ROCK TENN CO - 10-Q Quarterly Report

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 March 31, 2003

OR

o		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 No.)

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, former address and former fiscal year 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. Yesx No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesx No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


Class		Outstanding as of May 10, 2003

Class A Common Stock, .01 par value		34,507,553

TABLE OF CONTENTS


PART I: FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PART I. FINANCIAL INFORMATION
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
INDEX TO EXHIBITS
EX-99.1 SECTION 906 CERTIFICATION OF THE CEO
EX-99.2 SECTION 906 CERTIFICATION OF THE CFO

ROCK-TENN COMPANY

INDEX


		Page No.

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Income for the three months and six months ended March 31, 2003 and 2002		1
	Condensed Consolidated Balance Sheets at March 31, 2003 and September 30, 2002		2
	Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2003 and 2002		3
	Notes to Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25
Item 4.	Controls and Procedures		25
PART II.	OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders		27
Item 6.	Exhibits and Reports on Form 8-K		27
	Index to Exhibits		34

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Data)


	Three Months Ended						Six Months Ended
	March 31,			March 31,			March 31,			March 31,
	2003			2002			2003			2002

Net sales	$	367,427		$	348,119		$	714,983		$	698,686
Cost of goods sold		301,861			277,408			585,305			552,293

Gross profit		65,566			70,711			129,678			146,393
Selling, general and administrative expenses		45,070			45,061			94,071			92,580
Restructuring and other costs		935			35			416			(165	)

Income from operations		19,561			25,615			35,191			53,978
Interest expense		(6,566	)		(6,182	)		(13,029	)		(13,096	)
Interest and other income		56			88			108			368
Income (loss) from unconsolidated joint venture		(284	)		172			(284	)		(694	)
Minority interest in income of consolidated subsidiary		(784	)		(760	)		(1,522	)		(1,520	)

Income before income taxes		11,983			18,933			20,464			39,036
Provision for income taxes		4,653			7,349			8,064			15,253

Income before cumulative effect of a change in accounting principle		7,330			11,584			12,400			23,783
Cumulative effect of a change in accounting principle (net of income taxes of $2,368)		—			—			—			(5,844	)

Net income	$	7,330		$	11,584		$	12,400		$	17,939

Weighted average number of common and common equivalent shares outstanding		34,515			34,353			34,513			34,061

Basic earnings per share	$	.21		$	0.34		$	.36		$	0.53

Diluted earnings per share	$	.21		$	0.34		$	.36		$	0.53

Cash dividends per common share	$	.08		$	0.075		$	.16		$	0.15

See Accompanying Notes to Condensed Consolidated Financial Statements

ROCK-TENN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands, Except Share And Per Share Data)


					March 31,			September 30,
					2003			2002

ASSETS
Current assets:
	Cash and cash equivalents				$	5,422		$	6,560
	Accounts receivable (net of allowances of $6,921 and $7,046)					151,815			154,592
	Inventories					123,909			111,749
	Other current assets					17,825			15,060

			Total current assets			298,971			287,961

Property, plant and equipment, at cost:
	Land and buildings					199,983			194,632
	Machinery and equipment					983,365			949,032
	Transportation equipment					8,602			9,521
	Leasehold improvements					14,140			10,411

						1,206,090			1,163,596
	Less accumulated depreciation and amortization					(610,199	)		(591,509	)

	Net property, plant and equipment					595,891			572,087
Goodwill, net						287,593			260,394
Other assets						48,805			52,609

					$	1,231,260		$	1,173,051

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
		Accounts payable			$	80,892		$	75,130
		Accrued compensation and benefits				35,783			39,457
		Current maturities of long-term debt				4,335			62,917
		Other current liabilities				35,577			44,331

				Total current liabilities		156,587			221,835

Long-term debt, less current maturities						491,173			390,323
		Adjustment for fair value hedge				19,931			19,751

Total long-term debt, less current maturities						511,104			410,074
Deferred income taxes						90,942			84,345
Other long-term items						52,950			51,650

Shareholders’ equity:
		Preferred stock, $.01 par value; 50,000,000 shares authorized; no shares outstanding				—			—
		Class A common stock, $.01 par value; 175,000,000 shares authorized, 34,427,467 and 34,346,467 outstanding at March 31 and September 30, respectively; Class B common stock, $.01 par value; 60,000,000 shares authorized; no shares outstanding				344			343
		Capital in excess of par value				142,788			141,235
		Deferred compensation				(1,926	)		(2,267	)
		Retained earnings				304,286			298,279
		Accumulated other comprehensive loss				(25,815	)		(32,443	)

				Total shareholders’ equity		419,677			405,147

					$	1,231,260		$	1,173,051

See Accompanying Notes to Condensed Consolidated Financial Statements

ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)


			Six Months Ended
			March 31,			March 31,
			2003			2002

Operating Activities:
	Net income		$	12,400		$	17,939

	Items in income not affecting cash:
		Depreciation and amortization		38,207			36,142
		Deferred income taxes		1,102			4,761
		Deferred compensation expense		342			577
		Gain on disposal of property, plant and equipment, net		(747	)		(317	)
		Pension funding less (more) than expense		5,981			(2,138	)
		Equity in loss from joint venture		284			694
		Minority interest in income of consolidated subsidiary		1,522			1,520
		Impairment loss and other non-cash charges		896			5,852

	Change in operating assets and liabilities:
		Accounts receivable		11,958			5,835
		Inventories		1,034			(4,226	)
		Other assets		(5,631	)		5,260
		Accounts payable		(1,097	)		(14,513	)
		Accrued and other liabilities		(14,643	)		(18,051	)

	Cash provided by operating activities			51,608			39,335

Investing activities:
	Capital expenditures			(31,993	)		(28,649	)
	Cash paid for purchase of businesses			(65,220	)		(21,760	)
	Cash contributed to joint venture			(237	)		(1,650	)
	Proceeds from sale of property, plant and equipment			6,699			2,548
	Decrease in unexpended industrial revenue bond proceeds			827			—

	Cash used for investing activities			(89,924	)		(49,511	)

Financing activities:
	Proceeds from issuance of public notes			99,748			—
	Net additions to revolving credit facilities			1,600			12,000
	Additions to debt			47,220			11,794
	Repayments of debt			(106,318	)		(14,289	)
	Proceeds from monetizing swap contracts			2,482			—
	Debt issuance costs			(990	)		(70	)
	Issuances of common stock			1,981			4,719
	Purchases of common stock			(1,313	)		—
	Cash dividends paid to shareholders			(5,508	)		(5,054	)
	Distribution to minority interest			(1,260	)		(1,645	)

	Cash provided by financing activities			37,642			7,455

Effect of exchange rate changes on cash				(464	)		840
Decrease in cash and cash equivalents				(1,138	)		(1,881	)
Cash and cash equivalents at beginning of period				6,560			5,191

Cash and cash equivalents at end of period			$	5,422		$	3,310

Supplemental disclosure of cash flow information:
	Cash paid during the period for:
		Income taxes (net of refunds)	$	7,190		$	17,109
		Interest (net of amounts capitalized)		12,293			13,948

(continued)

See Accompanying Notes to Condensed Consolidated Financial Statements

ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(In Thousands)


			Six Months Ended
			March 31,		March 31,
			2003		2002

Supplemental schedule of non-cash investing and financing activities:

In January 2003, the Company purchased Groupe Cartem Wilco Inc. for $65,220. In the first six months of fiscal 2002, we purchased Athena Industries, Inc. for $12,772 and Advertising Display Company, Inc. for $8,988. In conjunction with the acquisitions, liabilities were assumed as follows:

	Fair value of assets acquired including goodwill		$	77,654	$	21,963
	Cash paid			65,220		21,760

		Liabilities assumed	$	12,434	$	203

See Accompanying Notes to Condensed Consolidated Financial Statements

ROCK-TENN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Month Periods Ended March 31, 2003
(Unaudited)

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, 2002 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 six month periods ended March 31, 2003 and 2002, the Company’s financial position at March 31, 2003 and September 30, 2002, and the cash flows for the six month periods ended March 31, 2003 and 2002.

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, 2002.

The results for the three months and six months ended March 31, 2003 are not necessarily indicative of results that may be expected for the full year.

Certain reclassifications have been made to prior year amounts to conform with the current year presentation.

Note 2. Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 could differ from those estimates and the differences could be material.

The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates associated with its evaluation of the recoverability of goodwill and property, plant and equipment as well as those used in the determination of taxation, restructuring, and environmental matters. In addition, significant estimates form the basis for the Company’s reserves with respect to collectibility of accounts receivable, inventory valuations, post-retirement benefits, and certain benefits provided to current employees. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial techniques. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. For example, our allowance for doubtful accounts fluctuates based on the credit quality of our customers and the related credit exposure to those same customers. At March 31, 2003 the allowance for doubtful accounts was $0.1 million lower than at September 30, 2002. The change by quarter was an increase of $0.8 million and a decrease of $0.9 million for the first and second quarters of fiscal 2003, respectively. During the second quarter of fiscal 2003, the allowance for doubtful accounts decreased by $1.6 million due to improvements in the credit quality of several customers and reduced credit exposure to those same customers, which was partially offset by an increase of $0.7 million due from the acquisition of Cartem Wilco.

Note 3. New Accounting Standards

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB 51” (“FIN 46”). The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other

than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE (the “primary beneficiary”). This new model for consolidation applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures regarding the nature, purpose, size and activities of the VIE and the enterprise’s maximum exposure to loss as a result of its involvement with the VIE. The Company is required to adopt this interpretation no later than July 1, 2003 for any VIEs in which it holds a variable interest that it acquired before February 1, 2003. The interpretation is effective immediately for any VIEs created after January 31, 2003 and for VIEs in which an enterprise obtains an interest after that date. As discussed in Note 12, the Company has announced that it intends to purchase the assets included in its synthetic lease facility. Accordingly, adoption of FIN 46 is not expected to have a material effect on the condensed consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. FIN 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company adopted the disclosure requirements of FIN 45 as of December 31, 2002. The Company has not entered into or modified any material guarantees subsequent to December 31, 2002. As of March 31, 2003, the Company has made the following guarantees to unconsolidated third parties:

• The Company maintains a $24.8 million synthetic lease facility. The facility expires in April 2004 unless it is extended pursuant to two five-year renewal terms. In connection with this facility, the Company has made a residual value guarantee for the leased property equal to 85% of the financing, or $20.8 million as of March 31, 2003. As discussed in Note 12, the Company intends to purchase the assets included in this synthetic lease facility.

• The Company has a 49% ownership interest in Seven Hills Paperboard, LLC, a joint venture. Funding of net losses is guaranteed by the partners of the joint venture in their proportionate share of ownership.

• The Company leases certain manufacturing and warehousing facilities and equipment under various operating leases. A substantial portion of these leases require the Company to indemnify the lessor in the event that additional taxes are assessed due to a change in the tax law. The Company is unable to estimate its maximum exposure under these leases as it is dependent on changes in the tax law.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS 148”), which amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” to provide alternative transition met

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	•		The Company maintains a $24.8 million synthetic lease facility. The facility expires in April 2004 unless it is extended pursuant to two five-year renewal terms. In connection with this facility, the Company has made a residual value guarantee for the leased property equal to 85% of the financing, or $20.8 million as of March 31, 2003. As discussed in Note 12, the Company intends to purchase the assets included in this synthetic lease facility.
	•		The Company has a 49% ownership interest in Seven Hills Paperboard, LLC, a joint venture. Funding of net losses is guaranteed by the partners of the joint venture in their proportionate share of ownership.
	•		The Company leases certain manufacturing and warehousing facilities and equipment under various operating leases. A substantial portion of these leases require the Company to indemnify the lessor in the event that additional taxes are assessed due to a change in the tax law. The Company is unable to estimate its maximum exposure under these leases as it is dependent on changes in the tax law.