ROCK-TENN COMPANY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended December 31, 2007
or
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o |
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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)
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Georgia
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62-0342590 |
(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.) |
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504 Thrasher Street, Norcross, Georgia
(Address of Principal Executive Offices)
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30071
(Zip Code) |
Registrants 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 a large accelerated filer, an accelerated filer or a
non-accelerated filer (See definition of accelerated filer and
large accelerated filer in Rule 12b-2 of the Exchange Act).
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date:
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Class |
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Outstanding as of January 25, 2008 |
Class A Common Stock, $0.01 par value
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38,012,340 |
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Millions, Except Per Share Data)
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Three Months Ended |
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December 31, |
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2007 |
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2006 |
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Net sales |
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$ |
596.3 |
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$ |
533.9 |
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Cost of goods sold |
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489.3 |
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436.3 |
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Gross profit |
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107.0 |
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97.6 |
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Selling, general and administrative expenses |
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65.2 |
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61.3 |
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Restructuring and other costs, net |
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3.0 |
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0.5 |
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Operating profit |
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38.8 |
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35.8 |
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Interest expense |
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(11.8 |
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(13.0 |
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Interest and other income (expense), net |
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(0.1 |
) |
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0.2 |
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Equity in income (loss) of unconsolidated entities |
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(0.3 |
) |
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0.3 |
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Minority interest in income of consolidated subsidiaries |
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(0.9 |
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(1.9 |
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Income before income taxes |
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25.7 |
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21.4 |
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Income tax expense |
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(8.2 |
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(6.3 |
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Net income |
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$ |
17.5 |
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$ |
15.1 |
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Weighted average diluted shares outstanding |
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38.0 |
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38.7 |
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Basic earnings per share: |
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Net income |
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$ |
0.47 |
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$ |
0.40 |
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Diluted earnings per share: |
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Net income |
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$ |
0.46 |
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$ |
0.39 |
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Cash dividends paid per common share |
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$ |
0.10 |
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$ |
0.09 |
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See Accompanying Notes to Condensed Consolidated Financial Statements
1
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions, Except Per Share Data)
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December 31, |
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September 30, |
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2007 |
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2007 |
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ASSETS |
Current Assets: |
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Cash and cash equivalents |
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$ |
35.6 |
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$ |
10.9 |
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Accounts receivable (net of allowances of $4.8 and $5.4) |
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212.6 |
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230.6 |
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Inventories |
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226.5 |
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224.4 |
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Other current assets |
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21.1 |
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26.8 |
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Assets held for sale |
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1.8 |
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Total current assets |
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495.8 |
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494.5 |
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Property, plant and equipment at cost: |
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Land and buildings |
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276.2 |
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274.8 |
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Machinery and equipment |
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1,379.8 |
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1,368.6 |
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Transportation equipment |
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11.0 |
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10.8 |
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Leasehold improvements |
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5.9 |
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5.9 |
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1,672.9 |
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1,660.1 |
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Less accumulated depreciation and amortization |
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(844.9 |
) |
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(822.6 |
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Net property, plant and equipment |
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828.0 |
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837.5 |
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Goodwill |
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364.9 |
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364.5 |
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Intangibles, net |
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66.4 |
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67.6 |
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Investment in unconsolidated entities |
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28.3 |
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28.9 |
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Other assets |
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15.4 |
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7.7 |
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$ |
1,798.8 |
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$ |
1,800.7 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Current portion of debt |
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$ |
182.7 |
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$ |
46.0 |
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Accounts payable |
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147.2 |
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161.6 |
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Accrued compensation and benefits |
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48.2 |
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73.8 |
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Other current liabilities |
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64.3 |
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63.5 |
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Total current liabilities |
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442.4 |
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344.9 |
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Long-term debt due after one year |
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555.6 |
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667.8 |
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Hedge adjustments resulting from terminated fair value interest rate derivatives or swaps |
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8.1 |
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8.5 |
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Total long-term debt |
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563.7 |
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676.3 |
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Accrued pension and other long-term benefits |
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46.2 |
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47.3 |
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Deferred income taxes |
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122.9 |
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125.7 |
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Other long-term liabilities |
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10.3 |
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7.6 |
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Commitments and contingencies (Note 10) |
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Minority interest |
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10.1 |
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9.9 |
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Shareholders equity: |
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Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares outstanding |
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Class A common stock, $0.01 par value; 175,000,000 shares authorized; 38,012,340 and
37,988,779 shares outstanding at December 31, 2007 and September 30, 2007, respectively |
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0.4 |
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0.4 |
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Capital in excess of par value |
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225.1 |
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222.6 |
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Retained earnings |
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369.7 |
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357.8 |
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Accumulated other comprehensive income |
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8.0 |
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8.2 |
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Total shareholders equity |
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603.2 |
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589.0 |
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$ |
1,798.8 |
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$ |
1,800.7 |
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See Accompanying Notes to Condensed Consolidated Financial Statements
2
ROCK-TENN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
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Three Months Ended |
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December 31, |
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2007 |
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2006 |
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Operating activities: |
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Net income |
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$ |
17.5 |
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$ |
15.1 |
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Items in income not affecting cash: |
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Depreciation and amortization |
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25.8 |
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26.0 |
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Deferred income tax (benefit) expense |
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(2.7 |
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4.1 |
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Share-based compensation expense |
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2.0 |
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1.8 |
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(Gain) Loss on disposal of plant, equipment and other, net |
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(0.2 |
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0.9 |
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Minority interest in income of consolidated subsidiaries |
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0.9 |
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1.9 |
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Equity in (income) loss of unconsolidated entities |
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0.3 |
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(0.3 |
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Payment on termination of cash flow interest rate hedges |
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(3.5 |
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(0.2 |
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Pension funding (more) less than expense |
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(0.9 |
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3.5 |
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Impairment adjustments and other non-cash items |
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1.7 |
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(0.1 |
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Change in operating assets and liabilities, net of acquisitions: |
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Accounts receivable |
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18.1 |
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21.8 |
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Inventories |
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(2.0 |
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(11.2 |
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Other assets |
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(10.7 |
) |
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(3.2 |
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Accounts payable |
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(14.4 |
) |
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(12.1 |
) |
Income taxes payable |
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9.2 |
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(7.6 |
) |
Accrued liabilities |
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(18.8 |
) |
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(8.1 |
) |
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Net cash provided by operating activities |
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22.3 |
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32.3 |
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Investing activities: |
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Capital expenditures |
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(17.9 |
) |
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(17.3 |
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Cash paid for purchase of business, net of cash received |
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(0.8 |
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Investment in unconsolidated entities |
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(8.5 |
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Cash contributed to unconsolidated entities |
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(0.1 |
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Return of capital from unconsolidated entities |
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0.2 |
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3.9 |
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Proceeds from sale of property, plant and equipment |
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2.2 |
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0.9 |
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Proceeds from property, plant and equipment insurance settlement |
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0.4 |
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Net cash used for investing activities |
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(16.3 |
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(20.7 |
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Financing activities: |
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Additions to revolving credit facilities |
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39.5 |
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0.3 |
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Repayments of revolving credit facilities |
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(17.7 |
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(29.1 |
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Additions to debt |
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10.0 |
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11.8 |
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Repayments of debt |
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(7.2 |
) |
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(8.1 |
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Issuances of common stock |
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0.6 |
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16.3 |
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Excess tax benefits from share-based compensation |
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5.2 |
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Repayments to unconsolidated entity |
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(2.0 |
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(4.5 |
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Cash dividends paid to shareholders |
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(3.8 |
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(3.4 |
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Cash distributions paid to minority interest |
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(0.7 |
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(1.0 |
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Net cash provided by (used for) financing activities |
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18.7 |
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(12.5 |
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Effect of exchange rate changes on cash and cash equivalents |
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0.3 |
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Increase (decrease) in cash and cash equivalents |
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24.7 |
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(0.6 |
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Cash and cash equivalents at beginning of period |
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10.9 |
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6.9 |
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Cash and cash equivalents at end of period |
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$ |
35.6 |
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$ |
6.3 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for: |
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Income taxes, net of refunds |
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$ |
1.5 |
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$ |
4.6 |
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Interest, net of amounts capitalized |
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5.9 |
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8.2 |
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See Accompanying Notes to Condensed Consolidated Financial Statements
3
ROCK-TENN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Month Period Ended December 31, 2007
(Unaudited)
Unless the context otherwise requires, we, us, our, Rock-Tenn and the Company refer
to the business of Rock-Tenn Company and its consolidated subsidiaries, including RTS Packaging,
LLC (RTS) and Fold-Pak, LLC (Fold-Pak, formerly known as GSD Packaging, LLC). We own 65% of
RTS and conduct our interior packaging products business through RTS. At September 30, 2006 we
owned 60% of Fold-Pak and conducted some of our folding carton operations through Fold-Pak. In
January 2007, we acquired the remaining 40% of Fold-Pak. These terms do not include Seven Hills
Paperboard, LLC (Seven Hills), Quality Packaging Specialists International, LLC (QPSI), or
Display Source Alliance, LLC (DSA). We own 49% of Seven Hills, a manufacturer of gypsum
paperboard liner, 23.96% of QPSI, a business providing merchandising displays, contract packing,
logistics and distribution solutions, and 45% of DSA, a business providing primarily permanent
merchandising displays, none of which we consolidate. All references in the accompanying condensed
consolidated financial statements and this Quarterly Report on Form 10-Q to 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, which
sells only converted products which would not be material. 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 mill.
Note 1. Interim Financial Statements
Our independent registered public accounting firm has not audited our accompanying condensed
consolidated financial statements. We derived the condensed consolidated balance sheet at
September 30, 2007 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 months ended December 31, 2007 and 2006, our financial position at December 31, 2007 and
September 30, 2007, and our cash flows for the three months ended December 31, 2007 and 2006.
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 condensed
consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K
for the fiscal year ended September 30, 2007 (the Fiscal 2007 Form 10-K).
The results for the three months ended December 31, 2007 are not necessarily indicative of
results that may be expected for the full year.
Note 2. New Accounting Standards
Recently Adopted
We adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting
for Uncertainty in Income Taxes an Interpretation of FASB Statement 109 (FIN 48) as of
October 1, 2007, the beginning of our current fiscal year. See Note 6. Tax Provision.
Recently Issued Standards
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles in the United States (GAAP), and expands disclosures
about fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement,
not an entity-specific measurement. Therefore, a fair value measurement would be determined based
on the assumptions that market participants would use in pricing the asset or liability. SFAS 157
is effective for fiscal years beginning after November 15, 2007 (October 1, 2008 for us).
Management is presently evaluating the impact, if any, upon adoption.
4
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141(R)). SFAS 141(R) expands the definition of a business combination and requires the fair value
of the purchase price of an acquisition, including the issuance of equity securities, to be
determined on the acquisition date. SFAS 141(R) also requires that all assets, liabilities,
contingent considerations, and contingencies of an acquired business be recorded at fair value at
the acquisition date. In addition, SFAS 141(R) requires that acquisition costs generally be
expensed as incurred, restructuring costs generally be expensed in periods subsequent to the
acquisition date, and changes in accounting for deferred tax asset valuation allowances and
acquired income tax uncertainties after the measurement period impact income tax expense. SFAS
141(R) is effective for fiscal years beginning after December 15, 2008 (October 1, 2009 for us)
with early adoption prohibited. We are currently evaluating the effect the implementation of SFAS
141(R) will have on the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an Amendment of ARB No. 51 (SFAS 160). SFAS 160 changes the accounting and
reporting for minority interests such that minority interests will be recharacterized as
noncontrolling interests and will be required to be reported as a component of equity, and requires
that purchases or sales of equity interests that do not result in a change in control be accounted
for as equity transactions and, upon a loss of control, requires the interest sold, as well as any
interest retained, to be recorded at fair value with any gain or loss recognized in earnings. SFAS
160 is effective for fiscal years beginning on or after December 15, 2008 (October 1, 2009 for us)
with early adoption prohibited. We are currently evaluating the effect the implementation of SFAS
160 will have on the consolidated financial statements.
Note 3. Comprehensive Income
The following are the components of comprehensive income (in millions):
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Three Months Ended |
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
17.5 |
|
|
$ |
15.1 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
(4.7 |
) |
Reclassification of previously terminated hedges to earnings, net of tax |
|
|
(0.3 |
) |
|
|
(0.7 |
) |
Net unrealized gain on derivative instruments, net of tax |
|
|
0.1 |
|
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|
0.1 |
|
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|
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|
Comprehensive income |
|
$ |
17.3 |
|
|
$ |
9.8 |
|
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|
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|
The change in other comprehensive income due to foreign currency translation was primarily due
to the change in the Canadian/U.S. dollar exchange rates.
Note 4. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share (in
millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
17.5 |
|
|
$ |
15.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic earnings per share weighted average shares |
|
|
37.3 |
|
|
|
37.3 |
|
Effect of dilutive stock options and restricted stock awards |
|
|
0.7 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share weighted average
shares and assumed conversions |
|
|
38.0 |
|
|
|
38.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
Net income per share basic |
|
$ |
0.47 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
Net income per share diluted |
|
$ |
0.46 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
Options to purchase 0.3 million common shares in the three months ended December 31, 2007 were
not included in the computation of diluted earnings per share because the effect of including the
options in the computation
5
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
would have been antidilutive. All outstanding options to purchase common
shares were dilutive at December 31, 2006 and were included in the effect of dilutive securities.
Note 5. Restructuring and Other Costs, Net
Summary of Restructuring and Other Initiatives
We recorded pre-tax restructuring and other costs, net, of $3.0 million and $0.5 million for
the three months ended December 31, 2007 and 2006, respectively. These amounts are not comparable
since the timing and scope of the individual actions associated with a restructuring can vary. We
discuss these charges in more detail below. The following table presents a summary of restructuring
and other charges, net, related to our active restructuring initiatives that we incurred during the
three months ended December 31, 2007 and 2006, the cumulative recorded amount since we announced
each initiative, and the total we expect to incur (in millions):
Summary of Restructuring and Other Costs (Income), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Other |
|
|
Equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Property, |
|
|
Employee |
|
|
and |
|
|
Facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant and |
|
|
Related |
|
|
Inventory |
|
|
Carrying |
|
|
|
|
|
|
|
Segment |
|
|
Period |
|
Equipment (1) |
|
|
Costs |
|
|
Relocation |
|
|
Costs |
|
|
Other |
|
|
Total |
|
Consumer |
|
Current Qtr. |
|
$ |
1.9 |
|
|
$ |
1.1 |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
3.3 |
|
Packaging(a) |
|
Prior Year Qtr. |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
7.2 |
|
|
|
3.9 |
|
|
|
1.7 |
|
|
|
0.8 |
|
|
|
4.4 |
|
|
|
18.0 |
|
|
|
|
|
Expected Total |
|
|
7.2 |
|
|
|
4.3 |
|
|
|
2.2 |
|
|
|
1.4 |
|
|
|
4.8 |
|
|
|
19.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard |
|
Current Qtr. |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
Prior Year Qtr. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
(0.2 |
) |
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.4 |
|
|
|
(0.1 |
) |
|
|
0.4 |
|
|
|
|
|
Expected Total |
|
|
(0.2 |
) |
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.4 |
|
|
|
(0.1 |
) |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Current Qtr. |
|
$ |
1.6 |
|
|
$ |
1.1 |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Year Qtr. |
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
$ |
7.0 |
|
|
$ |
4.1 |
|
|
$ |
1.8 |
|
|
$ |
1.2 |
|
|
$ |
4.3 |
|
|
$ |
18.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Total |
|
$ |
7.0 |
|
|
$ |
4.5 |
|
|
$ |
2.3 |
|
|
$ |
1.8 |
|
|
$ |
4.7 |
|
|
$ |
20.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For this Note 5, we have defined Net property, plant and equipment as:
property, plant and equipment impairment losses, and subsequent adjustments to fair value
for assets classified as held for sale, subsequent (gains) or losses on sales of property,
plant and equipment, and property, plant and equipment related parts and supplies. |
|
(a) |
|
The Consumer Packaging segment charges primarily reflect the following folding
carton plant closures recorded: Chicopee, Massachusetts (announced in fiscal 2008), Stone
Mountain, Georgia (announced and closed in fiscal 2007), Kerman, California (announced and
closed in fiscal 2006), Marshville, North Carolina (announced at the end of fiscal 2005 and
closed in fiscal 2006), and Waco, Texas (announced and closed in fiscal 2005). Although
specific circumstances vary, our strategy has generally been to consolidate our business into
large very well-equipped plants that operate at high utilization rates and take advantage of
open capacity created by operational excellence initiatives. We transferred a substantial
portion of each plants assets and production to our other folding carton plants. We
recognized an impairment charge primarily to reduce the carrying value of equipment to its
estimated fair value or fair value less cost to sell, and recorded charges for severance and
other employee related costs. At the time of each announced closure, we expected to record
future charges for equipment relocation, facility carrying costs and other employee related
costs that are reflected in the table above. In fiscal 2007, we recorded a $1.4 million
charge and related estimated fair value of the liability for future lease payments when we
ceased operations at the Stone Mountain plant. In fiscal 2006, we recorded a $1.0 million
charge and related liability for future lease payments when we ceased operations at the Kerman
plant, and recorded charges of $1.3 million for a customer relationship intangible asset. The
charges for the future lease payments and the customer relationship intangible asset are
recorded in the Other column in the table. |
6
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The following table represents a summary of the restructuring accrual, which is primarily
composed of accrued severance and other employee costs, and a reconciliation of the restructuring
accrual to the line item Restructuring and other costs, net on our condensed consolidated
statements of income for the three months ended December 31, 2007 and 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Accrual at beginning of fiscal year |
|
$ |
2.4 |
|
|
$ |
2.1 |
|
Additional accruals |
|
|
1.1 |
|
|
|
|
|
Payments |
|
|
(0.3 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
Accrual at December 31, |
|
$ |
3.2 |
|
|
$ |
1.6 |
|
|
|
|
|
|
|
|
Reconciliation of accruals and charges to restructuring and other costs, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional accruals and adjustment to accruals (see table above) |
|
$ |
1.1 |
|
|
$ |
|
|
Net property, plant and equipment |
|
|
1.6 |
|
|
|
0.1 |
|
Severance and other employee costs |
|
|
0.1 |
|
|
|
0.1 |
|
Equipment relocation |
|
|
0.1 |
|
|
|
0.1 |
|
Facility carrying costs |
|
|
0.1 |
|
|
|
0.1 |
|
Other |
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
Total restructuring and other costs, net |
|
$ |
3.0 |
|
|
$ |
0.5 |
|
|
|
|
|
|
|
|
Note 6. Tax Provision
The effective rate for the first quarter of fiscal 2008 was approximately 32%, which is lower
than the 35.5% effective rate we expect for the full fiscal year. This is primarily due to the
inclusion of a tax benefit of $1.1 million related to a tax rate reduction in Canada. Our
effective tax rate for the first quarter of fiscal 2007 was 29.4%, which included a net tax benefit
of $1.4 million primarily due to research and development credits arising from the resolution of a
review by the Canadian taxing authority, the extension of the Federal research and development tax
credits by the U.S. Government, and changes in estimates.
In July 2006, the FASB released FIN 48 which prescribes a comprehensive model for how a
company should recognize, measure, present, and disclose in its consolidated financial statements
uncertain tax positions that the company has taken or expects to take on a tax return (including a
decision whether to file or not to file a return in a particular jurisdiction). We adopted the
provisions of FIN 48 on October 1, 2007. Under FIN 48, the consolidated financial statements
reflect expected future tax consequences of such positions presuming the taxing authorities full
knowledge of the position and all relevant facts.
As a result of the implementation of FIN 48, the Company recorded an increase in the liability
for unrecognized tax benefits of approximately $1.8 million. This increase was recorded as a
reduction to the October 1, 2007 balance of retained earnings. As of October 1, 2007, the gross
amount of unrecognized tax benefits was approximately $9.6 million, exclusive of interest and
penalties. Of this balance, if the Company were to prevail on all unrecognized tax benefits
recorded, approximately $4.3 million of the $9.6 million reserve would benefit the effective tax
rate. We regularly evaluate, assess and adjust the related liabilities in light of changing facts
and circumstances, which could cause the effective tax rate to fluctuate from period to period.
We recognize interest and penalties accrued related to unrecognized tax benefits in income tax
expense in the consolidated statements of income, which is consistent with the recognition of these
items in prior reporting periods. As of October 1, 2007, we had a recorded liability of $1.3
million for the payment of interest and penalties related to the FIN 48 liability for unrecognized
tax benefits.
We file federal, state and local income tax returns in the U.S. and various foreign
jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or
non-U.S. income tax examinations by tax authorities for years prior to 2001.
7
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Note 7. Inventories
We value substantially all of our U.S. inventories at the lower of cost or market, with cost
determined on the last-in first-out (LIFO) inventory valuation method, which we believe generally
results in a better matching of current costs and revenues than under the first-in first-out
(FIFO) inventory valuation method. In periods of increasing costs, the LIFO method generally
results in higher cost of goods sold than under the FIFO method. In periods of decreasing costs,
the results are generally the opposite. Because LIFO is designed for annual determinations, it is
possible to make an actual valuation of inventory under the LIFO method only at the end of each
fiscal year based on the inventory levels and costs at that time. Accordingly, we base interim
LIFO estimates on managements projection of expected year-end inventory levels and costs. We
value all other inventories at the lower of cost or market, with cost determined using methods
which approximate cost computed on a FIFO basis. These other inventories represent primarily
foreign inventories and spare parts inventories. Inventories were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2007 |
|
|
2007 |
|
Finished goods and work in process |
|
$ |
147.3 |
|
|
$ |
152.1 |
|
Raw materials |
|
|
79.0 |
|
|
|
71.9 |
|
Supplies and spare parts |
|
|
35.2 |
|
|
|
34.3 |
|
|
|
|
|
|
|
|
Inventories at FIFO cost |
|
|
261.5 |
|
|
|
258.3 |
|
LIFO reserve |
|
|
(35.0 |
) |
|
|
(33.9 |
) |
|
|
|
|
|
|
|
Net inventories |
|
$ |
226.5 |
|
|
$ |
224.4 |
|
|
|
|
|
|
|
|
Note 8. Debt
The following were individual components of debt (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2007 |
|
|
2007 |
|
Face value of 5.625% notes due March 2013, net of
unamortized discount of $0.1 and $0.1 |
|
$ |
99.9 |
|
|
$ |
99.9 |
|
Hedge adjustments resulting from terminated interest
rate derivatives or swaps |
|
|
1.7 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
101.6 |
|
|
|
101.7 |
|
|
|
|
|
|
|
|
|
|
Face value of 8.20% notes due August 2011, net of
unamortized discount of $0.2 and $0.3 |
|
|
249.8 |
|
|
|
249.7 |
|
Hedge adjustments resulting from terminated interest
rate derivatives or swaps |
|
|
6.4 |
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
|
256.2 |
|
|
|
256.4 |
|
|
|
|
|
|
|
|
|
|
Term loan facility (a) |
|
|
156.0 |
|
|
|
160.7 |
|
|
|
|
|
|
|
|
|
|
Revolving credit and swing facilities (a) |
|
|
90.1 |
|
|
|
68.3 |
|
|
|
|
|
|
|
|
|
|
Receivables-backed financing facility (b) |
|
|
110.0 |
|
|
|
100.0 |
|
Industrial development revenue bonds, bearing
interest at variable rates (4.50% at December 31,
2007, and 4.94% at September 30, 2007), due through
October 2036 |
|
|
21.4 |
|
|
|
23.9 |
|
Other notes |
|
|
11.1 |
|
|
|
11.3 |
|
|
|
|
|
|
|
|
Total Debt |
|
|
746.4 |
|
|
|
722.3 |
|
Less current portion of debt |
|
|
182.7 |
|
|
|
46.0 |
|
|
|
|
|
|
|
|
Long-term debt due after one year |
|
$ |
563.7 |
|
|
$ |
676.3 |
|
|
|
|
|
|
|
|
The following were the aggregate components of debt (in millions):
|
|
|
|
|
|
|
|
|
Face value of debt instruments, net of unamortized discounts |
|
$ |
738.3 |
|
|
$ |
713.8 |
|
Hedge adjustments resulting from terminated interest rate
derivatives or swaps |
|
|
8.1 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
Total Debt |
|
$ |
746.4 |
|
|
$ |
722.3 |
|
|
|
|
|
|
|
|
8
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
A portion of the debt classified as long-term, which includes the revolving and swing
facilities, may be paid down earlier than scheduled at our discretion without penalty if our cash
balances and expected future cash flows support such action. Included in the current portion of
debt at December 31, 2007 and September 30, 2007 is an amount of $15.0 million to reflect amounts
required to support normal working capital needs.
For a discussion of certain of our debt characteristics, see Note 10. Debt of the Notes to
Consolidated Financial Statements section of the Fiscal 2007 Form 10-K. Other than the items noted
below, there have been no significant developments.
|
(a) |
|
The Senior Credit Facility includes revolving credit, swing, term loan, and letters of
credit facilities with an aggregate original maximum principal amount of $700 million. The
Senior Credit Facility provides for up to $100.0 million in loans to a Canadian subsidiary.
At December 31, 2007 and September 30, 2007, there were $45.1 million and $46.8 million in
borrowings by the Canadian subsidiary, respectively, predominantly denominated in Canadian
dollars. As scheduled term loan payments are made, the facility size is reduced by those
notional amounts. As of December 31, 2007, the facility has cumulatively been
reduced by $93.9 million. At December 31, 2007, the Senior Credit Facility had a maximum
principal amount of $606.1 million. The Senior Credit Facility is pre-payable at any time
and is scheduled to expire on June 6, 2010. At December 31, 2007, we had issued aggregate
outstanding letters of credit under this facility of approximately $37.0 million, none of
which had been drawn upon. At December 31, 2007, due to the restrictive covenants on the
revolving credit facility, maximum additional available borrowings under this facility were
approximately $322.8 million. Borrowings in the United States under the Senior Credit
Facility bear interest based upon either: (1) LIBOR plus an applicable margin (U.S. LIBOR
Loans) or (2) an alternative base rate plus an applicable margin (U.S. Base Rate Loans).
Borrowings in Canada under the Senior Credit Facility bear interest based upon either: (1)
Canadian Deposit Offering Rate plus an applicable margin for Canadian dollar loans
(Bankers Acceptance Loans); (2) LIBOR plus an applicable margin for U.S. Dollar loans
(Canadian LIBOR Loans); or (3) the Canadian or U.S. Dollar base rate plus an applicable
margin (Canadian Base Rate Loans). The following table summarizes the applicable margins
and percentages related to the Senior Credit Facility: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
Range |
|
|
December 31, 2007 |
|
|
2007 |
|
Applicable margin/percentage for determining: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and
Canadian Base Rate Loans interest rate (1) |
|
|
0.00%-0.75 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Bankers Acceptance and U.S. and
Canadian LIBOR Loans interest rate (1) |
|
|
0.875%-1.75 |
% |
|
|
1.00 |
% |
|
|
1.00 |
% |
Facility commitment fee (2) |
|
|
0.175%-0.40 |
% |
|
|
0.20 |
% |
|
|
0.20 |
% |
|
|
|
(1) |
|
Based on the ratio of our total funded debt to EBITDA as defined in the
credit agreement (Leverage Ratio). |
|
(2) |
|
Applied to the aggregate borrowing availability based on the Leverage Ratio. |
|
(b) |
|
On November 16, 2007, we amended the 364-day receivables-backed financing facility
(Receivables Facility) and increased the size of the facility from $100.0 million to
$110.0 million. The new facility is scheduled to expire on November 15, 2008. Accordingly,
such borrowings are classified as current at December 31, 2007 and non-current at September
30, 2007 since the facility was scheduled to mature beyond one year from the balance sheet
date. Borrowing availability under this facility is based on the eligible underlying
receivables. At December 31, 2007 and September 30, 2007, maximum available borrowings
under this facility were approximately $110.0 million and $100.0 million, respectively. The
borrowing rate, which consists of the market rate for asset-backed commercial paper plus a
utilization fee, was 5.73% and 5.49% as of December 31, 2007 and September 30, 2007,
respectively. |
Interest on our 8.20% notes due August 2011 is payable in arrears each February and August.
Interest on our 5.625% notes due March 2013 is payable in arrears each September and March. These
notes are unsecured facilities. The indenture related to these notes restricts us and our
subsidiaries from incurring certain liens and entering into certain sale and leaseback
transactions, subject to a number of exceptions.
Interest Rate Swaps
We are exposed to changes in interest rates as a result of our short-term and long-term debt.
We use interest rate swap instruments to varying degrees from time to time to manage the interest
rate characteristics of a portion of our outstanding debt. At September 30, 2007, we had interest
rate swap agreements in place with an aggregate notional
9
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
amount of $200.0 million. We
previously designated those swaps as cash flow hedges of the
interest rate exposure on an equivalent amount of our floating rate debt. Periodically we may
terminate or sell our interest rate swaps. Upon termination or sale of any cash flow swaps, any
amounts received (or paid) are generally not immediately recognized as income but remain in Other
Comprehensive Income/(Loss) and are amortized to earnings, as interest income (or expense), over
the remaining term of the originally hedged item. The cash received (or paid) as a result of
terminating the hedges is classified, in the statement of cash flows, in the same category as the
cash flows relating to the items being hedged. In October 2007, we paid $3.5 million to terminate
all of our open interest rate swaps.
Note 9. Retirement Plans
We have five qualified defined benefit pension plans. In addition, under several labor
contracts, we make payments based on hours worked into multi-employer pension plan trusts
established for the benefit of certain collective bargaining employees in facilities both inside
and outside the United States. We have a Supplemental Executive Retirement Plan that provides
unfunded supplemental retirement benefits to certain of our executives. The following table
represents a summary of the components of net pension cost (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Service cost |
|
$ |
2.5 |
|
|
$ |
2.6 |
|
Interest cost |
|
|
5.3 |
|
|
|
4.9 |
|
Expected return on plan assets |
|
|
(6.7 |
) |
|
|
(5.7 |
) |
Amortization of prior service cost |
|
|
0.1 |
|
|
|
0.1 |
|
Amortization of net actuarial loss |
|
|
0.7 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
Company defined benefit plan expense |
|
|
1.9 |
|
|
|
3.4 |
|
Multi-employer plans for collective bargaining employees |
|
|
0.2 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
Net pension cost |
|
$ |
2.1 |
|
|
$ |
3.5 |
|
|
|
|
|
|
|
|
During the three months ended December 31, 2007, we contributed an aggregate of $2.9 million
to our five defined benefit pension plans (U.S. Qualified Plans). During the three months ended
December 31, 2006, we made no contributions to the U.S. Qualified Plans. Based on our current
assumptions, we anticipate contributing the projected required minimum funding of approximately $23
million and approximately $22 million in fiscal 2008 and 2009, respectively, to the U.S. Qualified
Plans. However, it is possible that we may decide to contribute an amount greater than the minimum
required funding in either of those years.
Note 10. Commitments and Contingencies
Environmental and Other Matters
We are subject to various federal, state, local and foreign environmental laws and
regulations, including, among others, CERCLA, the Clean Air Act (as amended in 1990), the Clean
Water Act, the Resource Conservation and Recovery Act and the Toxic Substances Control Act. These
environmental regulatory programs are primarily administered by the US Environmental Protection
Agency. In addition, some states in which we operate have adopted equivalent or more stringent
environmental laws and regulations or have enacted their own parallel environmental programs, which
are enforced through various state administrative agencies.
We believe that future compliance with these environmental laws and regulations will not have
a material adverse effect on our results of operations, financial condition or cash flows.
However, our compliance and remediation costs could increase materially. In addition, we cannot
currently assess with certainty the impact that the future emissions standards and enforcement
practices associated with changes to regulations promulgated under the Clean Air Act will have on
our operations or capital expenditure requirements. However, we believe that any impact or capital
expenditures will not have a material adverse effect on our results of operations, financial
condition or cash flows.
We have been identified as a potentially responsible party (PRP) at nine active superfund
sites pursuant to Superfund legislation. Based upon currently available information and the
opinions of our environmental compliance managers and general counsel, although there can be no
assurance, we have reached the following conclusions with respect to these nine sites:
10
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
|
|
|
With respect to one site, while we have been identified as a PRP, our records reflect no
evidence that we are associated with the site. Accordingly, if we are considered to be a
PRP, we believe that we should be categorized as an unproven PRP. |
|
|
|
|
With respect to each of eight sites, we preliminarily determined that, while we may be
associated with the site and while it is probable that we have incurred a liability with
respect to the site, one of the following conclusions was applicable: |
|
|
|
With respect to each of six sites, we determined while it was not estimable, the
potential liability was reasonably likely to be a de minimis amount and immaterial. |
|
|
|
|
With respect to one site, we have preliminarily determined the potential liability
was best reflected by a range of reasonably possible liabilities, all of which we
expect to be de minimis and immaterial. |
|
|
|
|
With respect to one site, we have preliminarily determined that it is probable that
we have incurred a liability with respect to this site. The status of the site is
unknown, pending further investigation. |
In addition to the above mentioned sites, four of our current or former locations are being
investigated under various state regulations. These investigations may lead to remediation costs;
however, we believe any such costs, if any, would be insignificant. Additional information on the
four sites follows:
|
|
|
Contamination was discovered at the time of the Gulf States Acquisition at two sites we
acquired. We did not assume any environmental liabilities as part of the acquisition, but
have limited indemnification rights with respect to this contamination. We would expect to
assert various defenses under applicable laws with respect to this contamination. |
|
|
|
|
One of these sites is one of our former locations that is involved in an investigation
under the state hazardous waste sites program. It is expected that any potential issues
will be handled through administrative controls, such as a deed restriction, rather than
remediation. |
|
|
|
|
It is believed that the contamination discovered at one of the sites was due to an oil
release by a previous owner. The previous owner is obligated to indemnify us for any
contamination caused by the oil release. |
Except as stated above, we can make no assessment of our potential liability, if any, with
respect to any site. Further, there can be no assurance that we will not be required to conduct
some remediation in the future at any of these sites and that the remediation will not have a
material adverse effect on our results of operations, financial condition or cash flows. We
believe that we can assert claims for indemnification pursuant to existing rights we have under
settlement and purchase agreements in connection with certain of these sites. There can be no
assurance that we will be successful with respect to any claim regarding these indemnification
rights or that, if we are successful, any amounts paid pursuant to the indemnification rights will
be sufficient to cover all costs and expenses.
During the first quarter of fiscal 2008 we received approximately $1.7 million in recovery of
previously expensed environmental remediation costs from a third party for a site we previously
acquired. The recovery reduced the line item cost of goods sold on our condensed consolidated
statements of income.
Guarantees
We have made the following guarantees as of December 31, 2007:
|
|
|
We have a 49% ownership interest in Seven Hills. The partners 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/or subsidiaries and have retained
liabilities pursuant to asset and stock purchase and sale agreements. These agreements contain
various representations and warranties
11
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
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 and may
contain 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 have
expired either by operation of law or as a result of the terms of the agreement. Our specified
maximum aggregate potential liability (on an undiscounted basis) is approximately $7.6 million,
other than with respect to certain specified liabilities, including liabilities relating to title,
taxes, and certain environmental matters, with respect to which there may be no limitation. We
estimate the fair value of our aggregate liability for outstanding indemnities, including the
indemnities described above with respect to which there are no limitations, to be approximately
$0.1 million. Accordingly, we have recorded a liability for that amount.
Insurance Placed with Kemper
During fiscal 1985 through 2002, Kemper Insurance Companies/Lumbermens Mutual provided us with
workers compensation insurance, auto liability insurance and general liability insurance. Kemper
has made public statements that they are uncertain that they will be able to pay all of their
claims liabilities in the future. At present, based on public comments made by Kemper, we believe
it is reasonably possible they will not be able to pay some or all of the future liabilities
associated with our open and reopened claims. However, we cannot reasonably estimate the amount
that Kemper may be unable to pay. Additionally, we cannot reasonably estimate the impact of state
guarantee funds and any facultative and treaty reinsurance that may be available to pay such
liabilities. If Kemper is ultimately unable to pay such liabilities, we believe the range of our
liability is between approximately $0 and $2 million, and we are unable to estimate the liability
more specifically because of the factors described above. There can be no assurance that any
associated liabilities we may ultimately incur will not be material to our results of operations,
financial condition or cash flows.
Note Receivable
We have a note payable to and a note receivable from an obligor who has filed for Chapter 11
bankruptcy protection. We have offset these notes on our condensed consolidated balance sheets for
the periods ending December 31, 2007 and September 30, 2007. Based on the terms of the note, we do
not believe that it is probable a loss will be incurred. If we ultimately do suffer a loss, we
believe the loss could range from $0 to $3 million.
Seven Hills Option
Seven Hills commenced operations on March 29, 2001. Our partner has the option to put its
interest in Seven Hills to us, at a formula price, effective on the sixth or any subsequent
anniversary of the commencement date by providing notice to purchase its interest no later than two
years prior to the anniversary of the commencement date on which such transaction is to occur. No
notification has been received from our partner to date. Therefore, the earliest date at which a
put could be completed would be March 29, 2010. We have not recorded any liability for our
partners right to put its interest in Seven Hills to us. We currently project this contingent
obligation to purchase our partners interest (based on the formula) to be approximately $16
million at December 31, 2007, which would result in a purchase price of less than 60% of our
partners net equity reflected on Seven Hills December 31, 2007 balance sheet.
12
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Note 11. Segment Information
The following table shows certain operating data for our four segments (in millions). We do
not allocate certain of our income and expenses to our segments and, thus, the information that
management uses to make operating decisions and assess performance does not reflect such amounts.
We report these items as non-allocated expenses or in other line items in the table below after
Total segment income. In the first quarter of fiscal 2008 we changed the name of our Packaging
Products segment to Consumer Packaging to more clearly describe the segment.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Net sales (aggregate): |
|
|
|
|
|
|
|
|
Consumer Packaging |
|
$ |
327.3 |
|
|
$ |
303.1 |
|
Paperboard |
|
|
235.0 |
|
|
|
210.8 |
|
Merchandising Displays |
|
|
82.0 |
|
|
|
60.9 |
|
Corrugated Packaging |
|
|
41.2 |
|
|
|
36.6 |
|
|
|
|
|
|
|
|
Total |
|
$ |
685.5 |
|
|
$ |
611.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less net sales (intersegment): |
|
|
|
|
|
|
|
|
Consumer Packaging |
|
$ |
2.5 |
|
|
$ |
0.7 |
|
Paperboard |
|
|
80.5 |
|
|
|
72.4 |
|
Merchandising Displays |
|
|
|
|
|
|
|
|
Corrugated Packaging |
|
|
6.2 |
|
|
|
4.4 |
|
|
|
|
|
|
|
|
Total |
|
$ |
89.2 |
|
|
$ |
77.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales (unaffiliated customers): |
|
|
|
|
|
|
|
|
Consumer Packaging |
|
$ |
324.8 |
|
|
$ |
302.4 |
|
Paperboard |
|
|
154.5 |
|
|
|
138.4 |
|
Merchandising Displays |
|
|
82.0 |
|
|
|
60.9 |
|
Corrugated Packaging |
|
|
35.0 |
|
|
|
32.2 |
|
|
|
|
|
|
|
|
Total |
|
$ |
596.3 |
|
|
$ |
533.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income: |
|
|
|
|
|
|
|
|
Consumer Packaging |
|
$ |
16.3 |
|
|
$ |
11.7 |
|
Paperboard |
|
|
21.5 |
|
|
|
23.9 |
|
Merchandising Displays |
|
|
8.0 |
|
|
|
5.1 |
|
Corrugated Packaging |
|
|
2.2 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
Total segment income |
|
|
48.0 |
|
|
|
42.5 |
|
Restructuring and other costs, net |
|
|
(3.0 |
) |
|
|
(0.5 |
) |
Non-allocated expenses |
|
|
(6.5 |
) |
|
|
(5.9 |
) |
Interest expense |
|
|
(11.8 |
) |
|
|
(13.0 |
) |
Interest and other income (expense), net |
|
|
(0.1 |
) |
|
|
0.2 |
|
Minority interest in income of consolidated subsidiaries |
|
|
(0.9 |
) |
|
|
(1.9 |
) |
|
|
|
|
|
|
|
Income before income taxes |
|
|
25.7 |
|
|
|
21.4 |
|
Income tax expense |
|
|
(8.2 |
) |
|
|
(6.3 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
17.5 |
|
|
$ |
15.1 |
|
|
|
|
|
|
|
|
Note 12. Subsequent Event
Pending Acquisition
On January 10, 2008, we announced an agreement to acquire the stock of Southern Container
Corp. (Southern Container), a privately-held containerboard manufacturing and corrugated
packaging business, for approximately $851 million in cash. We expect that Southern Container will
have approximately $142 million in debt outstanding immediately after the acquisition. Southern
Container operates the 720,000 ton per year Solvay mill, located near Syracuse, NY, one of the
lowest cost recycled containerboard mills in North America, as well as eight integrated corrugated
box plants, two sheet plants, and four high impact graphics facilities. Consolidated net sales of
the acquired business for the 52 week period ended September 8, 2007 were approximately $538
million. All corporate approvals of the transaction have been received. The closing is subject to
customary closing conditions. We requested and received early termination clearance under the
Hart-Scott-Rodino Act of 1976. We plan to finance the acquisition with the aggregate proceeds from
$1.4 billion in new credit facilities and the sale of unsecured senior notes. The $1.4 billion will
provide us with funding to complete the acquisition, refinance our
13
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
existing credit facilities and provide in excess of $200 million of undrawn capacity. Wachovia Bank, N.A., Bank of America and SunTrust Bank and certain
affiliates of each have committed to provide $1.4 billion in a combination of new credit facilities and bridge financing to support this transaction.
The new credit facilities will be secured with certain of our and Southern Containers assets and will share certain of its collateral
with our existing senior notes in accordance with the terms of the indenture dated July 31, 1995. We expect to close the acquisition in March 2008.
On January 31, 2008, we entered into two interest rate swaps of an initial notional amount
aggregating $550.0 million. These swaps are tiered and the notional amounts will decline through
April 2012. These forward starting floating-to-fixed swaps will start on April 1, 2008. We have
designated these swaps as cash flow hedges of the interest rate exposure on an equivalent amount of
floating rate debt we expect to incur as part of our announced acquisition of Southern Container
Corp.
14
PART I. FINANCIAL INFORMATION
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
The following discussion should be read in conjunction with the condensed consolidated
financial statements and notes thereto, included herein and our audited consolidated financial
statements and notes thereto for the fiscal year ended September 30, 2007, as well as the
information under the heading Managements Discussion and Analysis of Financial Condition and
Results of Operations, that are part of our Fiscal 2007 Form 10-K, which we filed with the SEC on
November 28, 2007. The table in Note 11. Segment Information of the Notes to Condensed
Consolidated Financial Statements section of the Financial Statements included herein shows certain
operating data for our four segments.
Overview
Operating profit increased $3.0 million in the first quarter of fiscal 2008 as compared to the
first quarter of fiscal 2007 based on improved performance across most of our business segments,
primarily our Consumer Packaging segment. Our results included higher net sales in each of our
business segments reflecting a combination of higher volumes and increased sales prices to recover
higher material costs. Average recycled fiber costs were higher in the first quarter of fiscal
2008 than in the prior year quarter.
Results of Operations (Consolidated)
Net Sales (Unaffiliated Customers)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
Fiscal |
($ In Millions) |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Year |
2007 |
|
$ |
533.9 |
|
|
$ |
585.7 |
|
|
$ |
591.4 |
|
|
$ |
604.8 |
|
|
$ |
2,315.8 |
|
2008 |
|
$ |
596.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
11.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales in the first quarter of fiscal 2008 increased compared to the first quarter of
fiscal 2007 primarily due to increased volume and pricing, primarily in our Consumer Packaging,
Merchandising Displays and Paperboard segments.
Cost of Goods Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
Fiscal |
($ In Millions) |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Year |
2007 |
|
$ |
436.3 |
|
|
$ |
473.3 |
|
|
$ |
472.2 |
|
|
$ |
488.4 |
|
|
$ |
1,870.2 |
|
(% of Net Sales) |
|
|
81.7 |
% |
|
|
80.8 |
% |
|
|
79.8 |
% |
|
|
80.8 |
% |
|
|
80.8 |
% |
2008 |
|
$ |
489.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(% of Net Sales) |
|
|
82.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold as a percentage of net sales increased in the first quarter of fiscal 2008
compared to the prior year first quarter primarily due to rising material costs. Average recycled
fiber costs increased $49 per ton over the prior year quarter. We believe recycled fiber costs in
the first quarter of fiscal 2008 decreased pre-tax income by approximately $12.6 million compared
to the prior year quarter. Additionally, in the current year quarter we experienced increased
energy costs of approximately $1.9 million and higher costs associated with our Dallas mill due to
a dryer section failure and rebuild in December. During the first quarter of fiscal 2008 we
received approximately $1.7 million in recovery of previously expensed environmental remediation
costs, incurred reduced pension expense of $1.2 million and better leveraged our fixed costs due to
higher net sales.
15
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
Fiscal |
($ In Millions) |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Year |
2007 |
|
$ |
61.3 |
|
|
$ |
63.5 |
|
|
$ |
65.7 |
|
|
$ |
68.6 |
|
|
$ |
259.1 |
|
(% of Net Sales) |
|
|
11.5 |
% |
|
|
10.8 |
% |
|
|
11.1 |
% |
|
|
11.3 |
% |
|
|
11.2 |
% |
2008 |
|
$ |
65.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(% of Net Sales) |
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative (SG&A) expenses decreased as a percentage of net sales
in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 due primarily to
increased net sales from higher volumes and prices. SG&A expenses in the first quarter of fiscal
2008 were $3.9 million higher than in the prior year first quarter. SG&A salaries increased $1.4
million and commissions expense increased $0.8 million on increased sales.
Restructuring and Other Costs, Net
We recorded aggregate pre-tax restructuring and other costs of $3.0 million and $0.5 million
in the first quarter of fiscal 2008 and 2007, respectively. We discuss these charges in more
detail in Note 5. Restructuring and Other Costs, Net of the Notes to Condensed Consolidated
Financial Statements section of the Financial Statements included herein and incorporated herein by
reference.
Equity in Income (Loss) of Unconsolidated Entities
Equity in income (loss) of unconsolidated entities in the first quarter of fiscal 2008 was a
loss of $0.3 million compared to income of $0.3 million in the first quarter of fiscal 2007. The
first quarter of fiscal 2008 includes our share of our Seven Hills, DSA and QPSI investments. The
first quarter of fiscal 2007 includes our share of our Seven Hills investment and one month of our
QPSI investment.
Interest Expense
Interest expense for the first quarter of fiscal 2008 decreased $1.2 million to $11.8 million
from $13.0 million for the same quarter last year. The decrease in our average outstanding
borrowings decreased interest expense by approximately $1.1 million and lower interest rates, net
of swaps, decreased interest expense by approximately $0.1 million.
Interest and Other Income (Expense)
Interest and other income (expense) for the first quarter of fiscal 2008 was expense of $0.1
million compared to income of $0.2 million in the same quarter last year.
Minority Interest in Income of Consolidated Subsidiaries
In January 2007 we acquired the remaining 40% minority interest in GSD. As a result, minority
interest in income of our consolidated subsidiaries for the first quarter of fiscal 2008 decreased
to $0.9 million from $1.9 million in the first quarter of fiscal 2007. Earnings at our RTS
subsidiary for the first quarter of fiscal 2008 were relatively flat compared to the prior year
quarter.
Provision for Income Taxes
We recorded income tax expense of $8.2 million in the first quarter of fiscal 2008 compared to
$6.3 million in the first quarter of last year. The effective rate for the first quarter of fiscal
2008 was approximately 32%, which is lower than the 35.5% effective rate we expect for the full
fiscal year, without taking into account acquisitions. This is primarily due to the inclusion of a
tax benefit of $1.1 million related to a tax rate reduction in Canada. Our effective tax rate for
the first quarter of fiscal 2007 was 29.4%, which included a net tax benefit of $1.4 million
primarily due to research and development credits arising from the resolution of a review by the
Canadian taxing authority, the extension of the Federal research and development tax credits by the
U.S. Government, and changes in estimates.
16
Results of Operations (Segment Data)
Consumer Packaging Segment (Aggregate Before Intersegment Eliminations)
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Net Sales |
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|
Segment |
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|
Return |
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|
|
(Aggregate) |
|
|
Income |
|
|
on Sales |
|
|
|
(In millions, except percentages) |
|
First Quarter |
|
$ |
303.1 |
|
|
$ |
11.7 |
|
|
|
3.9 |
% |
Second Quarter |
|
|
312.8 |
|
|
|
13.1 |
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|
|
4.2 |
|
Third Quarter |
|
|
319.0 |
|
|
|
12.4 |
|
|
|
3.9 |
|
Fourth Quarter |
|
|
326.0 |
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|
|
12.1 |
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|
3.7 |
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|
Fiscal 2007 |
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$ |
1,260.9 |
|
|
$ |
49.3 |
|
|
|
3.9 |
% |
|
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|
First Quarter Fiscal 2008 |
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$ |
327.3 |
|
|
$ |
16.3 |
|
|
|
5.0 |
% |
Net Sales (Consumer Packaging Segment)
The 8.0% increase in net sales for the Consumer Packaging segment for the first quarter of
fiscal 2008 compared to the prior year first quarter was due to higher sales of folding cartons and
interior packaging products due to increases in volume and prices representing pass through of
higher paperboard costs.
Segment Income (Consumer Packaging Segment)
Segment income of the Consumer Packaging segment for the quarter ended December 31, 2007
increased 39.3% compared to the prior year first quarter primarily due to productivity improvements
and operating efficiencies, and sales price increases to recover previous cost increases.
Paperboard Segment (Aggregate Before Intersegment Eliminations)
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Coated and |
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Specialty |
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Recycled |
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Bleached |
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Paperboard |
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Corrugated |
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Paperboard |
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Market Pulp |
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Net Sales |
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Segment |
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Tons |
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Medium Tons |
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Tons |
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Tons |
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Average |
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(Aggregate) |
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Income |
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Return |
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Shipped (a) |
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Shipped |
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Shipped |
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Shipped |
|
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Price (a) |
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(In Millions) |
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|
(In Millions) |
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On Sales |
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(In Thousands) |
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|
(In Thousands) |
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|
(In Thousands) |
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|
(In Thousands) |
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|
(Per Ton) |
|
First Quarter |
|
$ |
210.8 |
|
|
$ |
23.9 |
|
|
|
11.3 |
% |
|
|
221.5 |
|
|
|
44.6 |
|
|
|
74.0 |
|
|
|
20.9 |
|
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$ |
558 |
|
Second Quarter |
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|
231.6 |
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|
|
26.9 |
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|
|
11.6 |
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|
|
223.0 |
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|
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46.2 |
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|
82.2 |
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|
|
24.6 |
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|
|
571 |
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Third Quarter |
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|
247.7 |
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|
|
34.1 |
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13.8 |
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|
|
225.1 |
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|
|
45.3 |
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|
90.1 |
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|
|
25.6 |
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|
|
588 |
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Fourth Quarter |
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|
249.5 |
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|
29.3 |
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|
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11.7 |
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223.5 |
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46.8 |
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88.7 |
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24.8 |
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596 |
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Fiscal 2007 |
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$ |
939.6 |
|
|
$ |
114.2 |
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|
|
12.2 |
% |
|
|
893.1 |
|
|
|
182.9 |
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|
335.0 |
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|
95.9 |
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$ |
578 |
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|
First Quarter
Fiscal 2008 |
|
$ |
235.0 |
|
|
$ |
21.5 |
|
|
|
9.1 |
% |
|
|
217.1 |
|
|
|
44.7 |
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|
|
79.6 |
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|
21.2 |
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|
$ |
599 |
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(a) |
|
Recycled Paperboard Tons Shipped and Average Price Per Ton include tons shipped by
Seven Hills. |
Net Sales (Paperboard Segment)
Our Paperboard segment net sales in the first quarter of fiscal 2008 increased 11.5% compared
to the first quarter of fiscal 2007 due to higher pricing across all paperboard grades. Average
selling price for all paperboard grades increased $41 per ton over the prior year quarter.
Bleached paperboard and market pulp tons shipped increased 7.6% and 1.5%, respectively, and
recycled paperboard tons shipped decreased 1.6% primarily due to decreased specialty recycled
paperboard tons sold.
Segment Income (Paperboard Segment)
Segment income attributable to the Paperboard segment for the first quarter of fiscal 2008
decreased $2.4 million compared to the prior year first quarter primarily due to rising material
costs. Average recycled fiber costs increased $49 per ton over the prior year quarter. We believe
recycled fiber costs decreased pre-tax income by
17
approximately $12.6 million, although fiber costs were largely offset by the $41 per ton increase in average
selling price over the prior year quarter. During the quarter we received approximately $1.7
million in recovery of previously expensed environmental remediation costs, which was largely
offset by approximately $1.3 million of impact in our Dallas mill associated with a dryer section
failure and rebuild in December. Additionally, the segment incurred increased energy costs of
approximately $1.3 million.
Merchandising Displays Segment (Aggregate Before Intersegment Eliminations)
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Net Sales |
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Segment |
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Return |
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|
|
(Aggregate) |
|
|
Income |
|
|
on Sales |
|
|
|
(In millions, except percentages) |
|
First Quarter |
|
$ |
60.9 |
|
|
$ |
5.1 |
|
|
|
8.4 |
% |
Second Quarter |
|
|
82.6 |
|
|
|
12.2 |
|
|
|
14.8 |
|
Third Quarter |
|
|
76.8 |
|
|
|
10.8 |
|
|
|
14.1 |
|
Fourth Quarter |
|
|
85.5 |
|
|
|
10.6 |
|
|
|
12.4 |
|
|
|
|
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|
|
|
|
|
|
Fiscal 2007 |
|
$ |
305.8 |
|
|
$ |
38.7 |
|
|
|
12.7 |
% |
|
|
|
|
|
|
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|
|
|
|
|
|
First Quarter Fiscal 2008 |
|
$ |
82.0 |
|
|
$ |
8.0 |
|
|
|
9.8 |
% |
Net Sales (Merchandising Displays Segment)
Net sales for the Merchandising Displays segment increased $21.1 million in the first quarter
of fiscal 2008 compared to the prior year first quarter. The increase was primarily due to higher
volumes on strong demand for promotional displays.
Segment Income (Merchandising Displays Segment)
Segment income attributable to the Merchandising Displays segment for the first quarter of
fiscal 2008 increased $2.9 million, or 56.9%, compared to the prior year first quarter. The
increase in display sales enabled us to better leverage fixed costs.
Corrugated Packaging Segment (Aggregate Before Intersegment Eliminations)
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|
|
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|
|
|
|
|
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|
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|
|
Net Sales |
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|
Segment |
|
|
Return |
|
|
|
(Aggregate) |
|
|
Income |
|
|
on Sales |
|
|
|
(In millions, except percentages) |
|
First Quarter |
|
$ |
36.6 |
|
|
$ |
1.8 |
|
|
|
4.9 |
% |
Second Quarter |
|
|
40.4 |
|
|
|
2.4 |
|
|
|
5.9 |
|
Third Quarter |
|
|
40.6 |
|
|
|
2.0 |
|
|
|
4.9 |
|
Fourth Quarter |
|
|
40.7 |
|
|
|
2.2 |
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 |
|
$ |
158.3 |
|
|
$ |
8.4 |
|
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Fiscal 2008 |
|
$ |
41.2 |
|
|
$ |
2.2 |
|
|
|
5.3 |
% |
Net Sales (Corrugated Packaging Segment)
Net sales for the Corrugated Packaging segment increased $4.6 million in the first quarter of
fiscal 2008 compared to the prior year first quarter. The increase was primarily due to increased
volumes and higher sales prices to recover higher paperboard costs.
Segment Income (Corrugated Packaging Segment)
Segment income attributable to the Corrugated Packaging segment for the first quarter of
fiscal 2008 increased $0.4 million compared to the prior year first quarter primarily due to
increased volumes.
18
Liquidity and Capital Resources
Working Capital and Capital Expenditures
We fund our working capital requirements, capital expenditures and acquisitions from net cash
provided by operating activities, borrowings under term notes, our receivables-backed financing
facility and bank credit facilities, proceeds from the sale of discontinued assets, and proceeds
received in connection with the issuance of industrial development revenue bonds as well as other
debt and equity securities.
Cash and cash equivalents was $35.6 million at December 31, 2007, compared to $10.9 million at
September 30, 2007. Our debt balance at December 31, 2007 was $746.4 million compared with $722.3
million at September 30, 2007, an increase of $24.1 million. Net Debt (as hereinafter defined)
decreased slightly. We are exposed to changes in interest rates as a result of our short-term and
long-term debt. We use interest rate swap instruments to varying degrees from time to time to
manage the interest rate characteristics of a portion of our outstanding debt. At the inception of
the swaps we designated such swaps as either cash flow hedges or fair value hedges of the interest
rate exposure on an equivalent amount of our floating rate or fixed rate debt. At September 30,
2007, we had interest rate swap agreements in place with an aggregate notional amount of $200.0
million. In October 2007, we paid $3.5 million to terminate all of our open interest rate swaps.
At December 31, 2007, we did not have any interest rate swaps.
The Senior Credit Facility includes term loan, revolving credit, swing, and letters of credit
facilities with an aggregate original principal amount of $700.0 million. The Senior Credit
Facility is pre-payable at any time and is scheduled to expire on June 6, 2010. Certain restrictive
covenants govern our maximum availability under this facility, including: Minimum Consolidated
Interest Ratio Coverage; Maximum Leverage Ratio; and Minimum Consolidated Net Worth; as those terms
are defined by the Senior Credit Facility. We test and report our compliance with these covenants
each quarter. We are well within compliance at December 31, 2007. Due to the covenants in the
Senior Credit Facility, at the time we submitted our compliance calculation for December 31, 2007,
maximum additional available borrowings under this facility were approximately $322.8 million. We
have aggregate outstanding letters of credit under this facility of approximately $37.0 million.
In addition, we have a receivables-backed financing facility
(Receivables Facility). On November
16, 2007, we amended the 364-day facility and increased the size of the facility from $100.0
million to $110.0 million. The new facility is scheduled to expire on November 15, 2008.
Accordingly, such borrowings are classified as current at December 31, 2007 and non-current at
September 30, 2007 since the facility was scheduled to mature beyond one year from the balance
sheet date. Borrowing availability under this facility is based on the eligible underlying
receivables. At December 31, 2007 and September 30, 2007 we had $110.0 million and $100.0 million,
respectively, outstanding under our receivables-backed financing facility. For additional
information regarding our outstanding debt, our credit facilities and their securitization, see
Note 8. Debt of the Notes to Condensed Consolidated Financial Statements.
On January 10, 2008, we announced an agreement to acquire the stock of Southern Container, a
privately-held containerboard manufacturing and corrugated packaging business, for approximately
$851 million in cash. We expect that Southern Container will have approximately $142 million in
debt outstanding immediately after the acquisition. We plan to finance the acquisition with the
aggregate proceeds from $1.4 billion in new credit facilities and the sale of unsecured senior
notes. The $1.4 billion will provide us with funding to complete the acquisition, refinance our
existing credit facilities and provide in excess of $200 million of undrawn capacity. Wachovia
Bank, N.A., Bank of America and SunTrust Bank and certain affiliates of each have committed to
provide $1.4 billion in a combination of new credit facilities and bridge financing to support this
transaction. The new credit facilities will be secured with certain of our and Southern
Containers assets and will share certain of its collateral with our existing senior notes in accordance with the terms of
the indenture dated July 31, 1995. We expect to close the acquisition in March 2008. See Note 12.
Subsequent Event of the Notes to Condensed Consolidated Financial Statements.
On January 31, 2008, we entered into two interest rate swaps of an initial notional amount
aggregating $550.0 million. These swaps are tiered and the notional amounts will decline through
April 2012. These forward starting floating-to-fixed swaps will start on April 1, 2008. We have
designated these swaps as cash flow hedges of the interest rate exposure on an equivalent amount of
floating rate debt we expect to incur as part of our announced acquisition of Southern Container
Corp.
Net cash provided by operating activities during the three months ended December 31, 2007 and
2006 was $22.3 million and $32.3 million, respectively. The decrease was primarily due to the
reduction of non-debt current liabilities. For additional items please see our condensed
consolidated statements of cash flows.
Net cash used for investing activities was $16.3 million during the three months ended
December 31, 2007 compared to $20.7 million for the comparable period of the prior year. Net cash
used for investing activities in the first quarter of fiscal 2008 consisted primarily of $17.9
million of capital expenditures. Partially offsetting these amounts was $2.2 million in proceeds
from the sale of property, plant and equipment, primarily for the sale of previously closed
facilities. Net cash used for investing activities in the first quarter of fiscal 2007 consisted
primarily of $17.3 million of capital expenditures. Additionally, in the first quarter of the
fiscal 2007 we invested
19
$8.5 million, including fees, for our investment in QPSI in our Merchandising Displays
segment. Partially offsetting these amounts was the return of capital of $3.9 million from our
Seven Hills investment.
Net cash provided by financing activities was $18.7 million during the three months ended
December 31, 2007 and cash used for financing activities was $12.5 million in the same period last
year. In the first quarter of fiscal 2008 net cash provided by financing activities consisted
primarily of net additions to revolving credit facilities and debt. Partially offsetting these
amounts were repayments to an unconsolidated entity, cash dividends paid to shareholders and
distributions to our minority interest partner. In the first quarter of fiscal 2007 net cash used
consisted primarily of net repayments of debt, repayments to an unconsolidated entity, cash
dividends paid to shareholders and distributions to our minority interest partners, which were
partially offset by issuances of common stock. In the first quarter of fiscal 2007, the source of
cash from the issuance of common stock was primarily due to the exercising of 1.1 million shares of
stock options resulting from the increase in our stock price.
Our capital expenditures aggregated $17.9 million during the three months ended December 31,
2007. We used these expenditures primarily for the purchase and upgrading of machinery and
equipment. We estimate that our capital expenditures will aggregate approximately $75 to $80
million in fiscal 2008, without taking into account acquisitions. We intend to use these
expenditures for the purchase and upgrading of machinery and equipment, including growth and
efficiency capital focused on our folding carton business, and maintenance capital. Included in
our capital expenditures estimate is approximately $3.0 million for capital expenditures that we
will spend during fiscal 2008 in connection with matters relating to environmental compliance.
Based on current facts and assumptions, we do not expect cash tax payments to exceed income
tax expense in fiscal 2008, 2009 and 2010, respectively.
In connection with prior dispositions of assets and/or subsidiaries, we have made certain
guarantees to third parties as of December 31, 2007. Our specified maximum aggregate potential
liability (on an undiscounted basis) is approximately $7.6 million, other than with respect to
certain specified liabilities, including liabilities relating to title, taxes, and certain
environmental matters, with respect to which there may be no limitation. We estimate the fair
value of our aggregate liability for outstanding indemnities, including the indemnities described
above with respect to which there are no limitations, to be approximately $0.1 million.
Accordingly, we have recorded a liability for that amount. For additional information regarding our
guarantees, see Note 10. Commitments and Contingencies of the Notes to Condensed Consolidated
Financial Statements.
During fiscal 2008 we have minimum pension contributions of approximately $23 million to make
to the U.S. Qualified Plans. Based on current facts and assumptions, we anticipate contributing
approximately $22 million to the U.S. Qualified Plans in fiscal 2009. However, it is possible that
we may decide to contribute an amount greater than the minimum required funding in either of those
years.
In January 2008, our board of directors approved a resolution to pay our quarterly dividend of
$0.10 per share and in November 2007 they approved a resolution to pay a quarterly dividend of
$0.10 per share, indicating an annualized dividend of $0.40 in fiscal 2008 on our Common Stock.
We anticipate that we will be able to fund our capital expenditures, interest payments, stock
repurchases, dividends, pension payments, working capital needs, and repayments of current portion
of long-term debt for the foreseeable future from cash generated from operations, borrowings under
our Senior Credit Facility and Receivables Facility, proceeds from the issuance of debt or equity
securities or other additional long-term debt financing, including new or amended facilities to
finance acquisitions.
Contractual Obligations
For a discussion of contractual obligations, see the Managements Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources Contractual
Obligations section in our Fiscal 2007 Form 10-K. There have been no material developments with
respect to contractual obligations.
New Accounting Standards
See Note 2. New Accounting Standards of the Notes to Condensed Consolidated Financial
Statements included herein for a full description of recent accounting pronouncements including the
respective expected dates of adoption and expected effects on results of operations and financial
condition.
20
Non-GAAP Measures
We have included in the discussion under the caption Managements Discussion and Analysis of
Financial Condition and Results of Operations above a financial measure that was not prepared in
accordance with GAAP. Any analysis of non-GAAP financial measures should be used only in
conjunction with results presented in accordance with GAAP. Below, we define the non-GAAP
financial measure, provide a reconciliation of the non-GAAP financial measure to the most directly
comparable financial measure calculated in accordance with GAAP, and discuss the reasons that we
believe this information is useful to management and may be useful to investors.
Net Debt
We have defined the non-GAAP measure Net Debt to include the aggregate debt obligations
reflected in our balance sheet, less the hedge adjustments resulting from terminated fair value
interest rate derivatives or swaps, the balance of our cash and cash equivalents and certain other
investments that we consider to be readily available to satisfy such debt obligations.
Our management uses Net Debt, along with other factors, to evaluate our financial condition.
We believe that Net Debt is an appropriate supplemental measure of financial condition and may be
useful to investors because it provides a more complete understanding of our financial condition
before the impact of our decisions regarding the appropriate use of cash and liquid investments.
Net Debt is not intended to be a substitute for GAAP financial measures and should not be used as
such.
Set forth below is a reconciliation of Net Debt to the most directly comparable GAAP measures,
Current Portion of Debt and Total Long-Term Debt (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2007 |
|
|
2006 |
|
Current Portion of Debt |
|
$ |
182.7 |
|
|
$ |
46.0 |
|
|
$ |
125.5 |
|
Total Long-Term Debt |
|
|
563.7 |
|
|
|
676.3 |
|
|
|
652.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
746.4 |
|
|
|
722.3 |
|
|
|
778.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Hedge Adjustments Resulting From Terminated
Fair Value Interest Rate Derivatives or Swaps |
|
|
(8.1 |
) |
|
|
(8.5 |
) |
|
|
(10.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
738.3 |
|
|
|
713.8 |
|
|
|
768.2 |
|
Less: Cash and Cash Equivalents |
|
|
(35.6 |
) |
|
|
(10.9 |
) |
|
|
(6.3 |
) |
|
|
|
|
|
|
|
|
|
|
Net Debt |
|
$ |
702.7 |
|
|
$ |
702.9 |
|
|
$ |
761.9 |
|
|
|
|
|
|
|
|
|
|
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Forward-Looking Statements
Statements made in this report constitute forward-looking statements within the meaning of the
federal securities laws, including statements regarding, among other things, the anticipated
closing of the Southern Container Corp. acquisition; the date of such closing; the availability of
financing on satisfactory terms; results and impacts of the proposed acquisition, including cost
reductions, synergies and transitional costs to achieve the synergies and the timing of such costs
and synergies; the impact of operational restructuring activities, including the cost and timing of
such activities, the size and cost of employment terminations, operational consolidation, capacity
utilization, cost reductions and production efficiencies, estimated fair values of assets, and
returns from planned asset transactions, and the impact of such factors on earnings; the ability of
insurance carriers to pay potential claims under our insurance policies and our potential liability
with respect thereto; potential liability for outstanding guarantees and indemnities and the
potential impact of such liabilities; the impact of economic conditions, including the nature of
the current market environment, raw material and energy costs and market trends or factors that
affect such trends, such as expected price increases, competitive pricing pressures, cost
increases, as well as the impact and continuation of such factors; our results of operations,
including our ability to address operational inefficiencies, costs, sales growth or declines, the
timing and impact of customer transitioning, the impact of announced price increases and the impact
of the gain and loss of customers; pension plan contributions and expense, funding requirements and
earnings; environmental law liability as well as the impact of related compliance efforts,
including the cost of required improvements and the availability of certain indemnification claims;
capital expenditures for fiscal 2008; the cost and other effects of complying with governmental
laws and regulations and the timing of such costs; income tax rates and future cash tax payments;
our ability to fund capital expenditures, interest payments,
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stock repurchases, dividends, working capital needs and debt for the foreseeable future from available cash and
the proceeds from borrowings and security issuances; our estimates and assumptions regarding our
contractual obligations and the impact of our contractual obligations on our liquidity and cash
flow; the impact of changes in assumptions and estimates underlying accounting policies; the
expected impact of implementing new accounting standards; and the impact of changes in assumptions
and estimates on which we based the design of our system of disclosure controls and procedures.
Such statements are based on our current expectations and beliefs concerning Rock-Tenn Company on a
stand alone basis (without giving effect to the acquisition of Southern Container) and are subject
to certain risks and uncertainties that could cause actual results to differ materially from those
expressed or implied in any forward-looking statement. With respect to these statements, we have
made assumptions regarding, among other things, economic, competitive and market conditions;
volumes and price levels of purchases by customers; competitive conditions in our businesses;
possible adverse actions of our customers, our competitors and suppliers; labor costs; the amount
and timing of capital expenditures, including installation costs, project development and
implementation costs, severance and other shutdown costs; restructuring costs; utilization of real
property that is subject to the restructurings due to realizable values from the sale of such
property; credit availability; volumes and price levels of purchases by customers; raw material and
energy costs; and competitive conditions in our businesses. Management believes its assumptions
are reasonable; however, undue reliance should not be placed on such estimates, which are based on
current expectations. These forward-looking statements are subject to certain risks including,
among others, that our assumptions will prove to be inaccurate. There are many factors that impact
these forward-looking statements that we cannot predict accurately. Actual results may vary
materially from current expectations, in part because we manufacture most of our products against
customer orders with short lead times and small backlogs. Our earnings are dependent on volume due
to price levels and fixed operating costs. Further, our business is subject to a number of general
risks that would affect any such forward-looking statements including, among others, decreases in
demand for our products; increases in energy, raw material, shipping and capital equipment costs;
reduced supplies of raw materials; fluctuations in selling prices and volumes; intense competition;
our ability to identify, complete, integrate or finance acquisitions; the potential loss of certain
customers; adverse changes in and the cost of complying with extensive governmental regulations;
and adverse changes in general market and industry conditions. Such risks are more particularly
described in our filings with the SEC, including under the caption Business Forward-Looking
Information and Risk Factors in our Fiscal 2007 Form 10-K. Further, forward-looking statements
speak only as of the date they are made, and we do not have or undertake any obligation to update
any such information as future events unfold.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of certain of the market risks to which we are exposed, see the Quantitative
and Qualitative Disclosures About Market Risk section in our Fiscal 2007 Form 10-K.
Item 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities
Exchange Act of 1934 (the Exchange Act)) as of the end of the period covered by this quarterly
report. Based on that evaluation, the Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in reports we file or submit under the Exchange Act is (i) recorded,
processed, summarized, and reported within the time periods specified in the Securities and
Exchange Commissions rules and forms, and (ii) is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosures.
There has been no change in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15
that occurred during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are a party to litigation incidental to our business from time to time. We are not
currently a party to any litigation that management believes, if determined adversely to us, would
have a material adverse effect on our results of operations, financial condition or cash flows.
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Item 6. EXHIBITS
See separate Exhibit Index attached hereto and hereby incorporated herein.
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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.
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ROCK-TENN COMPANY |
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(Registrant) |
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Date: February 1, 2008
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By:
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/s/ Steven C. Voorhees |
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Steven C. Voorhees |
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Executive Vice President & Chief Financial Officer |
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(Principal Financial Officer and duly authorized officer) |
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ROCK-TENN COMPANY
INDEX TO EXHIBITS
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Exhibit 2.1
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Agreement and Plan of Merger, dated as of January 10, 2008,
by and among Rock-Tenn Company, Carrier Merger Sub, Inc.,
Southern Container Corp., the Stockholders listed therein,
Steven Hill and the Stockholders Representative, as defined
therein (incorporated by reference to Exhibit 2.1 of the
Registrants Current Report on Form 8-K filed on January 11,
2008). |
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Exhibit 3.1
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Restated and Amended Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 to the
Registrants Registration Statement on Form S-1, File No
33-73312). |
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Exhibit 3.2
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Articles of Amendment to the Registrants Restated and
Amended Articles of Incorporation (incorporated by reference
to Exhibit 3.2 of the Registrants Annual Report on Form 10-K
for the year ended September 30, 2000). |
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Exhibit 3.3
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Bylaws of the Registrant (incorporated by reference to
Exhibit 3.3 of the Registrants Annual Report on Form 10-K
for the year ended September 30, 2003). |
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Exhibit 4.1
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The rights of the Registrants equity security holders are
defined in Article II of the Restated and Amended Articles of
Incorporation of the Registrant and Article II of the
Articles of Amendment to the Registrants Restated and
Amended Articles of Incorporation. See Exhibits 3.1 and 3.2. |
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Exhibit 10.1
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Third Amendment to Amended and Restated Credit and Security
Agreement dated as of November 16, 2007 among Rock-Tenn
Financial, Inc., as Borrower, Rock-Tenn Converting Company,
as Servicer, Variable Funding Capital Company LLC, as
assignee of Blue Ridge Asset Funding Corporation, Three
Pillars Funding LLC and SunTrust Bank as liquidity provider
to TPF, SunTrust Capital Markets, Inc., as agent for the TPF
Group, and Wachovia Bank, National Association, as liquidity
provider to VFCC, agent for the VFCC Group and Administrative
Agent. |
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Exhibit 10.2
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Second Amendment to the Rock-Tenn Company Supplemental
Retirement Savings Plan Effective as of November 16, 2007. |
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Exhibit 31.1
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Certification Accompanying Periodic Report Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, executed by
James A. Rubright, Chairman of the Board and Chief Executive
Officer of Rock-Tenn Company. |
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Exhibit 31.2
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Certification Accompanying Periodic Report Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, executed by
Steven C. Voorhees, Executive Vice President and Chief
Financial Officer of Rock-Tenn Company. |
Additional Exhibits
In accordance with SEC Release No. 33-8238, Exhibit 32.1 is to be treated as accompanying
this report rather than filed as part of the report.
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Exhibit 32.1
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, executed by James A. Rubright, Chairman
of the Board and Chief Executive Officer of Rock-Tenn Company, and by Steven C.
Voorhees, Executive Vice President and Chief Financial Officer of Rock-Tenn Company. |
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