<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<TABLE>
<C> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NO. 0-20646
CARAUSTAR INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NORTH CAROLINA 58-1388387
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
3100 WASHINGTON STREET
AUSTELL, GEORGIA 30106
(Address of principal executive offices)
(Zip Code)
(770) 948-3101
(Registrant's telephone number, include 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 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 outstanding of each of issuer's classes of common
stock, as of the latest practicable date, August 10, 1998.
<TABLE>
<S> <C>
COMMON STOCK, $.10 PAR VALUE 25,427,407
(Class) (Outstanding)
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
CARAUSTAR INDUSTRIES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997....................................... 3
Condensed Consolidated Statements of Income for the
three-month and six-month periods ended June 30, 1998 and
June 30, 1997............................................... 4
Condensed Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 1998 and June 30, 1997..... 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 six-month
periods ended June 30, 1998 and June 30, 1997............... 8
PART II-- OTHER INFORMATION
Item 2. Changes in Securities....................................... 13
Item 6. Exhibits and Reports on Form 8-K............................ 14
Signatures............................................................. 15
Exhibit Index.......................................................... 16
</TABLE>
2
<PAGE> 3
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
PART I, ITEM 1.
CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997*
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 6,810 $ 1,391
Receivables, net.......................................... 81,816 70,944
Inventories............................................... 70,721 62,319
Refundable income taxes................................... 636 1,190
Other current assets...................................... 6,284 5,312
--------- ---------
Total current assets............................... 166,267 141,156
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 6,785 6,305
Buildings and improvements................................ 94,672 86,967
Machinery and equipment................................... 397,527 362,384
Furniture and fixtures.................................... 10,628 10,103
--------- ---------
509,612 465,759
Less accumulated depreciation............................. (189,636) (174,723)
--------- ---------
Property, plant and equipment, net........................ 319,976 291,036
--------- ---------
GOODWILL, net............................................... 116,438 104,323
--------- ---------
OTHER ASSETS................................................ 15,367 13,575
--------- ---------
$ 618,048 $ 550,090
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 9 $ 9
Accounts payable.......................................... 48,738 43,861
Accrued liabilities....................................... 28,327 21,414
Dividends payable......................................... 4,068 4,052
Other note payable........................................ 26,000 0
--------- ---------
Total current liabilities.......................... 107,142 69,336
--------- ---------
REVOLVING CREDIT LOANS...................................... 149,000 129,000
--------- ---------
LONG-TERM DEBT, less current maturities..................... 83,061 83,129
--------- ---------
DEFERRED INCOME TAXES....................................... 34,573 30,731
--------- ---------
DEFERRED COMPENSATION....................................... 4,061 4,190
--------- ---------
OTHER LIABILITIES........................................... 4,559 4,616
--------- ---------
MINORITY INTEREST........................................... 419 15,157
--------- ---------
COMMITMENTS AND CONTINGENCIES
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, 25,423,096 and 25,330,670 shares issued and
outstanding at June 30, 1998 and December 31, 1997,
respectively............................................ 2,542 2,533
Additional paid-in capital................................ 147,313 144,442
Retained earnings......................................... 87,219 68,823
Accumulated other comprehensive income.................... (1,841) (1,867)
--------- ---------
235,233 213,931
--------- ---------
$ 618,048 $ 550,090
========= =========
</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 JUNE 30, 1998
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
SALES................................................. $199,026 $167,769 $384,614 $332,304
FREIGHT............................................... 9,368 6,935 18,085 13,887
-------- -------- -------- --------
Net sales................................. 189,658 160,834 366,529 318,417
COST OF SALES......................................... 138,429 113,012 265,545 226,775
-------- -------- -------- --------
Gross profit.............................. 51,229 47,822 100,984 91,642
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......... 26,501 23,130 51,327 44,840
-------- -------- -------- --------
Operating income.......................... 24,728 24,692 49,657 46,802
OTHER (EXPENSE) INCOME:
Interest expense.................................... (3,990) (3,524) (7,689) (6,779)
Interest income..................................... 103 65 176 135
Equity in income of unconsolidated affiliates....... 1,323 365 1,901 1,181
Other, net.......................................... (205) (42) (323) (101)
-------- -------- -------- --------
(2,769) (3,136) (5,935) (5,564)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST...... 21,959 21,556 43,722 41,238
MINORITY INTEREST..................................... (103) (398) (558) (760)
PROVISION FOR INCOME TAXES............................ 8,525 8,339 16,656 15,918
-------- -------- -------- --------
NET INCOME............................................ $ 13,331 $ 12,819 $ 26,508 $ 24,560
======== ======== ======== ========
BASIC
NET INCOME PER COMMON SHARE........................... $ 0.53 $ 0.52 $ 1.05 $ 0.99
======== ======== ======== ========
Weighted average number of shares outstanding......... 25,376 24,655 25,328 24,735
======== ======== ======== ========
DILUTED
NET INCOME PER COMMON SHARE........................... $ 0.52 $ 0.51 $ 1.04 $ 0.98
======== ======== ======== ========
Diluted weighted average number of shares
outstanding......................................... 25,585 24,908 25,548 25,035
======== ======== ======== ========
</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 JUNE 30, 1998
PART I, ITEM 1.
CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash provided by (used in)
Operating activities:
Net income............................................. $26,508 $24,560
Adjustments for noncash charges........................ 17,655 15,676
Changes in current assets and liabilities.............. (2,366) (9,043)
------- -------
Net cash provided by operating activities....... 41,797 31,193
------- -------
Investing activities:
Purchases of property, plant and equipment............. (19,055) (21,038)
Acquisitions of businesses............................. (14,433) 0
Other.................................................. 760 1,795
------- -------
Net cash used in investing activities........... (32,728) (19,243)
------- -------
Financing activities:
Proceeds from revolving credit loans................... 43,000 39,000
Repayments of revolving credit loans................... (23,000) (23,000)
Repayments of long-term debt........................... (10,304) (2,355)
Dividends paid......................................... (8,097) (6,965)
Proceeds from issuances of stock....................... 433 2,021
Purchases of stock..................................... (2,192) (29,444)
Distributions to minority interest holder.............. (3,100) 0
Other.................................................. (390) (381)
------- -------
Net cash used in financing activities........... (3,650) (21,124)
------- -------
Net increase (decrease) in cash and cash equivalents...... 5,419 (9,174)
Cash and cash equivalents at beginning of period.......... 1,391 11,989
------- -------
Cash and cash equivalents at end of period................ $ 6,810 $ 2,815
======= =======
Supplemental Disclosures:
Cash payments for interest............................. $ 7,586 $ 6,753
======= =======
Cash payments for income taxes......................... $16,322 $13,391
======= =======
Stock issued for acquisition........................... $ 4,660 $10,300
======= =======
Note payable issued for acquisition.................... $26,000 $ 0
======= =======
</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 JUNE 30, 1998
PART I, ITEM 1.
CARAUSTAR INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(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 six months ended June 30, 1998 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 1998 presentation.
NOTE 2. COMMON STOCK PURCHASE PLAN
During the first quarter of 1998, the Company purchased and retired
66,000 shares of its common stock at a market price of $33.00 per share,
totaling $2.2 million. The Company has cumulatively purchased 2,258,000
shares since January 1996. The Company's board of directors has
authorized purchases of up to 1,742,000 additional shares.
NOTE 3. ACQUISITIONS
Each of the following acquisitions was accounted for under the purchase
method of accounting, applying the provisions of Accounting Principles
Board Opinion No. 16 and, as a result, the Company recorded the assets
and liabilities of the acquired companies at their estimated fair values
with the excess of the purchase price over these amounts being recorded
as goodwill. Actual allocations of goodwill and other identifiable assets
will be based on further studies and may change during the allocation
period, generally one year following the date of acquisition. These
acquisitions are not expected to have a material impact on the operations
of the Company.
In March 1998, the Company acquired all of the outstanding common stock
of Chesapeake Paperboard Company and its wholly owned subsidiary,
Chesapeake Fiber Packaging Corporation, ("Chesapeake") for approximately
$21.0 million, including approximately $8.2 million of Chesapeake's debt,
which was repaid by the Company. Chesapeake Paperboard, located in
Baltimore, Maryland, produces recycled paperboard used primarily in the
folding carton and other specialty markets. Chesapeake Fiber Packaging,
located in Hunt Valley, Maryland, manufactures folding cartons and
specialty corrugated products. No goodwill was recorded in connection
with the Chesapeake acquisition.
In May 1998, the Company acquired all of the outstanding stock of Etowah
Recycling, Inc. ("Etowah") in exchange for approximately 140,000 shares
of the Company's common stock, valued at $4.7 million. Simultaneously,
the Company repaid Etowah's debt of approximately $2.1 million. Etowah
operates two recovered fiber facilities, located in Canton, Georgia and
Hardeeville, South Carolina. Goodwill in the amount of $3.3 million was
recorded in connection with the Etowah acquisition and is being amortized
over 40 years.
In June 1998, the Company acquired the 20 percent interest in the CPI
partnership held by Tenneco Packaging, Inc. ("TPI") for $27.4 million.
The CPI partnership had operated as a joint venture of the Company and
TPI since July of 1996. As a result of this transaction, the Company now
owns 100 percent of the partnership's operations which include
clay-coated recycled paperboard mills located in Rittman, Ohio and Tama,
Iowa and recovered fiber recycling and brokerage operations located in
6
<PAGE> 7
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
PART I, ITEM 1.
Rittman and Cleveland, Ohio. The purchase price consisted of $1.4 million
in cash paid at closing and a note payable to TPI for the remaining $26.0
million due in June of 1999. Goodwill in the amount of $9.7 million was
recorded in connection with this transaction and will be amortized over
40 years.
NOTE 4. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 is designed to improve the reporting
of changes in equity from period to period. The Company adopted SFAS 130
on January 1, 1998. Total comprehensive income, consisting of net income
plus other nonowner changes in equity, for the six months ended June 30,
1998 and 1997 was $26,534,000 and $24,569,000, respectively.
NOTE 5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB 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 impact of SFAS No. 131.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans.
It standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer deemed as useful. SFAS No. 132 is
effective for the Company's fiscal year ending December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities and
is effective for all fiscal quarters for fiscal years beginning after
June 15, 1999. Management does not expect SFAS 133 to have a significant
impact on the Company's financial statements.
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.
7
<PAGE> 8
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
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 JUNE 30, 1998 AND 1997
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 JUNE 30,
--------------- %
1998 1997 CHANGE CHANGE
------ ------ ------ ------
<S> <C> <C> <C> <C>
Production source of paperboard tons sold (in
thousands):
From paperboard mill production..................... 236.1 230.7 5.4 2.3%
Outside purchases................................... 22.8 20.8 2.0 9.6%
------ ------ ----
Total paperboard tonnage.................... 258.9 251.5 7.4 2.9%
====== ====== ====
Tons sold by market (in thousands):
Tube, core and can volume........................... 67.1 67.8 (0.7) -1.0%
Folding carton volume............................... 75.3 66.5 8.8 13.2%
Gypsum facing paper volume.......................... 65.4 66.7 (1.3) -1.9%
Other specialty volume.............................. 51.1 50.5 0.6 1.2%
------ ------ ----
Total paperboard tonnage.................... 258.9 251.5 7.4 2.9%
====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
QUARTERS
ENDED JUNE 30,
-------------- %
1998 1997 CHANGE CHANGE
----- ----- ------ ------
<S> <C> <C> <C> <C>
Gross paper margins ($/ton):
Paperboard mill:
Average same-mill net selling price............. $413 $404 $ 9 2.2%
Average same-mill recovered fiber cost.......... 74 72 2 2.8%
---- ---- ---
Paperboard mill gross paper margin......... $339 $332 $ 7 2.1%
==== ==== ===
Tube and core:
Average net selling price....................... $736 $713 $23 3.2%
Average paperboard cost......................... 410 398 12 3.0%
---- ---- ---
Tube and core gross paper margin........... $326 $315 $11 3.5%
==== ==== ===
</TABLE>
Consolidated net sales for the quarter ended June 30, 1998 increased 18.0
percent to $189.7 million from $160.8 million for the same period last year.
Acquisitions completed since the second quarter of 1997 accounted for $31.5
million of sales during the second quarter of 1998. Excluding acquisitions from
the current quarter's sales, net sales decreased 1.6 percent.
Total paperboard tonnage in the quarter increased 2.9 percent to 258.9 thousand
tons from 251.5 thousand tons due to acquisitions made after the second quarter
of last year. Tons sold from paperboard mill production (consisting of sales to
outside customers and transfers to the Company's converting operations)
increased 2.3 percent (decreased 1.1 percent excluding acquisitions) in the
quarter versus the year-earlier quarter. Total tonnage converted increased 10.1
percent (decreased 5.1 percent excluding acquisitions) to 100.9 thousand tons in
the quarter versus 91.6 thousand tons in the second quarter last year. Excluding
acquisitions, tube, core
8
<PAGE> 9
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
PART I, ITEM 2.
and can volume decreased 3.0 percent; folding carton volume increased 0.8
percent; and other specialty volume decreased 6.9 percent.
The Company's gross margin decreased to 27.0 percent of net sales from 29.7
percent in the second quarter of 1997. This margin decrease was due primarily to
the acquisition of operations with lower margins, as a percent of sales, than
the Company's other operations combined with lower margins at folding carton and
tube and core converting facilities. These lower margins were partially offset
by improved margins at the Company's paperboard mills.
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 averaged
$83 during 1997 and $74 during the second quarter of 1998. 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 it experiences short-term margin shrinkage during all
periods of 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.
Operating income for the second quarter of 1998 was $24.7 million, essentially
unchanged from the year-earlier period. Excluding acquisitions, operating income
declined $1.7 million, or 6.9 percent, due primarily to lower margins at folding
carton and tube and core converting operations. Selling, general and
administrative expenses increased $3.4 million in the second quarter of 1998
compared with the year-earlier period due to acquisitions.
Interest expense increased 13.2 percent to $4.0 million in the second quarter
compared with $3.5 million in the same period last year due to higher average
outstanding borrowings under the revolving credit facility.
Equity income from unconsolidated affiliates for the second quarter of 1998 was
$1.3 million, up 262.5 percent from the year-earlier quarter due to improved
results from the Company's gypsum wallboard joint venture with Temple-Inland.
Net income increased 4.0 percent to $13.3 million in the second quarter from
$12.8 million in the second quarter last year. Diluted net income per common
share increased 2.0 percent to $0.52 from $0.51 in the second quarter of 1997.
9
<PAGE> 10
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
PART I, ITEM 2.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The following tables set forth certain operating data regarding the Company's
volume and gross paper margins for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------- %
1998 1997 CHANGE CHANGE
------ ------ ------ ------
<S> <C> <C> <C> <C>
Production source of paperboard tons sold (in
thousands):
From paperboard mill production..................... 462.2 458.5 3.7 0.8%
Outside purchases................................... 46.4 39.2 7.2 18.4%
------ ------ -----
Total paperboard tonnage.................... 508.6 497.7 10.9 2.2%
====== ====== =====
Tons sold by market (in thousands):
Tube, core and can volume........................... 133.8 129.7 4.1 3.2%
Folding carton volume............................... 149.0 136.0 13.0 9.6%
Gypsum facing paper volume.......................... 128.4 131.9 (3.5) -2.7%
Other specialty volume.............................. 97.4 100.1 (2.7) -2.7%
------ ------ -----
Total paperboard tonnage.................... 508.6 497.7 10.9 2.2%
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-------------- %
1998 1997 CHANGE CHANGE
----- ----- ------ ------
<S> <C> <C> <C> <C>
Gross paper margins ($/ton):
Paperboard mill:
Average same-mill net selling price............. $415 $403 $12 3.0%
Average same-mill recovered fiber cost.......... 79 73 6 8.2%
---- ---- ---
Paperboard mill gross paper margin......... $336 $330 $ 6 1.8%
==== ==== ===
Tube and core:
Average net selling price....................... $742 $707 $35 5.0%
Average paperboard cost......................... 412 395 17 4.3%
---- ---- ---
Tube and core gross paper margin........... $330 $312 $18 5.8%
==== ==== ===
</TABLE>
Net sales for the six months ended June 30, 1998 increased 15.1 percent to
$366.5 million from $318.4 million in the same period last year. Acquisitions
accounted for $50.6 million of sales during the first half of 1998. Excluding
acquisitions, net sales declined 0.8 percent.
Total paperboard tonnage for the first half of 1998 increased 2.2 percent to
508.6 thousand tons compared with the first half of 1997. Excluding
acquisitions, total paperboard tonnage declined 1.4 percent to 490.8 thousand
tons. Tons sold from paperboard mill production increased 0.8 percent for the
first half of 1998 versus the first half of 1997 but declined 0.9 percent
excluding the Chesapeake Paperboard acquisition. Total tonnage converted
increased 15.4 percent (1.3 percent excluding acquisitions) in the first half of
1998 versus 1997. Excluding acquisitions, tube, core and can volume increased
0.5 percent; folding carton volume increased 2.0 percent; and other specialty
volume declined 6.8 percent.
Gross margin for the first six months of 1998 decreased to 27.6 percent of net
sales from 28.8 percent for the same period of 1997. This margin decrease was
due primarily to the acquisition of operations with lower margins, as a percent
of sales, than the Company's other operations combined with lower margins at the
Company's converting operations. These lower margins were partially offset by
improved margins at the Company's paperboard mills.
10
<PAGE> 11
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
PART I, ITEM 2.
Operating income increased $2.9 million, or 6.1 percent, to $49.7 million from
$46.8 million for the first half of 1997. Operating income at comparable
facilities declined by $569 thousand, or 1.2 percent. This decline was due
primarily to lower margins at converting operations partially offset by improved
margins at paperboard mills. Selling, general and administrative expenses
increased $6.5 million in the first half of 1998 versus the year-earlier period.
Excluding acquisitions, these expenses were essentially unchanged.
Interest expense increased to $7.7 million in the first half of 1998 from $6.8
million in the same period of 1997 due to higher average borrowings under the
revolving credit facility.
Equity income from unconsolidated affiliates was $1.9 million, up 61.0 percent
from the first half of 1997 due to improved results for the Company's gypsum
wallboard joint venture with Temple-Inland.
Net income increased 7.9 percent from $24.6 million in the first half of 1997 to
$26.5 million. Diluted net income per common share increased 6.1 percent to
$1.04 for the first six months of 1998 from $0.98 for the year-earlier period.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 1998, the Company had loans of $149.0 million outstanding under its
revolving credit facility versus $116.0 million on June 30, 1997 and $129.0
million on December 31, 1997. 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 six months ended June 30, 1998 and 1997 and for the year
ended December 31, 1997, the weighted average borrowings outstanding under the
revolving credit facility during such periods bore interest at 5.92 percent,
5.87 percent and 5.86 percent, respectively. Other long-term debt, less current
maturities, primarily the Company's 7.74 percent senior notes, was $83.1 million
at June 30, 1998 versus $83.2 million and $83.1 million at June 30, 1997 and
December 31, 1997, respectively.
The Company has a $400 million, five-year bank revolving credit facility which
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 for general corporate
purposes, including acquisitions. Interest under the 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 $41.8 million for the six months ended June
30, 1998 compared with $31.2 million for the same period last year. The increase
in 1998 compared to the same period last year was due to higher net income and
decreased working capital needs.
Capital expenditures, excluding acquisitions, were $19.1 million in the first
six months of 1998 versus $21.0 million for the same period last year. Aggregate
capital expenditures of approximately $45.0 million are anticipated for 1998.
In March 1998, the Company acquired all of the outstanding common stock of
Chesapeake Paperboard Company and its wholly owned subsidiary, Chesapeake Fiber
Packaging Corporation, for approximately $21.0 million, including approximately
$8.2 million of Chesapeake's debt, which was repaid by the Company. Chesapeake
Paperboard, located in Baltimore, Maryland, produces recycled paperboard used
primarily in the folding carton and other specialty markets. Chesapeake Fiber
Packaging, located in Hunt Valley, Maryland, manufactures folding cartons and
specialty corrugated products.
11
<PAGE> 12
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
PART I, ITEM 2.
In May 1998, the Company acquired all of the outstanding stock of Etowah
Recycling, Inc. in exchange for approximately 140,000 shares of the Company's
common stock, valued at $4.7 million. Simultaneously, the Company repaid
Etowah's debt of approximately $2.1 million. Etowah operates two recovered fiber
facilities, located in Canton, Georgia and Hardeeville, South Carolina.
In June 1998, the Company acquired Tenneco Packaging, Inc.'s 20 percent interest
in the CPI partnership for $27.4 million. The CPI Partnership had operated as a
joint venture of the Company and TPI since July of 1996. As a result of this
transaction, the Company now owns 100 percent of CPI's operations which include
clay-coated recycled paperboard mills located in Rittman, Ohio and Tama, Iowa
and recovered fiber recycling and brokerage operations located in Rittman and
Cleveland, Ohio. The purchase price consisted of $1.4 million in cash paid at
closing and a note payable to TPI for the remaining $26.0 million due in June of
1999.
Cash dividends of $8.1 million were paid in the first half of 1998 versus $7.0
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 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 quarter of 1998, the Company purchased and retired 66,000
shares of its common stock at a market price of $33.00 per share totaling $2.2
million. The Company has cumulatively purchased 2,258,000 shares since January
1996. The Company's board of directors has authorized purchases of up to
1,742,000 additional shares.
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.
The Company uses software and related information technologies throughout its
businesses that may be affected by the date change in the year 2000. The Company
has a plan to address the year 2000 issue and is working to ensure that its
systems continue to meet both its internal needs and those of its customers.
Costs to resolve the year 2000 issue will be incurred during 1998 and 1999.
These costs are not expected to materially impact the Company's financial
condition or results of operations.
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 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.
12
<PAGE> 13
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
PART II, ITEM 2.
CARAUSTAR INDUSTRIES, INC.
ITEM 2. CHANGES IN SECURITIES
On May 4, 1998, the Company acquired all of the outstanding stock of Etowah
Recycling, Inc. in exchange for approximately 140,000 shares of the Company's
common stock, valued at $4.7 million. Simultaneously, the Company repaid
Etowah's debt of approximately $2.1 million. The shares were issued to the
holders of the outstanding capital stock of Etowah in a transaction not
involving a public offering in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated thereunder.
13
<PAGE> 14
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
PART II, ITEM 6.
CARAUSTAR INDUSTRIES, INC.
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 no current reports on Form 8-K during the quarter ended
June 30, 1998.
14
<PAGE> 15
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
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.
By: /s/ H. LEE THRASH, III
------------------------------------
H. Lee Thrash, III
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
Dated: August 12, 1998
15
<PAGE> 16
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT FILED
NUMBER DESCRIPTION HEREWITH(*)
- ------- ----------- -----------
<C> <S> <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])
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])
</TABLE>
16
<PAGE> 17
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
EXHIBIT FILED
NUMBER DESCRIPTION HEREWITH(*)
- ------- ----------- -----------
<C> <S> <C>
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])
10.14 1998 Key Employee Incentive Compensation Plan (Incorporated
by reference -- Exhibit 10.14 to Annual Report for 1997 on
Form 10-K [SEC File No. 0-20646]
11.01 Computation of Earnings per Share *
27.01 Financial Data Schedule (For SEC purposes only) *
</TABLE>
17
<PAGE> 1
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
EXHIBIT 11.01
CARAUSTAR INDUSTRIES, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
COMPUTATION OF BASIC AND DILUTED EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1998 1997 1998 1997
-------- -------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Earnings:
Net income available to common stock.................... $13,331 $12,819 $26,508 $24,560
------- ------- ------- -------
Shares:
Weighted average common shares outstanding.............. 25,376 24,655 25,328 24,735
Dilutive effect of stock options........................ 209 253 220 300
------- ------- ------- -------
Average diluted shares outstanding and equivalents...... 25,585 24,908 25,548 25,035
------- ------- ------- -------
Basic earnings per common share:
Net income...................................... $ 0.53 $ 0.52 $ 1.05 $ 0.99
======= ======= ======= =======
Diluted earnings per common share:
Net income...................................... $ 0.52 $ 0.51 $ 1.04 $ 0.98
======= ======= ======= =======
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME OF CARAUSTAR INDUSTRIES FOR THE SIX
MONTHS ENDED JUNE 30,1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,810
<SECURITIES> 0
<RECEIVABLES> 81,816<F1>
<ALLOWANCES> 0
<INVENTORY> 70,721
<CURRENT-ASSETS> 166,267
<PP&E> 509,612
<DEPRECIATION> (189,636)
<TOTAL-ASSETS> 618,048
<CURRENT-LIABILITIES> 107,142
<BONDS> 232,061<F2>
0
0
<COMMON> 2,542
<OTHER-SE> 232,691
<TOTAL-LIABILITY-AND-EQUITY> 618,048
<SALES> 366,529
<TOTAL-REVENUES> 366,529
<CGS> 265,545
<TOTAL-COSTS> 265,545
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,689
<INCOME-PRETAX> 43,722
<INCOME-TAX> 16,656
<INCOME-CONTINUING> 26,508
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,508
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.04
<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>
