<PAGE> 1
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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 DECEMBER 31, 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 February 9, 1999
- ----------------------------------- ----------------------------------
Class A Common Stock, .01 par value 23,054,208
Class B Common Stock, .01 par value 11,748,233
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<PAGE> 2
ROCK-TENN COMPANY
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the three months
ended December 31, 1998 and 1997 1
Condensed Consolidated Balance Sheets at December 31, 1998 and
September 30, 1998 2
Condensed Consolidated Statements of Cash Flows for the three months
ended December 31, 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 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II.OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Index to Exhibits 18
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
December 31, December 31,
1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 310,795 $ 316,475
Cost of goods sold 224,586 234,634
--------- ---------
Gross profit 86,209 81,841
Selling, general and administrative expenses 58,831 56,224
Plant closure and other costs 2,053 ---
--------- ---------
Income from operations 25,325 25,617
Interest income and other income 111 98
Interest expense (8,314) (9,011)
Minority interest in income of consolidated subsidiary (1,441) (965)
--------- ---------
Income before income taxes 15,681 15,739
Provision for income taxes 6,923 7,062
--------- ---------
Net income $ 8,758 $ 8,677
========= =========
Weighted average number of common and
common equivalent shares outstanding 34,975 35,218
--------- ---------
Basic earnings per share $ .25 $ .25
========= =========
Diluted earnings per share $ .25 $ .25
========= =========
Cash dividends per common share $ .075 $ .075
========= =========
</TABLE>
See accompanying notes
1
<PAGE> 4
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
- -----------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 8,550 $ 5,769
Accounts receivable (net of allowances of
$3,863 and $3,817) 102,101 118,164
Inventories 91,786 88,019
Other current assets 5,115 4,200
----------- -----------
Total current assets 207,552 216,152
Property, plant and equipment at cost:
Land and buildings 180,345 178,168
Machinery and equipment 757,010 740,498
Transportation equipment 15,505 14,957
Leasehold improvements 4,449 4,386
----------- -----------
957,309 938,009
Less accumulated depreciation and amortization (390,068) (376,470)
----------- -----------
Net property, plant and equipment 567,241 561,539
Goodwill 315,047 317,389
Other assets 16,467 16,401
----------- -----------
$ 1,106,307 $ 1,111,481
=========== ===========
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 58,332 $ 45,924
Accrued compensation and benefits 32,576 42,040
Current maturities of long-term debt 40,423 43,462
Other current liabilities 24,152 21,054
----------- -----------
TOTAL CURRENT LIABILITIES 155,483 152,480
Long-term debt due after one year 446,787 464,876
Deferred income taxes 83,270 82,248
Other long-term items 16,072 14,462
Shareholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized; no
shares outstanding at December 31, 1998 and September 30, 1998 --- ---
Class A common stock, $.01 par value; 175,000,000 shares authorized,
22,947,900 outstanding at December 31, 1998 and 22,851,838 outstanding at
September 30, 1998; Class B common stock, $.01 par value; 60,000,000 shares
authorized; 11,740,152 outstanding
at December 31, 1998 and 11,724,972 outstanding at September 30, 1998 347 346
Capital in excess of par value 129,819 128,904
Retained earnings 280,089 274,039
Other (5,560) (5,874)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 404,695 397,415
----------- -----------
$ 1,106,307 $ 1,111,481
=========== ===========
</TABLE>
See accompanying notes
2
<PAGE> 5
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
December 31, December 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,758 $ 8,677
Items in income not affecting cash:
Depreciation and amortization 17,995 17,302
Deferred income taxes 1,022 ---
Gain on disposal of plant and equipment and other (203) (150)
Minority interest in income of consolidated subsidiary 1,441 965
Change in operating assets and liabilities:
Accounts receivable 16,086 5,924
Inventories (3,753) (7,693)
Other assets (1,174) (401)
Accounts payable 12,398 (13,364)
Accrued liabilities (6,865) (3,423)
Income taxes payable 1,402 4,481
Other 81 60
----------- -----------
18,175 (14,416)
----------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES 47,188 12,378
FINANCING ACTIVITIES:
Net (repayments) additions to revolving credit facilities (16,000) 12,000
Repayments of long-term debt (5,128) (6,900)
Sales of common stock 810 798
Cash dividends paid to shareholders (2,602) (2,579)
Distribution to minority interest (875) ---
----------- -----------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (23,795) 3,319
INVESTING ACTIVITIES:
Capital expenditures (21,245) (17,402)
Proceeds from sale of property, plant and equipment 411 596
Decrease in unexpended industrial revenue bond proceeds --- 610
----------- -----------
CASH USED FOR INVESTING ACTIVITIES (20,834) (16,196)
Effect of exchange rate changes on cash 222 (11)
Increase (decrease) in cash and cash equivalents 2,781 (510)
Cash and cash equivalents at beginning of period 5,769 3,345
----------- -----------
Cash and cash equivalents at end of period $ 8,550 $ 2,835
=========== ===========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Income taxes $ 4,577 $ 1,015
Interest (net of amounts capitalized) 6,069 7,776
</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 periods ended December 31, 1998 and 1997, the Company's financial
position at December 31, 1998 and September 30, 1998, and the cash flows for the
three month periods ended December 31, 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,
1998.
The results for the three months ended December 31, 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 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 synthetically manage 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 synthetically manage the selling
prices and raw material costs of a portion of its recycled corrugating 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.
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.
4
<PAGE> 7
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.
Inventories at December 31, 1998 and September 30, 1998 were as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
----------- -------------
(Unaudited)
<S> <C> <C>
Finished goods and work in process $ 67,927 $ 68,735
Raw materials 33,402 29,139
Supplies 11,560 12,048
--------- ---------
Inventories at first-in, first-out (FIFO) cost 112,889 109,922
LIFO reserve (21,103) (21,903)
--------- ---------
Net inventories $ 91,786 $ 88,019
========= =========
</TABLE>
NOTE 5. 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.
During the first quarter of fiscal 1999 and 1998, total comprehensive income
amounted to $ 9.1 million and $6.9 million, respectively. The difference between
total comprehensive income and net income for the quarters ended December 31,
1998 and 1997 was foreign currency translation adjustments. The fluctuation in
the exchange rates was greater during the first quarter of fiscal 1998 than
during the first quarter of fiscal 1999.
In 1997, the FASB issued Statement of Financial Accounting Standards No. 131
("SFAS 131"). SFAS 131 establishes standards for disclosures of segment
information which were not required by accounting standards previously used by
the Company. The Company is required to adopt this statement for its 1999 fiscal
year-end reporting. The Company is currently evaluating SFAS 131 and has not yet
determined its impact on the Company's consolidated financial statements.
In 1998, the FASB issued Statement of Financial Accounting Standards No. 133
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 is required to be
adopted in fiscal 2000. The Company is currently evaluating SFAS 133 and has not
yet determined its impact on the Company's consolidated financial statements.
5
<PAGE> 8
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
December 31, December 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Numerator:
Net income $ 8,758 $ 8,677
Denominator:
Denominator for basic earnings per share - weighted average shares 34,580 34,416
Effect of dilutive stock options 395 802
----------- -----------
Denominator for diluted earnings per share - weighted
average shares and assumed conversions 34,975 35,218
=========== ===========
Basic earnings per share $ 0.25 $ 0.25
=========== ===========
Diluted earnings per share $ 0.25 $ 0.25
=========== ===========
</TABLE>
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto, included herein, and 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.
7
<PAGE> 10
ROCK-TENN COMPANY
INDUSTRY SEGMENT INFORMATION
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR TONNAGE DATA)
<TABLE>
<CAPTION>
===============================================================================================
FOR THE THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES:
Converted Products Segment $ 255,884 $ 260,588
Paperboard Segment 107,122 121,368
Intersegment Eliminations (52,211) (65,481)
- -----------------------------------------------------------------------------------------------
TOTAL 310,795 316,475
- -----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES:
Converted Products Segment 13,874 9,580
Paperboard Segment 13,424 18,004
Corporate Expense (1,973) (1,967)
Interest Expense (8,314) (9,011)
Interest and Other Income 111 98
Minority Interest in Income of Consolidated Subsidiary (1,441) (965)
- -----------------------------------------------------------------------------------------------
TOTAL $ 15,681 $ 15,739
===============================================================================================
Paperboard shipped (in tons) 266,904 286,988
===============================================================================================
</TABLE>
RESULTS OF OPERATIONS
Net Sales (Unaffiliated Customers)
Net sales for the quarter ended December 31, 1998 decreased 1.8% to $310.8
million from $316.5 million for the quarter ended December 31, 1997. Net sales
decreased primarily as a result of volume and price decreases.
Net Sales (Aggregate) - Converted Products Segment
<TABLE>
<CAPTION>
(In Millions) First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 $260.6 $268.0 $263.3 $271.8 $1,063.7
1999 255.9 --- --- --- ---
--------------------------------------------------------------------------------------------------------------
</TABLE>
Net sales of converted products before intersegment eliminations for the quarter
ended December 31, 1998 decreased 1.8% to $255.9 million from $260.6 million for
the quarter ended December 31, 1997. The decrease for the quarter ended December
31, 1998 was primarily a result of volume decreases, which were partially offset
by higher selling prices. The volume decreases were partially attributable to
lower sales to a national customer during the quarter ended December 31, 1998.
In addition, another national customer completed the phase out of their business
with the Company during the first quarter of fiscal 1999. The Company currently
believes that the impact of lower volumes with these national customers will be
offset by the award of new business from other customers. However, there can be
no assurance regarding the amount or timing of any such awards. See Segment and
Market Information.
8
<PAGE> 11
Net Sales (Aggregate) - Paperboard Segment
<TABLE>
<CAPTION>
(In Millions) First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 $121.4 $118.7 $111.8 $109.2 $461.1
1999 107.1 --- --- --- ---
------------------------------------------------------------------------------------------------------------
</TABLE>
Net sales of paperboard before intersegment eliminations for the quarter ended
December 31, 1998 decreased 11.8% to $107.1 million from $121.4 million for the
quarter ended December 31, 1997. The decrease for the quarter ended December 31,
1998 was the result of volume and price decreases reflecting weakness in the
markets for coated and uncoated recycled board and soft demand in the Company's
converting businesses. In addition, the volume decreases were partially
attributable to lower volume with one national customer within the converted
products segment discussed above. In addition, the phase out of another national
customer's purchases as discussed above will also result in a reduction in
boxboard volumes. The Company currently believes that the impact of lower
volumes with these national customers will be offset by the award of new
business from converted products customers and from sales of boxboard to other
converters. However, there can be no assurance regarding the amount or timing of
any such awards. See Segment and Market Information.
Cost of Goods Sold
Cost of goods sold for the quarter ended December 31, 1998 decreased 4.3% to
$224.6 million from $234.6 million for the quarter ended December 31, 1997. Cost
of goods sold as a percentage of net sales for the quarters ended December 31,
1998 and 1997 was 72.3% and 74.1%. The decrease in cost of good sold resulted
from lower average recovered paper and energy costs and increased manufacturing
efficiencies, which were offset somewhat by increases in health insurance costs.
Substantially all U.S. inventories of the Company are valued at the lower of
cost or market with cost determined on the last-in, first-out (LIFO) inventory
valuation method, which management believes generally results in a better
matching of current costs and revenues than under the first-in, first-out (FIFO)
inventory valuation method. In periods of decreasing costs, the LIFO method
generally results in lower cost of goods sold than under the FIFO method. In
periods of increasing costs, the results are generally the opposite. The
Company's quarterly results of operations reflect LIFO estimates based on
management's projection of expected year-end inventory levels and costs. Because
these estimates are subject to many factors beyond management's control, interim
results are subject to the final year-end LIFO inventory valuation.
Since some of the Company's competitors principally use the FIFO method, the
following supplemental data is presented to illustrate the comparative effect of
LIFO and FIFO accounting on the Company's results of operations. Cost of goods
sold determined under the LIFO method was $0.8 million lower and $1.0 million
higher than it would have been under the FIFO method in the quarters ended
December 31, 1998 and 1997, respectively. Net income was $0.5 million higher and
$0.6 million lower than it would have been under the FIFO method in the quarters
ended December 31, 1998 and 1997, respectively. These supplemental FIFO earnings
reflect the after tax effect of LIFO each year.
Gross Profit
<TABLE>
<CAPTION>
(% of Net Sales) First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 25.8% 25.8% 27.7% 26.8% 26.5%
1999 27.7% --- --- --- ---
--------------------------------------------------------------------------------------------------------------
</TABLE>
Gross profit for the quarter ended December 31, 1998 increased 5.4% to $86.2
million from $81.8 million for the quarter ended December 31, 1997. Gross profit
as a percentage of net sales was 27.7% and 25.8% for the quarters ended December
31, 1998 and 1997. See Cost of Goods Sold.
9
<PAGE> 12
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended December 31,
1998 increased 4.6% to $58.8 million from $56.2 million for the quarter ended
December 31, 1997. Selling, general and administrative expenses as a percentage
of net sales for the quarter ended December 31, 1998 increased to 18.9% from
17.8% for the quarter ended December 31, 1997. The increase in these expenses as
a percentage of net sales resulted primarily from increased compensation
expenses and lower net sales.
Plant Closing and Other Costs
During the fourth quarter of fiscal 1998, the Company began implementing certain
cost reduction initiatives designed to reduce overhead and production costs and
improve operating efficiency. In connection with these cost reduction
initiatives, the Company notified approximately 40 people of their termination
and recorded $2.0 million of costs related to these terminations during fiscal
1998. As of December 31, 1998, the Company had a remaining liability of
$1,798,000, substantially all of which will be paid in fiscal 1999, related to
these terminations. No adjustments were made to the liability during the first
quarter of fiscal 1999. In addition, included in these initiatives are the
closure of a folding carton plant in Taylorsville, North Carolina and a
laminated converted products operation in Otsego, Michigan. In connection with
these closings, the Company incurred a charge of $2.1 million during the first
quarter of fiscal 1999, which consisted primarily of employee termination and
related expenses. With respect to this charge, the Company made payments of $0.3
million during the first quarter of fiscal 1999. The Company plans to
consolidate these businesses into other existing facilities. The Company expects
to incur an additional $3.6 million of costs during fiscal 1999 in connection
with the these plant closings and other cost reduction initiatives, principally
for costs of equipment and personnel relocation which will be expensed as
incurred.
Segment Operating Income.
Operating Income - Converted Products Segment
<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
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 --- --- ---
THIRD QUARTER --- --- ---
FOURTH QUARTER --- --- ---
- ----------------------------------------------------------------------------------------------
FISCAL 1999 --- --- ---
==============================================================================================
</TABLE>
Operating income attributable to the converted products segment for the quarter
ended December 31, 1998 increased 44.8% to $13.9 million from $9.6 million for
the quarter ended December 31, 1997. Excluding $2.1 million of plant closure and
other related costs, operating income attributable to the converted products
segment for the quarter ended December 31, 1998 increased 65.6% to $16.0 million
from $9.6 million for the quarter ended December 31, 1997. Excluding $2.1
million of plant closure and other related costs, operating margin for the
quarter ended December 31, 1998 was 6.3% compared to 3.7% for the quarter ended
December 31, 1997. The increase in operating margin was the result of increased
manufacturing efficiencies and price increases, which were offset by lower
volumes.
10
<PAGE> 13
Operating Income - Paperboard Segment
<TABLE>
<CAPTION>
Weighted
Average
Boxboard Average Medium Average Recovered
Net Sales Operating Tons Boxboard Tons Medium Paper
(Aggregate) (In Income Return Shipped Price Shipped Price Cost
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 $406 45.0 $330 $70
Second Quarter 118.7 18.3 15.4 236.2 408 45.6 347 68
Third Quarter 111.8 18.3 16.4 225.3 405 40.8 338 59
Fourth Quarter 109.2 14.8 13.6 220.0 398 43.9 318 58
- -----------------------------------------------------------------------------------------------------------------------
Fiscal 1998 $461.1 $ 69.4 15.1% 923.5 $404 175.3 $332 $64
=======================================================================================================================
FIRST QUARTER $107.1 $ 13.4 12.5% 221.7 $384 45.2 $288 $53
SECOND QUARTER --- --- --- --- --- --- --- --
THIRD QUARTER --- --- --- --- --- --- --- --
FOURTH QUARTER --- --- --- --- --- --- --- --
- -----------------------------------------------------------------------------------------------------------------------
FISCAL 1999 --- --- --- --- --- --- --- ---
=======================================================================================================================
</TABLE>
Operating income attributable to the paperboard segment for the quarter ended
December 31, 1998 decreased 25.6% to $13.4 million from $18.0 million for the
quarter ended December 31, 1997. Operating margin for the quarter ended December
31, 1998 was 12.5% compared to 14.8% for the quarter ended December 31, 1997.
The decrease in operating margin was primarily the result of lower selling
prices and volumes, which was partially offset by lower average recovered paper
costs.
Interest Expense
Interest expense for the quarter ended December 31, 1998 decreased to $8.3
million from $9.0 million for the quarter ended December 31, 1997. The decrease
in interest expense for the quarter ended December 31, 1998 was primarily due to
a decrease in the average outstanding borrowings during the quarter ended
December 31, 1998.
Provision for Income Taxes
Provision for income taxes decreased to $6.9 million for the quarter ended
December 31, 1998 from $7.1 million for the quarter ended December 31, 1997. The
Company's effective tax rate decreased to 44.1% for the quarter ended December
31, 1998 compared to 44.9% for the quarter ended December 31, 1997. This
decrease in the effective tax rate was primarily due to a decrease in the
Company's effective state tax rate.
Net Income and Earnings Per Common and Common Equivalent Share
Net income for the quarter ended December 31, 1998 increased 1.1% to $8.8
million from $8.7 million for the quarter ended December 31, 1998. Net income as
a percentage of net sales increased to 2.8% for the quarter ended December 31,
1997 from 2.7% for the quarter ended December 31, 1997. Earnings per common and
common equivalent share for the quarters ended December 31, 1998 and 1997 was
$0.25.
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 December 31, 1998, the
Company had $353.0 million outstanding under its revolving credit facility. The
revolving credit facility terminates in 2002. Cash and cash equivalents, $8.6
million at December 31, 1998, increased from $5.8 million at September 30, 1998.
Net cash provided by operating activities for the three months ended December
31, 1998 was $47.2 million compared to $12.4 million for the quarter ended
December 31, 1997. This increase was primarily the result of significant
decreases in net current operating asset requirements. Net cash used by
financing activities aggregated
11
<PAGE> 14
$23.8 million for the quarter ended December 31, 1998 and consisted primarily of
repayments under the revolving credit facility, repayments of long-term debt and
dividend payments. Net cash provided by financing activities aggregated $3.3
million for the quarter ended December 31, 1997 and consisted primarily of net
borrowings of long-term debt which was partially offset by dividend payments.
Net cash used for investing activities was $20.8 million for the quarter ended
December 31, 1998 compared to $16.2 million for the quarter ended December 31,
1997 and consisted primarily of capital expenditures for the quarters ended
December 31, 1998 and December 31, 1997.
Capital expenditures during the quarter ended December 31, 1998 aggregated $21.2
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
$55.8 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.
Acquisitions
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 will be able to capitalize on this trend in the
future. The Company, however, is currently in the process of integrating the
operations acquired during fiscal 1997 into the Company's other operations.
Consequently, although the Company cannot predict the extent to which it will
pursue future acquisitions, the Company expects that it will be less likely to
pursue additional acquisitions in the near term.
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
12
<PAGE> 15
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 Year 2000
problem, such as modifying or replacing the system, and actually fixing the
problem. Testing is performed on the system once the remediation is complete.
When it is determined that the system is Year 2000 compliant, the system is
implemented.
The Company expects to have substantially completed all phases of its Year 2000
program by June 30, 1999, which will leave six months for additional internal
testing and troubleshooting prior to 2000. The Company is approximately 90% and
60% complete with the assessment stage relating to IT and non-IT systems,
respectively. With respect to IT systems that are known to have required
remediation, approximately 60% 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 50% of such
systems have been remediated, tested and implemented and are currently Year 2000
compliant. Based on the results of the Company's Year 2000 program, the Company
will develop contingency plans as necessary.
The Company currently believes that it will be able to modify, upgrade or
replace all of its IT and non-IT systems affected by the Year 2000 problem on a
timely basis. In the event that the Company does not remediate on a timely basis
any material Year 2000 problem, the Company may be unable to, among other
things, take customer orders, manufacture and ship products, invoice customers
or collect payments. Under a number of the Company's supply agreements, the
Company is required to indemnify and hold harmless customers for damages
incurred by such customers arising from the Company's failure to resolve its
Year 2000 problems. The amount of any potential liability and/or lost revenue
cannot be reasonably estimated at this time; however, such amounts could be
material.
The Company has also begun a program to assess the Year 2000 readiness of its
suppliers. This program has involved identifying suppliers that are critical to
the Company's operations as well as suppliers that would be hard to replace and
conducting a survey of such suppliers to begin assessing their Year 2000
readiness. Based upon the results of this assessment, the Company will develop
contingency plans as deemed necessary. The Company cannot reasonably estimate
the magnitude of the impact on the Company of the Year 2000 problems that may be
experienced by any of the Company's suppliers; however, the impact of any such
problems could have a material adverse effect on the Company's results of
operations, financial condition and cash flow. Further, the Company does not
propose to assess the Year 2000 problems, if any, of its customers. To the
extent customers experience Year 2000 problems that are not remediated on a
timely basis, the Company anticipates potential material fluctuations in the
demand for is products.
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
13
<PAGE> 16
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 $1.0 million in connection
with the Year 2000 program and expects to spend an additional $2.0 million to
$5.0 million to complete the program. There can be no assurance that the cost of
the Company's Year 2000 program will not materially exceed expectations.
14
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For a discussion of certain market risks related to the Company, See Part I,
Item 7A, "Quantitative and Qualitative Disclosures about Market Risk", in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1998. There have been no significant developments with respect to derivatives or
exposure to market risk.
15
<PAGE> 18
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
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCK-TENN COMPANY
(Registrant)
Date: February 10, 1999 By: /s/ DAVID C. NICHOLSON
--------------------------- ------------------------------------------
David C. Nicholson, Senior Vice-President,
Chief Financial Officer, Secretary
(Principal Financial Officer, Principal
Accounting Officer and duly
authorized officer)
17
<PAGE> 20
ROCK-TENN COMPANY
INDEX TO EXHIBITS
Page No.
Exhibit 27 Financial Data Schedule (for SEC use only)
18
<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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,550
<SECURITIES> 0
<RECEIVABLES> 105,964
<ALLOWANCES> 3,863
<INVENTORY> 91,786
<CURRENT-ASSETS> 207,552
<PP&E> 957,309
<DEPRECIATION> 390,068
<TOTAL-ASSETS> 1,106,307
<CURRENT-LIABILITIES> 155,483
<BONDS> 446,787
0
0
<COMMON> 347
<OTHER-SE> 404,348
<TOTAL-LIABILITY-AND-EQUITY> 1,106,307
<SALES> 310,795
<TOTAL-REVENUES> 310,795
<CGS> 224,586
<TOTAL-COSTS> 224,586
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,314
<INCOME-PRETAX> 15,681
<INCOME-TAX> 6,923
<INCOME-CONTINUING> 8,758
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,758
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
