UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
| þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2005
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
| Georgia | 62-0342590 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| 504 Thrasher Street, Norcross, Georgia (Address of Principal Executive Offices) |
30071 (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.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
Yes þ 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 4, 2005 | |
| Class A Common Stock, $0.01 par value | 35,975,952 |
ROCK-TENN COMPANY
INDEX
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
ROCK-TENN COMPANY
| Three Months Ended | Six Months Ended | |||||||||||||||
| March 31, | March 31, | March 31, | March 31, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Net sales |
$ | 394,338 | $ | 400,000 | $ | 780,155 | $ | 766,110 | ||||||||
Cost of goods sold |
335,159 | 331,791 | 665,152 | 636,050 | ||||||||||||
Gross profit |
59,179 | 68,209 | 115,003 | 130,060 | ||||||||||||
Selling, general and administrative expenses |
48,509 | 51,296 | 94,967 | 99,397 | ||||||||||||
Restructuring and other costs |
2,724 | 5,643 | 3,200 | 5,748 | ||||||||||||
Operating profit |
7,946 | 11,270 | 16,836 | 24,915 | ||||||||||||
Interest expense |
(6,771 | ) | (5,871 | ) | (13,219 | ) | (11,775 | ) | ||||||||
Interest and other income (loss) |
(76 | ) | 131 | 100 | 204 | |||||||||||
Income (loss) from unconsolidated joint
venture |
200 | (83 | ) | 343 | (133 | ) | ||||||||||
Minority interest in income of consolidated
subsidiary |
(703 | ) | (590 | ) | (1,568 | ) | (1,476 | ) | ||||||||
Income from continuing operations before
income taxes |
596 | 4,857 | 2,492 | 11,735 | ||||||||||||
Provision for income taxes |
356 | 1,848 | 1,770 | 4,560 | ||||||||||||
Income from continuing operations |
240 | 3,009 | 722 | 7,175 | ||||||||||||
Income (loss) from discontinued operations
(net of $(48) and $4,665 income taxes) |
— | (99 | ) | — | 7,614 | |||||||||||
Net income |
$ | 240 | $ | 2,910 | $ | 722 | $ | 14,789 | ||||||||
Weighted average number of common and
common equivalent shares outstanding |
35,879 | 35,312 | 35,887 | 35,305 | ||||||||||||
Basic earnings per share: |
||||||||||||||||
Income from continuing operations |
$ | 0.01 | $ | 0.09 | $ | 0.02 | $ | 0.21 | ||||||||
Net income |
$ | 0.01 | $ | 0.08 | $ | 0.02 | $ | 0.43 | ||||||||
Diluted earnings per share: |
||||||||||||||||
Income from continuing operations |
$ | 0.01 | $ | 0.09 | $ | 0.02 | $ | 0.20 | ||||||||
Net income |
$ | 0.01 | $ | 0.08 | $ | 0.02 | $ | 0.42 | ||||||||
Cash dividends per common share |
$ | 0.09 | $ | 0.085 | $ | 0.18 | $ | 0.17 | ||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
1
ROCK-TENN COMPANY
| March 31, | September 30, | |||||||
| 2005 | 2004 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 28,505 | $ | 28,661 | ||||
Investment in marketable securities |
31,230 | 28,230 | ||||||
Accounts receivable (net of allowances of $5,633 and $6,431) |
161,299 | 177,378 | ||||||
Inventories |
128,896 | 127,359 | ||||||
Other current assets |
26,520 | 22,286 | ||||||
Current assets held for sale |
427 | 1,526 | ||||||
Total current assets |
376,877 | 385,440 | ||||||
Property, plant and equipment at cost: |
||||||||
Land and buildings |
224,615 | 221,338 | ||||||
Machinery and equipment |
957,047 | 955,315 | ||||||
Transportation equipment |
9,019 | 9,034 | ||||||
Leasehold improvements |
6,045 | 6,043 | ||||||
| 1,196,726 | 1,191,730 | |||||||
Less accumulated depreciation and amortization |
(653,285 | ) | (638,927 | ) | ||||
Net property, plant and equipment |
543,441 | 552,803 | ||||||
Goodwill |
298,503 | 297,060 | ||||||
Intangibles, net |
16,116 | 19,014 | ||||||
Other assets |
28,495 | 29,496 | ||||||
| $ | 1,263,432 | $ | 1,283,813 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Current maturities of debt |
$ | 74,716 | $ | 83,906 | ||||
Current net fair value of hedge adjustments resulting from
terminated interest rate derivatives or swaps |
767 | 2,148 | ||||||
Current net fair value of hedge adjustments resulting from
existing interest rate derivatives or swaps |
(393 | ) | (294 | ) | ||||
Total current maturities of debt |
75,090 | 85,760 | ||||||
Accounts payable |
84,436 | 94,483 | ||||||
Accrued compensation and benefits |
40,348 | 48,751 | ||||||
Other current liabilities |
40,353 | 40,522 | ||||||
Total current liabilities |
240,227 | 269,516 | ||||||
Long-term debt due after one year |
381,300 | 381,694 | ||||||
Net fair value of hedge adjustments resulting from terminated
interest rate derivatives or swaps |
17,935 | 19,087 | ||||||
Net fair value of hedge adjustments resulting from existing
interest rate derivatives or swaps |
(8,544 | ) | (2,480 | ) | ||||
Total long-term debt, less current maturities |
390,691 | 398,301 | ||||||
Deferred income taxes |
85,163 | 84,947 | ||||||
Other long-term items |
104,952 | 93,448 | ||||||
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; 35,873,752 and 35,640,784 shares outstanding at
March 31, 2005 and September 30, 2004, respectively |
359 | 356 | ||||||
Capital in excess of par value |
161,842 | 159,012 | ||||||
Deferred compensation |
(2,994 | ) | (3,795 | ) | ||||
Retained earnings |
315,829 | 321,557 | ||||||
Accumulated other comprehensive loss |
(32,637 | ) | (39,529 | ) | ||||
Total shareholders’ equity |
442,399 | 437,601 | ||||||
| $ | 1,263,432 | $ | 1,283,813 | |||||
See Accompanying Notes to Condensed Consolidated Financial Statements
2
ROCK-TENN COMPANY
| Six Months Ended | ||||||||
| March 31, | March 31, | |||||||
| 2005 | 2004 | |||||||
Operating activities: |
||||||||
Income from continuing operations |
$ | 722 | $ | 7,175 | ||||
Items in income not affecting cash: |
||||||||
Depreciation and amortization |
37,030 | 37,159 | ||||||
Deferred income taxes |
(449 | ) | (4,388 | ) | ||||
Income tax benefit of employee stock options |
127 | 188 | ||||||
Deferred compensation expense |
748 | 562 | ||||||
(Gain) loss on disposal of plant and equipment and other, net |
81 | (2,170 | ) | |||||
Minority interest in income of consolidated subsidiary |
1,568 | 1,476 | ||||||
(Income) loss from unconsolidated joint venture |
(343 | ) | 133 | |||||
Pension funding less than expense |
7,640 | 8,597 | ||||||
Impairment (gain) loss and other non-cash charges |
(74 | ) | 6,619 | |||||
(Gain) loss on currency translation |
341 | (241 | ) | |||||
Change in operating assets and liabilities: |
||||||||
Accounts receivable |
17,000 | (5,528 | ) | |||||
Inventories |
(394 | ) | (2,283 | ) | ||||
Other assets |
(4,288 | ) | (2,337 | ) | ||||
Accounts payable |
(10,360 | ) | (5,404 | ) | ||||
Accrued liabilities |
(12,733 | ) | (4,830 | ) | ||||
Cash provided by operating activities from continuing operations |
36,616 | 34,728 | ||||||
Cash provided by operating activities from discontinued operations |
— | 451 | ||||||
Net cash provided by operating activities |
36,616 | 35,179 | ||||||
Investing activities: |
||||||||
Capital expenditures |
(22,452 | ) | (30,344 | ) | ||||
Purchases of marketable securities |
(175,250 | ) | (135,520 | ) | ||||
Sales of marketable securities |
172,250 | 107,890 | ||||||
Cash paid for purchase of businesses, net of cash received |
(75 | ) | (1,094 | ) | ||||
Cash contributed to joint venture |
(17 | ) | (103 | ) | ||||
Proceeds from sale of property, plant and equipment |
2,508 | 5,178 | ||||||
Cash used for investing activities from continuing operations |
(23,036 | ) | (53,993 | ) | ||||
Cash provided by investing activities of discontinued operations |
— | 61,921 | ||||||
Net cash provided by (used for) investing activities |
(23,036 | ) | 7,928 | |||||
Financing activities: |
||||||||
Net repayments of revolving credit facilities |
— | (3,500 | ) | |||||
Repayments of debt |
(9,711 | ) | (9,246 | ) | ||||
Proceeds from monetizing swap contracts |
— | 4,169 | ||||||
Debt issuance costs |
(64 | ) | — | |||||
Issuances of common stock |
2,759 | 2,785 | ||||||
Cash dividends paid to shareholders |
(6,450 | ) | (5,969 | ) | ||||
Distribution to minority interest |
(525 | ) | (350 | ) | ||||
Cash used for financing activities |
(13,991 | ) | (12,111 | ) | ||||
Effect of exchange rate changes on cash |
255 | 417 | ||||||
Increase (decrease) in cash and cash equivalents |
(156 | ) | 31,413 | |||||
Cash and cash equivalents at beginning of period |
28,661 | 14,173 | ||||||
Cash and cash equivalents at end of period |
$ | 28,505 | $ | 45,586 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Income taxes, net of refunds |
$ | 4,705 | $ | 10,554 | ||||
Interest, net of amounts capitalized |
14,848 | 17,275 | ||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
3
ROCK-TENN COMPANY
Unless the context otherwise requires, “we,” “us,” “our” and “the Company” refer to the business of Rock-Tenn Company and its consolidated subsidiaries, including RTS Packaging, LLC, which we refer to as “RTS.” We own 65% of RTS and conduct our interior packaging products business through RTS. These terms do not include Seven Hills Paperboard, LLC, which we refer to as “Seven Hills.” We own 49% of Seven Hills, a manufacturer of gypsum paperboard liner, which we do not consolidate for purposes of our financial statements. All references in the accompanying financial statements and Quarterly Report on Form 10-Q to aggregated data regarding sales price per ton and fiber, energy, chemical and freight costs with respect to our recycled paperboard mills excludes that data with respect to our Aurora, Illinois, recycled paperboard mill. We exclude that data because the Aurora operation is materially different. All other references herein to operating data with respect to our recycled paperboard mills, including tons data and capacity utilization rates, includes operating data from our Aurora recycled paperboard mill.
Note 1. Interim Financial Statements
Our independent auditors have not audited our accompanying condensed consolidated financial statements. We derived the condensed consolidated balance sheet at September 30, 2004 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 our results of operations for the three and six months ended March 31, 2005 and 2004, our financial position at March 31, 2005 and September 30, 2004, and our cash flows for the six months ended March 31, 2005 and 2004.
We have condensed or omitted certain notes and other information from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2004 (the “Fiscal 2004 Form 10-K”).
The results for three and six months ended March 31, 2005 are not necessarily indicative of results that may be expected for the full year.
We have made certain reclassifications to prior year amounts to conform such amounts to the current year presentation.
Marketable Securities
Beginning in the first quarter of fiscal 2004, we acquired auction rate securities and classified them as cash and cash equivalents in our balance sheet. During the quarter we have reclassified all of our auction rate securities as marketable securities. These investments generally have long-term maturities of up to 30 years, but have certain characteristics of short-term investments due to an interest rate setting mechanism and the ability to liquidate them through an auction process that occurs on intervals of approximately 30 days. Our intent in holding these securities is to have the cash available for current operations. We have purchased these high quality securities because they offer better rates than other short-term vehicles. Therefore, we classify these investments as short-term and as available-for-sale due to management’s intent. This reclassification does not affect our net income or results of operations. The reclassification of the securities as marketable securities as well as the purchase and sale of the securities does not impact cash provided by operating activities on our condensed consolidated statements of cash flows included herein.
4
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The table below provides a comparison of the amounts we previously reported and the reclassified amounts reflected herein for cash and cash equivalents, investment in marketable securities, and net cash provided by (used for) investing activities (in thousands):
| December 31, | March 31, | June 30, | September 30, | December 31, | ||||||||||||||||
| 2003 | 2004 | 2004 | 2004 | 2004 | ||||||||||||||||
Investment in marketable securities |
||||||||||||||||||||
as revised |
$ | 37,630 | $ | 27,630 | $ | 21,130 | $ | 28,230 | $ | 33,230 | ||||||||||
Cash and cash equivalents |
||||||||||||||||||||
as reported |
59,958 | 73,216 | 51,189 | 56,891 | 63,188 | |||||||||||||||
as revised |
22,328 | 45,586 | 30,059 | 28,661 | 29,958 | |||||||||||||||
| Three months | Six Months | Nine Months | Three Months | |||||||||||||||||
| Ended | Ended | Ended | Year Ended | Ended | ||||||||||||||||
| December 31, | March 31, | June 30, | September 30, | December 31, | ||||||||||||||||
| 2003 | 2004 | 2004 | 2004 | 2004 | ||||||||||||||||
Net cash provided by
(used for) investing
activities |
||||||||||||||||||||
as reported |
$ | 46,055 | $ | 35,558 | $ | 17,296 | $ | (8,051 | ) | $ | (8,206 | ) | ||||||||
as revised |
8,425 | 7,928 | (3,834 | ) | (36,281 | ) | (13,206 | ) | ||||||||||||
Note 2. Summary of Significant Accounting Policies
For a discussion of our significant accounting policies, see “Note 1. Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements section of our Fiscal 2004 Form 10-K. As of the date hereof, there have been no significant developments with respect to significant accounting policies since September 30, 2004.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates and the differences could be material.
The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with our evaluation of the recoverability of goodwill and property, plant and equipment as well as those used in the determination of taxation, insurance and restructuring. In addition, significant estimates form the basis for our 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 regularly re-evaluate these significant factors and make adjustments where facts and circumstances dictate.
Note 3. New Accounting Standards
In December 2004, the Financial Accounting Standards Board (which we refer to as the “FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (which we refer to as “SFAS 123(R)”). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. After the effective date, pro forma disclosure will no longer be an alternative.
5
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Effective April 21, 2005, the Securities and Exchange Commission (which we refer to as the “SEC”) amended Rule 4-01(a) of Regulation S-X to provide that registrants that are not small business issuers may adopt SFAS 123(R) beginning with the first interim or annual reporting period of the registrant’s first fiscal year beginning on or after June 15, 2005. Accordingly, we expect to adopt SFAS 123(R) on October 1, 2005.
SFAS 123(R) permits public companies to adopt its requirements using one of two methods:
| • | A “modified prospective” method in which the entity would recognize compensation cost beginning with the effective date: (a) based on the requirements of SFAS 123(R) for all share-based payments to be granted or modified after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date that remain unvested on the effective date. | |||
| • | A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either for (a) all prior periods presented or (b) the prior interim periods of the year of adoption. | |||
We have not made a decision as to which method we will use to adopt SFAS 123(R).
We currently account for share-based payments to employees using the intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Our adoption of SFAS 123(R)’s fair value method will likely have a significant impact on our results of operations, although it will have no impact on our overall financial condition. If we had adopted SFAS 123(R) in prior periods, the impact would have approximated the amounts disclosed in “Note 13. Shareholders’ Equity” of the Notes to Consolidated Financial Statements section of our Fiscal 2004 Form 10-K. The pro forma stock-based employee compensation expense was $2.7 million, $2.9 million, and $3.1 million, net of taxes, in fiscal 2004, 2003, and 2002, respectively. SFAS 123(R) will also require us to report the benefits of tax deductions in excess of recognized compensation cost as a financing cash flow, rather than as an operating cash flow as required under current accounting standards. This requirement will reduce our net operating cash flows and increase our net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows we recognized in prior periods for such excess tax deductions were $0.4 million, $1.0 million, and $1.3 million in fiscal 2004, 2003 and 2002, respectively.
In November 2004, the FASB released Statement of Financial Accounting Standards No, 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4” (which we refer to as “SFAS 151”). SFAS 151 requires us to recognize abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) as current-period charges and to base our allocation of fixed production overheads to the costs of conversion on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect our adoption of SFAS 151 to have a material effect on our consolidated financial statements.
Note 4. Comprehensive Income
The following are the components of comprehensive income (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| March 31, | March 31, | March 31, | March 31, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income |
$ | 240 | $ | 2,910 | $ | 722 | $ | 14,789 | ||||||||
Foreign currency translation adjustment |
(1,526 | ) | (1,865 | ) | 6,605 | 4,191 | ||||||||||
Unrealized gain (loss) on derivative instruments |
51 | (267 | ) | 287 | 28 | |||||||||||
Total other comprehensive income (loss) |
(1,475 | ) | (2,132 | ) | 6,892 | 4,219 | ||||||||||
Comprehensive income |
$ | (1,235 | ) | $ | 778 | $ | 7,614 | $ | 19,008 | |||||||
The change in other comprehensive income was primarily due to the change in the Canadian/U.S. dollar exchange rate. The numbers that follow are the Canadian dollar equivalent of one U.S. dollar. The second quarter of fiscal 2005 was impacted as the exchange rate moved to 1.2099 at March 31, 2005 from 1.1995 at December 31, 2004.
6
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The second quarter of fiscal 2004 was impacted as the exchange rate moved to 1.3111 at March 31, 2004 from 1.2963 at December 31, 2003.
The six months ended March 31, 2005 was impacted as the exchange rate moved to 1.2099 at March 31, 2005 from 1.2614 at September 30, 2004. The six months ended March 31, 2004 was impacted as the exchange rate moved to 1.3111 at March 31, 2004 from 1.3493 at September 30, 2003.
Note 5. Earnings per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share data):
| Three Months Ended | Six Months Ended | |||||||||||||||
| March 31, | March 31, | March 31, | March 31, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Numerator: |
||||||||||||||||
Income from continuing operations |
$ | 240 | $ | 3,009 | $ | 722 | $ | 7,175 | ||||||||
Income from discontinued
operations, net of tax |
— | (99 | ) | — | 7,614 | |||||||||||