<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, 2000
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-23340
ROCK-TENN COMPANY
(Exact name of registrant as specified in its charter)
Georgia 62-0342590
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
504 Thrasher Street, Norcross, Georgia 30071
---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 448-2193
--------------
N/A
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of August 8, 2000
----------------------------------- --------------------------------
Class A Common Stock, .01 par value 22,173,087
Class B Common Stock, .01 par value 11,531,162
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<PAGE> 2
ROCK-TENN COMPANY
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the three months
and nine months ended June 30, 2000 and 1999 1
Condensed Consolidated Balance Sheets at June 30, 2000 and
September 30, 1999 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended June 30, 2000 and 1999 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Index to Exhibits 22
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 370,545 $ 330,477 $ 1,087,306 $ 954,637
Cost of goods sold 300,915 256,689 871,842 740,307
----------- ----------- ----------- -----------
Gross profit 69,630 73,788 215,464 214,330
Selling, general and administrative expenses 46,816 42,052 135,334 124,491
Amortization of goodwill 2,179 2,355 6,892 7,057
Plant closing and other costs 4,876 2,763 60,075 5,901
----------- ----------- ----------- -----------
Income from operations 15,759 26,618 13,163 76,881
Interest and other income 120 85 308 300
Interest expense (8,924) (7,528) (25,383) (23,622)
Minority interest in income of
consolidated subsidiary (1,371) (1,634) (3,806) (4,563)
----------- ----------- ----------- -----------
Income (loss) before income taxes 5,584 17,541 (15,718) 48,996
Income tax expense 2,979 7,621 6,323 21,512
----------- ----------- ----------- -----------
Net income (loss) $ 2,605 $ 9,920 $ (22,041) $ 27,484
=========== =========== =========== ===========
Weighted average common
shares outstanding-diluted 34,769 35,232 34,838 35,166
=========== =========== =========== ===========
Basic earnings (loss) per share $ 0.08 $ 0.28 $ (0.63) $ 0.79
=========== =========== =========== ===========
Diluted earnings (loss) per share $ 0.07 $ 0.28 $ (0.63) $ 0.78
=========== =========== =========== ===========
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,
2000 1999
--------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,354 $ 4,538
Accounts receivable (net of allowances of
$2,909 and $3,610) 147,608 139,034
Inventories 108,630 94,501
Other current assets 8,920 5,308
----------- -----------
TOTAL CURRENT ASSETS 272,512 243,381
Property, plant and equipment, at cost:
Land and buildings 199,131 194,903
Machinery and equipment 856,773 805,537
Transportation equipment 13,763 14,738
Leasehold improvements 8,029 7,242
----------- -----------
1,077,696 1,022,420
Less accumulated depreciation and amortization (492,763) (429,681)
----------- -----------
Net property, plant and equipment 584,933 592,739
Goodwill, net 275,908 308,283
Other assets 22,735 17,067
----------- -----------
$ 1,156,088 $ 1,161,470
=========== ===========
--------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 70,676 $ 66,271
Accrued compensation and benefits 36,627 36,977
Current maturities of long-term debt 42,617 41,435
Other current liabilities 27,237 24,227
----------- -----------
TOTAL CURRENT LIABILITIES 177,157 168,910
Long-term debt due after one year 490,598 457,410
Deferred income taxes 79,306 85,631
Other long-term items 19,509 17,355
Shareholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized; no
shares outstanding at June 30 and September 30 -- --
Class A common stock, $.01 par value; 175,000,000 shares authorized,
22,362,794 and 23,411,395 outstanding at June 30 and
September 30, respectively; Class B common stock, $.01 par value;
60,000,000 shares authorized; 11,558,037 and 11,546,187 outstanding
at June 30 and September 30, respectively 339 350
Capital in excess of par value 129,493 132,048
Retained earnings 263,512 303,287
Accumulated other comprehensive loss (3,826) (3,521)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 389,518 432,164
----------- -----------
$ 1,156,088 $ 1,161,470
=========== ===========
</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,
2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (22,041) $ 27,484
Items in income not affecting cash:
Depreciation and amortization 57,964 54,150
Deferred income taxes (6,325) 2,845
Gain on disposal of property, plant and equipment (577) (314)
Minority interest in income of consolidated subsidiary 3,806 4,563
Impairment loss and other non-cash charges 49,721 --
Change in operating assets and liabilities:
Accounts receivable (8,706) (9,817)
Inventories (14,247) (9,893)
Other assets (4,819) (2,928)
Accounts payable 4,465 15,407
Accrued liabilities 3,218 (1,456)
----------- -----------
(20,089) (8,687)
----------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES 62,459 80,041
FINANCING ACTIVITIES:
Additions to $450 million revolving credit facility 424,000 39,000
Repayments of $450 million revolving credit facility (395,000) (41,000)
Net additions (repayments) to other revolving credit facilities 1,147 --
Additions to long term-debt 5,440 529
Repayments of long-term debt (1,217) (5,407)
Debt issuance costs (1,529) --
Sales of common stock 3,033 2,330
Purchases of common stock (15,472) --
Cash dividends paid to shareholders (7,860) (7,828)
Distribution to minority interest (3,150) (4,725)
----------- -----------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 9,392 (17,101)
INVESTING ACTIVITIES:
Capital expenditures (67,587) (66,883)
Proceeds from sale of property, plant and equipment 1,840 923
Increase in unexpended industrial revenue bond proceeds (3,247) --
----------- -----------
CASH USED FOR INVESTING ACTIVITIES (68,994) (65,960)
Effect of exchange rate changes on cash (41) 370
----------- -----------
Increase (decrease) in cash and cash equivalents 2,816 (2,650)
Cash and cash equivalents at beginning of period 4,538 5,769
----------- -----------
Cash and cash equivalents at end of period $ 7,354 $ 3,119
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes (net of refunds) $ 15,592 $ 20,667
Interest (net of amounts capitalized) $ 24,749 $ 21,452
</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,
1999 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, 2000 and 1999, the Company's
financial position at June 30, 2000 and September 30, 1999, and the cash flows
for the nine month periods ended June 30, 2000 and 1999.
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,
1999.
The results for the three months and nine months ended June 30, 2000 are not
necessarily indicative of results that may be expected for the full year.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
NOTE 2. ACCOUNTING POLICIES
The Company enters into a variety of derivative transactions. Generally, the
Company designates at inception that derivatives hedge risks associated with
specific assets, liabilities or future commitments and monitors each derivative
to determine if it remains an effective hedge. The effectiveness of the
derivative as a hedge is based on high correlation between changes in its value
and changes in the value of the underlying hedged item. The Company includes in
operations amounts received or paid when the underlying transaction settles. 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 to limit the Company's exposure to rising interest rates.
Amounts to be received or paid as a result of interest rate cap agreements and
interest rate swap agreements are accrued and recognized as an adjustment to
interest expense related to the designated debt. The cost of purchasing interest
rate caps are amortized to interest expense ratably during the life of the
agreement. Gains or losses on terminations of interest rate swap agreements are
deferred and amortized as an adjustment to interest expense related to the debt
over the remaining term of the original contract life of terminated swap
agreements. In the event of the early extinguishment of a designated debt
obligation, any realized or unrealized gain or loss from the swap would be
recognized in income at the time of extinguishment.
The Company uses forward contracts to limit exposure to fluctuations in Canadian
foreign currency rates with respect to its receivables denominated in Canadian
dollars. The forward contracts are settled monthly and resulting gains or losses
are recognized at the time of settlement.
The Company uses commodity swap agreements to limit the Company's exposure to
falling sales prices and rising raw material costs for a portion of its recycled
corrugating medium business. Amounts to be received or paid as a result of these
swap agreements are recognized in the period in which the related sale is made.
4
<PAGE> 7
NOTE 3. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income for the three months ended June 30, 2000 was $1.4
million and total comprehensive loss for the nine months ended June 30, 2000 was
$22.3 million. Total comprehensive income for the three and nine months ended
June 30, 1999 was $10.8 million and $29.6 million, respectively. The difference
between total comprehensive income (loss) and net income (loss) was foreign
currency translation adjustments.
NOTE 4. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results will differ from those estimates and the differences could be
material.
NOTE 5. INVENTORIES
Substantially all U.S. inventories are stated at the lower of cost or market,
with cost determined on the last-in, first-out (LIFO) basis. All other
inventories are valued at lower of cost or market, with cost determined using
methods which approximate cost computed on a first-in, first-out (FIFO) basis.
An actual valuation of inventory under the LIFO method can only be made at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO estimates must necessarily be based on management's
projection of expected year-end inventory levels and costs. Because these are
subject to many factors beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
Inventories at June 30, 2000 and September 30, 1999 were as follows (in
thousands):
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
---------- -------------
<S> <C> <C>
Finished goods and work in process $ 80,884 $ 67,934
Raw materials 44,071 37,029
Supplies 11,839 11,608
---------- ----------
Inventories at first-in, first-out (FIFO) cost 136,794 116,571
LIFO reserve (28,164) (22,070)
---------- ----------
Net inventories $ 108,630 $ 94,501
========== ==========
</TABLE>
NOTE 6. PLANT CLOSING AND OTHER COSTS
After the quarter ended June 30, 2000, the Company decided to consolidate the
folding carton operations of the Madison, Wisconsin folding carton plant into
other plants over a period of six to eight months. This closing was announced in
July 2000 and will result in the termination of approximately 180 employees. The
Company expects to incur pre-tax charges aggregating $2.1 million consisting
primarily of severance, machinery relocation, asset and lease write downs and
other one-time costs in connection with the closing of the Madison plant.
During the second quarter of fiscal 2000, the Company incurred losses in excess
of expectations in its two folding carton plants that use web offset
manufacturing technology. As a result, during the second quarter, the Company
decided to close its folding carton plant in Chicago, Illinois and consolidate
its web offset operations into its other folding carton operations. This closing
was announced in April 2000 and resulted in the termination of approximately 180
employees. The plant is expected to close prior to the end of fiscal 2000.
Although this consolidation will reduce expected operating losses in its web
offset operations, the Company expects to continue to incur losses in these
operations. Accordingly, the Company recorded asset impairment charges during
the second quarter of $43.1 million, reflecting its determination that a
material diminution in the value of the assets, including
5
<PAGE> 8
goodwill of $25.4 million (which is not deductible for tax purposes), relating
to its two folding carton plants that use web offset manufacturing technology
had occurred. The Company incurred pre-tax charges of approximately $2.5 million
and made payments of approximately $0.4 million for severance, equipment
relocation and other one-time costs, during the three and nine month periods
ended June 30, 2000, respectively, related to this closing. The Company expects
to incur additional pre-tax charges aggregating $2.6 million during the fourth
quarter of fiscal 2000 related to severance, machinery relocation and other one
time costs in connection with the closing of the Chicago plant.
During the second quarter of fiscal 2000, the Company decided to close its
folding carton plant in Norcross, Georgia. This closing was announced in April
2000 and resulted in the termination of approximately 70 employees. The plant is
expected to close prior to the end of fiscal 2000. As a result of this decision,
the Company incurred pre-tax charges of approximately $0.9 million and $1.9
million and made payments of approximately $0.2 million and $0.2 million for
severance, equipment relocation, impairment of certain plant assets and other
one-time costs, during the three and nine month periods ended June 30, 2000,
respectively, related to this closing. The Company expects to incur pre-tax
charges aggregating approximately $0.6 million during the fourth quarter of
fiscal 2000 consisting primarily of severance, machinery relocation and other
one time costs related to this closing. The Company is moving production from
this facility to other folding carton facilities.
During the first quarter of fiscal 2000, the Company announced the closing of
its Lynchburg, Virginia laminated paperboard products plant. The closing
resulted in the termination of approximately 115 employees. The Company expects
severance, equipment relocation and other one-time costs in connection with this
closing to reduce pre-tax income by approximately $8.9 million during fiscal
2000. The Company incurred pre-tax charges of approximately $1.5 million and
$8.0 million and made payments of approximately $1.9 million and $8.1 million
for severance, equipment relocation and other one-time costs, during the three
and nine month periods ended June 30, 2000, respectively, related to this
closing and certain other closed plants. The Company had a remaining nominal
liability at June 30, 2000 related to the closing of the Lynchburg plant.
During the second quarter of fiscal 2000, the Company decided to remove from
service certain equipment. As a result of this decision, the Company incurred
impairment charges of $4.6 million related to this equipment in the second
quarter.
During fiscal 1999, the Company closed a folding carton plant in Taylorsville,
North Carolina, a laminated paperboard products operation in Otsego, Michigan
and an uncoated papermill serving its coverboard converting operations in Jersey
City, New Jersey. The closures resulted in the termination of approximately 280
employees. In connection with these closings, the Company made severance and
other payments of $0.3 million and $0.7 million during the three and nine month
periods ended June 30, 2000, respectively. The Company had a nominal remaining
liability at June 30, 2000. The Company has consolidated the operations of these
closed plants into other existing facilities.
During 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 terminated approximately 40 employees. The Company made severance and
other payments of approximately $0.1 million and $0.4 million during the three
and nine months ended June 30, 2000, respectively, related to these
terminations. The remaining liability at June 30, 2000 is $0.8 million, which is
expected to be paid over the next two years.
NOTE 7. LONG-TERM DEBT
On June 30, 2000, the Company replaced its existing revolving credit agreement
with a new five-year $450 million revolving credit agreement.
6
<PAGE> 9
NOTE 8. INCOME TAXES
The differences between the statutory federal income tax rate and the Company's
effective income tax rate are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory federal tax rate 35.0% 35.0% 35.0% 35.0%
State taxes, net of federal benefit 3.8% 3.6% 3.1% 3.6%
Non-deductible amortization and
write-off of goodwill 10.7% 3.8% (74.5)% 4.1%
Other, net (primarily non-taxable
items) 3.8% 1.0% (3.8)% 1.2%
---------------------------------------------------------------------------------------------------------
Effective tax rate 53.3% 43.4% (40.2)% 43.9%
=========================================================================================================
</TABLE>
NOTE 9. NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." This statement requires the fair value of derivatives to be
recorded as assets or liabilities. Gains or losses resulting from changes in the
fair values of derivatives would be accounted for currently in earnings or
comprehensive income, depending on the purpose of the derivatives and whether
they qualify for hedge accounting treatment. 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.
In July 2000, the FASB issued Emerging Issues Task Force issue 00-10 ("EITF
00-10"), "Accounting for Shipping and Handling Costs." This issue provides
guidance regarding how shipping and handling costs incurred by the seller and
billed to a customer should be treated. EITF 00-10 concludes that all amounts
billed to a customer in a sale transaction related to shipping and handling
should be classified as revenue and the costs incurred by the seller for
shipping and handling should be classified as cost of goods sold. The Company
adopted EITF 00-10 during the third quarter of fiscal 2000.
NOTE 10. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 2,605 $ 9,920 $(22,041) $ 27,484
Denominator:
Denominator for basic earnings per share-
weighted average shares 34,688 34,854 34,838 34,758
Effect of dilutive stock options 81 378 -- 408
-------- -------- -------- --------
Denominator for diluted earnings per share-
weighted average shares and assumed
conversions 34,769 35,232 34,838 35,166
======== ======== ======== ========
Basic earnings (loss) per share $ 0.08 $ 0.28 $ (0.63) $ 0.79
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.07 $ 0.28 $ (0.63) $ 0.78
======== ======== ======== ========
</TABLE>
7
<PAGE> 10
Common stock equivalents were anti-dilutive and therefore excluded from the
calculation of weighted average shares used in computing diluted loss per share
for the nine months ended June 30, 2000.
NOTE 11. SEGMENT INFORMATION
The following table sets forth business segment information (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales (aggregate):
Packaging Products $ 242,596 $ 218,265 $ 711,319 $ 638,113
Paperboard 116,965 107,032 352,416 304,427
Laminated Paperboard, Plastic Packaging
And Recycled Fiber 82,202 65,358 233,677 186,322
------------------------------------------------------------------------------------------------------------------------------
Total $ 441,763 $ 390,655 $ 1,297,412 $ 1,128,862
==============================================================================================================================
Less net sales (intersegment):
Packaging Products $ 460 $ 278 $ 1,341 $ 577
Paperboard 52,658 49,916 160,621 148,161
Laminated Paperboard, Plastic Packaging
and Recycled Fiber 18,100 9,984 48,144 25,487
------------------------------------------------------------------------------------------------------------------------------
Total $ 71,218 $ 60,178 $ 210,106 $ 174,225
==============================================================================================================================
Net sales (unaffiliated customers):
Packaging Products $ 242,136 $ 217,987 $ 709,978 $ 637,536
Paperboard 64,307 57,116 191,795 156,266
Laminated Paperboard, Plastic Packaging
and Recycled Fiber 64,102 55,374 185,533 160,835
------------------------------------------------------------------------------------------------------------------------------
Total $ 370,545 $ 330,477 $ 1,087,306 $ 954,637
==============================================================================================================================
Segment income:
Packaging Products $ 16,256 $ 13,676 $ 41,655 $ 41,549
Paperboard 6,278 15,307 30,942 39,589
Laminated Paperboard, Plastic Packaging
and Recycled Fiber 3,801 1,729 11,960 3,398
------------------------------------------------------------------------------------------------------------------------------
26,335 30,712 84,557 84,536
LIFO and intercompany profit (3,429) (500) (6,094) 1,000
Plant closing and other costs (4,876) (2,763) (60,075) (5,901)
Other non-allocated expenses (2,271) (831) (5,225) (2,754)
Minority interest in income of consolidated (1,371) (1,634) (3,806) (4,563)
subsidiary
Interest expense (8,924) (7,528) (25,383) (23,622)
Interest and other income 120 85 308 300
------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 5,584 $ 17,541 $ (15,718) $ 48,996
==============================================================================================================================
</TABLE>
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto, included herein, and our
audited consolidated financial statements and notes thereto for the fiscal year
ended September 30, 1999 which have been filed with the Securities and Exchange
Commission as part of our Annual Report on Form 10-K.
SEGMENT AND MARKET INFORMATION
We report our results in three industry segments: packaging products, paperboard
and a segment combining the results of our laminated paperboard products
division, plastic packaging division and recycled fiber division.
The packaging products segment consists of facilities that produce folding
cartons, solid fiber partitions, corrugated containers and corrugated displays.
We compete with a significant number of national, regional and local packaging
suppliers. During fiscal 1999, we sold packaging products to approximately 5,000
customers with no customer accounting for more than 5% of our net sales. We sell
packaging products to several large national customers with sales to an
individual customer ranging as high as $55 million during fiscal 1999. The
majority of our packaging products sales are to national and regional customers
that annually purchase less than $10 million of packaging products from the
Company. The packaging business is highly competitive. As a result, we regularly
bid for sales opportunities to customers for business or for renewal of existing
business. The loss of business or the award of new business from our customers
may have a significant impact on our results of operations.
The paperboard segment consists of facilities that manufacture 100% recycled
clay-coated and uncoated paperboard, which we refer to as boxboard, and
corrugating medium, which we refer to as medium. In the paperboard segment, we
compete with integrated and non-integrated national, regional and local
companies manufacturing various grades of paperboard. During fiscal 1999, we
sold paperboard to approximately 700 customers. A significant percentage of our
sales of boxboard are made to our packaging products segment and laminated
paperboard products division. Our paperboard segment's sales volumes may
therefore be directly impacted by changes in demand for the Company's packaging
and laminated paperboard products.
The laminated paperboard, plastic packaging and recycled fiber segment consists
of facilities that produce laminated paperboard products and thermoformed
plastic products and that collect recovered paper. In our laminated paperboard
products and thermoformed plastic products divisions, we compete with a small
number of national, regional and local companies offering highly specialized
products. We also compete with foreign companies in the book cover market. Our
recycled fiber division competes with national, regional and local companies.
During fiscal 1999, we sold laminated paperboard, plastic packaging and recycled
fiber to approximately 2,400 customers.
The following table presents certain operating data for our three industry
segments. Certain of our income and expenses are not allocated to our segments
and are thus not reflected in the information used by management to make
operating decisions and assess performance at the plant level. These items are
reported as non-allocated expenses. These include adjustments to record
inventory on the last-in, first-out, or "LIFO", method compared to the first-in,
first-out, "FIFO", method, elimination of intercompany profit, plant closing and
related expenses, asset impairment charges and certain corporate expenses.
9
<PAGE> 12
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,
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES:
Packaging Products Segment $ 242,596 $ 218,265 $ 711,319 $ 638,113
Paperboard Segment 116,965 107,032 352,416 304,427
Laminated Paperboard, Plastic Packaging and
Recycled Fiber Segment 82,202 65,358 233,677 186,322
Intersegment Eliminations (71,218) (60,178) (210,106) (174,225)
---------------------------------------------------------------------------------------------------------------
TOTAL $ 370,545 $ 330,477 $ 1,087,306 $ 954,637
---------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES:
Packaging Products Segment $ 16,256 $ 13,676 $ 41,655 $ 41,549
Paperboard Segment 6,278 15,307 30,942 39,589
Laminated Paperboard, Plastic Packaging and
Recycled Fiber Segment 3,801 1,729 11,960 3,398
---------------------------------------------------------------------------------------------------------------
Segment Income Before Income Taxes 26,335 30,712 84,557 84,536
LIFO and Intercompany Profit (3,429) (500) (6,094) 1,000
Plant Closing and Other Costs (4,876) (2,763) (60,075) (5,901)
Other Non-Allocated Expenses (2,271) (831) (5,225) (2,754)
Interest Expense (8,924) (7,528) (25,383) (23,622)
Interest and Other Income 120 85 308 300
Minority Interest in Income of
Consolidated Subsidiary (1,371) (1,634) (3,806) (4,563)
---------------------------------------------------------------------------------------------------------------
TOTAL $ 5,584 $ 17,541 $ (15,718) $ 48,996
===============================================================================================================
Paperboard Shipped (in tons) 274,587 283,794 854,016 812,716
===============================================================================================================
</TABLE>
RESULTS OF OPERATIONS
Net Sales (Unaffiliated Customers)
Net sales for the quarter ended June 30, 2000 increased 12.1% to $370.5 million
from $330.5 million for the quarter ended June 30, 1999. Net sales for the nine
months ended June 30, 2000 increased 15.2% to $1.1 billion from $954.6 million
for the nine months ended June 30, 1999. Net sales increased primarily as a
result of price increases implemented to recover higher recovered fiber,
paperboard and other costs and continuing growth in our corrugated packaging and
display and plastics divisions.
Net Sales (Aggregate) -- Packaging 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>
1999 $210.8 $209.0 $218.3 $638.1 $238.3 $876.4
2000 230.0 238.7 242.6 711.3 -- --
============================================================================================================
</TABLE>
10
<PAGE> 13
Net sales of packaging products before intersegment eliminations for the quarter
ended June 30, 2000 increased 11.1% to $242.6 million from $218.3 million for
the quarter ended June 30, 1999. Net sales of packaging products before
intersegment eliminations for the nine months ended June 30, 2000 increased
11.5% to $711.3 million from $638.1 million for the nine months ended June 30,
1999. The increase was primarily a result of firmer market conditions in our
folding carton business generally and increases in volume and selling prices in
our corrugated packaging and display division.
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>
1999 $100.2 $ 97.2 $107.0 $304.4 $111.9 $416.3
2000 115.1 120.3 117.0 $352.4 -- --
----------------------------------------------------------------------------------------------------------------
</TABLE>
Net sales of paperboard before intersegment eliminations for the quarter ended
June 30, 2000 increased 9.3% to $117.0 million from $107.0 million for the
quarter ended June 30, 1999. Net sales of paperboard before intersegment
eliminations for the nine months ended June 30, 2000 increased 15.8% to $352.4
million from $304.4 million for the nine months ended June 30, 1999. The
increase was the result of higher selling prices.
Net Sales (Aggregate) - Laminated Paperboard, Plastic Packaging and Recycled
Fiber 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>
1999 $ 59.9 $ 61.0 $ 65.4 $186.3 $ 74.6 $260.9
2000 70.7 80.8 82.2 233.7 -- --
----------------------------------------------------------------------------------------------------------------
</TABLE>
Net sales within this segment before intersegment eliminations for the quarter
ended June 30, 2000 increased 25.7% to $82.2 million from $65.4 million for the
quarter ended June 30, 1999. Net sales within this segment before intersegment
eliminations for the nine months ended June 30, 2000 increased 25.4% to $233.7
million from $186.3 million for the nine months ended June 30, 1999. The
increase resulted from higher volumes in the plastic packaging division and
increased selling prices in the recycled fiber division.
Cost of Goods Sold
Cost of goods sold for the quarter ended June 30, 2000 increased 17.2% to $300.9
million from $256.7 million for the quarter ended June 30, 1999. Cost of goods
sold as a percentage of net sales for the quarter ended June 30, 2000 increased
to 81.2% from 77.7% for the quarter ended June 30, 1999. Cost of goods sold for
the nine months ended June 30, 2000 increased 17.8% to $871.8 million from
$740.3 million for the nine months ended June 30, 1999. Cost of goods sold as a
percentage of net sales for the nine months ended June 30, 2000 increased to
80.2% from 77.6% for the nine months ended June 30, 1999. The increase in cost
of goods sold as a percentage of net sales was primarily attributable to higher
raw material costs and operating inefficiencies at several plants some of which
was related to the start-up of certain new equipment.
Substantially all of our U.S. inventories are valued at the lower of cost or
market with cost determined on the last-in, first-out (LIFO) inventory valuation
method, which we believe generally results in a better matching of current costs
and revenues than under the first-in, first-out (FIFO) inventory valuation
method. In periods of decreasing costs, the LIFO method generally results in
lower cost of goods sold than under the FIFO method. In periods of increasing
costs, the results are generally the opposite. Our quarterly results of
operations reflect LIFO estimates based on management's projection of expected
year-end inventory levels and costs. Because these estimates are subject to many
factors beyond management's control, interim results are subject to the final
year-end LIFO inventory valuation.
11
<PAGE> 14
The following table illustrates the comparative effect of LIFO and FIFO
accounting on our results of operations. These supplemental FIFO earnings
reflect the after-tax effect of eliminating the LIFO adjustment each year.
<TABLE>
<CAPTION>
Three months ended June 30, Nine months ended June 30,
2000 1999 2000 1999
---------------- ---------------- ----------------- ----------------
(In Millions) LIFO FIFO LIFO FIFO LIFO FIFO LIFO FIFO
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cost of goods sold $300.9 $297.5 $256.7 $256.2 $871.8 $865.7 $740.3 $741.3
Net income 2.6 4.7 9.9 10.2 (22.0) (18.3) 27.5 26.9
-------------------------------------------------------------------------------------------------------
</TABLE>
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>
1999 23.0% 22.1% 22.3% 22.5% 22.3% 22.4%
2000 20.8% 19.9% 18.8% 19.8% -- --
-------------------------------------------------------------------------------------------------------
</TABLE>
Gross profit for the quarter ended June 30, 2000 decreased 5.7% to $69.6 million
from $73.8 million for the quarter ended June 30, 1999. Gross profit for the
nine months ended June 30, 2000 increased 0.6% to $215.5 million from $214.3
million for the nine months ended June 30, 1999. Gross profit as a percentage of
net sales was 18.8% and 22.3% for the quarters ended June 30, 2000 and 1999,
respectively. Gross profit as a percentage of net sales was 19.8% and 22.4% for
the nine months ended June 30, 2000 and 1999, respectively. See Cost of Goods
Sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended June 30, 2000
increased 11.2% to $46.8 million from $42.1 million for the quarter ended June
30, 1999. Selling, general and administrative expenses for the nine months ended
June 30, 2000 increased 8.7% to $135.3 million from $124.5 million for the nine
months ended June 30, 1999. Selling, general and administrative expenses as a
percentage of net sales for the quarter ended June 30, 2000 decreased to 12.6%
from 12.7% for the quarter ended June 30, 1999. Selling, general and
administrative expenses as a percentage of net sales for the nine months ended
June 30, 2000 decreased to 12.4% from 13.0% for the nine months ended June 30,
1999.
Plant Closing and Other Costs
After the quarter ended June 30, 2000, we decided to consolidate the folding
carton operations of our Madison, Wisconsin folding carton plant into other
plants over a period of six to eight months. This closing was announced in July
2000 and will result in the termination of approximately 180 employees. We
expect to incur pre-tax charges aggregating $2.1 million consisting primarily of
severance, machinery relocation, asset and lease write downs and other one-time
costs in connection with the closing of the Madison plant.
During the second quarter of fiscal 2000, we incurred losses in excess of
expectations in our two folding carton plants that use web offset manufacturing
technology. As a result, during the second quarter we decided to close our
folding carton plant in Chicago, Illinois and consolidate our web offset
operations into our other folding carton operations. This closing was announced
in April 2000 and resulted in the termination of approximately 180 employees.
The plant is expected to close prior to the end of fiscal 2000. Although this
consolidation will reduce expected operating losses in our web offset
operations, we expect to continue to incur losses in these operations.
Accordingly, we recorded asset impairment charges during the second quarter of
$43.1 million, reflecting our determination that a material diminution in the
value of the assets, including goodwill of $25.4 million (which is not
deductible for tax purposes), relating to our two folding carton plants that use
web offset manufacturing technology had occurred. We incurred pre-tax charges of
approximately $2.5 million and made payments of approximately $0.4 million for
severance, equipment relocation and other one-time costs, during the three and
nine month periods ended June 30, 2000, respectively, related to this closing.
We expect to incur additional pre-tax charges aggregating
12
<PAGE> 15
$2.6 million during the fourth quarter of fiscal 2000 related to severance,
machinery relocation and other one time costs in connection with the closing of
the Chicago plant.
During the second quarter of fiscal 2000, we decided to close our folding carton
plant in Norcross, Georgia. This closing was announced in April 2000 and
resulted in the termination of approximately 70 employees. The plant is expected
to close prior to the end of fiscal 2000. As a result of this decision, we
incurred pre-tax charges of approximately $0.9 million and $1.9 million and made
payments of approximately $0.2 million and $0.2 million for severance, equipment
relocation, impairment of certain plant assets and other one-time costs, during
the three and nine month periods ended June 30, 2000, respectively, related to
this closing. We expect to incur pre-tax charges aggregating approximately $0.6
million during the fourth quarter of fiscal 2000 consisting primarily of
severance, machinery relocation and other one time costs related to this
closing. We are moving production from this facility to other folding carton
facilities.
During the first quarter of fiscal 2000, we announced the closing of our
Lynchburg, Virginia laminated paperboard products plant. The closing resulted in
the termination of approximately 115 employees. We expect severance, equipment
relocation and other one-time costs in connection with this closing to reduce
pre-tax income by approximately $8.9 million during fiscal 2000. We incurred
pre-tax charges of approximately $1.5 million and $8.0 million and made payments
of approximately $1.9 million and $8.1 million for severance, equipment
relocation and other one-time costs, during the three and nine month periods
ended June 30, 2000, respectively, related to this closing and certain other
closed plants. We had a remaining nominal liability at June 30, 2000 related to
the closing of the Lynchburg plant.
During the second quarter of fiscal 2000, we decided to remove from service
certain equipment. As a result of this decision, we incurred impairment charges
of $4.6 million related to this equipment in the second quarter.
During fiscal 1999, we closed a folding carton plant in Taylorsville, North
Carolina, a laminated paperboard products operation in Otsego, Michigan and an
uncoated papermill serving our coverboard converting operations in Jersey City,
New Jersey. The closures resulted in the termination of approximately 280
employees. In connection with these closings, we made severance and other
payments of $0.3 million and $0.7 million during the three and nine month
periods ended June 30, 2000, respectively. We had a nominal remaining liability
at June 30, 2000. We have consolidated the operations of these closed plants
into other existing facilities.
During fiscal 1998, we began implementing certain cost reduction initiatives
designed to reduce overhead and production costs and improve operating
efficiency. In connection with these cost reduction initiatives, we terminated
approximately 40 employees. We made severance and other payments of
approximately $0.1 million and $0.4 million during the three and nine months
ended June 30, 2000, respectively, related to these terminations. The remaining
liability at June 30, 2000 is $0.8 million, which is expected to be paid over
the next two years.
13
<PAGE> 16
Segment Operating Income.
Operating Income -- Packaging Products Segment
<TABLE>
<CAPTION>
Net Sales Operating
(In Millions, except Percentages) (Aggregate) Income Return on Sales
----------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $ 210.8 $ 13.9 6.6%
Second Quarter 209.0 14.0 6.7
Third Quarter 218.3 13.7 6.3
------- ------- ---
Nine Months Ended 6/30 638.1 41.6 6.5
Fourth Quarter 238.3 19.1 8.0
----------------------------------------------------------------------------------
Fiscal 1999 $ 876.4 $ 60.7 6.9%
==================================================================================
FIRST QUARTER $ 230.0 $ 11.2 4.9%
SECOND QUARTER 238.7 14.2 5.9
THIRD QUARTER 242.6 16.3 6.7
------- ------- ---
NINE MONTHS ENDED 6/30 711.3 41.7 5.9
FOURTH QUARTER -- -- --
----------------------------------------------------------------------------------
FISCAL 2000 -- -- --
==================================================================================
</TABLE>
Operating income attributable to the packaging products segment for the quarter
ended June 30, 2000 increased 19.0% to $16.3 million from $13.7 million for the
quarter ended June 30, 1999. Operating income attributable to the packaging
products segment for the nine months ended June 30, 2000 increased 0.2% to $41.7
million from $41.6 million for the nine months ended June 30, 1999. Operating
margin for the quarter ended June 30, 2000 was 6.7% compared to 6.3% for the
quarter ended June 30, 1999. Operating margin for the nine months ended June 30,
2000 was 5.9% compared to 6.5% for the nine months ended June 30, 1999. The
increase in operating margin as a percentage of sales for the third fiscal
quarter was primarily the result of improved operating efficiencies in our
corrugated display operations and certain folding carton operations. The
decrease in operating margin as a percentage of sales for the nine month period
was primarily the result of higher raw material costs, significant losses in our
web offset folding carton operations and operational problems attributable in
part to start-up of new equipment.
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 $100.2 $ 13.6 13.6% 221.7 $ 403 45.2 $ 288 $ 53
Second Quarter 97.2 10.7 11.0 218.5 399 43.5 328 52
Third Quarter 107.0 15.3 14.3 238.5 398 45.3 340 58
Nine Months Ended 6/30 304.4 39.6 13.0 678.7 400 134.0 319 54
Fourth Quarter 111.9 12.7 11.3 242.5 406 44.7 388 76
----------------------------------------------------------------------------------------------------------------------------------
Fiscal 1999 $416.3 $ 52.3 12.6% 921.2 $ 401 178.7 $ 336 $ 60
==================================================================================================================================
FIRST QUARTER $115.1 $ 13.7 11.9% 242.6 $ 420 42.4 $ 386 $ 83
SECOND QUARTER 120.3 11.0 9.1 249.8 426 44.7 403 91
THIRD QUARTER 117.0 6.2 5.3 233.7 445 40.9 419 108
------ ------ ---- ----- ----- ------
NINE MONTHS ENDED 6/30 352.4 30.9 8.8 726.1 430 128.0 403 94.0
FOURTH QUARTER -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------------------------------------------------
FISCAL 2000 -- -- -- -- -- -- -- --
==================================================================================================================================
</TABLE>
Operating income attributable to the paperboard segment for the quarter ended
June 30, 2000 decreased 59.5% to $6.2 million from $15.3 million for the quarter
ended June 30, 1999. Operating income attributable to the
14
<PAGE> 17
paperboard segment for the nine months ended June 30, 2000 decreased 22.0% to
$30.9 million from $39.6 million for the nine months ended June 30, 1999.
Operating margin for the quarter ended June 30, 2000 was 5.3% compared to 14.3%
for the quarter ended June 30, 1999. Operating margin for the nine months ended
June 30, 2000 was 8.8% compared to 13.0% for the nine months ended June 30,
1999. The decrease in operating margin was primarily the result of raw material
and energy cost increases that were not fully passed on to customers, costs
associated with the start up of new equipment at our Otsego, Michigan papermill
and operational issues at certain other papermills.
Operating Income -- Laminated Paperboard, Plastic Packaging and Recycled Fiber
Segment
<TABLE>
<CAPTION>
Net Sales Operating Return
(Aggregate) Income On Sales
(In Millions, except Percentages)
---------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $ 59.9 $ 0.1 0.2%
Second Quarter 61.0 1.5 2.5
Third Quarter 65.4 1.7 2.6
------- ------- ---
Nine Months Ended 6/30 186.3 3.3 1.8
Fourth Quarter 74.6 3.6 4.8
---------------------------------------------------------------------------
Fiscal 1999 $ 260.9 $ 6.9 2.6%
===========================================================================
FIRST QUARTER $ 70.7 $ 3.2 4.5%
SECOND QUARTER 80.8 5.0 6.2
THIRD QUARTER 82.2 3.8 4.6
------- ------- ---
NINE MONTHS ENDED 6/30 233.7 12.0 5.1
FOURTH QUARTER -- -- --
---------------------------------------------------------------------------
FISCAL 2000 -- -- --
===========================================================================
</TABLE>
Operating income attributable to this segment for the quarter ended June 30,
2000 was $3.8 million as compared to $1.7 million for the quarter ended June 30,
1999. Operating income attributable to this segment for the nine months ended
June 30, 2000 was $12.0 million as compared to $3.3 million for the nine months
ended June 30, 1999. Operating margin for the quarter ended June 30, 2000
increased to 4.6% from 2.6% for the quarter ended June 30, 1999. Operating
margin for the nine months ended June 30, 2000 increased to 5.1% from 1.8% for
the nine months ended June 30, 1999. The increase in operating margin primarily
resulted from higher margins in our recycled fiber division due to increases in
selling prices and sales of higher margin products and improved operating
efficiencies in our plastic packaging division.
Interest Expense
Interest expense for the quarter ended June 30, 2000 increased 18.7% to $8.9
million from $7.5 million for the quarter ended June 30, 1999. Interest expense
for the nine months ended June 30, 2000 increased 7.6% to $25.4 million from
$23.6 million for the nine months ended June 30, 1999. The increase in interest
expense for the quarter and nine months ended June 30, 2000 was primarily due to
an increase in our average outstanding borrowings and increases in our weighted
average interest rates.
Provision for Income Taxes
The income tax expense for the quarter ended June 30, 2000 was $3.0 million
compared to $7.6 million for the quarter ended June 30, 1999. Provision for
income taxes decreased to $6.3 million for the nine months ended June 30, 2000
from $21.5 million for the nine months ended June 30, 1999. The Company's
effective tax expense rate was 53.3% for the quarter ended June 30, 2000
compared to an effective tax expense rate of 43.4% for the quarter ended June
30, 1999. The Company's effective tax rate decreased to 40.2% for the nine
months ended June 30, 2000 compared to 43.9% for the nine months ended June 30,
1999. Differences between our effective tax rate and statutory rates relate
primarily to the amortization and write-off of goodwill, which is not deductible
for income tax purposes.
15
<PAGE> 18
Net Income (Loss) and Earnings (Loss) Per Common and Common Equivalent Share
Net income for the quarter ended June 30, 2000 was $2.6 million and net loss for
the nine months ended June 30, 2000 was $(22.0) million. Net income for the
quarter and nine months ended June 30, 1999 was $9.9 million and $27.5 million,
respectively. Net income as a percentage of net sales was 0.7% for the quarter
and net loss as a percentage of net sales was 2.0% for the nine months ended
June 30, 2000. Net income as a percentage of net sales was 3.0% and 2.9% for the
quarter and nine months ended June 30, 1999, respectively. Earnings per common
and common equivalent share for the quarter ended June 30, 2000 was $0.07 and
loss per common and common equivalent share for the nine months ended June 30,
2000 was $(0.63). Earnings per common and common equivalent share for the
quarter and nine months ended June 30, 1999 were $0.28 and $0.78, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Capital Expenditures
We have funded our working capital requirements and capital expenditures,
including acquisitions, from net cash provided by operating activities,
borrowings under term notes and bank credit facilities and proceeds received in
connection with the issuance of industrial revenue bonds and debt and equity
securities. We maintain a revolving credit facility under which we have
aggregate borrowing availability of $450.0 million. On June 30, 2000 we replaced
our existing revolving credit agreement with a new five-year agreement that
terminates in fiscal 2005. At June 30, 2000, we had $391.0 million outstanding
under our revolving credit facility. Cash and cash equivalents, $7.4 million at
June 30, 2000, increased from $4.5 million at September 30, 1999.
Net cash provided by operating activities decreased for the nine months ended
June 30, 2000 to $62.5 million from $80.0 million for the nine months ended June
30, 1999. The decrease was primarily a result of increases in accounts
receivable and inventory balances and decreases in accounts payable and accrued
liabilities balances. Net cash provided by financing activities aggregated $9.4
million for the nine months ended June 30, 2000 and consisted primarily of
additional borrowings under the revolving credit facility, partially offset by
purchases of common stock and dividend payments. Net cash used for financing
activities aggregated $17.1 million for the nine months ended June 30, 1999 and
consisted primarily of repayments of long-term debt and dividend payments. Net
cash used for investing activities was $69.0 million for the nine months ended
June 30, 2000 compared to $66.0 million for the nine months ended June 30, 1999
and consisted primarily of capital expenditures for the nine months ended June
30, 2000 and June 30, 1999.
Capital expenditures during the nine months ended June 30, 2000 aggregated $67.6
million and were used primarily to purchase and upgrade machinery and equipment.
We estimate that our capital expenditures will aggregate approximately $35.0
million for the remainder of fiscal 2000. These expenditures will be used to
purchase and upgrade various machinery and equipment in all of our divisions.
During the second quarter of fiscal 2000, we announced the formation of a joint
venture with Lafarge Corporation to produce gypsum paperboard liner for
Lafarge's U.S. drywall manufacturing plants. The joint venture, Seven Hills
Paperboard, LLC, will own and operate a paperboard mill located at our
Lynchburg, Virginia manufacturing site. We will contribute a portion of our
existing Lynchburg assets to the venture, which will manufacture gypsum
paperboard liner using Lafarge's state of the art proprietary processes. As of
July 31, 2000 we have contributed $4.9 million and we anticipate contributing an
additional $4.1 million to the venture over the next several quarters for
equipment. Lafarge owns 51 percent and we own 49 percent of the joint venture.
On April 28, 2000, the Board of Directors amended our current stock repurchase
plan to allow for the repurchase of up to 2,000,000 shares in aggregate of Class
A Common or Class B Common from April 28, 2000 to July 31, 2003. Through July
31, 2000, we have repurchased a total of 1,158,568 shares under our amended
stock repurchase plan.
We anticipate that we will be able to fund our capital expenditures,
acquisitions, interest payments, stock repurchases, dividends and working
capital needs for the foreseeable future from cash generated from operations,
16
<PAGE> 19
borrowings under our revolving credit facility, proceeds from the issuance of
debt or equity securities, proceeds from the sale or securitization of assets or
other additional long-term debt financing.
Derivative Instruments
We enter into a variety of derivative transactions. Generally, we designate at
inception that derivatives hedge risks associated with specific assets,
liabilities or future commitments and monitor each derivative to determine if it
remains an effective hedge. The effectiveness of the derivative as a hedge is
based on a high correlation between changes in its value and changes in the
value of the underlying hedged item. We include in operations amounts received
or paid when the underlying transaction settles. We do not enter into or hold
derivatives for trading or speculative purposes.
We use interest rate cap agreements and interest rate swap agreements to manage
synthetically the interest rate characteristics of a portion of our outstanding
debt and to limit our exposure to rising interest rates. Amounts to be received
or paid as a result of interest rate cap agreements and interest rate swap
agreements are accrued and recognized as an adjustment to interest expense
related to the designated debt. The cost of purchasing interest rate caps are
amortized to interest expense ratably during the life of the agreement. Gains or
losses on terminations of interest rate swap agreements are deferred and
amortized as an adjustment to interest expense related to the debt over the
remaining term of the original contract life of terminated swap agreements. In
the event of the early extinguishment of a designated debt obligation, any
realized or unrealized gain or loss from the swap would be recognized in income
at the time of the extinguishment.
We use forward contracts to limit exposure to fluctuations in Canadian foreign
currency rates with respect to our receivables denominated in Canadian dollars.
The forward contracts are settled monthly and resulting gains or losses are
recognized at the time of settlement.
We use commodity swap agreements to limit our exposure to falling sales prices
and rising raw material costs for a portion of our recycled corrugating medium
business. Amounts to be received or paid as a result of these swap agreements
are recognized in the period in which the related sale is made.
17
<PAGE> 20
FORWARD-LOOKING STATEMENTS
Statements herein regarding future results of operations, estimated price
increases, the cost of plant closings and expected losses under one customer
contract constitute forward-looking statements within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934. Such statements
are subject to certain risks and uncertainties that could cause actual amounts
to differ materially from those projected. With respect to plant closings and
expected losses under one customer contract, management has made assumptions
regarding, among other things, the realizable value of property and equipment,
the amount of severance costs, the estimated cost to perform under the customer
contract and the amount and timing of estimated price increases. These
assumptions could be inaccurate. Further, our future results of operations are
subject to a number of general risks that could impact our performance in future
periods including, among others, decreases in demand for our products, increases
in raw material costs, fluctuations in selling prices, the adverse actions of
our customers, the adverse actions of our competitors and our suppliers and
adverse changes in general market and industry conditions. We believe our
statements are reasonable; however, undue reliance should not be placed on such
statements which are based on current expectations.
18
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For a discussion of certain market risks related to the Company, See the "Market
Risk Sensitive Instruments and Positions" section in the Management's Discussion
and Analysis of Results of Operations and Financial Condition, in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1999. Other
than the following, there have been no significant developments with respect to
derivatives or exposure to market risk. On January 18, 2000, we terminated our
interest rate swap agreement that had a $100 million notional amount and, as a
result, received $2.2 million in cash. This amount is being amortized into
interest expense over the original term of the interest rate swap agreement.
19
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 - Credit Agreement
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
20
<PAGE> 23
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, 2000 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)
21
<PAGE> 24
ROCK-TENN COMPANY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Exhibit 10 Credit Agreement
Exhibit 27 Financial Data Schedule (for SEC use only)
</TABLE>
22
