ROCK TENN CO - 10-Q Quarterly Report

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. Yes x No o

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

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


		Page No.

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Income for the three months ended December 31, 2003 and 2002		1
	Condensed Consolidated Balance Sheets at December 31, 2003 and September 30, 2003		2
	Condensed Consolidated Statements of Cash Flows for the three months ended December 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		21
Item 4.	Controls and Procedures		22

PART II.	OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K		23
Signatures			24
	Index to Exhibits		25

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


		Three Months Ended

		December 31,			December 31,
		2003			2002

Net sales		$	366,110		$	329,849
Cost of goods sold			304,344			267,921

Gross profit			61,766			61,928
Selling, general and administrative expenses			47,989			47,021
Restructuring and other costs			132			(519	)

Operating profit			13,645			15,426
Interest expense			(5,911	)		(6,463	)
Interest and other income			80			52
Loss from unconsolidated joint venture			(50	)		—
Minority interest in income of consolidated subsidiary			(886	)		(738	)

Income from continuing operations before income taxes			6,878			8,277
Provision for income taxes			2,712			3,332

Income from continuing operations			4,166			4,945
Income from discontinued operations (net of $4,713, and $79 income taxes)			7,713			125

Net income		$	11,879		$	5,070

Weighted average number of common and common equivalent shares outstanding			35,281			34,502

Basic earnings per share:
	Income from continuing operations	$	0.12		$	0.14

	Net income	$	0.34		$	0.15

Diluted earnings per share:
	Income from continuing operations	$	0.12		$	0.14

	Net income	$	0.34		$	0.15

Cash dividends per common share		$	0.085		$	0.08

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


		December 31,			September 30,
		2003			2003

ASSETS

Current assets:
	Cash and cash equivalents	$	50,875		$	14,173
	Accounts receivable (net of allowances of $6,151 and $5,475)		153,991			163,096
	Inventories		120,560			118,414
	Other current assets		17,221			17,717
	Current assets held for sale		—			52,703

Total current assets			342,647			366,103
Property, plant and equipment at cost:
	Land and buildings		228,239			226,153
	Machinery and equipment		960,432			946,050
	Transportation equipment		8,342			8,408
	Leasehold improvements		5,716			5,713

			1,202,729			1,186,324
	Less accumulated depreciation and amortization		(622,154	)		(606,810	)

Net property, plant and equipment			580,575			579,514
Goodwill, net			296,219			291,799
Other assets			50,224			53,979

		$	1,269,665		$	1,291,395

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
	Accounts payable	$	65,354		$	84,151
	Accrued compensation and benefits		32,504			46,935
	Current maturities of debt		429			12,927
	Other current liabilities		51,038			35,983
	Current liabilities held for sale		—			7,487

Total current liabilities			149,325			187,483
Long-term debt due after one year			489,022			489,037
Adjustment for fair value hedge			18,074			23,930

Total long-term debt, less current maturities			507,096			512,967
Deferred income taxes			90,447			93,801
Other long-term items			83,629			75,108

Shareholders’ equity:
	Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares outstanding		—			—
	Class A common stock, $0.01 par value; 175,000,000 shares authorized; 35,074,537 and 34,962,041 shares outstanding at December 31, 2003 and September 30, 2003, respectively		351			350
	Capital in excess of par value		151,320			149,722
	Deferred compensation		(2,824	)		(3,105	)
	Retained earnings		324,806			315,905
	Accumulated other comprehensive loss		(34,485	)		(40,836	)

Total shareholders’ equity			439,168			422,036

		$	1,269,665		$	1,291,395

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


			Three Months Ended

			December 31,			December 31,
			2003			2002

Operating activities:
Income from continuing operations			$	4,166		$	4,945
Items in income not affecting cash:
	Depreciation and amortization			18,602			17,953
	Deferred income taxes			(3,354	)		2,482
	Income tax benefit of employee stock options			188			—
	Deferred compensation expense			281			171
	Loss on disposal of plant and equipment and other, net			(441	)		(674	)
	Minority interest in income of consolidated subsidiary			886			738
	Equity in loss from joint venture			50			—
	Pension funding less than expense			4,416			3,144
	Impairment loss and other non-cash charges			34			366

Change in operating assets and liabilities:
	Accounts receivable			9,970			19,256
	Inventories			(1,981	)		(1,368	)
	Other assets			(6,167	)		(2.302	)
	Accounts payable			(20,437	)		(11,157	)
	Accrued liabilities			(2,150	)		(9,088	)

Cash provided by operating activities from continuing operations				4,063			24,466
Cash provided by operating activities from discontinued operations				531			1,870

Net cash provided by operating activities				4,594			26,336

Investing activities:
Capital expenditures				(15,428	)		(16,393	)
Cash paid for purchase of businesses, net of cash received				(1,060	)		—
Cash contributed to joint venture				(100	)		(82	)
Proceeds from sale of property, plant and equipment				693			6,126

		Cash used for investing activities from continuing operations		(15,895	)		(10,349	)
		Cash provided by (used for) investing activities from discontinued operations		61,943			(328	)

		Net cash provided by (used for) investing activities		46,048			(10,677	)

Financing activities:
Net repayments to revolving credit facilities				(3,500	)		(1,700	)
Additions to debt				27			7
Repayments of debt				(9,107	)		(10,134	)
Issuances of common stock				1,411			1,015
Purchases of common stock				—			(1,313	)
Cash dividends paid to shareholders				(2,978	)		(2,755	)
Distribution to minority interest				—			(1,100	)

		Cash used for financing activities		(14,147	)		(15,980	)

Effect of exchange rate changes on cash				207			565

Increase in cash and cash equivalents				36,702			244
Cash and cash equivalents at beginning of period				14,173			6,560

Cash and cash equivalents at end of period			$	50,875		$	6,804

Supplemental disclosure of cash flow information:
	Cash paid during the period for:
Income taxes, net of refunds			$	2,341		$	3,863
Interest, net of amounts capitalized			$	320		$	90

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


	Three Months Ended

	December 31,		December 31,
	2003		2002

Supplemental schedule of non-cash investing and financing activities:

In the first three months of fiscal 2004, we paid $1,060, primarily for additional consideration due to the August 2003 acquisition of PCPC, Inc., d/b/a Pacific Coast Packaging Corp. (which we refer to as “Pacific Coast Packaging”). The payment represented an adjustment based on the achievement of certain sales levels for the six-month period following the closing of the transaction and was recorded as goodwill. In conjunction with the acquisition, liabilities were assumed as follows:

Fair value of assets acquired including goodwill	$	1,060	$	—
Cash paid		1,060		—

Liabilities assumed	$	—	$	—

ROCK-TENN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Month Period Ended December 31, 2003
(Unaudited)

Unless the context otherwise requires, “we,” “us,” “our” or “the Company” refers to the business of Rock-Tenn Company and its subsidiaries, including RTS Packaging, LLC, which we refer to as “RTS,” and Seven Hills Paperboard, LLC, which we refer to as “Seven Hills.” We own 65% of RTS and conduct our interior packaging products business through RTS. We own 49% of Seven Hills, a manufacturer of gypsum paperboard liner, which we do not consolidate for purposes of our financial statements.

The accompanying condensed consolidated financial statements of the Company have not been audited by independent auditors. The condensed consolidated balance sheet at September 30, 2003 has been derived from the audited consolidated financial statements. In the opinion of our 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 period ended December 31, 2003 and 2002, the Company’s financial position at December 31, 2003 and September 30, 2003, and the cash flows for the three month period ended December 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, 2003.

The results for the three months ended December 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.

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, and restructuring. In addition, significant estimates form the basis for the Company’s reserves with respect to collectibility of accounts receivable, inventory valuations, pension 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. We constantly re-evaluate these significant factors and makes adjustments where facts and circumstances dictate.

In December 2003 the Financial Accounting Standards Board (which we refer to as the “FASB”) released revised FASB Statement No. 132 (which we refer to as “SFAS 132R”), Employers’ Disclosures about Pensions and Other Postretirement Benefits. The requirements of the standard are effective for public entities for fiscal years ending after December 15, 2003 (for calendar year companies, this means in their 2003 year-end financial statements) and

for quarters beginning after December 15, 2003, unless otherwise stated in the standard. The adoption of SFAS 132R is not expected to have a material effect on our consolidated financial statements.

In December 2003, the Staff of the Securities and Exchange Commission (which we refer to as the “SEC” or the “Staff”) issued Staff Accounting Bulletin No. 104 (which we refer to as “SAB 104”), Revenue Recognition, which supercedes SAB 101, Revenue Recognition in Financial Statements. Management has evaluated SAB 104 and concluded it does not have a material effect on our consolidated financial statements.

In December 2003, the FASB issued a revised version of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB 51 (which we refer to as “FIN 46R”). We are required to adopt this interpretation at the end of the first interim reporting period ending after March 15, 2004 for any variable interest entities (which we refer to as “VIEs”) in which we hold a variable interest that we 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. We are currently evaluating the impact of adopting FIN 46R.

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 (which we refer to as “FIN 45”). We have made the following guarantees to unconsolidated third parties:

•

We have a 49% ownership interest in Seven Hills, a joint venture. The partners of the joint venture guarantee funding of net losses in proportion to their share of ownership.

•

We lease certain manufacturing and warehousing facilities and equipment under various operating leases. A substantial number of these leases require us to indemnify the lessor in the event that additional taxes are assessed due to a change in the tax law. We are unable to estimate our maximum exposure under these leases because it is dependent on changes in the tax law.

•

Over the past several years, we have disposed of assets and subsidiaries and have assigned liabilities pursuant to asset and stock purchase agreements. These agreements contain various representations and warranties relating to matters such as title to assets; accuracy of financial statements; legal proceedings; contracts; employee benefit plans; compliance with environmental law; patent and trademark infringement; taxes; and products, as well as various covenants. These agreements may also provide specific indemnities for breaches of representations, warranties, or covenants as well as specific indemnification provisions. These indemnification provisions address a variety of potential losses, including, among others: losses related to liabilities other than those assumed by the buyer and liabilities under environmental laws. These indemnification provisions may be affected by various conditions and external factors. Many of the indemnification provisions issued or modified before December 31, 2002 have expired either by operation of law or as a result of the terms of the agreement. We have not recorded any liability for the indemnifications issued or modified before December 31, 2002, and are not aware of any claims or other information that would give rise to material payments under such indemnities. Because of the lapse of time, or the fact that the parties have resolved certain issues, we are not aware of any outstanding indemnities issued or modified before December 31, 2002, the potential exposure for which we estimate would have a material impact on our results of operations, financial condition or cash flows. Under the terms of the agreements that were issued or modified after December 31, 2002, our specified maximum aggregate potential liability on an undiscounted basis is approximately $6.0 million, other than with respect to certain specified liabilities, including liabilities relating to environmental matters, with respect to which there is no limitation. We estimate our aggregate liability for outstanding indemnities entered into after December 31, 2002, including the indemnities described above with respect to which there are no limitations, to be approximately $0.9 million. Accordingly, we have recorded a liability for that amount.

The increase in other comprehensive income for the quarter ended December 31, 2003 is primarily due to the change in the Canadian/U.S. exchange rate and an increase in our overall investment in Canada as a result of our acquisition of Groupe Cartem Wilco Inc. (which we refer to as “Cartem Wilco”), in January 2003. The exchange rate at September 30, 2003 was 1.3493 and moved to 1.2963 at December 31, 2003. Similarly, the exchange rate at September 30, 2002 was 1.5870 and moved to 1.5723 at December 31, 2002.

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2003

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


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)


Class		Outstanding as of February 10, 2004

Class A Common Stock, $0.01 par value		35,114,273


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
	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 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
		INDEX TO EXHIBITS
EX-10.1 AMENDMENT NO. 2-1993 STOCK PURCHASE PLAN
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO & CFO


		Three Months Ended
		December 31,		December 31,
		2003		2002

Net income		$	11,879	$	5,070

	Foreign currency translation adjustment		6,056		582
	Unrealized gain on derivative instruments		295		125

	Total other comprehensive income		6,351		707

Comprehensive income		$	18,230	$	5,777

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