes decreased to $7.6 million for the quarter ended June
30, 1999 from $8.8 million for the quarter ended June 30, 1998. Provision for
income taxes decreased to $21.5 million for the nine months ended June 30, 1999
from $23.8 million for the nine months ended June 30, 1998. The Company's
effective tax rate increased to 43.4% for the quarter ended June 30, 1999
compared to 42.8% for the quarter ended June 30, 1998. The Company's effective
tax rate decreased to 43.9% for the nine months ended June 30, 1999 compared to
44.0% for the nine months ended June 30, 1998. The increase in the effective
tax rate for the quarter ended June 30, 1999 was due to a decrease in net
income without a corresponding decrease in the level of permanent differences.
Differences between the Company's effective tax rates and statutory rates are
primarily the result of the amortization of goodwill related to the Waldorf
acquisition which is non-deductible for income tax purposes.
Net Income and Earnings Per Common and Common Equivalent Share
Net income for the quarter ended June 30, 1999 decreased 16.1% to $9.9 million
from $11.8 million for the quarter ended June 30, 1998. Net income for the nine
months ended June 30, 1999 decreased 9.2% to $27.5 million from $30.3 million
for the nine months ended June 30, 1998. Net income as a percentage of net sales
decreased to 3.0% for the quarter ended June 30, 1999 from 3.7% for the quarter
ended June 30, 1998. Net income as a percentage of net sales decreased to 2.9%
for the nine months ended June 30, 1999 from 3.1% for the nine months ended June
30, 1998. Earnings per common and common equivalent share for the quarter ended
June 30, 1999 decreased 17.6% to $0.28 from $0.34 for the quarter ended June 30,
1998. Earnings per common and common equivalent share for the nine months ended
June 30, 1999 decreased 9.3% to $0.78 from $0.86 for the nine months ended June
30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Capital Expenditures
The Company has funded its working capital requirements and capital
expenditures (including acquisitions) from net cash provided by operating
activities, borrowings under term notes and bank credit facilities and proceeds
received in connection with the issuance of industrial revenue bonds and debt
and equity securities. The Company maintains a revolving credit facility under
which it has aggregate borrowing availability of $450.0 million. At June 30,
1999, the Company had $367.0 million outstanding under its revolving credit
facility. The revolving credit facility terminates in 2002. Cash and cash
equivalents, $3.1 million at June 30, 1999, decreased from $5.8 million at
September 30, 1998.
Net cash provided by operating activities for the nine months ended June 30,
1999 was $80.0 million compared to $86.2 million for the nine months ended June
30, 1998. This decrease was primarily the result of increases in net current
operating asset requirements. Net cash used for financing activities aggregated
$17.1 million for the nine months ended June 30, 1999 and consisted primarily
of repayments under the revolving credit facility, repayments of long-term debt
and dividend payments. Net cash used for financing activities aggregated $23.0
million for the nine months ended June 30, 1998 and consisted primarily of net
repayments of long-term debt and dividend payments. Net cash used for investing
activities was $66.0 million for the nine months ended June 30, 1999 compared
to $58.9 million for the nine months ended June 30, 1998 and consisted
primarily of capital expenditures for the nine months ended June 30, 1999 and
1998.
11
<PAGE> 14
Capital expenditures for the nine months ended June 30, 1999 aggregated $66.9
million and were used primarily for the purchase and upgrading of certain
machinery and equipment in essentially all of the Company's divisions. The
Company estimates that its capital expenditures will aggregate approximately
$18.1 million for the remainder of fiscal 1999. These expenditures will be used
for the purchase and upgrading of certain machinery and equipment in
essentially all of the Company's divisions and building expansions and
improvements in one of the Company's divisions.
The Company anticipates that it will be able to fund its capital expenditures,
acquisitions, interest expense, stock repurchases, dividends and working
capital needs for the foreseeable future from cash generated from operations,
borrowings under its revolving credit facility, proceeds from the issuance of
debt or equity securities or other additional long-term debt financing.
Derivative Instruments
The Company enters into a variety of derivative transactions. Generally, the
Company designates at inception that derivatives are a hedge of risks
associated with specific assets, liabilities or future commitments and monitors
each derivative to determine if it remains an effective hedge. The
effectiveness of the derivative as a hedge is based on changes in its value
being highly correlated with changes in value of the underlying hedged item.
The Company includes amounts received or paid in operations when the underlying
transaction settles. The Company does not enter into or hold derivatives for
trading or speculative purposes.
The Company uses interest rate cap agreements and interest rate swap agreements
to manage synthetically the interest rate characteristics of a portion of its
outstanding debt and partially to limit the Company's exposure to rising
interest rates. Amounts to be received or paid as a result of interest rate cap
agreements and interest rate swap agreements are accrued and recognized as an
adjustment of interest expense related to the designated debt. Interest rate
cap purchase costs are amortized to interest expense ratably during the life of
the agreement.
The Company uses commodity swap agreements to manage synthetically the selling
prices and raw material costs of a portion of its medium business and to limit
the Company's exposure to falling prices and rising costs. Amounts to be
received or paid as a result of these swap agreements are recognized in the
period in which the related sale is made.
YEAR 2000
The Company is utilizing both internal and external resources to evaluate the
potential impact of the situation commonly referred to as the "Year 2000
problem." The Year 2000 problem, which is common to most businesses, concerns
the inability of computer systems and devices to properly recognize and process
date-sensitive information when the year changes to 2000. The Company depends
upon its information technology ("IT") and non-IT systems (used to run
manufacturing equipment that contain embedded hardware or software that must
handle dates and may not properly record dates after 1999) to conduct and
manage the Company's business. Unless remediated, Year 2000 related issues may
materially adversely affect the results of operations, financial condition and
cash flow of the Company and/or one or more of the Company's suppliers or
customers. While the Company obtains its raw materials, equipment and services
from a number of suppliers and sells its products to a number of customers for
a wide variety of applications, if a sufficient number of these suppliers or
customers experience Year 2000 problems that prevent or substantially impair
their ability to continue to transact business with the Company as they
currently do, the Company would be required to find alternative suppliers
and/or customers for its products. Any delay or inability in finding such
alternatives could have a material adverse effect on the Company's results of
operations, financial condition and cash flow.
The Company currently has a team dedicated to identifying, evaluating and
resolving the Company's potential Year 2000 issues. The Company's Year 2000
program includes six stages: education, inventory, assessment, remediation,
testing and implementation. The education stage involved identifying Year 2000
leaders at each of the Company's facilities and educating Company personnel on
the specific issues associated with the Year 2000 problem. During the inventory
stage, Company personnel identified any system (IT and non-IT) that could
potentially have a Year 2000 problem and developed software that is now being
used to centrally track these identified systems. The assessment stage involves
determining if there is a Year 2000 problem with the specific system (IT and
non-IT). Remediation involves deciding what action to take if there is a Year
2000 problem, such as
12
<PAGE> 15
modifying or replacing the system, and actually fixing the problem. Testing is
performed on the system once the remediation is complete. When it is determined
that the system is Year 2000 compliant, the system is implemented.
The Company expects to have substantially completed all phases of its Year 2000
program by September 30, 1999, which will leave three months for additional
internal testing and troubleshooting prior to 2000. The Company has essentially
completed the assessment stage relating to IT and non-IT systems. With respect
to IT systems that are known to have required remediation, approximately 90% of
such systems have been remediated, tested and implemented and are currently
Year 2000 compliant, and with respect to non-IT systems that are known to have
required remediation, approximately 85% of such systems have been remediated,
tested and implemented and are currently Year 2000 compliant. Based on the
results of the Company's Year 2000 program, the Company will develop
contingency plans as necessary.
The Company currently believes that it will be able to modify, upgrade or
replace all of its IT and non-IT systems affected by the Year 2000 problem on a
timely basis. In the event that the Company does not remediate on a timely
basis any material Year 2000 problem, the Company may be unable to, among other
things, take customer orders, manufacture and ship products, invoice customers
or collect payments. Under a number of the Company's supply agreements, the
Company is required to indemnify and hold harmless customers for damages
incurred by such customers arising from the Company's failure to resolve its
Year 2000 problems. The amount of any potential liability and/or lost revenue
cannot be reasonably estimated at this time; however, such amounts could be
material.
The Company has also begun a program to assess the Year 2000 readiness of its
suppliers. This program has involved identifying suppliers that are critical to
the Company's operations as well as suppliers that would be hard to replace and
conducting a survey of such suppliers to begin assessing their Year 2000
readiness. Based upon the results of this assessment, the Company will develop
contingency plans as deemed necessary. The Company cannot reasonably estimate
the magnitude of the impact on the Company of the Year 2000 problems that may
be experienced by any of the Company's suppliers; however, the impact of any
such problems could have a material adverse effect on the Company's results of
operations, financial condition and cash flow. Further, the Company does not
propose to assess the Year 2000 problems, if any, of its customers. To the
extent customers experience Year 2000 problems that are not remediated on a
timely basis, the Company anticipates potential material fluctuations in the
demand for its products.
While the Company believes the occurrence of such a scenario is unlikely, a
possible worst case scenario might include the inadvertent failure of the
Company to remediate the process controllers (which are non-IT systems) on one
or more of the Company's paper machines. Depending on the number of machines
affected, such event could have an adverse impact on the Company's manufacture
of paperboard and its ability to supply its converting operations, which,
depending on its duration, could have a material adverse effect on the
Company's results of operations, financial condition and cash flow. The Company
is in the process of assessing the process controllers on all of its paper
machines and has involved external process controller vendors to assist the
Company in testing these systems.
Costs associated with the Year 2000 program (excluding costs relating to
capital improvements to IT and non-IT systems that are not directly related to
remediating Year 2000 problems in such systems) are being expensed as incurred.
Funding for the program is being provided through the Company's operating cash
flows. To date, the Company has spent approximately $3.0 million in connection
with the Year 2000 program and expects to spend an additional $2.0 million to
$4.0 million to complete the program. There can be no assurance that the cost
of the Company's Year 2000 program will not materially exceed expectations.
13
<PAGE> 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a discussion of certain market risks related to the Company, See Part I,
Item 7A, "Quantitative and Qualitative Disclosures about Market Risk", in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1998. There have been no significant developments with respect to derivatives
or exposure to market risk.
14
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCK-TENN COMPANY
(Registrant)
Date August 11, 1999 By: /s/ DAVID C. NICHOLSON
--------------------- ------------------------------------
David C. Nicholson, Senior Vice-President,
Chief Financial Officer, Secretary
(Principal Financial Officer, Principal
Accounting Officer and duly
authorized officer)
16
<PAGE> 19
ROCK-TENN COMPANY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<S> <C> <C>
Page No.
Exhibit 27 Financial Data Schedule (For SEC use only)
</TABLE>
17
<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 OF ROCK-TENN COMPANY
FOR THE NINE MONTHS ENDED JUNE 30, 1999 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-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,119
<SECURITIES> 0
<RECEIVABLES> 131,584
<ALLOWANCES> 3,230
<INVENTORY> 98,255
<CURRENT-ASSETS> 236,749
<PP&E> 998,255
<DEPRECIATION> 415,807
<TOTAL-ASSETS> 1,146,018
<CURRENT-LIABILITIES> 146,437
<BONDS> 475,980
0
0
<COMMON> 349
<OTHER-SE> 421,142
<TOTAL-LIABILITY-AND-EQUITY> 1,146,018
<SALES> 952,590
<TOTAL-REVENUES> 952,590
<CGS> 691,735
<TOTAL-COSTS> 691,735
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,622
<INCOME-PRETAX> 48,996
<INCOME-TAX> 21,512
<INCOME-CONTINUING> 27,484
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,484
<EPS-BASIC> 0.79
<EPS-DILUTED> 0.78
</TABLE>
