<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 AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number: 0-20646
-------
CARAUSTAR INDUSTRIES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
North Carolina 58-1388387
- ---------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3100 Washington Street
Austell, Georgia 30106
----------------------
(Address of principal executive offices)
(Zip Code)
(770) 948-3101
--------------
(Registrant's telephone number, including area code)
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 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.
x Yes No
---- ----
Indicate the number of shares outstanding of each of issuer's classes of common
stock, as of the latest practicable date, November 7, 1997.
Common Stock, $.10 par value 25,307,603
- -------------------------------------- ----------------------------------
(Class) (Outstanding)
===============================================================================
<PAGE> 2
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
CARAUSTAR INDUSTRIES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996..................................................................................3
Condensed Consolidated Statements of Income for the three-month
and nine-month periods ended September 30, 1997 and September 30, 1996.................................4
Condensed Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 1997 and September 30, 1996................................................5
Notes to Condensed Consolidated Financial Statements...................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the three-month and nine-month
periods ended September 30, 1997 and September 30,1996.................................................9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................................................16
SIGNATURES.......................................................................................................17
EXHIBIT INDEX....................................................................................................18
</TABLE>
2
<PAGE> 3
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I, ITEM 1.
CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996*
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,600 $ 11,989
Receivables, net 73,964 59,789
Inventories 59,569 46,468
Refundable income taxes 0 5,620
Other current assets 5,390 3,187
--------- ---------
Total current assets 149,523 127,053
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land 5,802 5,640
Buildings and improvements 82,591 74,837
Machinery and equipment 359,567 313,379
Furniture and fixtures 9,781 9,098
--------- ---------
457,741 402,954
Less accumulated depreciation (167,162) (146,120)
--------- ---------
Property, plant and equipment, net 290,579 256,834
--------- ---------
GOODWILL, net 96,473 81,124
--------- ---------
OTHER ASSETS 11,484 11,269
--------- ---------
$ 548,059 $ 476,280
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 29 $ 29
Accounts payable 45,611 42,347
Accrued liabilities 27,525 28,840
Income taxes payable 2,828 0
Dividends payable 3,541 3,501
--------- ---------
Total current liabilities 79,534 74,717
--------- ---------
REVOLVING CREDIT LOANS 134,000 100,000
--------- ---------
LONG-TERM DEBT, less current maturities 83,203 83,261
--------- ---------
DEFERRED INCOME TAXES 29,623 24,787
--------- ---------
DEFERRED COMPENSATION 5,538 5,727
--------- ---------
OTHER LIABILITIES 4,250 3,782
--------- ---------
MINORITY INTEREST 14,667 13,436
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par value; 5,000,000 shares
authorized; none issued 0 0
Common stock, $.10 par value; 60,000,000 shares authorized,
25,293,313 and 25,053,460 shares issued and outstanding at
September 30, 1997 and December 31, 1996, respectively 2,529 2,505
Additional paid-in capital 140,062 140,144
Retained earnings 54,653 27,921
--------- ---------
197,244 170,570
--------- ---------
$ 548,059 $ 476,280
========= =========
</TABLE>
*Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
<PAGE> 4
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I, ITEM 1.
CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SALES $ 180,705 $ 165,009 $ 513,009 $ 462,845
FREIGHT 6,985 6,810 20,872 19,727
--------- --------- --------- ---------
Net Sales 173,720 158,199 492,137 443,118
COST OF SALES 126,920 111,197 353,695 309,010
--------- --------- --------- ---------
Gross profit 46,800 47,002 138,442 134,108
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 21,660 20,813 66,500 58,991
--------- --------- --------- ---------
Operating income 25,140 26,189 71,942 75,117
OTHER (EXPENSE) INCOME:
Interest expense (3,629) (3,286) (10,408) (7,506)
Interest income 92 135 227 433
Nonrecurring gain 0 0 0 2,357
Equity in income of unconsolidated affiliates 25 808 1,206 1,085
Other, net (246) 717 (347) 420
--------- --------- --------- ---------
(3,758) (1,626) (9,322) (3,211)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 21,382 24,563 62,620 71,906
MINORITY INTEREST (471) (291) (1,231) (296)
PROVISION FOR INCOME TAXES 8,287 9,506 24,205 27,966
--------- --------- --------- ---------
NET INCOME $ 12,624 $ 14,766 $ 37,184 $ 43,644
========= ========= ========= =========
PRIMARY
- -------
NET INCOME PER COMMON SHARE $ 0.50 $ 0.58 $ 1.48 $ 1.72
========= ========= ========= =========
Primary weighted average number
of shares outstanding 25,240 25,300 25,104 25,355
========= ========= ========= =========
FULLY DILUTED
- -------------
NET INCOME PER COMMON SHARE $ 0.50 $ 0.58 $ 1.48 $ 1.72
========= ========= ========= =========
Fully diluted weighted average number
of shares outstanding 25,257 25,314 25,136 25,426
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements of income.
4
<PAGE> 5
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I, ITEM 1.
CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1997 1996
--------- ------------
<S> <C> <C>
Cash provided by (used in) (Unaudited)
Operating activities:
Net income $ 37,184 $ 43,644
Adjustments for noncash charges 24,906 15,851
Changes in current assets and liabilities (9,786) 9,344
-------- ---------
Net cash provided by operating activities 52,304 68,839
-------- ---------
Investing activities:
Purchases of property, plant and equipment (30,031) (27,009)
Acquisitions of businesses (8,479) (139,002)
Proceeds from sale of interest in net assets of subsidiary 0 10,524
Other 2,538 6,840
-------- ---------
Net cash used in investing activities (35,972) (148,647)
-------- ---------
Financing activities:
Proceeds from revolving credit loans 67,000 145,000
Repayments of revolving credit loans (33,000) (40,000)
Repayments of long-term debt (14,007) (110)
Dividends paid (10,418) (9,016)
Proceeds from issuances of stock 2,728 1,672
Purchases of stock (29,444) (20,312)
Other (580) (553)
-------- ---------
Net cash (used in) provided by financing activities (17,721) 76,681
-------- ---------
Net decrease in cash and cash equivalents (1,389) (3,127)
Cash and cash equivalents at beginning of period 11,989 8,785
-------- ---------
Cash and cash equivalents at end of period $ 10,600 $ 5,658
======== =========
Cash payments for:
Interest $ 8,761 $ 5,496
======== =========
Income taxes $ 14,903 $ 26,868
======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements of cash flows.
5
<PAGE> 6
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I, ITEM 1.
CARAUSTAR INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
Note 1. Basis of Presentation
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a
fair statement of results for the interim periods. The results of
operations for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full
year. Certain amounts in the prior period financial statements have
been reclassified to conform with the 1997 presentation.
Note 2. Common Stock Purchase Plan
During the first and second quarters of 1997, the Company purchased
and retired 1,106,000 shares of its common stock pursuant to a plan
authorized and approved by its board of directors. These purchases
were made in a series of open market transactions at an aggregate
cost of $29.4 million and at prices ranging from $22.25 to $31.94 per
share. The Company has cumulatively purchased 2,126,000 shares since
January 1996. The Company's board of directors has authorized
purchases of up to 1,874,000 additional shares.
Note 3. Acquisitions
On March 31, 1997, the Company acquired all of the outstanding stock
of The New General Packaging Service, Inc. ("NGP") in exchange for
approximately 429,000 shares of the Company's common stock, valued at
$10.3 million. NGP, located in Clifton, New Jersey, is a primary
packager of pharmaceutical and medical products as well as numerous
health, beauty and personal care products. The Company has accounted
for this acquisition as a purchase and has accordingly allocated the
purchase price to the acquired assets and liabilities assumed based
on their estimated fair values at the date of acquisition. This
allocation resulted in goodwill of $6.1 million which will be
amortized over 40 years. The NGP acquisition is not expected to have
a material effect on the operations of the Company.
On August 18, 1997, the Company acquired all of the outstanding
common stock of Oak Tree Packaging Corporation ("Oak Tree") in
exchange for approximately 556,000 shares of the Company's common
stock, valued at $16.8 million. Simultaneous with the acquisition,
the Company redeemed Oak Tree's preferred stock for approximately
$8.5 million and repaid Oak Tree's debt of approximately $11.7
million.
6
<PAGE> 7
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I, ITEM 1.
Oak Tree's operations consist of three folding carton plants located
in Versailles, Connecticut; Thorndike, Massachusetts; and York,
Pennsylvania. The Company has accounted for this transaction as a
purchase and has accordingly allocated the purchase price to the
acquired assets and liabilities assumed based on their estimated fair
values at the date of the acquisition. This allocation resulted in
goodwill of approximately $11.2 million which will be amortized over
40 years. The Oak Tree acquisition is not expected to have a material
effect on the operations of the Company.
In October 1997, subsequent to the quarter ended September 30, 1997,
the Company acquired substantially all of the assets and business of
Baxter Tube Company, a subsidiary of The Tranzonic Companies, for
approximately $13.5 million. Baxter Tube Company manufactures
spiral-wound tubes at four facilities located in Ware Shoals, South
Carolina; Perrysburg, Ohio; Minerva, Ohio and Leyland, Lancaster,
United Kingdom (under the name Unity Paper Tube, Ltd.). The Baxter
Tube Company acquisition is not expected to have a material effect on
the operations of the Company.
Note 4. Long-Term Debt
In July 1997, the Company replaced its $200 million bank revolving
credit facility with a $400 million, five-year bank revolving credit
facility and refinanced the loans outstanding with loans under the
new facility. The new credit facility may be increased up to $500
million and its maturity extended by up to three additional years,
subject to certain conditions and approvals. Interest under the new
facility is computed using the Company's choice of: (a) the
Eurodollar rate plus a margin; or (b) the higher of the Federal Funds
Rate plus a margin or the bank's prime lending rate. The Company can
also choose the basis for determining the margin above the Eurodollar
rate as either: (a) its consolidated leverage ratio; or (b) its
investment grade rating, should it attain such a rating in the
future. The credit agreement contains certain restrictive covenants
regarding, among other matters, the incurrence of additional
indebtedness and the maintenance of certain leverage and interest
coverage ratios, as defined in the agreement.
Note 5. New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share." The new standard simplifies the computation of earnings
per share (EPS) and increases comparability to international
standards. Under SFAS No. 128, primary EPS is replaced by "Basic"
EPS, which excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of
common shares outstanding for the period. "Diluted" EPS, which is
computed similarly to fully diluted EPS, reflects the potential
dilution that could occur if
7
<PAGE> 8
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I, ITEM 1.
securities or other contracts to issue common stock were exercised or
converted into common stock.
The Company is required to adopt the new standard in its year-end
1997 financial statements. All prior-period EPS information
(including interim EPS) is required to be restated at that time.
Early adoption is not permitted. Pro forma EPS, as if the Company
adopted SFAS No. 128 on January 1 of each period presented, is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ---------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS $0.51 $0.60 $1.50 $1.75
Diluted EPS $0.50 $0.58 $1.48 $1.72
</TABLE>
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 129, "Disclosure of Information About Capital Structure."
SFAS No. 129 requires companies to disclose descriptive information
about an entity's capital structure. It also requires disclosure of
information about the liquidation preference of preferred stock and
redeemable stock. SFAS No. 129 is effective for the Company's fiscal
year ending December 31, 1997. Management does not expect that SFAS
No. 129 will require significant revision of prior disclosures.
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 is designed
to improve the reporting of changes in equity from period to period.
SFAS No. 130 is effective for the Company's fiscal year ending
December 31, 1998. Management does not expect SFAS No. 130 to have a
significant impact on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 requires that an enterprise disclose
certain information about operating segments. SFAS No. 131 is
effective for the Company's fiscal year ending December 31, 1998.
Management has not yet determined the effect of SFAS No. 131.
Note 6. Commitments and Contingencies
The Company is involved in certain litigation arising in the ordinary
course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect
on the Company's financial condition or results of operations.
8
<PAGE> 9
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I, ITEM 2.
CARAUSTAR INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and operating
results during the periods included in the accompanying condensed consolidated
financial statements.
QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
The following tables set forth certain operating data regarding the Company's
volume and gross paper margins for the periods indicated:
<TABLE>
<CAPTION>
Quarters
Ended September 30,
------------------- %
1997 1996 Change Change
------ ------ ------ ------
<S> <C> <C> <C> <C>
Production source of tons of paperboard
sold (in thousands):
From paperboard mill production 237.5 235.8 1.7 0.7%
Outside purchases 16.2 27.6 (11.4) -41.3%
----- ----- -----
Total paperboard tonnage 253.7 263.4 (9.7) -3.7%
===== ===== =====
Tons sold by market (in thousands):
Tube, core and can volume 65.8 67.3 (1.5) -2.2%
Folding carton volume 74.8 76.4 (1.6) -2.1%
Gypsum facing paper volume 63.6 67.7 (4.1) -6.1%
Other specialty volume 49.5 52.0 (2.5) -4.8%
----- ----- -----
Total paperboard tonnage 253.7 263.4 (9.7) -3.7%
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Quarters
Ended September 30,
-------------------- %
1997 1996 Change Change
------ ------ ------ ------
<S> <C> <C> <C> <C>
Gross paper margins ($/ton):
Mill:
Average net selling price $ 408 $ 402 $ 6 1.5%
Average recovered fiber cost 93 66 27 40.9%
----- ----- -----
Mill gross paper margin $ 315 $ 336 $ (21) -6.3%
===== ===== =====
Tube and core:
Average net selling price $ 723 $ 725 $ (2) -0.3%
Average paperboard cost 395 397 (2) -0.5%
----- ----- -----
Tube and core gross paper margin $ 328 $ 328 $ 0 0.0%
===== ===== =====
</TABLE>
9
<PAGE> 10
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I, ITEM 2.
Net sales for the quarter ended September 30, 1997 increased 9.8 percent to
$173.7 million from $158.2 million for the same period last year. Acquisitions
completed since the third quarter of 1996 accounted for $8.8 million of sales
during the third quarter of 1997. Excluding acquisitions from the current
quarter's sales and dispositions from the year-earlier quarter's sales, net
sales increased 5.1 percent. This increase was due primarily to higher average
selling prices for paperboard and higher sales of paperstock to outside
customers.
Total paperboard tonnage in the quarter decreased 3.7 percent to 253.7 thousand
tons from 263.4 thousand tons in the year-earlier quarter. On a same-plant
basis, excluding acquisitions, total paperboard tonnage decreased 5.0 percent.
This decrease was due to the 41.3 percent reduction in purchases of paperboard
from outside manufacturers (primarily gypsum facing paper for resale and other
grades of paperboard for internal conversion). Tons sold from paperboard mill
production (consisting of sales to outside customers and transfers to the
Company's converting operations) increased 0.7 percent in the quarter versus the
year-earlier quarter. Total tonnage converted increased 4.2 percent (0.4 percent
excluding acquisitions) to 92.1 thousand tons in the third quarter of 1997 from
88.4 thousand tons in the same period last year.
The Company's gross margin decreased to 26.9 percent of net sales from 29.7
percent in the third quarter of 1996. This margin decrease was due primarily to
a decrease in gross paper margins at the Company's paperboard mills. Market
prices for certain grades of recycled paperstock were significantly higher in
the third quarter compared with the same period of last year and earlier this
year. Recovered fiber costs per ton were 40.9 percent higher than in the third
quarter last year. Although the Company raised its selling prices in response to
these cost increases, the customary time lag in implementation of price
increases prevented the Company from completely offsetting the higher fiber
costs. The Company expects that its gross paper margins will improve in the
fourth quarter as corresponding price increases are further realized.
Recovered fiber, which is derived from recycled paperstock, is the
Company's only significant raw material. Historically, the cost of recovered
fiber has fluctuated significantly due to market and industry conditions. For
example, the Company's average recovered fiber cost per ton of paperboard
produced increased from $43 per ton in 1993 to $144 per ton in 1995, an
increase of 235 percent, before dropping to $66 per ton in 1996. Recovered
fiber cost per ton has averaged $80 during the first three quarters of 1997.
Although the Company raises its selling prices in response to increases in raw
material costs, it often is unable to maintain its operating margins in the
face of such dramatic cost increases, and often it experiences short-term
margin shrinkage during periods of rapid price increases due to customary time
lags in the implementation of price increases. There can be no assurance that
the Company will be able to recoup any future increases in the cost of
recovered fiber by raising the prices of its products. There also can be no
assurance that, even if the Company is able to recoup such cost increases, its
operating margins and results of operations will not be materially and
adversely affected by time delays in the implementation of price increases.
10
<PAGE> 11
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I, ITEM 2.
Operating income decreased by $1.0 million, or 4.0 percent, to $25.1 million
from $26.2 million in the third quarter of last year. Operating income at
comparable facilities (excluding the impact of acquisitions and dispositions)
declined $2.1 million, or 7.9 percent, due primarily to lower margins at the
Company's paperboard mills and converting operations, partially offset by
improved results at paperstock recycling operations. Selling, general and
administrative expenses increased $0.8 million in the third quarter of 1997
compared with the same period last year. Excluding acquisitions and
dispositions, these expenses were up $0.2 million from the year-earlier period.
Interest expense increased 10.4 percent to $3.6 million in the third quarter
from $3.3 million in the same period last year as the result of higher average
outstanding borrowings under the revolving credit facility.
Net income decreased $2.1 million, or 14.5 percent, to $12.6 million in the
third quarter versus $14.8 million in the same period last year. Fully diluted
net income per common share declined 13.8 percent to $0.50 compared to $0.58 in
the third quarter last year.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The following tables set forth certain operating data regarding the Company's
volume and gross paper margins for the periods indicated:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------- %
1997 1996 Change Change
------ ------- ------ ------
<S> <C> <C> <C> <C>
Production source of tons of paperboard
sold (in thousands):
From paperboard mill production 696.0 593.3 102.7 17.3%
Outside purchases 55.3 80.0 (24.7) -30.9%
----- ----- -----
Total paperboard tonnage 751.3 673.3 78.0 11.6%
===== ===== =====
Tons sold by market (in thousands):
Tube, core and can volume 195.5 198.0 (2.5) -1.3%
Folding carton volume 210.8 131.3 79.5 60.5%
Gypsum facing paper volume 195.4 193.5 1.9 1.0%
Other specialty volume 149.6 150.5 (0.9) -0.6%
----- ----- -----
Total paperboard tonnage 751.3 673.3 78.0 11.6%
===== ===== =====
</TABLE>
11
<PAGE> 12
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I, ITEM 2.
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
------------------- %
1997 1996 Change Change
---- ---- ------ ------
<S> <C> <C> <C> <C>
Gross paper margins ($/ton):
Mill:
Average same-mill net selling price $ 399 $ 398 $ 1 0.3%
Average same-mill recovered fiber cost 80 65 15 23.1%
----- ----- -----
Mill gross paper margin $ 319 $ 333 $ (14) -4.2%
===== ===== =====
Tube and core:
Average net selling price $ 712 $ 730 $ (18) -2.5%
Average paperboard cost 392 399 (7) -1.8%
----- ----- -----
Tube and core gross paper margin $ 320 $ 331 $ (11) -3.3%
===== ===== =====
</TABLE>
Net sales for the nine months ended September 30, 1997 increased 11.1 percent to
$492.1 million from $443.1 million in the same period last year. Acquisitions
accounted for $56.2 million of sales during the first nine months of 1997.
Excluding acquisitions and dispositions, net sales increased 0.8 percent.
Total paperboard tonnage increased 11.6 percent to 751.3 thousand tons in the
first nine months of 1997 compared with the same period last year. Excluding
acquisitions, total paperboard tonnage was down 1.1 percent to 665.9 thousand
tons. This decrease was due to a 30.9 percent reduction in purchases of
paperboard from outside manufacturers. Excluding acquisitions, tons sold from
paperboard mill production for the first nine months of 1997 increased 3.3
percent to 612.7 thousand tons. Total tonnage converted (including acquisitions)
increased 0.6 percent to 264.0 thousand tons compared with the year-earlier
period. Excluding acquisitions, total tonnage converted was down 0.7 percent
compared with the first nine months of 1996.
Gross margin for the first nine months of 1997 decreased to 28.1 percent of net
sales from 30.3 percent for the same period last year. This margin decrease was
due primarily to lower gross paper margins at the Company's paperboard mills and
tube and core converting facilities.
Operating income declined $3.2 million, or 4.2 percent, to $71.9 million from
$75.1 million for the first nine months of 1996. Operating income at comparable
facilities declined $7.1 million, or 9.5 percent. This decline was due primarily
to lower margins at paperboard mills and converting operations, partially offset
by improved results at paperstock recycling operations. Selling, general, and
administrative expenses increased $7.5 million in the first nine months of 1997
versus the same period of 1996. Excluding acquisitions and dispositions, these
expenses increased $1.2 million from the year-earlier period.
Interest expense increased to $10.4 million for the first nine months of 1997
from $7.5 million in the same period last year due primarily to higher average
outstanding borrowings under the revolving credit facility to finance
acquisitions.
12
<PAGE> 13
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I, ITEM 2.
Net income decreased 14.8 percent from $43.6 million in the first nine months of
1996 to $37.2 million. Excluding the nonrecurring gain on the sale of a 50
percent interest in the net assets of Standard Gypsum from the 1996 nine-month
results, net income declined $5.0 million, or 11.9 percent. Fully diluted net
income per common share decreased 14.0 percent to $1.48 for the first nine
months of 1997 from $1.72 for the same period last year. Excluding the
nonrecurring gain, net income per common share decreased $0.18, or 10.8 percent.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1997, the Company had loans of $134.0 million outstanding under
its revolving credit facility versus $115.0 million on September 30, 1996 and
$100.0 million on December 31, 1996. Loans under the revolving credit facility
bear interest, payable monthly, at the Eurodollar rate plus a margin based upon
the Company's consolidated leverage ratio, as defined in the revolving credit
agreement. For the nine months ended September 30, 1997 and 1996 and for the
year ended December 31, 1996, the weighted average borrowings outstanding under
the revolving credit facility during such periods bore interest at 5.84 percent,
5.70 percent and 5.71 percent, respectively. Other long-term debt, less current
maturities, primarily the Company's 7.74 percent senior notes, was $83.2 million
at September 30, 1997 versus $83.3 million at September 30, 1996 and December
31, 1996.
In the second quarter of 1997, the Company replaced its $200 million bank
revolving credit facility with a $400 million, five-year bank revolving credit
facility and refinanced the loans outstanding with loans from the new facility.
The new credit facility may be increased up to $500 million and its maturity
extended by up to three additional years, subject to certain conditions and
approvals. The Company can use the facility to fund ongoing working capital
needs and general corporate purposes, including acquisitions. Interest under the
new facility is computed using the Company's choice of: (a) the Eurodollar rate
plus a margin; or (b) the higher of the Federal Funds Rate plus a margin or the
bank's prime lending rate. The Company can also choose the basis for determining
the margin above the Eurodollar rate as either: (a) its consolidated leverage
ratio; or (b) its investment grade rating, should it attain such a rating in the
future. The credit agreement contains certain restrictive covenants regarding,
among other matters, the incurrence of additional indebtedness and the
maintenance of certain leverage and interest coverage ratios, as defined in the
agreement.
Cash generated from operations was $52.3 million for the nine months ended
September 30, 1997 compared with $68.8 million for the same period last year.
The decrease in 1997 compared to the same period in 1996 was primarily due to
increased net working capital needs.
Capital expenditures, excluding acquisitions, were $30.0 million in the first
nine months of 1997 versus $27.0 million for the same period last year. Capital
expenditures of approximately $45.0 million are anticipated for 1997.
On August 18, 1997, the Company acquired all of the outstanding common stock of
Oak Tree Packaging Corporation ("Oak Tree") in exchange for approximately
556,000 shares of the
13
<PAGE> 14
Company's common stock, valued at $16.8 million. Simultaneous with the
acquisition, the Company redeemed Oak Tree's preferred stock for approximately
$8.5 million and repaid Oak Tree's debt of approximately $11.7 million. Oak
Tree's operations consist of three folding carton plants located in Versailles,
Connecticut; Thorndike, Massachusetts; and York, Pennsylvania. In conjunction
with this acquisition, the Company recorded approximately $11.2 million in
goodwill which will be amortized over 40 years.
In October 1997, subsequent to the quarter ended September 30, 1997, the Company
acquired substantially all of the assets and business of Baxter Tube Company, a
subsidiary of The Tranzonic Companies, for approximately $13.5 million in cash.
Baxter Tube Company manufactures spiral-wound tubes at four facilities located
in Ware Shoals, South Carolina; Perrysburg, Ohio; Minerva, Ohio and Leyland,
Lancaster, United Kingdom (under the name Unity Paper Tube, Ltd.).
Cash dividends of $10.4 million were paid in the nine months ended September 30,
1997 versus $9.0 million in the same period last year. The Company's senior
notes agreement contains a provision which limits the payment of dividends, on a
cumulative basis, to a base amount plus 33 percent of the Company's cumulative
consolidated net income since October of 1992. The Company does not believe that
this provision will limit its ability to pay dividends at its current rate or
limit its ability to increase dividends in the future. The revolving credit
agreement contains no specific limitations on the payment of dividends.
During the first and second quarters of 1997, the Company purchased and retired
1,106,000 shares of its common stock. These purchases were made in a series of
open market transactions, at prices ranging from $22.25 to $31.94 per share,
totaling $29.4 million. These purchases were funded with borrowings under the
revolving credit facility and internally generated cash. The Company has
cumulatively purchased 2,126,000 shares since January 1996. The Company's board
of directors has authorized purchases of up to 1,874,000 additional shares, and
the Company intends to continue such purchases, subject to market conditions and
availability, but there can be no assurance as to the completion, timing or
prices of such future purchases.
The Company anticipates that it will be able to meet its funding needs for the
possible acquisition of additional facilities, working capital, capital
expenditures and additional stock purchases through internally generated cash
and borrowings under its revolving credit facility.
FORWARD-LOOKING INFORMATION
This Report on Form 10-Q, including "Management's Discussion and Analysis of
Financial Condition and Results of Operations," may contain various
"forward-looking statements," within the meaning of Section 21E of the
Securities Exchange Act of 1934, that are based on management's belief and
assumptions, as well as information currently available to management. When used
in this document, the words "anticipate," "estimate," "expect," and similar
expressions may identify forward-looking statements. Although the Company
believes that the expectations reflected in any such forward-looking statements
are reasonable, it can give no
14
<PAGE> 15
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I, ITEM 2.
assurance that such expectations will prove to be correct. Any such statements
are subject to certain risks, uncertainties and assumptions. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, the Company's actual financial results, performance or
condition may vary materially from those anticipated, estimated or expected.
Among the key factors that may have a direct bearing on the Company's actual
financial results, performance or condition are fluctuations in raw material
prices and the economy in general, the degree and nature of competition, demand
for the Company's products, changes in government regulations, the Company's
ability to complete acquisitions and integrate the operations of acquired
businesses and other matters discussed in this Report and the Company's other
filings with the Securities and Exchange Commission.
15
<PAGE> 16
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART II, ITEM 6.
CARAUSTAR INDUSTRIES, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits to this Report on Form 10-Q are listed in the
accompanying Exhibit Index.
(b) Reports on Form 8-K
The Company filed two current reports on Form 8-K during the
quarter ending September 30, 1997. The first report, filed
October 9, 1997, incorporated the contents of a press release
in which the Company announced that it was considering the
possibility of making a cash offer for United Kingdom-based
Britton Group plc. The second report, filed October 14, 1997,
incorporated the contents of a press release in which the
Company announced that it did not then intend to proceed with
a cash offer for Britton.
16
<PAGE> 17
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
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.
CARAUSTAR INDUSTRIES, INC.
Dated: November 11, 1997 /s/ H. Lee Thrash, III
------------------------------------------------
By: H. Lee Thrash, III
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
17
<PAGE> 18
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Filed Herewith (*)
- ----------- ----------- ------------------
<S> <C> <C>
2.01 Contribution Agreement between Tenneco Packaging Inc. and Caraustar
Industries, Inc. regarding the formation of a Partnership, dated as of
June 21, 1996 (including Annex A, Form of Partnership Agreement), as amended
by Amendment to Contribution Agreement dated July 15, 1996 (Incorporated by
reference - Exhibit 2 to Current Report on Form 8-K dated July 15, 1996 [SEC
File No. 0-20646])
3.01 Amended and Restated Articles of Incorporation of the Company
(Incorporated by reference - Exhibit 3.01 to Annual Report for
1992 on Form 10-K [SEC File No. 0-20646])
3.02 Second Amended and Restated Bylaws of the Company (Incorporated by reference -
Exhibit 3.02 to Annual Report for 1992 on Form 10-K [SEC File No. 0-20646])
4.01 Specimen Common Stock Certificate (Incorporated by reference - Exhibit 4.01 to
Registration Statement on Form S-1 [SEC File No. 33-50582])
4.02 Articles 3 and 4 of the Company's Amended and Restated Articles of
Incorporation (included in Exhibit 3.01)
4.03 Article II of the Company's Second Amended and Restated Bylaws (included in
Exhibit 3.02)
4.04 Rights Agreement, dated as of April 19, 1995, between Caraustar Industries,
Inc. and First Union National Bank of North Carolina, as Rights Agent
(Incorporated by reference - Exhibit 1 to Current Report on Form 8-K dated
April 19, 1995 [SEC File No. 0-20646])
10.01 Note Agreement, dated as of October 1, 1992, between the Company and the
Prudential Insurance Company of America, regarding the Company's 7.89% Senior
Subordinated Notes (Incorporated by reference - Exhibit 10.02 to Annual Report
for 1992 on Form 10-K [SEC File No. 0-20646])
10.02 Amendment Agreement, dated as of June 2, 1995, between the Company and the
Prudential Insurance Company of America regarding the Company's 7.89% Senior
Subordinated Notes (Incorporated by reference - Exhibit 10.03 to Report on Form
10-Q for the quarter ended September 30, 1995 [SEC File No.0-20646])
10.03 Amendment Agreement, dated as of July 23, 1997, between the Company and the
Prudential Insurance Company of America regarding the Company's 7.89% Senior
Subordinated Notes (Incorporated by reference - Exhibit 10.03 to Report on
Form 10-Q for the quarter ended June 30, 1997 [SEC File No. 0-20646])
</TABLE>
18
<PAGE> 19
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
<TABLE>
<S> <C>
10.04 Employment Agreement, dated December 31, 1990, between the Company and Thomas
V. Brown (Incorporated by reference - Exhibit 10.06 to Registration Statement
on Form S-1 [SEC File No. 33-50582])
10.05 Asset Purchase Agreement, dated August 7, 1992, between the Company and Domtar
Gypsum Inc. (Incorporated by reference - Exhibit 10.07 to Registration
Statement on Form S-1 [SEC File No. 33-50582])
10.06 Deferred Compensation Plan, together with copies of existing individual
deferred compensation agreements (Incorporated by reference - Exhibit 10.08 to
Registration Statement on Form S-1 [SEC File No. 33-50582])
10.07 1987 Executive Stock Option Plan (Incorporated by reference - Exhibit 10.09 to
Registration Statement on Form S-1 [SEC File No. 33-50582])
10.08 1993 Key Employees' Share Ownership Plan (Incorporated by reference - Exhibit
10.10 to Registration Statement on Form S-1 [SEC File No. 33-50582])
10.09 Energy Purchase Agreement, dated December 18, 1989, between Camden Paperboard
Corporation and Camden Cogen, L.P. (Incorporated by reference - Exhibit 10.11
to Registration Statement on Form S-1 [SEC File No. 33-50582])
10.10 Incentive Bonus Plan of the Company (Incorporated by reference - Exhibit 10.10
to Annual Report for 1993 on Form 10-K [SEC File No. 0-20646])
10.11 Agreement and Plan of Merger, dated as of September 13, 1995, among the Company,
CSAR Acquisition, Inc., GAR Holding Company and each of the stockholders,
warrantholders and optionees of GAR Holding Company, as amended by Amendment
No. 1 to Agreement and Plan of Merger dated as of October 31, 1995 (Incorporated by
reference - Exhibit 10.11 to Report on Form 10-Q for the quarter ended September 30,
1995 [SEC File No. 0-20646])
10.12 1996 Director Equity Plan of the Company (Incorporated by reference - Exhibit
10.12 to Report on Form 10-Q for the quarter ended March 31, 1996 [SEC File
No. 0-20646])
10.13 Credit Agreement, dated as of July 23, 1997, by and among the Company, as Borrower,
the banks listed therein, Bankers Trust Company, as Administrative Agent, NationsBank,
N.A., as Syndication Agent, SunTrust Bank, Atlanta, as Documentation Agent, First
Union National Bank, as Managing Agent and each of Credit Lyannais, The Bank of New
York, The Bank of Nova Scotia, The Bank of Tokyo - Mitsubishi, Ltd., and Wachovia Bank,
as Co-Agents (Incorporated by Reference - Exhibit 10.13 to Report on Form 10-Q for the
Quarter Ended June 30, 1997 [SEC File No.0-20646])
11.01 Computation of Earnings per Share *
27.01 Financial Data Schedule (For SEC purposes only) *
</TABLE>
19
<PAGE> 1
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 EXHIBIT 11.01
CARAUSTAR INDUSTRIES, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Earnings:
Net income available to common stock $12,624 $14,766 $37,184 $43,644
------- ------- ------- -------
Shares:
Primary weighted average common
shares outstanding 24,975 24,783 24,815 24,895
Stock options 265 517 289 460
------- ------- ------- -------
Average primary shares outstanding
and equivalents 25,240 25,300 25,104 25,355
------- ------- ------- -------
Fully diluted weighted average common
shares outstanding 24,975 24,783 24,815 24,895
Stock options 282 531 321 531
------- ------- ------- -------
Average fully diluted shares outstanding
and equivalents 25,257 25,314 25,136 25,426
------- ------- ------- -------
Primary earnings per common share:
Net income $ 0.50 $ 0.58 $ 1.48 $ 1.72
======= ======= ======= =======
Fully diluted earnings per common share:
Net income $ 0.50 $ 0.58 $ 1.48 $ 1.72
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1997 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,600
<SECURITIES> 0
<RECEIVABLES> 73,964<F1>
<ALLOWANCES> 0
<INVENTORY> 59,569
<CURRENT-ASSETS> 149,523
<PP&E> 457,741
<DEPRECIATION> 167,162
<TOTAL-ASSETS> 548,059
<CURRENT-LIABILITIES> 79,534
<BONDS> 217,203<F2>
0
0
<COMMON> 2,529
<OTHER-SE> 194,715
<TOTAL-LIABILITY-AND-EQUITY> 548,059
<SALES> 492,137
<TOTAL-REVENUES> 492,137
<CGS> 353,695
<TOTAL-COSTS> 353,695
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,408
<INCOME-PRETAX> 62,620
<INCOME-TAX> 24,205
<INCOME-CONTINUING> 37,184
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,184
<EPS-PRIMARY> 1.48
<EPS-DILUTED> 1.48
<FN>
<F1>(RECEIVABLES) ARE PRESENTED NET OF THE ALLOWANCE FOR DOUBTFUL ACCOUNTS.
<F2>(BONDS) REPRESENT REVOLVING CREDIT LOANS AND LONG TERM DEBT, LESS CURRENT
MATURITIES.
</FN>
</TABLE>
