ROCK-TENN COMPANY
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 30, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
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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
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(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
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30071
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(Address of Principal Executive
Offices)
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(Zip Code)
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Registrants telephone number, including area code:
(770) 448-2193
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Class A Common Stock, par value $0.01 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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
The aggregate market value of the common equity held by
non-affiliates of the registrant as of March 31, 2007, the
last day of the registrants most recently completed second
fiscal quarter (based on the last reported closing price of
$33.20 per share of Class A Common Stock as reported on the
New York Stock Exchange on such date), was approximately
$1,196 million.
As of November 9, 2007, the registrant had
37,988,779 shares of Class A Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on January 25, 2008, are
incorporated by reference in Parts II and III.
ROCK-TENN
COMPANY
INDEX TO
FORM 10-K
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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 and
2005 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 this Annual Report and
the accompanying consolidated financial statements to data
regarding sales price per ton and fiber, energy, chemical and
freight costs with respect to our recycled paperboard mills
exclude that data with respect to our Aurora, Illinois, recycled
paperboard mill, which sells only converted products and 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, include operating data
from our Aurora mill.
General
We are primarily a manufacturer of packaging products,
paperboard and merchandising displays. We operate a total of 88
facilities located in 26 states, Canada, Mexico, Chile and
Argentina.
Products
We report our results of operations in four
segments: (1) Packaging Products,
(2) Paperboard, (3) Merchandising Displays, and
(4) Corrugated Packaging. For segment financial
information, see Item 8, Financial Statements
and Supplementary Data. For non-US financial
information operations, see Note 19. Segment
Information of the Notes to Consolidated Financial
Statements.
Packaging
Products Segment
In our Packaging Products segment, we manufacture folding
cartons and solid fiber interior packaging.
Folding Cartons. We believe we are one of the
largest manufacturers of folding cartons in North America
measured by net sales. Customers use our folding cartons to
package dry, frozen and perishable foods for the retail sale and
quick-serve markets; beverages; paper goods; automotive
products; hardware; health care and nutritional food supplement
products; household goods; health and beauty aids; recreational
products; apparel; take out food products; and other products.
We also manufacture express mail envelopes for the overnight
courier industry. Folding cartons typically protect
customers products during shipment and distribution and
employ graphics to promote them at retail. We manufacture
folding cartons from recycled and virgin paperboard, laminated
paperboard and various substrates with specialty characteristics
such as grease masking and microwaveability. We print, coat,
die-cut and glue the paperboard to customer specifications. We
ship finished cartons to customers for assembling, filling and
sealing. We employ a broad range of offset, flexographic,
gravure, backside printing, and double coating technologies. We
support our customers with new product development, graphic
design and packaging systems services. Sales of folding cartons
to external customers accounted for 47.0%, 51.9%, and 49.1% of
our net sales in fiscal 2007, 2006, and 2005, respectively.
Interior Packaging. Our subsidiary, RTS,
designs and manufactures fiber partitions and die-cut paperboard
components. We believe we are the largest manufacturer of solid
fiber partitions in North America measured by net sales. We sell
our solid fiber partitions principally to glass container
manufacturers and producers of beer, food, wine, cosmetics and
pharmaceuticals. We also manufacture specialty agricultural
packaging for specific fruit and vegetable markets and sheeted
separation products. We manufacture solid fiber interior
packaging primarily from recycled paperboard. Our solid fiber
interior packaging is made from varying thicknesses of single
ply and
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laminated paperboard to meet different structural requirements,
including those required for high speed-casing, de- casing and
filling lines. We employ primarily proprietary manufacturing
equipment developed by our engineering services group. This
equipment delivers high-speed production and rapid turnaround on
large jobs and specialized capabilities for short-run, custom
applications. RTS operates in the United States, Canada, Mexico,
Chile, and Argentina. Sales of interior packaging products to
external customers accounted for 7.2%, 7.3%, and 8.0% of our net
sales in fiscal 2007, 2006, and 2005, respectively.
Paperboard
Segment
In our Paperboard segment, we produce virgin and recycled
paperboard, corrugated medium, and market pulp, and buy and sell
recycled fiber.
We believe we are one of the largest U.S. manufacturers of
100% recycled paperboard measured by tons produced. We sell our
coated and specialty recycled paperboard to manufacturers of
folding cartons, solid fiber interior packaging, tubes and
cores, and other paperboard products. We manufacture bleached
paperboard and market pulp. We believe our bleached paperboard
mill is one of the lowest cost solid bleached sulphate
paperboard mills in North America because of cost advantages
achieved through original design, process flow, relative age of
its recovery boiler and hardwood pulp line replaced in the early
1990s and access to hardwood and softwood fiber. We also
manufacture recycled corrugated medium, which we sell to
corrugated sheet manufacturers. Through our Seven Hills joint
venture we manufacture gypsum paperboard liner for sale to our
joint venture partner. We also convert specialty paperboard into
book cover and laminated paperboard products for use in
furniture, automotive components, storage, and other industrial
products. Our paper recovery facilities collect primarily waste
paper from factories, warehouses, commercial printers, office
complexes, retail stores, document storage facilities, and paper
converters, and from other wastepaper collectors. We handle a
wide variety of grades of recovered paper, including old
corrugated containers, office paper, box clippings, newspaper
and print shop scraps. After sorting and baling, we transfer
collected paper to our paperboard mills for processing, or sell
it, principally to U.S. manufacturers of paperboard,
tissue, newsprint, roofing products and insulation. We also
operate a fiber marketing and brokerage group that serves large
regional and national accounts. Sales of pulp, paperboard,
recycled corrugated medium, book covers, laminated paperboard
products, and recovered paper to external customers accounted
for 26.7%, 24.3%, and 23.8% of our net sales in fiscal 2007,
2006, and 2005, respectively.
Merchandising
Displays Segment
We manufacture temporary and permanent point-of-purchase
displays. We believe that we are one of the largest
manufacturers of temporary promotional point-of-purchase
displays in North America measured by net sales. We design,
manufacture and, in most cases, pack temporary displays for sale
to consumer products companies. These displays are used as
marketing tools to support new product introductions and
specific product promotions in mass merchandising stores,
supermarkets, convenience stores, home improvement stores and
other retail locations. We also design, manufacture and, in some
cases, pre-assemble permanent displays for the same categories
of customers. We make temporary displays primarily from
corrugated paperboard. Unlike temporary displays, permanent
displays are restocked and, therefore, are constructed primarily
from metal, plastic, wood and other durable materials. We
provide contract packing services such as multi-product
promotional packing. We manufacture lithographic laminated
packaging for sale to our customers that require packaging with
high quality graphics and strength characteristics. Sales of our
merchandising displays, lithographic laminated packaging and
contract packaging services to external customers accounted for
13.2%, 10.9%, and 13.1% of our net sales in fiscal 2007, 2006,
and 2005, respectively.
Corrugated
Packaging Segment
We manufacture corrugated packaging for sale to industrial and
consumer products manufacturers and corrugated sheet stock for
sale to corrugated box manufacturers located primarily in the
southeastern United States. To make corrugated sheet stock, we
feed linerboard and corrugated medium into a corrugator that
flutes the medium to specified sizes, glues the linerboard and
fluted medium together and slits and cuts the resulting
corrugated paperboard into sheets to customer specifications. We
also convert corrugated sheets into corrugated products ranging
from one-color protective cartons to graphically brilliant
point-of-purchase containers and displays. We
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provide structural design and engineering services. Sales of
corrugated packaging and sheet stock to external customers
accounted for 5.9%, 5.6%, and 6.0% of our net sales in fiscal
2007, 2006, and 2005, respectively.
Raw
Materials
The primary raw materials that our paperboard operations use are
recycled fiber at our recycled paperboard mills and virgin
fibers from hardwoods and softwoods at our bleached paperboard
mill. The average cost per ton of recycled fiber that our
recycled paperboard mills used during fiscal 2007, 2006, and
2005 was $115, $88, and $102, respectively. Recycled fiber
prices can fluctuate significantly. While virgin fiber prices
are generally more stable than recycled fiber prices, they also
fluctuate, particularly during prolonged periods of heavy rain.
Pursuant to a five year agreement entered into in June 2005,
Gulf States Paper Corporation (Gulf States,
currently known as the Westervelt Company) has essentially
agreed to continue to sell to our bleached paperboard mill the
supply of soft wood chips that it made available to the mill
before our acquisition of substantially all of the assets of
Gulf States Paperboard and Packaging operations
(GSPP) and assumed certain of Gulf
States related liabilities in June 2005 (the GSPP
Acquisition), which represents approximately 75% to
80% of the mills historical soft wood chip supply
requirements and 29% of the mills total wood fiber supply
requirement.
Recycled and virgin paperboard are the primary raw materials
that our paperboard converting operations use. One of the
primary grades of virgin paperboard, coated unbleached kraft,
used by our folding carton operations, has only two domestic
suppliers. While we believe that we would be able to obtain
adequate replacement supplies in the market should either of our
current vendors discontinue supplying us coated unbleached
kraft, the failure to obtain these supplies or the failure to
obtain these supplies at reasonable market prices could have an
adverse effect on our results of operations. We supply
substantially all of our needs for recycled paperboard from our
own mills and consume approximately 50% of our bleached
paperboard production, although we have the capacity to consume
it all. Because there are other suppliers that produce the
necessary grades of recycled and bleached paperboard used in our
converting operations, management believes that it would be able
to obtain adequate replacement supplies in the market should we
be unable to meet our requirements for recycled or bleached
paperboard through internal production.
Energy
Energy is one of the most significant manufacturing costs of our
paperboard operations. We use natural gas, electricity, fuel oil
and coal to operate our mills and to generate steam to make
paper. We use primarily electricity for our converting
equipment. We generally purchase these products from suppliers
at market rates. Occasionally, we enter into agreements to
purchase natural gas at fixed prices. In recent years, the cost
of natural gas, oil and electricity has fluctuated
significantly. The average cost of energy used by our recycled
paperboard mills to produce a ton of paperboard during fiscal
2007 was $78 per ton, compared to $86 per ton during fiscal 2006
and $73 per ton in fiscal 2005. Our bleached paperboard mill
uses wood by-products and pulp process wastes to supply a
substantial portion of the mills energy needs.
Transportation
Inbound and outbound freight is a significant expenditure for
us. Factors that influence our freight expense are distance
between our shipping and delivery locations, distance from
customers and suppliers, mode of transportation (rail, truck,
intermodal) and freight rates which are influenced by supply and
demand and fuel costs.
Sales and
Marketing
Our top 10 external customers represented approximately 26% of
consolidated net sales in fiscal 2007, none of which
individually accounted for more than 10% of our consolidated net
sales. We generally manufacture our products pursuant to
customers orders. The loss of any of our larger customers
could have a material adverse effect on the income attributable
to the applicable segment and, depending on the significance of
the product line, our results of operations. We believe that we
have good relationships with our customers.
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In fiscal 2007, we sold:
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packaging products to approximately 2,900 customers, the top 10
of which represented approximately 32% of the external sales of
our Packaging Products segment;
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paperboard products to approximately 1,100 customers, the top 10
of which represented approximately 37% of the external sales of
our Paperboard segment;
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merchandising display products to approximately 400 customers,
the top 10 of which represented approximately 81% of the
external sales of our Merchandising Display segment; and
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corrugated packaging products to approximately 500 customers,
the top 10 of which represented approximately 50% of the
external sales of our Corrugated Packaging segment.
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During fiscal 2007, we sold approximately 34% of our Paperboard
segment sales to internal customers, primarily to our Packaging
Products segment. Our Paperboard segments sales volumes
may therefore be directly impacted by changes in demand for our
packaging products. Under the terms of our Seven Hills joint
venture arrangement, our joint venture partner is required to
purchase all of the qualifying gypsum paperboard liner produced
by Seven Hills.
We market our products, other than our gypsum paperboard liner,
primarily through our own sales force. We also market a number
of our products through either independent sales representatives
or independent distributors, or both. We pay our paperboard
products sales personnel a base salary, and we generally pay our
packaging products, merchandising displays and corrugated
packaging sales personnel a base salary plus commissions. We pay
our independent sales representatives on a commission basis.
Competition
The packaging products and paperboard industries are highly
competitive, and no single company dominates either industry.
Our competitors include large, vertically integrated packaging
products and paperboard companies and numerous smaller
non-integrated companies. In the folding carton and corrugated
packaging markets, we compete with a significant number of
national, regional and local packaging suppliers in North
America. In the solid fiber interior packaging, promotional
point-of-purchase display, and converted paperboard products
markets, we compete with a smaller number of national, regional
and local companies offering highly specialized products. Our
paperboard operations compete with integrated and non-integrated
national and regional companies operating in North America that
manufacture various grades of paperboard and, to a limited
extent, manufacturers outside of North America.
Because all of our businesses operate in highly competitive
industry segments, we regularly bid for sales opportunities to
customers for new business or for renewal of existing business.
The loss of business or the award of new business from our
larger customers may have a significant impact on our results of
operations.
The primary competitive factors in the packaging products and
paperboard industries are price, design, product innovation,
quality and service, with varying emphasis on these factors
depending on the product line and customer preferences. We
believe that we compete effectively with respect to each of
these factors and we evaluate our performance with annual
customer service surveys. However, to the extent that any of our
competitors becomes more successful with respect to any key
competitive factor, our business could be materially adversely
affected.
Our ability to pass through cost increases can be limited based
on competitive market conditions for our products and by the
actions of our competitors. In addition, we sell a significant
portion of our paperboard and paperboard-based converted
products pursuant to term contracts that provide that prices are
either fixed for specified terms or provide for price
adjustments based on negotiated terms, including changes in
specified paperboard index prices. The effect of these
contractual provisions generally is to either limit the amount
of the increase or delay our ability to recover announced price
increases for our paperboard and paperboard-based converted
products.
The packaging products and recycled paperboard industries have
undergone significant consolidation in recent years. Within the
packaging products industry, larger corporate customers with an
expanded geographic presence
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have tended in recent years to seek suppliers who can, because
of their broad geographic presence, efficiently and economically
supply all or a range of the customers packaging needs. In
addition, during recent years, purchasers of paperboard and
packaging products have demanded higher quality products meeting
stricter quality control requirements. These market trends could
adversely affect our results of operations or, alternatively,
favor our products depending on our competitive position in
specific product lines.
Our paperboard packaging products compete with plastic and
corrugated packaging and packaging made from other materials.
Customer shifts away from paperboard packaging to packaging from
other materials could adversely affect our results of operations.
Governmental
Regulation
Health
and Safety Regulations
Our operations are subject to federal, state, local and foreign
laws and regulations relating to workplace safety and worker
health including the Occupational Safety and Health Act
(OSHA) and related regulations. OSHA, among
other things, establishes asbestos and noise standards and
regulates the use of hazardous chemicals in the workplace.
Although we do not use asbestos in manufacturing our products,
some of our facilities contain asbestos. For those facilities
where asbestos is present, we believe we have properly contained
the asbestos
and/or we
have conducted training of our employees to ensure that no
federal, state or local rules or regulations are violated in the
maintenance of our facilities. We do not believe that future
compliance with health and safety laws and regulations will have
a material adverse effect on our results of operations,
financial condition or cash flows.
Environmental
Regulation
We are subject to various federal, state, local and foreign
environmental laws and regulations, including, among others, the
Comprehensive Environmental Response, Compensation and Liability
Act (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 U.S. 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 such impact or capital expenditures will not have a material
adverse effect on our results of operations, financial condition
or cash flows.
We estimate that we will spend approximately $3 million for
capital expenditures during fiscal 2008 in connection with
matters relating to safety and environmental compliance.
For additional information concerning environmental regulation,
see Note 18. Commitments and
Contingencies of the Notes to Consolidated
Financial Statements.
Patents
and Other Intellectual Property
We hold a substantial number of patents and pending patent
applications in the United States and certain foreign countries.
Our patent portfolio consists primarily of utility and design
patents relating to our products, as well as certain process and
method patents relating to our manufacturing operations. Certain
of our products and services are also protected by trademarks
such as
CartonMate®,
Duraframe®,
DuraFreeze®,
MillMask®,
Millennium
Board®,
BlueCuda®,
MAXPDQ®,
MAXLitePDQ®,
AdvantaEdge®,
Clik
Top®,
Formations®,
Bio-Pak®,
Bio-Plus®,
Fold-Pak®,
BillBoard®,
CitruSaver®,
ProduSaver®,
and
WineGuard®.
Our patents and other intellectual property, particularly our
patents relating to our interior packaging, retail displays and
folding carton operations, are important to our operations as a
whole.
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Employees
At September 30, 2007, we had approximately
9,300 employees. Of these employees, approximately 7,100
were hourly and approximately 2,200 were salaried. Approximately
3,400 of our hourly employees are covered by union collective
bargaining agreements, which generally have three-year terms. We
have not experienced any work stoppages in the past
10 years other than a three-week work stoppage at our
Aurora, Illinois, paperboard facility during fiscal 2004.
Management believes that our relations with our employees are
good.
Available
Information
Our Internet address is www.rocktenn.com. Our Internet
address is included herein as an inactive textual reference
only. The information contained on our website is not
incorporated by reference herein and should not be considered
part of this report. We file annual, quarterly and current
reports, proxy statements and other information with the
Securities and Exchange Commission (SEC) and
we make available free of charge most of our SEC filings through
our Internet website as soon as reasonably practicable after
filing with the SEC. You may access these SEC filings via the
hyperlink that we provide on our website to a third-party SEC
filings website. We also make available on our website the
charters of our audit committee, our compensation committee, and
our nominating and corporate governance committee, as well as
the corporate governance guidelines adopted by our board of
directors, our Code of Business Conduct for employees, our Code
of Business Conduct and Ethics for directors and our Code of
Ethical Conduct for CEO and senior financial officers. We will
also provide copies of these documents, without charge, at the
written request of any shareholder of record. Requests for
copies should be mailed to: Rock-Tenn Company, 504 Thrasher
Street, Norcross, Georgia 30071, Attention: Corporate Secretary.
Forward-Looking
Information
We, or our executive officers and directors on our behalf, may
from time to time make forward-looking statements
within the meaning of the federal securities laws.
Forward-looking statements include statements preceded by,
followed by or that include the words believes,
expects, anticipates, plans,
estimates, or similar expressions. These statements
may be contained in reports and other documents that we file
with the SEC or may be oral statements made by our executive
officers and directors to the press, potential investors,
securities analysts and others. These forward-looking statements
could involve, among other things, statements regarding any of
the following: our results of operations, financial condition,
cash flows, liquidity or capital resources, including
expectations regarding sales growth, our production capacities,
our ability to achieve operating efficiencies, and our ability
to fund our capital expenditures, interest payments, estimated
tax payments, stock repurchases, dividends, working capital
needs, and repayments of debt; the consummation of acquisitions
and financial transactions, the effect of these transactions on
our business and the valuation of assets acquired in these
transactions; our competitive position and competitive
conditions; our ability to obtain adequate replacement supplies
of raw materials or energy; our relationships with our
customers; our relationships with our employees; our plans and
objectives for future operations and expansion; amounts and
timing of capital expenditures and the impact of such capital
expenditures on our results of operations, financial condition,
or cash flows; our compliance obligations with respect to health
and safety laws and environmental laws, the cost of compliance,
the timing of these costs, or the impact of any liability under
such laws on our results of operations, financial condition or
cash flows, and our right to indemnification with respect to any
such cost or liability; the impact of any gain or loss of a
customers business; the impact of announced price
increases; the scope, costs, timing and impact of any
restructuring of our operations and corporate and tax structure;
the scope and timing of any litigation or other dispute
resolutions and the impact of any such litigation or other
dispute resolutions on our results of operations, financial
condition or cash flows; factors considered in connection with
any impairment analysis, the outcome of any such analysis and
the anticipated impact of any such analysis on our results of
operations, financial condition or cash flows; pension and
retirement plan obligations, contributions, the factors used to
evaluate and estimate such obligations and expenses, the impact
of amendments to our pension and retirement plans, the impact of
governmental regulations on our results of operations, financial
condition or cash flows; and pension and retirement plan asset
investment strategies; the financial condition of our insurers
and the impact on our results of operations, financial condition
or cash flows in the event of an insurers default on their
obligations; the impact of any market risks, such as interest
rate risk, pension plan risk, foreign currency risk, commodity
price risks, energy price risk, rates of return, the risk of
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investments in derivative instruments, and the risk of
counterparty nonperformance, and factors affecting those risks;
the amount of contractual obligations based on variable price
provisions and variable timing and the effect of contractual
obligations on liquidity and cash flow in future periods; the
implementation of accounting standards and the impact of these
standards once implemented; factors used to calculate the fair
value of options, including expected term and stock price
volatility; our assumptions and expectations regarding critical
accounting policies and estimates; the adequacy of our system of
internal controls over financial reporting; and the
effectiveness of any actions we may take with respect to our
system of internal controls over financial reporting.
Any forward-looking statements are based on our current
expectations and beliefs at the time of the statements and would
be subject to risks and uncertainties that could cause actual
results of operations, financial condition, acquisitions,
financing transactions, operations, expansion and other events
to differ materially from those expressed or implied in these
forward-looking statements. With respect to these statements, we
make a number of assumptions regarding, among other things,
expected economic, competitive and market conditions generally;
expected 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 expected capital expenditures,
including installation costs, project development and
implementation costs, severance and other shutdown costs;
restructuring costs; the expected utilization of real property
that is subject to the restructurings due to realizable values
from the sale of that property; anticipated earnings that will
be available for offset against net operating loss
carry-forwards; expected credit availability; raw material and
energy costs; replacement energy supply alternatives and related
capital expenditures; and expected year-end inventory levels and
costs. These assumptions also could be affected by changes in
managements plans, such as delays or changes in
anticipated capital expenditures or changes in our operations.
We believe that our assumptions are reasonable; however, undue
reliance should not be placed on these assumptions, 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, while our earnings are dependent on volume due to
price levels and our generally high fixed operating costs.
Forward-looking statements speak only as of the date they are
made, and we, and our executive officers and directors, have no
duty under the federal securities laws and undertake no
obligation to update any such information as future events
unfold.
Further, our business is subject to a number of general risks
that would affect any forward-looking statements, including the
risks discussed under Item 1A. Risk
Factors.
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We May Face Increased Costs and Reduced Supply of Raw
Materials
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Historically, the cost of recovered paper and virgin paperboard,
our principal externally sourced raw materials, have fluctuated
significantly due to market and industry conditions. Increasing
demand for products packaged in 100% recycled paper and the
shift by manufacturers of virgin paperboard, tissue, newsprint
and corrugated packaging to the production of products with some
recycled paper content have and may continue to increase demand
for recovered paper. Furthermore, there has been a substantial
increase in demand for U.S. sourced recovered paper by
Asian countries. These increasing demands may result in cost
increases. In recent years, the cost of natural gas, which we
use in many of our manufacturing operations, including most of
our paperboard mills, and other energy costs (including energy
generated by burning natural gas) have also fluctuated
significantly. There can be no assurance that we will be able to
recoup any past or future increases in the cost of recovered
paper or other raw materials or of natural gas or other energy
through price increases for our products. Further, a reduction
in supply of recovered paper, virgin paperboard or other raw
materials due to increased demand or other factors could have an
adverse effect on our results of operations and financial
condition.
|
|
|
|
|
We May Experience Pricing Variability
|
The paperboard and converted products industries historically
have experienced significant fluctuations in selling prices. If
we are unable to maintain the selling prices of products within
these industries, that inability may
9
have a material adverse effect on our results of operations and
financial condition. We are not able to predict with certainty
market conditions or the selling prices for our products.
|
|
|
|
|
Our Earnings are Highly Dependent on Volumes
|
Our operations generally have high fixed operating cost
components and therefore our earnings are highly dependent on
volumes, which tend to fluctuate. These fluctuations make it
difficult to predict our results with any degree of certainty.
|
|
|
|
|
We Face Intense Competition
|
Our businesses are in industries that are highly competitive,
and no single company dominates an industry. Our competitors
include large, vertically integrated packaging products and
paperboard companies and numerous non-integrated smaller
companies. We generally compete with companies operating in
North America. Competition from foreign manufacturers in the
future could negatively impact our sales volumes and pricing.
Because all of our businesses operate in highly competitive
industry segments, we regularly bid for sales opportunities to
customers for new business or for renewal of existing business.
The loss of business from our larger customers may have a
significant impact on our results of operations. Further,
competitive conditions may prevent us from fully recovering
increased costs and may continue to inhibit our ability to pass
on cost increases to our customers. Our paperboard
segments sales volumes may be directly impacted by changes
in demand for our packaging products and our laminated
paperboard products. See Business
Competition.
|
|
|
|
|
We Have Been Dependent on Certain Customers
|
Each of our segments has certain large customers, the loss of
which could have a material adverse effect on the segments
sales and, depending on the significance of the loss, our
results of operations, financial condition or cash flows.
|
|
|
|
|
We May Incur Business Disruptions
|
The occurrence of a natural disaster, such as a hurricane,
tropical storm, earthquake, tornado, flood, fire, or other
unanticipated problems could cause operational disruptions or
short term rises in raw material or energy costs that could
materially adversely affect our earnings. Any losses due to
these events may not be covered by our existing insurance
policies or may be subject to certain deductibles.
|
|
|
|
|
We May be Unable to Complete and Finance
Acquisitions
|
We have completed several acquisitions in recent years and may
seek additional acquisition opportunities. There can be no
assurance that we will successfully be able to identify suitable
acquisition candidates, complete and finance acquisitions,
integrate acquired operations into our existing operations or
expand into new markets. There can also be no assurance that
future acquisitions will not have an adverse effect upon our
operating results. Acquired operations may not achieve levels of
revenues, profitability or productivity comparable with those
our existing operations achieve, or otherwise perform as
expected. In addition, it is possible that, in connection with
acquisitions, our capital expenditures could be higher than we
anticipated and that we may not realize the expected benefits of
such capital expenditures.
|
|
|
|
|
We are Subject to Extensive Environmental and Other
Governmental Regulation
|
We are subject to various federal, state, local and foreign
environmental laws and regulations, including those regulating
the discharge, storage, handling and disposal of a variety of
substances, as well as other financial and non-financial
regulations.
We regularly make capital expenditures to maintain compliance
with applicable environmental laws and regulations. However,
environmental laws and regulations are becoming increasingly
stringent. Consequently, our compliance and remediation costs
could increase materially. In addition, we cannot currently
assess the impact that the future emissions standards and
enforcement practices will have on our operations or capital
expenditure requirements. Further, we have been identified as a
potentially responsible party at various superfund
sites pursuant to CERCLA or comparable state statutes. See
Note 18. Commitments and Contingencies
of the Notes to Consolidated Financial Statements. There
can be no assurance that any liability we may incur in
connection with
10
these superfund sites or other governmental regulation will not
be material to our results of operations, financial condition or
cash flows.
|
|
|
|
|
We May Incur Additional Restructuring Costs
|
We have restructured portions of our operations from time to
time in recent years and it is possible that we may engage in
additional restructuring opportunities. Because we are not able
to predict with certainty market conditions, the loss of large
customers, or the selling prices for our products, we also may
not be able to predict with certainty when it will be
appropriate to undertake restructurings. It is also possible, in
connection with these restructuring efforts, that our costs
could be higher than we anticipate and that we may not realize
the expected benefits.
|
|
|
|
|
We May Incur Increased Transportation Costs
|
We distribute our products primarily by truck and rail. Reduced
availability of truck or rail carriers could negatively impact
our ability to ship our products in a timely manner. There can
be no assurance that we will be able to recoup any past or
future increases in transportation rates or fuel surcharges
through price increases for our products.
|
|
|
|
|
We May Incur Increased Employee Benefit Costs
|
Our pension and health care benefits are dependent upon multiple
factors resulting from actual plan experience and assumptions of
future experience. Our pension plan assets are primarily made up
of equity and fixed income investments. Fluctuations in market
performance and changes in interest rates may result in
increased or decreased pension costs in future periods. Changes
in assumptions regarding expected long-term rate of return on
plan assets, changes in our discount rate or expected
compensation levels could also increase or decrease pension
costs. Future pension funding requirements, and the timing of
funding payments, may be subject to changes in legislation.
Item 1B. UNRESOLVED
STAFF COMMENTS
Not applicable there are no unresolved SEC staff
comments.
We operate at a total of 88 locations. These facilities are
located in 26 states (mainly in the Eastern and Midwestern
U.S.), Canada, Mexico, Chile and Argentina. We own our principal
executive offices in Norcross, Georgia. There are 30 owned and
11 leased facilities used by operations in our Packaging
Products segment, 23 owned and 1 leased facility used by
operations in our Paperboard segment, 1 owned and 14 leased
facilities used by operations in our Merchandising Displays
segment, and 6 owned and 1 leased facilities used by operations
in our Corrugated Packaging segment. We believe that our
existing production capacity is adequate to serve existing
demand for our products. We consider our plants and equipment to
be in good condition.
11
The following table shows information about our paperboard
mills. We own all of our mills.
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
|
|
Capacity
|
|
|
Location of Mill
|
|
(in tons @ 9/30/2007)
|
|
Paperboard Produced
|
|
Demopolis, AL
|
|
|
335,000
|
|
|
|
Bleached paperboard
|
|
|
|
|
100,000
|
|
|
|
Market pulp
|
|
St. Paul, MN
|
|
|
184,000
|
|
|
|
Recycled corrugating medium
|
|
St. Paul, MN
|
|
|
160,000
|
|
|
|
Coated recycled paperboard
|
|
Battle Creek, MI
|
|
|
160,000
|
|
|
|
Coated recycled paperboard
|
|
Sheldon Springs, VT (Missisquoi Mill)
|
|
|
112,000
|
|
|
|
Coated recycled paperboard
|
|
Dallas, TX
|
|
|
99,000
|
|
|
|
Coated recycled paperboard
|
|
Stroudsburg, PA
|
|
|
75,000
|
|
|
|
Coated recycled paperboard
|
|
|
|
|
|
|
|
|
|
|
Total Coated Capacity
|
|
|
606,000
|
|
|
|
|
|
Chattanooga, TN
|
|
|
132,000
|
|
|
|
Specialty recycled paperboard
|
|
Lynchburg, VA
|
|
|
103,000
|
(1)
|
|
|
Specialty recycled paperboard
|
|
Eaton, IN
|
|
|
60,000
|
|
|
|
Specialty recycled paperboard
|
|
Cincinnati, OH
|
|
|
53,000
|
|
|
|
Specialty recycled paperboard
|
|
Aurora, IL
|
|
|
32,000
|
|
|
|
Specialty recycled paperboard
|
|
|
|
|
|
|
|
|
|
|
Total Specialty Capacity
|
|
|
380,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mill Capacity
|
|
|
1,605,000
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects the production capacity of a paperboard machine that
manufactures gypsum paperboard liner and is owned by our Seven
Hills joint venture. |
The following is a list of our significant facilities other than
our paperboard mills:
|
|
|
Type of Facility
|
|
Locations
|
|
Merchandising Display Operations
|
|
Winston-Salem, NC
(sales, design, manufacturing and contract packing)
|
Headquarters
|
|
Norcross, GA
|
|
|
Item 3.
|
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. For additional information
regarding litigation to which we are a party, which is
incorporated by reference into this item, see
Note 18. Commitments and Contingencies
of the Notes to Consolidated Financial Statements.
|
|
Item 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
Not applicable there were no matters submitted to a
vote of security holders in our fourth fiscal quarter ended
September 30, 2007.
12
|
|
Item 5.
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Common
Stock
Our Class A common stock, par value $0.01 per share
(Common Stock), trades on the New York Stock
Exchange under the symbol RKT. As of November 1, 2007,
there were approximately 289 shareholders of record of our
Common Stock. The number of shareholders of record only includes
a single shareholder, Cede & Co., for all of the
shares held by our shareholders in individual brokerage accounts
maintained at banks, brokers and institutions.
Price
Range of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
28.50
|
|
|
$
|
19.33
|
|
|
$
|
15.12
|
|
|
$
|
11.70
|
|
Second Quarter
|
|
$
|
35.54
|
|
|
$
|
26.91
|
|
|
$
|
15.19
|
|
|
$
|
12.54
|
|
Third Quarter
|
|
$
|
43.22
|
|
|
$
|
31.51
|
|
|
$
|
16.74
|
|
|
$
|
13.88
|
|
Fourth Quarter
|
|
$
|
37.19
|
|
|
$
|
23.54
|
|
|
$
|
20.75
|
|
|
$
|
15.37
|
|
Dividends
During fiscal 2007, we paid a quarterly dividend on our Common
Stock of $0.09 per share in the first quarter of fiscal 2007 and
$0.10 per share in each of the remaining three quarters of
fiscal 2007 ($0.39 per share in fiscal 2007). During fiscal
2006, we paid a quarterly dividend on our Common Stock of $0.09
per share ($0.36 per share annually).
For additional dividend information, please see Item 6,
Selected Financial Data.
Securities
Authorized for Issuance Under Equity Compensation
Plans
The section under the heading Executive
Compensation entitled Equity
Compensation Plan Information in the Proxy
Statement for the Annual Meeting of Shareholders to be held on
January 25, 2008, which will be filed with the SEC on or
before December 31, 2007, is incorporated herein by
reference.
For additional information concerning our capitalization, see
Note 15. Shareholders Equity
of the Notes to Consolidated Financial Statements.
Our board of directors has approved a stock repurchase plan that
allows for the repurchase from time to time of shares of Common
Stock over an indefinite period of time. At September 30,
2006, we had approximately 2.0 million shares of Common
Stock available for repurchase from our 4.0 million shares
of Common Stock authorized. In August 2007, the board of
directors amended our stock repurchase plan to allow for the
repurchase an additional 2.0 million shares bringing the
cumulative total authorized to 6.0 million shares of Common
Stock. Pursuant to our repurchase plan, during fiscal 2007, we
repurchased approximately 2.1 million shares for an
aggregate cost of $58.7 million. In fiscal 2006 and 2005,
we did not repurchase any shares of Common Stock. As of
September 30, 2007, we had approximately 1.9 million
shares of Common Stock available for repurchase under the
amended repurchase plan.
13
The following table presents information with respect to
purchases of our Common Stock that we made during the three
months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
of Shares that May
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
Yet Be Purchased
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced Plans or
|
|
|
Under the Plans or
|
|
|
|
Purchased(a)
|
|
|
per Share
|
|
|
Programs
|
|
|
Programs
|
|
|
July 1, 2007 through July 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
2,033,832
|
|
August 1, 2007 through August 31, 2007
|
|
|
1,797,000
|
|
|
|
27.34
|
|
|
|
1,797,000
|
|
|
|
2,236,832
|
|
September 1, 2007 through September 30, 2007
|
|
|
346,700
|
|
|
|
27.73
|
|
|
|
346,700
|
|
|
|
1,890,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,143,700
|
|
|
$
|
27.41
|
|
|
|
2,143,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During fiscal 2007, in addition to the information presented in
the table above, 104,032 shares, at an average price of
$34.32, were surrendered by employees to the Company to satisfy
tax withholding obligations in connection with the vesting of
shares of restricted stock. We had no other share repurchases in
fiscal 2007. There have been no repurchases subsequent to
September 30, 2007. |
|
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
The following selected consolidated financial data should be
read in conjunction with our Consolidated Financial Statements
and Notes thereto and Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations included herein. We derived the
consolidated statements of income and consolidated statements of
cash flows data for the years ended September 30, 2007,
2006, and 2005, and the consolidated balance sheet data as of
September 30, 2007 and 2006, from the Consolidated
Financial Statements included herein. We derived the
consolidated statements of income and consolidated statements of
cash flows data for the years ended September 30, 2004 and
2003, and the consolidated balance sheet data as of
September 30, 2005, 2004, and 2003, from audited
Consolidated Financial Statements not included in this report.
We reclassified our plastic packaging operations, which we sold
in October 2003, as a discontinued operation on the consolidated
statements of income for all periods presented. We have also
presented the assets and liabilities of our plastic packaging
operations as assets and liabilities held for sale for all
periods presented on our consolidated balance sheets. The table
that follows is consistent with those presentations.
14
On June 6, 2005, we acquired from Gulf States substantially
all of the GSPP assets. The GSPP Acquisition was the primary
reason for the changes in the selected financial data beginning
in fiscal 2005. Our results of operations shown below may not be
indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions, except per share amounts)
|
|
|
Net sales
|
|
$
|
2,315.8
|
|
|
$
|
2,138.1
|
|
|
$
|
1,733.5
|
|
|
$
|
1,581.3
|
|
|
$
|
1,433.3
|
|
Restructuring and other costs, net
|
|
|
4.7
|
|
|
|
7.8
|
|
|
|
7.5
|
|
|
|
32.7
|
|
|
|
1.5
|
|
Income from continuing operations
|
|
|
81.7
|
|
|
|
28.7
|
|
|
|
17.6
|
|
|
|
9.6
|
|
|
|
29.5
|
|
Income from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.0
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
81.7
|
|
|
|
28.7
|
|
|
|
17.6
|
|
|
|
17.6
|
|
|
|
29.6
|
|
Diluted earnings per common share from continuing operations
|
|
|
2.07
|
|
|
|
0.77
|
|
|
|
0.49
|
|
|
|
0.27
|
|
|
|
0.85
|
|
Diluted earnings per common share
|
|
|
2.07
|
|
|
|
0.77
|
|
|
|
0.49
|
|
|
|
0.50
|
|
|
|
0.85
|
|
Dividends paid per common share
|
|
|
0.39
|
|
|
|
0.36
|
|
|
|
0.36
|
|
|
|
0.34
|
|
|
|
0.32
|
|
Book value per common share
|
|
|
15.51
|
|
|
|
13.49
|
|
|
|
12.57
|
|
|
|
12.28
|
|
|
|
12.07
|
|
Total assets
|
|
|
1,800.7
|
|
|
|
1,784.0
|
|
|
|
1,798.4
|
|
|
|
1,283.8
|
|
|
|
1,291.4
|
|
Current portion of debt
|
|
|
46.0
|
|
|
|
40.8
|
|
|
|
7.1
|
|
|
|
85.8
|
|
|
|
12.9
|
|
Total long-term debt
|
|
|
676.3
|
|
|
|
765.3
|
|
|
|
908.0
|
|
|
|
398.3
|
|
|
|
513.0
|
|
Total debt(a)
|
|
|
722.3
|
|
|
|
806.1
|
|
|
|
915.1
|
|
|
|
484.1
|
|
|
|
525.9
|
|
Shareholders equity
|
|
|
589.0
|
|
|
|
508.6
|
|
|
|
456.2
|
|
|
|
437.6
|
|
|
|
422.0
|
|
Net cash provided by operating activities(b)
|
|
|
238.3
|
|
|
|
153.5
|
|
|
|
153.3
|
|
|
|
93.5
|
|
|
|
112.5
|
|
Capital expenditures
|
|
|
78.0
|
|
|
|
64.6
|
|
|
|
54.3
|
|
|
|
60.8
|
|
|
|
57.4
|
|
Cash paid for investment in unconsolidated subsidiaries
|
|
|
9.6
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.3
|
|
Cash paid for purchase of businesses, net of cash received
|
|
|
32.1
|
|
|
|
7.8
|
|
|
|
552.3
|
|
|
|
15.0
|
|
|
|
81.8
|
|
Notes (in millions):
|
|
|
(a) |
|
Total debt includes the aggregate of fair value hedge
adjustments resulting from terminated and/or existing fair value
interest rate derivatives or swaps of $8.5, $10.4, $12.3, $18.5,
and $23.9 during fiscal 2007, 2006, 2005, 2004, and 2003,
respectively. |
|
(b) |
|
Net cash provided by operating activities for the year ended
September 30, 2004 was reduced by approximately $9.9 in
cash taxes paid from the gain on the sale of discontinued
operations. |
15
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Segment
and Market Information
We report our results in four segments: (1) Packaging
Products, (2) Paperboard, (3) Merchandising Displays,
and (4) Corrugated Packaging.
The following table shows certain operating data for our four
segments. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Net sales (aggregate):
|
|
|
|
|
|
|
|
|
|
|
|
|
Packaging Products
|
|
$
|
1,260.9
|
|
|
$
|
1,267.8
|
|
|
$
|
994.0
|
|
Paperboard
|
|
|
939.6
|
|
|
|
819.7
|
|
|
|
615.4
|
|
Merchandising Displays
|
|
|
305.8
|
|
|
|
233.2
|
|
|
|
226.3
|
|
Corrugated Packaging
|
|
|
158.3
|
|
|
|
135.7
|
|
|
|
118.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,664.6
|
|
|
$
|
2,456.4
|
|
|
$
|
1,954.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less net sales (intersegment):
|
|
|
|
|
|
|
|
|
|
|
|
|
Packaging Products
|
|
$
|
5.2
|
|
|
$
|
2.9
|
|
|
$
|
3.4
|
|
Paperboard
|
|
|
321.5
|
|
|
|
298.9
|
|
|
|
202.3
|
|
Merchandising Displays
|
|
|
|
|
|
|
0.1
|
|
|
|
0.2
|
|
Corrugated Packaging
|
|
|
22.1
|
|
|
|
16.4
|
|
|
|
14.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
348.8
|
|
|
$
|
318.3
|
|
|
$
|
220.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales (unaffiliated customers):
|
|
|
|
|
|
|
|
|
|
|
|
|
Packaging Products
|
|
$
|
1,255.7
|
|
|
$
|
1,264.9
|
|
|
$
|
990.6
|
|
Paperboard
|
|
|
618.1
|
|
|
|
520.8
|
|
|
|
413.1
|
|
Merchandising Displays
|
|
|
305.8
|
|
|
|
233.1
|
|
|
|
226.1
|
|
Corrugated Packaging
|
|
|
136.2
|
|
|
|
119.3
|
|
|
|
103.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,315.8
|
|
|
$
|
2,138.1
|
|
|
$
|
1,733.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Packaging Products
|
|
$
|
49.3
|
|
|
$
|
45.0
|
|
|
$
|
33.4
|
|
Paperboard
|
|
|
114.2
|
|
|
|
62.2
|
|
|
|
31.6
|
|
Merchandising Displays
|
|
|
38.7
|
|
|
|
16.4
|
|
|
|
17.6
|
|
Corrugated Packaging
|
|
|
8.4
|
|
|
|
4.0
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income
|
|
|
210.6
|
|
|
|
127.6
|
|
|
|
86.1
|
|
Restructuring and other costs, net
|
|
|
(4.7
|
)
|
|
|
(7.8
|
)
|
|
|
(7.5
|
)
|
Non-allocated expenses
|
|
|
(23.0
|
)
|
|
|
(20.8
|
)
|
|
|
(17.8
|
)
|
Interest expense
|
|
|
(49.8
|
)
|
|
|
(55.6
|
)
|
|
|
(36.6
|
)
|
Interest and other income (expense), net
|
|
|
(1.3
|
)
|
|
|
1.6
|
|
|
|
0.5
|
|
Minority interest in income of consolidated subsidiaries
|
|
|
(4.8
|
)
|
|
|
(6.4
|
)
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
127.0
|
|
|
|
38.6
|
|
|
|
19.9
|
|
Income tax expense
|
|
|
(45.3
|
)
|
|
|
(9.9
|
)
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
81.7
|
|
|
$
|
28.7
|
|
|
$
|
17.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Overview
Segment income increased $83.0 million in fiscal 2007 based
on improved performance in each of our segments. Higher prices
and operating rates in coated recycled paperboard mills and
strong demand for promotional displays resulted in record net
sales and strong income growth in the fiscal 2007. Our bleached
board mill also continued its trend of year over year
improvement in operating results and increased shipped tons by
5.9%.
Net cash provided by operating activities in fiscal 2007 was
$238.3 million, an increase of $84.8 million over the
prior fiscal year. During fiscal 2007, we decreased debt by
$83.8 million, funded $78.0 million on capital
expenditures, paid $58.7 million to repurchase
2,143,700 shares of Common Stock of the Company, paid $32.0
million to acquire the remaining 40% minority interest in
Fold-Pak, paid $15.4 million in dividends to our
shareholders, and invested $8.6 million in QPSI, which
offers integrated display fulfillment and third party logistics
solutions to our customers.
Results
of Operations
We provide below quarterly information to reflect trends in our
results of operations. For additional discussion of quarterly
information, see our quarterly reports on
Form 10-Q
filed with the SEC and Note 20. Financial
Results by Quarter (Unaudited) of the Notes to
Consolidated Financial Statements.
Net
Sales (Unaffiliated Customers)
Net sales for fiscal 2007 increased 8.3% to
$2,315.8 million compared to $2,138.1 million in
fiscal 2006 primarily due to increased board volume and an
increase in average selling prices in our Paperboard segment and
increased sales of merchandising displays.
Net sales for fiscal 2006 increased 23.3% to
$2,138.1 million compared to $1,733.5 million in
fiscal 2005 primarily due to the June 2005 GSPP Acquisition.
Excluding the net increase of $324.5 million of net sales
from the acquired assets, our sales increased by 5.1%.
Net
Sales (Aggregate) Packaging Products
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Fiscal Year
|
|
|
(In millions)
|
|
2005
|
|
$
|
221.8
|
|
|
$
|
218.8
|
|
|
$
|
239.2
|
|
|
$
|
314.2
|
|
|
$
|
994.0
|
|
2006
|
|
|
301.1
|
|
|
|
319.7
|
|
|
|
326.2
|
|
|
|
320.8
|
|
|
|
1,267.8
|
|
2007
|
|
|
303.1
|
|
|
|
312.8
|
|
|
|
319.0
|
|
|
|
326.0
|
|
|
|
1,260.9
|
|
The 0.5% decrease in net sales before intersegment eliminations
for the Packaging Products segment in fiscal 2007 compared to
fiscal 2006 was primarily due to lower folding carton volumes
which more than offset higher selling prices. Partially
offsetting this decline were higher sales of interior packaging
products due to net sales from the interior packaging facilities
acquired in the second quarter of fiscal 2006.
The 27.5% increase in net sales before intersegment eliminations
for the Packaging Products segment in fiscal 2006 compared to
fiscal 2005 was primarily due to sales resulting from the GSPP
Acquisition, the partition business we acquired and higher
demand for consumer packaging.
Net
Sales (Aggregate) Paperboard Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Fiscal Year
|
|
|
(In millions)
|
|
2005
|
|
$
|
128.7
|
|
|
$
|
131.8
|
|
|
$
|
155.0
|
|
|
$
|
199.9
|
|
|
$
|
615.4
|
|
2006
|
|
|
187.7
|
|
|
|
205.7
|
|
|
|
204.1
|
|
|
|
222.2
|
|
|
|
819.7
|
|
2007
|
|
|
210.8
|
|
|
|
231.6
|
|
|
|
247.7
|
|
|
|
249.5
|
|
|
|
939.6
|
|
The 14.6% increase in Paperboard segment net sales before
intersegment eliminations in fiscal 2007 compared to fiscal 2006
was primarily due to higher pricing across all paperboard grades
and increased shipped tons. Operating rates in our coated
recycled mills increased, and operating rates in our specialty
recycled paperboard
17
mills decreased on weaker market demand. We expect to see some
further price increases in the early part of fiscal 2008 as a
result of price increases we previously announced. However, the
impact of announced board price increases will be dictated, in
part, by market forces that determine the timing and extent of
our recovery of the increases. During both fiscal 2007 and
fiscal 2006, our recycled mills operated at 96% of capacity.
Recycled paperboard tons shipped in fiscal 2007 for the segment
increased 1.2% to 1,076,069 tons compared to 1,063,115 tons
shipped in fiscal 2006. We sold 335,005 tons of bleached
paperboard and 95,882 tons of market pulp in fiscal 2007,
compared to 320,249 tons of bleached paperboard and 86,569 tons
of market pulp in fiscal 2006, an increase of 5.9%.
The 33.2% increase in Paperboard segment net sales before
intersegment eliminations in fiscal 2006 compared to fiscal 2005
was primarily due to bleached paperboard and market pulp net
sales from our GSPP Acquisition, strong demand for recycled
paperboard in part due to capacity closures of competing coated
recycled mills and higher pricing. Recycled paperboard tons
shipped increased 4.3% compared to the same period last year.
During fiscal 2006, our recycled mills operated at 96% of
capacity compared to 92% in fiscal 2005. Recycled paperboard
tons shipped in fiscal 2006 for the segment increased 4.3% to
1,063,115 tons compared to 1,019,139 tons shipped in fiscal
2005. We sold 320,249 tons of bleached paperboard and 86,569
tons of market pulp in fiscal 2006, compared to 110,882 tons of
bleached paperboard and 30,037 tons of market pulp in the four
months we owned the contributing assets in fiscal 2005.
Net
Sales (Aggregate) Merchandising Displays
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Fiscal Year
|
|
|
(In millions)
|
|
2005
|
|
$
|
52.7
|
|
|
$
|
59.0
|
|
|
$
|
57.0
|
|
|
$
|
57.6
|
|
|
$
|
226.3
|
|
2006
|
|
|
49.2
|
|
|
|
55.8
|
|
|
|
58.8
|
|
|
|
69.4
|
|
|
|
233.2
|
|
2007
|
|
|
60.9
|
|
|
|
82.6
|
|
|
|
76.8
|
|
|
|
85.5
|
|
|
|
305.8
|
|
The 31.1% increase in Merchandising Displays segment net sales
before intersegment eliminations for fiscal 2007 compared to
fiscal 2006 was primarily due to higher sales from strong demand
for promotional displays, a new product rollout of theft
deterrent displays and new customer growth. We continue to seek
to broaden our permanent and multi-material display capabilities
as well as to continue developing theft deterrent solutions for
high theft products. We have made significant progress in the
marketplace with our
MAXPDQ®
display. We also expect revenues to grow from our brand
management group and our focus on sustainable packaging.
The 3.0% increase in Merchandising Displays segment net sales
before intersegment eliminations for fiscal 2006 compared to
fiscal 2005 was primarily due to increased display sales driven
by a strong fourth quarter for promotional orders from some of
our largest customers.
Net
Sales (Aggregate) Corrugated Packaging
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Fiscal Year
|
|
|
(In millions)
|
|
2005
|
|
$
|
28.8
|
|
|
$
|
30.2
|
|
|
$
|
29.8
|
|
|
$
|
29.7
|
|
|
$
|
118.5
|
|
2006
|
|
|
28.4
|
|
|
|
31.9
|
|
|
|
36.6
|
|
|
|
38.8
|
|
|
|
135.7
|
|
2007
|
|
|
36.6
|
|
|
|
40.4
|
|
|
|
40.6
|
|
|
|
40.7
|
|
|
|
158.3
|
|
The 16.7% increase in Corrugated Packaging segment net sales
before intersegment eliminations for fiscal 2007 compared to
fiscal 2006 was primarily due to increased volumes and higher
prices.
The 14.5% increase in Corrugated Packaging segment net sales
before intersegment eliminations for fiscal 2006 compared to
fiscal 2005 was primarily due to increased sales of corrugated
sheet stock and higher prices.
Cost
of Goods Sold
Cost of goods sold increased to $1,870.2 million (80.8% of
net sales) in fiscal 2007 from $1,789.0 million (83.7% of
net sales) in fiscal 2006 primarily due to higher material costs
and increased volumes in several of our segments. Cost of goods
sold as a percentage of net sales decreased due to cost savings
and productivity initiatives
18
and sales price increases which reflect changing paperboard
market conditions and the recovery of previous cost increases.
We experienced reduced energy costs of approximately
$10.7 million, reduced freight costs of $7.9 million,
reduced workers compensation expense of $6.6 million,
reduced pension expense of $2.8 million, better performance
of our bleached paperboard mill, and better leveraging of fixed
costs due to higher net sales. These improvements were partially
offset by increased fiber costs of $28.9 million at our
recycled paperboard mills, increased employee group insurance
expense of $3.9 million, and increased paperboard prices in
our Packaging Products segment. We have foreign currency
transaction risk primarily due to our operations in Canada. See
Quantitative and Qualitative Disclosures About
Market Risk Foreign Currency below.
The impact of foreign currency transactions in fiscal 2007
compared to fiscal 2006 increased costs of goods sold by
$0.8 million.
Cost of goods sold increased to $1,789.0 million (83.7% of
net sales) in fiscal 2006 from $1,459.2 million (84.2% of
net sales) in fiscal 2005 primarily due to the GSPP Acquisition,
the partition business we acquired, higher raw material prices
in many of our businesses, increased freight costs, and higher
energy prices that were partially offset by lower fiber prices.
On a volume adjusted basis, energy and freight costs at our
recycled paperboard mills increased $13.0 million and
$1.7 million, respectively, and were offset by a
$14.8 million decrease in fiber costs. Excluding amounts
attributable to the GSPP Acquisition, workers compensation
expense increased $3.0 million and group insurance expense
decreased $4.4 million during fiscal 2006 compared to
fiscal 2005. The impact of foreign currency transactions in
fiscal 2006 compared to fiscal 2005 decreased costs of goods
sold by $0.6 million.
We value the majority 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.
The following table illustrates the comparative effect of LIFO
and FIFO accounting on our results of operations. This
supplemental FIFO earnings information reflects the after-tax
effect of eliminating the LIFO adjustment each year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
|
LIFO
|
|
|
FIFO
|
|
|
LIFO
|
|
|
FIFO
|
|
|
LIFO
|
|
|
FIFO
|
|
|
|
(In millions)
|
|
|
Cost of goods sold
|
|
$
|
1,870.2
|
|
|
$
|
1,863.4
|
|
|
$
|
1,789.0
|
|
|
$
|
1,784.7
|
|
|
$
|
1,459.2
|
|
|
$
|
1,463.6
|
|
Net income
|
|
|
81.7
|
|
|
|
86.0
|
|
|
|
28.7
|
|
|
|
31.3
|
|
|
|
17.6
|
|
|
|
14.9
|
|
Net income in fiscal 2007 and 2006 is higher under the FIFO
method since we experienced periods of rising costs. Net income
is higher in fiscal 2005 under the LIFO method than the FIFO
method because generally accepted accounting principles require
that inventory acquired in an acquisition be valued at selling
price less costs to sell, dispose, complete and a reasonable
profit allowance for the selling effort. This value is generally
higher than the cost to manufacture inventory. For the GSPP
Acquisition in fiscal 2005, the inventory value computed in this
manner was $7.3 million higher than the cost to
manufacture. This
step-up
would have been expensed under the FIFO method. Under our LIFO
inventory method, this higher cost remains in inventory until
the inventory layer represented by this inventory is consumed.
To the extent inventory levels acquired in the GSPP Acquisition
are lowered in the future, cost of goods sold could be higher
than the normal cost to manufacture.
Selling,
General and Administrative Expenses
Selling, general and administrative
(SG&A) expenses decreased as a
percentage of net sales to 11.2% in fiscal 2007 from 11.4% in
fiscal 2006 due primarily to leveraging increased net sales.
However, SG&A expenses were $14.9 million higher than
in the prior fiscal year, including the increase associated with
the interior packaging facilities acquired in the second quarter
of fiscal 2006. Stock-based compensation expense increased
$3.8 million including the acceleration of expense
recognition for a portion of our restricted stock that vested in
March 2007 as a result of the attainment of certain income
growth goals. Bonus expense increased $5.6 million,
SG&A salaries increased $2.8 million, commission
expense increased $1.5 million, and employee payroll tax
expense increased $1.1 million. These increases were
partially offset by reduced bad debt expense of
$1.0 million and reduced professional fees of
$1.1 million.
19
SG&A expenses decreased as a percentage of net sales to
11.4% in fiscal 2006 from 11.8% in fiscal 2005 primarily as a
result of the synergies we realized following the GSPP
Acquisition and our continued focus on cost reductions and
efficiency. However, SG&A expenses were $39.2 million
higher than in the prior fiscal year primarily as a result of
SG&A expenses from the GSPP locations and the partition
business we acquired. Additionally, excluding amounts
attributable to the GSPP Acquisition, bonus expense increased
$7.6 million; SG&A salaries increased
$5.0 million primarily due to the partition business we
acquired and to support other product offerings; stock-based
compensation expense increased $1.7 million primarily due
to the adoption of SFAS 123(R) and bad debt expense
increased $1.4 million compared to the prior fiscal year
resulting from increased total exposure to and decreases in the
credit quality of several customers.
Acquisitions
On January 24, 2007, we acquired, for $32.0 million,
the remaining 40% minority interest in Fold-Pak, giving us sole
ownership of the company. These operations are included in the
results of our Packaging Products segment. We acquired our
initial 60% interest in Fold-Pak in connection with the GSPP
Acquisition in June 2005. Fold-Pak makes paperboard-based food
containers serving a very broad customer base and is a consumer
of board from our bleached paperboard mill. The acquisition
included $18.7 million of intangibles, primarily for
customer relationships, and $3.5 million of goodwill. The
goodwill is deductible for income tax purposes. We are
amortizing the intangibles on a straight-line basis over a
weighted average life of 19.0 years. The pro forma impact
of the acquisition is not material to our financial results.
On February 27, 2006, our RTS subsidiary completed the
acquisition of the partition business of Caraustar Industries,
Inc. for an aggregate purchase price of $6.1 million. This
acquisition was funded by capital contributions to RTS by us and
our partner in proportion to our investments in RTS. RTS
accounted for this acquisition as a purchase of a business and
we have included these operations in our consolidated financial
statements since that date in our Packaging Products segment.
RTS made the acquisition in order to gain entrance into the
specialty partition market that manufactures high quality
die-cut partitions. The acquisition resulted in
$2.4 million of goodwill. The goodwill is deductible for
income tax purposes. The pro forma impact of the acquisition is
not material to our financial results.
On June 6, 2005, we acquired from Gulf States substantially
all of the GSPP assets and operations and assumed certain of
Gulf States related liabilities. We have included the
results of GSPPs operations in our consolidated financial
statements since that date in our Paperboard segment and
Packaging Products segment. In fiscal 2005, we recorded the
aggregate purchase price for the GSPP Acquisition of
$552.2 million, net of cash received of $0.7 million,
including various expenses. As a result of the GSPP Acquisition
we recorded goodwill and intangibles. We assigned the goodwill
to our Paperboard and Packaging Products segments in the amounts
of $37.2 million and $13.8 million, respectively. The
$51.0 million of the goodwill is deductible for tax
purposes. We recorded $50.7 million of intangible assets
and incurred $4.0 million of financing costs to finance the
acquisition. We assigned the customer relationship intangibles
to our Paperboard and Packaging Products segments in the amounts
of $36.4 million and $14.3 million, respectively. The
customer relationship intangibles lives vary by segment
acquired, and we are amortizing them on a straight-line basis
over a weighted average life of 22.3 years. The pro forma
impact of the GSPP Acquisition was material to our consolidated
financial results for fiscal 2005.
For additional information, see
Note 6. Acquisitions of the
Notes to Consolidated Financial Statements.
Restructuring
and Other Costs, Net
We recorded pre-tax restructuring and other costs, net of
$4.7 million, $7.8 million, and $7.5 million for
fiscal 2007, 2006, and 2005, respectively. These amounts are not
comparable since the timing and scope of the individual actions
associated with a restructuring can vary. For additional
information, see Note 7. Restructuring and
Other Costs, Net of the Notes to Consolidated
Financial Statements for a discussion of the charges and
expected future charges. In most instances when we exit a
facility we transfer a substantial portion of the
facilitys assets and production to other facilities and
recognize an impairment charge, if necessary, on equipment not
transferred, primarily to reduce the carrying value of equipment
to its estimated fair value or fair value less cost to sell, and
record a charge for severance and other employee related costs.
At the time of each announced closure, we generally
20
expect to record future charges for equipment relocation,
facility carrying costs and other employee related costs. We
generally expect the integration of the closed facilitys
assets and production will enable the receiving facilities to
better leverage their fixed costs while eliminating fixed costs
from the facility being closed.
Segment
Income
Segment
Income Packaging Products Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Segment
|
|
|
Return
|
|
|
|
(Aggregate)
|
|
|
Income
|
|
|
on Sales
|
|
|
|
(In millions, except percentages)
|
|
|
First Quarter
|
|
$
|
221.8
|
|
|
$
|
5.3
|
|
|
|
2.4
|
%
|
Second Quarter
|
|
|
218.8
|
|
|
|
5.7
|
|
|
|
2.6
|
|
Third Quarter
|
|
|
239.2
|
|
|
|
10.6
|
|
|
|
4.4
|
|
Fourth Quarter
|
|
|
314.2
|
|
|
|
11.8
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005
|
|
$
|
994.0
|
|
|
$
|
33.4
|
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
301.1
|
|
|
$
|
6.8
|
|
|
|
2.3
|
%
|
Second Quarter
|
|
|
319.7
|
|
|
|
13.4
|
|
|
|
4.2
|
|
Third Quarter
|
|
|
326.2
|
|
|
|
13.2
|
|
|
|
4.0
|
|
Fourth Quarter
|
|
|
320.8
|
|
|
|
11.6
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
$
|
1,267.8
|
|
|
$
|
45.0
|
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
303.1
|
|
|
$
|
11.7
|
|
|
|
3.9
|
%
|
Second Quarter
|
|
|
312.8
|
|
|
|
13.1
|
|
|
|
4.2
|
|
Third Quarter
|
|
|
319.0
|
|
|
|
12.4
|
|
|
|
3.9
|
|
Fourth Quarter
|
|
|
326.0
|
|
|
|
12.1
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
$
|
1,260.9
|
|
|
$
|
49.3
|
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Packaging Products segment income increased to
$49.3 million in fiscal 2007 from $45.0 million in
fiscal 2006 primarily due to productivity improvements and
operating efficiencies, and sales price increases which were
somewhat offset by higher raw material costs, primarily due to
rising paperboard prices and lower folding carton volumes.
Decreased freight costs of $4.5 million, decreased pension
expense of $1.4 million, decreased commissions of
$1.3 million, and decreased workers compensation
expense of $1.1 million, were partially offset by increased
employee group insurance expense of $2.6 million and
increased bonus expense of $1.2 million. The impact of
foreign currency transactions in fiscal 2007 compared to fiscal
2006 decreased segment income by $1.0 million.
Packaging Products segment income increased to
$45.0 million in fiscal 2006 from $33.4 million in
fiscal 2005 primarily due to the earnings from the plants we
acquired in the GSPP Acquisition. Return on sales increased
despite increased material costs. Excluding amounts attributable
to the GSPP Acquisition, segment income for the segment was
decreased by increased bonus expense of $3.7 million, and
higher freight costs of $6.7 million; partially offsetting
those costs was a decrease in group insurance expense of
$2.3 million. Amortization expense increased
$1.5 million due to intangible assets acquired in the GSPP
Acquisition.
21
Segment
Income Paperboard Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coated and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recycled
|
|
|
|
|
|
Bleached
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paperboard
|
|
|
Corrugated
|
|
|
Paperboard
|
|
|
Market Pulp
|
|
|
|
|
|
|
Net Sales
|
|
|
Segment
|
|
|
|
|
|
Tons
|
|
|
Medium Tons
|
|
|
Tons
|
|
|
Tons
|
|
|
Average
|
|
|
|
(Aggregate)
|
|
|
Income
|
|
|
Return
|
|
|
Shipped (a)
|
|
|
Shipped
|
|
|
Shipped (b)
|
|
|
Shipped (b)
|
|
|
Price (a) (c)
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
On Sales
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
(Per Ton)
|
|
|
First Quarter
|
|
$
|
128.7
|
|
|
$
|
4.4
|
|
|
|
3.4
|
%
|
|
|
210.6
|
|
|
|
42.7
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
$
|
467
|
|
Second Quarter
|
|
|
131.8
|
|
|
|
3.6
|
|
|
|
2.7
|
|
|
|
209.7
|
|
|
|
45.2
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
472
|
|
Third Quarter
|
|
|
155.0
|
|
|
|
7.6
|
|
|
|
4.9
|
|
|
|
211.6
|
|
|
|
44.8
|
|
|
|
26.7
|
|
|
|
6.9
|
|
|
|
491
|
|
Fourth Quarter
|
|
|
199.9
|
|
|
|
16.0
|
|
|
|
8.0
|
|
|
|
209.7
|
|
|
|
44.8
|
|
|
|
84.2
|
|
|
|
23.1
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005
|
|
$
|
615.4
|
|
|
$
|
31.6
|
|
|
|
5.1
|
%
|
|
|
841.6
|
|
|
|
177.5
|
|
|
|
110.9
|
|
|
|
30.0
|
|
|
$
|
492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
187.7
|
|
|
$
|
(1.0
|
)
|
|
|
(0.5
|
)%
|
|
|
208.3
|
|
|
|
45.0
|
|
|
|
79.2
|
|
|
|
15.0
|
|
|
$
|
524
|
|
Second Quarter
|
|
|
205.7
|
|
|
|
15.8
|
|
|
|
7.7
|
|
|
|
223.5
|
|
|
|
45.4
|
|
|
|
80.7
|
|
|
|
27.9
|
|
|
|
526
|
|
Third Quarter
|
|
|
204.1
|
|
|
|
18.9
|
|
|
|
9.3
|
|
|
|
220.6
|
|
|
|
44.2
|
|
|
|
76.6
|
|
|
|
23.7
|
|
|
|
539
|
|
Fourth Quarter
|
|
|
222.2
|
|
|
|
28.5
|
|
|
|
12.8
|
|
|
|
229.1
|
|
|
|
47.0
|
|
|
|
83.7
|
|
|
|
20.0
|
|
|
|
561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
$
|
819.7
|
|
|
$
|
62.2
|
|
|
|
7.6
|
%
|
|
|
881.5
|
|
|
|
181.6
|
|
|
|
320.2
|
|
|
|
86.6
|
|
|
$
|
538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
210.8
|
|
|
$
|
23.9
|
|
|
|
11.3
|
%
|
|
|
221.5
|
|
|
|
44.6
|
|
|
|
74.0
|
|
|
|
20.9
|
|
|
$
|
558
|
|
Second Quarter
|
|
|
231.6
|
|
|
|
26.9
|
|
|
|
11.6
|
|
|
|
223.0
|
|
|
|
46.2
|
|
|
|
82.2
|
|
|
|
24.6
|
|
|
|
571
|
|
Third Quarter
|
|
|
247.7
|
|
|
|
34.1
|
|
|
|
13.8
|
|
|
|
225.1
|
|
|
|
45.3
|
|
|
|
90.1
|
|
|
|
25.6
|
|
|
|
588
|
|
Fourth Quarter
|
|
|
249.5
|
|
|
|
29.3
|
|
|
|
11.7
|
|
|
|
223.5
|
|
|
|
46.8
|
|
|
|
88.7
|
|
|
|
24.8
|
|
|
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
$
|
939.6
|
|
|
$
|
114.2
|
|
|
|
12.2
|
%
|
|
|
893.1
|
|
|
|
182.9
|
|
|
|
335.0
|
|
|
|
95.9
|
|
|
$
|
578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Recycled Paperboard Tons Shipped and Average Price Per Ton
include tons shipped by Seven Hills. |
|
(b) |
|
Bleached paperboard and market pulp tons shipped began in June
2005 as a result of the GSPP Acquisition. |
|
(c) |
|
Beginning in the third quarter of fiscal 2005, Average Price Per
Ton includes coated and specialty recycled paperboard,
corrugated medium, bleached paperboard and market pulp. |
Paperboard segment income for fiscal 2007 increased to
$114.2 million compared to $62.2 million in fiscal
2006 due to sales price increases, higher volumes, reduced
energy costs, better performance of our bleached paperboard
mill, reduced freight costs, and higher operating rates which
were partially offset by increased fiber costs. Our coated
recycled mills operated at 99% of capacity in fiscal 2007
compared to 94% the prior fiscal year period. Our specialty
recycled paperboard mills operated at 90% of capacity due to
weaker market demand. In September 2007, we replaced a portion
of the press section at our Battle Creek coated recycled
paperboard mill to add sixteen thousand tons of capacity, the
pre-tax impact of which was approximately $1.7 million.
Energy costs decreased $9.8 million, freight costs
decreased $5.0 million, workers compensation expense
decreased $4.8 million, and pension expense decreased
$1.5 million. Recycled paperboard mills fiber costs
increased $28.9 million and group insurance expense
increased $1.1 million.
Our long-term steam contract at our St. Paul Mill complex
expired June 2007; however, we were supplied steam through
August 2007. The contract will not be renewed because the coal
plant in the area that supplied the steam has closed. As a
result, we will burn an additional three million MMBtu per year
of either natural gas or fuel oil at St. Paul. At current market
prices, we expect our quarterly cost of energy will increase by
approximately $1 million over the rates charged under the
steam contract prior to June 30, 2007.
Paperboard segment income for fiscal 2006 increased to
$62.2 million compared to $31.6 million in fiscal 2005
due to increased operating rates and pricing improvements for
recycled paperboard and income contributed from the acquired
bleached paperboard mill. Segment income was reduced by the
sharp increase in natural gas prices following Hurricanes
Katrina and Rita; the annual maintenance shutdown in October and
November 2005 of our bleached paperboard mill; a mechanical
failure of the white liquor clarifier at our bleached paperboard
mill; and a flood at one of our recycled paperboard mills. Our
recycled paperboard mills operated at 96% of capacity in fiscal
2006 compared to 92% in fiscal 2005. On a volume adjusted basis,
energy and freight costs at our recycled paperboard mills
increased $13.0 million and $1.7 million,
respectively, and were offset by a $14.8 million decrease
22
in fiber costs. Our bleached paperboard mill operated at 98% of
capacity in fiscal 2006. Additionally, group insurance expense
decreased by $2.0 million and amortization expense
increased $0.9 million due to the GSPP Acquisition.
Segment
Income Merchandising Displays Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Segment
|
|
|
Return on
|
|
|
|
(Aggregate)
|
|
|
Income
|
|
|
Sales
|
|
|
|
(In millions, except percentages)
|
|
|
First Quarter
|
|
$
|
52.7
|
|
|
$
|
2.4
|
|
|
|
4.6
|
%
|
Second Quarter
|
|
|
59.0
|
|
|
|
3.7
|
|
|
|
6.3
|
|
Third Quarter
|
|
|
57.0
|
|
|
|
5.4
|
|
|
|
9.5
|
|
Fourth Quarter
|
|
|
57.6
|
|
|
|
6.1
|
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005
|
|
$
|
226.3
|
|
|
$
|
17.6
|
|
|
|
7.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
49.2
|
|
|
$
|
2.8
|
|
|
|
5.7
|
%
|
Second Quarter
|
|
|
55.8
|
|
|
|
3.2
|
|
|
|
5.7
|
|
Third Quarter
|
|
|
58.8
|
|
|
|
1.6
|
|
|
|
2.7
|
|
Fourth Quarter
|
|
|
69.4
|
|
|
|
8.8
|
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
$
|
233.2
|
|
|
$
|
16.4
|
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
$
|
305.8
|
|
|
$
|
38.7
|
|
|
|
12.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandising Displays segment income in fiscal 2007 increased
to $38.7 million from $16.4 million in fiscal 2006
primarily due to increased display sales, favorable product mix
and associated higher leverage of fixed costs. Commissions
increased $2.6 million due to increased sales, bonus
expense increased $2.1 million due to the significant
increase in performance, and SG&A salaries increased
$1.8 million primarily to support the increased sales
levels and new product and service offerings.
Merchandising Displays segment income in fiscal 2006 decreased
to $16.4 million from $17.6 million in fiscal 2005.
Increased raw material prices and increased freight expense of
$1.0 million reduced segment income. SG&A salaries
increased $2.7 million primarily to support new product
offerings.
23
Segment
Income Corrugated Packaging Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Segment
|
|
|
Return on
|
|
|
|
(Aggregate)
|
|
|
Income
|
|
|
Sales
|
|
|
|
(In millions, except percentages)
|
|
|
First Quarter
|
|
$
|
28.8
|
|
|
$
|
0.3
|
|
|
|
1.0
|
%
|
Second Quarter
|
|
|
30.2
|
|
|
|
1.1
|
|
|
|
3.6
|
|
Third Quarter
|
|
|
29.8
|
|
|
|
1.0
|
|
|
|
3.4
|
|
Fourth Quarter
|
|
|
29.7
|
|
|
|
1.1
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005
|
|
$
|
118.5
|
|
|
$
|
3.5
|
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
28.4
|
|
|
$
|
0.4
|
|
|
|
1.4
|
%
|
Second Quarter
|
|
|
31.9
|
|
|
|
1.0
|
|
|
|
3.1
|
|
Third Quarter
|
|
|
36.6
|
|
|
|
1.0
|
|
|
|
2.7
|
|
Fourth Quarter
|
|
|
38.8
|
|
|
|
1.6
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
$
|
135.7
|
|
|
$
|
4.0
|
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging segment income in fiscal 2007 increased to
$8.4 million from $4.0 million in fiscal 2006
primarily due to higher sales prices, increased volumes and
improved product mix.
Corrugated Packaging segment income in fiscal 2006 increased to
$4.0 million from $3.5 million in fiscal 2005 due
primarily to increased net sales. Increased raw material prices
and increased freight expense of $0.5 million reduced
segment income.
Equity
in Income (Loss) of Unconsolidated Entities
Equity in income (loss) of unconsolidated entities in fiscal
2007 was $1.1 million of income compared to
$1.9 million of income fiscal 2006. The income in fiscal
2007 includes Seven Hills as well as our share of our newly
formed QPSI and DSA investments that we entered into during the
first quarter and third quarter of fiscal 2007, respectively.
The income in fiscal 2006 was solely for Seven Hills and
included a positive adjustment of $1.2 million for the
settlement of arbitration between us and our Seven Hills
partner. Equity in income (loss) of unconsolidated entities in
fiscal 2005 was also solely for Seven Hills and was a loss of
$1.0 million which reflected our estimate of our share of
the adverse impact of a preliminary settlement of arbitration
between us and our joint venture partner.
Interest
Expense
Interest expense for fiscal 2007 decreased 10.4%, or
$5.8 million, to $49.8 million from $55.6 million
for fiscal 2006. The decrease in our average outstanding
borrowings decreased interest expense by approximately
$7.2 million and higher interest rates, net of swaps,
increased interest expense by approximately $1.4 million.
Interest expense for fiscal 2006 increased 51.9%, or
$19.0 million, to $55.6 million from
$36.6 million for fiscal 2005. The increase in our average
outstanding borrowings due primarily to our increased debt
levels to fund the GSPP Acquisition increased interest expense
by approximately $16.9 million and higher interest rates,
net of swaps, increased interest expense by approximately
$2.1 million.
Interest
and Other Income (Expense), net
Interest and other income (expense), net for fiscal 2007 was
expense of $1.3 million compared to income of
$1.6 million in fiscal 2006. The expense in the current
year was primarily due to a charge for an other than
24
temporary decline in the fair value of a cost method investment.
In fiscal 2006, we sold our Dallas Recycle equipment and the
majority of the customers from that facility and sold our
Fort Worth Recycle facility. We received aggregate proceeds
of $3.0 million and recorded a gain on the sale of
$1.3 million for these two transactions. These facilities
were immaterial for reporting as discontinued operations for all
periods presented. Interest and other income for fiscal 2005 was
$0.5 million.
Minority
Interest in Income of Consolidated Subsidiaries
In January 2007 we acquired the remaining 40% minority interest
in Fold-Pak. As a result, minority interest in income of our
consolidated subsidiaries for fiscal 2007 decreased to
$4.8 million from $6.4 million in fiscal 2006.
Minority interest in income of our consolidated subsidiaries for
fiscal 2006 increased to $6.4 million from
$4.8 million in fiscal 2005. The increase was primarily due
to our acquisition of a 60% ownership share in Fold-Pak as part
of the GSPP Acquisition which we owned for the full year in
fiscal 2006 and only four months in fiscal 2005.
Provision
for Income Taxes
For fiscal 2007, we recorded a provision for income taxes of
$45.3 million, at an effective rate of 35.7% of pre-tax
income, as compared to a provision of $9.9 million for
fiscal 2006, at an effective rate of 25.8% of pre-tax income. In
fiscal 2007, we adjusted the rate at which our deferred taxes
are computed for state income tax purposes on our domestic
operations from approximately 3% to approximately 3.4%. This was
based on our judgment regarding the expected long-term effective
tax rates applicable to such items including the estimated
impact of changes in state tax laws. As a result, we recorded
tax expense of $1.2 million. We also recorded a benefit of
$3.3 million and $0.7 million for research and
development and other tax credits, net of valuation allowances,
in the United States and Canada, respectively. We also recorded
$0.6 million of additional expense to increase our tax
contingency reserves. Our fiscal 2006 provision includes a
benefit of $2.4 million related to a change in the rate at
which deferred taxes were computed for state income tax purposes
and a benefit of $0.8 million for research and development
and other tax credits, net of valuation allowances. Other
adjustments to the statutory federal tax rate are more fully
described in Note 13. Income Taxes
of the Notes to the Consolidated Financial Statements
included herein. We estimate that the annual domestic marginal
effective income tax rate for fiscal 2007 was approximately
36.5%.
For fiscal 2006, we recorded a provision for income taxes of
$9.9 million, at an effective rate of 25.8% of pre-tax
income, as compared to a provision of $2.3 million for
fiscal 2005, at an effective rate of 11.3% of pre-tax income. In
fiscal 2006, we adjusted the rate at which our deferred taxes
are computed for state income tax purposes on our domestic
operating entities from approximately 4% to approximately 3%.
This was based upon our judgment regarding the expected
long-term effective tax rates applicable to such items. As a
result, we recorded a tax benefit of $2.4 million. This
benefit was offset by net expense of $0.4 million resulting
from Quebec provincial and Canadian federal tax law changes that
we recorded in the first and third quarters of fiscal 2006,
respectively. We recorded an additional benefit in fiscal 2006
of $0.8 million for research and development and other tax
credits, net of valuation allowance primarily related to prior
years. Our fiscal 2005 provision reflects a benefit due to a
$4.1 million reduction of tax contingency reserves
resulting from the adjustment and resolution of federal and
state tax deductions that we had previously reserved.
During the first quarter of fiscal 2006, we repatriated, from
certain of our foreign subsidiaries, $33.3 million in
extraordinary dividends, as allowed under the American Jobs
Creation Act of 2004. This Act created a temporary incentive for
United States corporations to repatriate accumulated income
earned abroad by allowing a deduction from US taxable income of
an amount equal to 85% of certain dividends received from
controlled foreign corporations. As a result of this
repatriation, in fiscal 2007 we owed $1.7 million of United
States taxes before foreign tax credits of $0.9 million.
Net of foreign tax credits, in fiscal year 2007 we paid
$0.8 million in United States taxes.
25
Liquidity
and Capital Resources
Working
Capital and Capital Expenditures
We fund our working capital requirements, capital expenditures,
acquisitions and share repurchases 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 idled 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 $10.9 million at
September 30, 2007, compared to $6.9 million at
September 30, 2006. Our debt balance at September 30,
2007 was $722.3 million compared with $806.1 million
at September 30, 2006, a decrease of $83.8 million. 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. As of September 30, 2007 and
September 30, 2006, we had cash flow hedge swaps in place
amounting to a notional amount of $200.0 million and
$350.0 million, respectively. In October 2007 we terminated
all of our cash flow hedges. For additional information
regarding our interest rate swaps, see the caption
Interest Rate Swaps and Derivatives in
Note 11. Derivatives of the Notes
to Consolidated Financial Statements.
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 September 30, 2007. Due to the covenants in
the Senior Credit Facility, at the time we submitted our
compliance calculation for September 30, 2007, maximum
additional available borrowings under this facility were
approximately $342.7 million. We have aggregate outstanding
letters of credit under this facility of approximately
$39.0 million. In addition, we have a $100.0 million
364-day
receivables-backed financing facility (Receivables
Facility) which expired on November 16, 2007. We
amended the facility, which is now scheduled to expire on
November 15, 2008 and increased the size of the facility
from $100.0 million to $110.0 million. Accordingly,
such borrowings are classified as non-current at
September 30, 2007. Similarly, in fiscal 2006, such
borrowings were classified as non-current at September 30,
2006. Borrowing availability under this facility is based on the
eligible underlying receivables. At September 30, 2007 and
September 30, 2006, maximum available borrowings under this
facility were approximately $100.0 million. At
September 30, 2007 and September 30, 2006, we had
$100.0 million and $90.0 million, respectively,
outstanding under our receivables-backed financing facility. For
additional information regarding our outstanding debt, our
credit facilities and their securitization, see
Note 10. Debt of the Notes to
Consolidated Financial Statements.
Net cash provided by operating activities for fiscal 2007 and
2006 was $238.3 million and $153.5 million,
respectively. The increase was primarily due to the increase in
net income and a greater source of funds for working capital in
fiscal 2007, including changes in the timing of vendor payments,
accounts receivable and inventory. Net cash provided by
operating activities for fiscal 2006 was $153.5 million and
$153.3 million in fiscal 2005. In fiscal 2006, proceeds
from the termination of interest rate swap contracts and higher
earnings before depreciation and amortization resulting from the
GSPP Acquisition were offset by increases in working capital and
pension funding more than expense. The increase in working
capital in fiscal 2006 was primarily due to higher inventories
and accounts receivable offset by higher accounts payables
resulting from a change in timing of vendor payments.
Net cash used for investing activities was $109.1 million
during fiscal 2007 compared to $67.0 million in fiscal
2006. Net cash used for investing activities in fiscal 2007
consisted primarily of $78.0 million of capital
expenditures, $32.0 million paid to acquire the remaining
40% interest in Fold-Pak, and $9.6 million of investment in
unconsolidated entities, primarily for our interest in QPSI in
our Merchandising Displays segment. Partially offsetting these
amounts was the return of capital of $6.5 million primarily
from our Seven Hills investment. Net cash used for investing
activities in fiscal 2006 consisted primarily of
$64.6 million of capital expenditures and $7.8 million
of cash paid for the purchase of businesses, primarily for two
Packaging Products segment acquisitions. Net cash used for
investing activities was $572.5 million in fiscal 2005 and
consisted primarily of the $552.2 million
26
purchase price of the GSPP Acquisition, $54.3 million of
capital expenditures that were partially offset by net sales of
$28.2 million of marketable securities, and proceeds from
the sale of property, plant and equipment of $6.0 million,
primarily from previously idled facilities and equipment.
Net cash used for financing activities was $124.9 million
during fiscal 2007 and cash used for financing activities was
$105.8 million in fiscal 2006. In fiscal 2007, net cash
used consisted primarily of net repayments of debt of
$86.8 million, purchases of Common Stock of
$58.7 million, cash dividends paid to shareholders of
$15.4 million, repayments to unconsolidated entity of
$5.4 million, and distributions paid to minority interest
partners of $4.2 million. These items were partially offset
by $31.5 million in issuances of Common Stock and
$14.1 million for tax benefits from share-based
compensation. In fiscal 2007, cash from the issuance of Common
Stock increased due to the exercise of stock options for
approximately 2.3 million shares. Net cash used for
financing activities in fiscal 2006 consisted primarily of net
repayments of debt, cash dividends paid to shareholders, and
distributions to minority interest partners, which were
partially offset by issuances of Common Stock and advances from
an unconsolidated entity. In fiscal 2005, net cash provided by
financing activities was $416.5 million and consisted
primarily of net additions to debt to finance the GSPP
Acquisition and the issuance of Common Stock, which were
partially offset by cash dividends paid to shareholders,
distributions to minority interest partners, payment on
termination of fair value interest rate hedges, and debt
issuance costs.
In fiscal 2007, we received $1.6 million of insurance
proceeds primarily for property damage claims for a flood that
occurred at one of our mills during fiscal 2006. The proceeds
are being used primarily to return certain property and
equipment to its original condition. Net cash used for investing
activities in fiscal 2007 included $1.3 million for capital
equipment purchased and the balance was classified in cash
provided by operating activities. In fiscal 2006, we received
$4.3 million of insurance proceeds, after $3.9 million
of deductibles, for $1.5 million of property damage claims
and $2.8 million of business interruption claims. The
proceeds were used to return certain equipment to its original
condition, perform plant
clean-up,
and replace other equipment that was damaged. Net cash used for
investing activities included $0.9 million for capital
equipment purchased and the balance was classified in cash
provided by operating activities.
Our capital expenditures aggregated $78.0 million in fiscal
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 million in fiscal 2008. We were obligated to purchase
$4.4 million of fixed assets at September 30, 2007. 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. We believe that our financial position would support
higher levels of capital expenditures, if justified by
opportunities to increase revenues or reduce costs, and we
continuously review new investment opportunities. Accordingly,
it is possible that our capital expenditures in fiscal 2008
could be higher than currently anticipated.
We estimate that we will spend approximately $3 million for
capital expenditures during fiscal 2008 in connection with
matters relating to safety and 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 September 30, 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 18.
Commitments and Contingencies of the Notes to
Consolidated Financial Statements.
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 the
current portion of long-term debt for the foreseeable future
from cash generated from operations, borrowings under our Senior
Credit Facility and
27
Receivables Facility, proceeds from the issuance of debt or
equity securities or other additional long-term debt financing.
In November 2007, our board of directors approved a resolution
to pay our quarterly dividend of $0.10 per share, indicating an
annualized dividend of $0.40 per year, on our Common Stock.
During fiscal 2008 we have minimum pension contributions of
approximately $23 million to make to the
U.S. Qualified Plans (as defined below). Based on current
facts and assumptions, we anticipate contributing approximately
$22 million to the U.S. Qualified Plans in fiscal 2009.
Contractual
Obligations
We summarize our enforceable and legally binding contractual
obligations at September 30, 2007, and the effect these
obligations are expected to have on our liquidity and cash flow
in future periods in the following table. We based some of the
amounts in this table on managements estimates and
assumptions about these obligations, including their duration,
the possibility of renewal, anticipated actions by third
parties, and other factors. Because these estimates and
assumptions are subjective, the enforceable and legally binding
obligations we actually pay in future periods may vary from
those we have summarized in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
|
Contractual Obligations
|
|
Total
|
|
|
2008
|
|
|
2009 & 2010
|
|
|
2011 & 2012
|
|
|
Thereafter
|
|
|
|
(In millions)
|
|
|
Long-term debt, including current portion(a)(e)
|
|
$
|
714.2
|
|
|
$
|
46.0
|
|
|
$
|
287.5
|
|
|
$
|
250.6
|
|
|
$
|
130.1
|
|
Operating lease obligations(b)
|
|
|
23.8
|
|
|
|
10.0
|
|
|
|
9.3
|
|
|
|
3.0
|
|
|
|
1.5
|
|
Purchase obligations(c)(d)
|
|
|
263.4
|
|
|
|
159.4
|
|
|
|
102.2
|
|
|
|
1.7
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,001.4
|
|
|
$
|
215.4
|
|
|
$
|
399.0
|
|
|
$
|
255.3
|
|
|
$
|
131.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We have included in the long-term debt line item above amounts
owed on our note agreements, industrial development revenue
bonds, and credit agreements. For purposes of this table, we
assume that all of our long-term debt will be held to maturity.
We have not included in these amounts interest payable on our
long-term debt. We have excluded aggregate hedge adjustments
resulting from terminated interest rate derivatives or swaps of
$8.5 million and excluded unamortized bond discounts of
$0.4 million from the table to arrive at actual debt
obligations. For information on the interest rates applicable to
our various debt instruments, see Note 10.
Debt of the Notes to Consolidated Financial
Statements. |
|
(b) |
|
For more information, see Note 12. Leases
of the Notes to Consolidated Financial Statements. |
|
(c) |
|
Purchase obligations include agreements to purchase goods or
services that are enforceable and legally binding and that
specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price
provision; and the approximate timing of the transaction.
Purchase obligations exclude agreements that are cancelable
without penalty. |
|
(d) |
|
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 us
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 by us from our
partner to date. Therefore, the earliest date at which a put
could be completed would be March 29, 2010. We currently
project this contingent obligation to purchase our
partners interest (based on the formula) to be
approximately $16 million, which would result in a purchase
price of less than 60% of our partners share of the net
equity reflected on Seven Hills September 30, 2007
balance sheet. We have not included the $16 million in the
table above. |
|
(e) |
|
We have not included in the table above an item labeled
other long-term liabilities reflected on our
consolidated balance sheet because none of our other long-term
liabilities has a definite pay-out scheme. As discussed in
Note 14. Retirement Plans of the
Notes to Consolidated Financial Statements, we have long-term
liabilities for deferred employee compensation, including
pension, supplemental retirement plans, and |
28
|
|
|
|
|
deferred compensation. We have not included in the table the
payments related to the supplemental retirement plans and
deferred compensation because these amounts are dependent upon,
among other things, when the employee retires or leaves our
Company, and whether the employee elects lump-sum or installment
payments. In addition, we have not included in the table minimum
pension funding requirements because such amounts are not
available for all periods presented. We estimate that we will
contribute approximately $23 million to our pension plans
in fiscal 2008 and, based on current facts and assumptions,
expect to contribute $22 million to the plans in fiscal
2009. During fiscal 2007, we contributed approximately
$20.9 million to our pension and supplemental retirement
plans. |
In addition to the enforceable and legally binding obligations
quantified in the table above, we have other obligations for
goods and services and raw materials entered into in the normal
course of business. These contracts, however, either are not
enforceable or legally binding or are subject to change based on
our business decisions.
For information concerning certain related party transactions,
see Note 17. Related Party Transactions
of the Notes to Consolidated Financial Statements.
Stock
Repurchase Program
Our board of directors has approved a stock repurchase plan that
allows for the repurchase from time to time of shares of Common
Stock over an indefinite period of time. As of
September 30, 2006, we had approximately 2.0 million
shares of Common Stock available for repurchase from our
4.0 million shares of Common Stock authorized. In August
2007 our board of directors amended our stock repurchase plan to
allow for the repurchase of an additional 2.0 million
shares bringing the cumulative total authorized to
6.0 million shares of Common Stock. Pursuant to our
repurchase plan, during fiscal 2007, we repurchased
2.1 million shares for an aggregate cost of
$58.7 million. In fiscal 2006 and 2005, we did not
repurchase any shares of Common Stock. At September 30,
2007, we had approximately 1.9 million shares of Common
Stock available for repurchase under the amended repurchase plan.
Expenditures
for Environmental Compliance
For a discussion of our expenditures for environmental
compliance, see Item 1, Business
Governmental Regulation Environmental
Regulation.
Critical
Accounting Policies and Estimates
We have prepared our accompanying consolidated financial
statements in conformity with U.S. generally accepted
accounting principles, which require management to make
estimates that affect the amounts of revenues, expenses, assets
and liabilities reported. The following are critical accounting
matters that are both important to the portrayal of our
financial condition and results and that require some of
managements most subjective and complex judgments. The
accounting for these matters involves the making of estimates
based on current facts, circumstances and assumptions that, in
managements judgment, could change in a manner that would
materially affect managements future estimates with
respect to such matters and, accordingly, could cause our future
reported financial condition and results to differ materially
from those that we are currently reporting based on
managements current estimates. For additional information,
see Note 1. Description of Business and Summary
of Significant Accounting Policies of the Notes to
Consolidated Financial Statements. See also Item 7A,
Quantitative and Qualitative Disclosures About Market
Risk.
Accounts
Receivable and Allowances
We have an allowance for doubtful accounts, returns and
allowances, and cash discounts that serve to reduce the value of
our gross accounts receivable to the amount we estimate we will
ultimately collect. The allowances contain uncertainties because
the calculation requires management to make assumptions and
apply judgment regarding the customers credit worthiness
and the returns and allowances and cash discounts that may be
taken by our customers. We perform ongoing evaluations of our
customers financial condition and adjust credit limits
based upon payment history and the customers current
credit worthiness, as determined by our review of their current
financial information. We continuously monitor collections from
our customers and maintain a provision for
29
estimated credit losses based upon our customers financial
condition, our collection experience and any other relevant
customer specific information. Our assessment of this and other
information forms the basis of our allowances. We do not believe
there is a reasonable likelihood that there will be a material
change in the future estimates or assumptions we use to estimate
the allowances. However, while these credit losses have
historically been within our expectations and the provisions we
established, it is possible that our credit loss rates could be
higher or lower in the future depending on changes in business
conditions. At September 30, 2007, our allowances were
$5.4 million; a 5% change in our assumptions would change
our allowance by approximately $0.3 million.
Inventory
We carry our inventories at the lower of cost or market. Cost
includes materials, labor and overhead. Market, with respect to
all inventories, is replacement cost or net realizable value,
depending on the inventory. Management frequently reviews
inventory to determine the necessity to markdown excess,
obsolete or unsaleable inventory. Judgment and uncertainty
exists with respect to this estimate because it requires
management to assess customer and market demand. These estimates
may prove to be inaccurate, in which case we may have overstated
or understated the markdown required for excess, obsolete or
unsaleable inventory. We have not made any material changes in
the accounting methodology used to markdown inventory during the
past three fiscal years. We do not believe there is a reasonable
likelihood that there will be a material change in the future
estimates or assumptions we use to calculate inventory
markdowns. While these markdowns have historically been within
our expectations and the markdowns we established, it is
possible that our reserves could be higher or lower in the
future if our estimates are inaccurate. At September 30,
2007, our inventory reserves were $1.6 million; a 5% change
in our inventory allowance assumptions would change our reserve
by approximately $0.1 million.
Prior to the application of the LIFO method, our
U.S. operations use a variety of methods to estimate the
FIFO cost of their finished goods inventories. One of our
divisions uses a standard cost system. Another division divides
the actual cost of goods manufactured by the tons produced and
multiplies this amount by the tons of inventory on hand. Other
divisions calculate a ratio, on a plant by plant basis, the
numerator of which is the cost of goods sold and the denominator
is net sales. This ratio is applied to the estimated sales value
of the finished goods inventory. Variances and other unusual
items are analyzed to determine whether it is appropriate to
include those items in the value of inventory. Examples of
variances and unusual items include, but are not limited to,
freight, handling costs and wasted materials (spoilage) to
determine the amount of current period charges. Cost includes
raw materials and supplies, direct labor, indirect labor related
to the manufacturing process and depreciation and other factory
overheads.
Goodwill
and Long-Lived Assets
We review the recorded value of our goodwill annually during the
fourth quarter of each fiscal year, or sooner if events or
changes in circumstances indicate that the carrying amount may
exceed fair value as set forth in Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets. We determine recoverability by
comparing the estimated fair value of the reporting unit to
which the goodwill applies to the carrying value, including
goodwill, of that reporting unit. Estimating the fair value of
the reporting unit involves uncertainties, because it requires
management to develop numerous assumptions, including
assumptions about the future growth and potential volatility in
revenues and costs, capital expenditures, industry economic
factors and future business strategy.
The variability of the factors that management uses to perform
the goodwill impairment test depends on a number of conditions,
including uncertainty about future events and cash flows. All
such factors are interdependent and, therefore, do not change in
isolation. Accordingly, our accounting estimates may materially
change from period to period due to changing market factors. If
we had used other assumptions and estimates or if different
conditions occurred in future periods, future operating results
could be materially impacted. For example, based on available
information as of our most recent review during the fourth
quarter of fiscal 2007, if our net operating profit before tax
had decreased by 10% with respect to the pre-tax earnings we
used in our forecasts, the enterprise value of each of our
divisions would have continued to exceed their respective net
book values. Also, based on the same information, if we had
concluded that it was appropriate to increase by 100 basis
points the discount rate we used to estimate the fair value of
each reporting unit, the fair value for each of our reporting
units would have continued to exceed its carrying value.
30
We follow Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets
(SFAS 144), in determining whether
the carrying value of any of our long-lived assets is impaired.
Our judgments regarding the existence of impairment indicators
are based on legal factors, market conditions and operational
performance. Future events could cause us to conclude that
impairment indicators exist and that assets associated with a
particular operation are impaired. Evaluating the impairment
also requires us to estimate future operating results and cash
flows, which also require judgment by management. Any resulting
impairment loss could have a material adverse impact on our
financial condition and results of operations.
Included in our long-lived assets are certain intangible assets.
These intangible assets are amortized based on the approximate
pattern in which the economic benefits are consumed over their
estimated useful lives ranging from 1 to 40 years and have
a weighted average life of approximately 21.3 years. We
identify the weighted average lives of our intangible assets by
category in Note 8. Other Intangible
Assets of the Notes to Consolidated Financial
Statements.
We have not made any material changes to our impairment loss
assessment methodology during the past three fiscal years. We do
not believe there is a reasonable likelihood that there will be
a material change in future assumptions or estimates we use to
calculate impairment losses. However, if actual results are not
consistent with our assumptions and estimates, we may be exposed
to additional impairment losses that could be material.
Health
Insurance
We are self-insured for the majority of our group health
insurance costs, subject to specific retention levels. Our
self-insurance liabilities contain uncertainties because the
calculation requires management to make assumptions regarding,
and apply judgment to estimate, the ultimate cost to settle
reported claims and claims incurred but not reported as of the
balance sheet date. We utilize historical claims lag data
provided by our claims administrators to compute the required
estimated reserve rate. We calculate our average monthly claims
paid utilizing the actual monthly payments during the trailing
12-month
period. At that time, we also calculate our required reserve
utilizing the reserve rates discussed above. During fiscal 2007,
the average monthly claims paid were between $3.4 million
and $3.7 million and our average claims lag was between 1.3
and 1.4 times the average monthly claims paid. Our accrual at
September 30, 2007, represents approximately 1.3 times the
average monthly claims paid. Health insurance costs have risen
in recent years, but our reserves have historically been within
our expectations. We have not made any material changes in the
accounting methodology used to establish our self-insured
liabilities during the past three fiscal years. We do not
believe there is a reasonable likelihood that there will be a
material change in the future assumptions or estimates we use to
calculate our self-insured liabilities. However, if actual
results are not consistent with our assumptions, we may be
exposed to losses or gains that could be material. A 5% change
in the average claims lag would change our reserve by
approximately $0.2 million.
Workers
Compensation
We purchase workers compensation policies for the majority
of our workers compensation liabilities that are subject
to various deductibles. We calculate our workers
compensation reserves based on estimated actuarially calculated
development factors. Our workers compensation liabilities
contain uncertainties because the calculation requires
management to make assumptions regarding the injuries. We have
not made any material changes in the accounting methodology used
to establish our workers compensation liabilities during
the past three fiscal years. We do not believe there is a
reasonable likelihood that there will be a material change in
the future assumptions or estimates we use to calculate our
workers compensation liabilities. However, if actual
results are not consistent with our assumptions, we may be
exposed to losses or gains that could be material. Although the
cost of individual claims may vary over the life of the claim,
the population taken as a whole has not changed significantly
from our expectations. A 5% adverse change in our development
factors at September 30, 2007 would have resulted in an
additional $0.4 million of expense for the fiscal year.
Accounting
for Income Taxes
As part of the process of preparing our Consolidated Financial
Statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. We estimate our actual
current tax exposure and assess temporary differences resulting
from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance
sheet.
31
Certain judgments, assumptions and estimates may affect the
carrying value of any deferred tax assets and their associated
valuation allowances, if any, and deferred tax liabilities in
our Consolidated Financial Statements. We periodically review
our estimates and assumptions of our estimated tax assets and
obligations using historical experience in the jurisdictions we
do business in, and informed judgments. In addition, we maintain
reserves for certain tax contingencies based upon our
expectations of the outcome of tax audits in the jurisdictions
where we operate. While we believe that our assumptions are
appropriate, significant differences in our actual experience or
significant changes in our assumptions may materially affect our
income tax expense and liabilities. A 1% increase in our
effective tax rate would increase tax expense by approximately
$1.3 million for fiscal 2007. A 1% increase in our
estimated tax rate used to compute deferred tax liabilities and
assets, as recorded on the September 30, 2007 consolidated
balance sheet, would increase tax expense by approximately
$3.9 million for fiscal 2007.
Pension
Plans
We have five defined benefit pension plans
(U.S. Qualified Plans), with
approximately 52% of our employees in the United States
currently accruing benefits. 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. The determination of our
obligation and expense for pension plans is dependent on our
selection of certain assumptions used by actuaries in
calculating such amounts. We describe these assumptions in
Note 14. Retirement Plans of the
Notes to Consolidated Financial Statements, which include, among
others, the discount rate, expected long-term rate of return on
plan assets and expected rates of increase in compensation
levels. Although there is authoritative guidance on how to
select most of these assumptions, management must exercise some
degree of judgment when selecting these assumptions.
The amounts necessary to fund future payouts under these plans
are subject to numerous assumptions and variables. Certain
significant variables require us to make assumptions such as a
discount rate, expected rate of return on plan assets and future
compensation levels. We evaluate these assumptions with our
actuarial advisors on an annual basis and we believe they are
within accepted industry ranges, although an increase or
decrease in the assumptions or economic events outside our
control could have a direct impact on reported net earnings.
Our discount rate for each plan used for determining future net
periodic benefit cost is based on the Citigroup Pension Discount
Curve. We project benefit cash flows from our defined benefit
plans against discount rates published in the September 30,
2007 Citigroup Pension Discount Curve matched to fit our
expected liability payment pattern. The benefits paid in each
future year were discounted to the present at the published rate
of the Citigroup Pension Discount Curve for that year. These
present values were added up and a discount rate for each plan
was determined that would develop the same present value as the
sum of the individual years. To set the discount rate for all
plans, the average of the discount rate for the two largest
plans was rounded to the nearest 0.125%. We believe this
accurately reflects the future defined benefit payment streams
for our plans. For measuring benefit obligations as of
September 30, 2007 and September 30, 2006 we employed
a discount rate of 6.25% and 5.875%, respectively. The
37.5 basis point increase in our discount rate compared to
the prior measurement date, the return on plan assets achieved
in fiscal 2007 and our $20.9 million of employer
contributions in fiscal 2007 were the primary reasons for the
$38.6 million increase in funded status compared to the
prior fiscal year.
In determining the long-term rate of return for a plan, we
consider the historical rates of return, the nature of the
plans investments and an expectation for the plans
investment strategies. As of September 30, 2007 and 2006,
we used an expected return on plan assets of 9.0%. The plan
assets were divided among various investment classes. As of
September 30, 2007, approximately 68% of plan assets were
invested with equity managers, approximately 31% of plan assets
were invested with fixed income managers, and approximately 1%
of plan assets were held in cash. The difference between actual
and expected returns on plan assets is accumulated and amortized
over future periods and, therefore, affects our recorded
obligations and recognized expenses in such future periods. For
fiscal 2007 our pension plans had actual returns on assets of
$36.3 million as compared with expected returns on assets
of $23.2 million, which resulted in a net deferred gain of
$13.1 million. At September 30, 2007, we had an
unrecognized actuarial loss of $65.4 million. In fiscal
2008, we expect to charge to net periodic pension cost
approximately $2.9 million of this unrecognized loss. The
amount of this unrecognized loss charged to pension cost in
future years is dependent upon future interest rates and pension
investment results. A 25 basis point change in the discount
rate, the expected increase in compensation levels or the
expected long-term rate of return on plan assets
32
would have had the following effect on fiscal 2007 pension
expense (in millions, amounts in the table in parentheses
reflect additional income):
|
|
|
|
|
|
|
|
|
|
|
25 Basis Point
|
|
|
25 Basis Point
|
|
|
|
Increase
|
|
|
Decrease
|
|
|
Discount rate
|
|
$
|
(1.3
|
)
|
|
$
|
1.4
|
|
|
|
|
|
|
|
|
|
|
Compensation level
|
|
$
|
0.1
|
|
|
$
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
Expected long-term rate of return on plan assets
|
|
$
|
(0.6
|
)
|
|
$
|
0.6
|
|
|
|
|
|
|
|
|
|
|
Several factors influence our annual funding requirements. For
the U.S. Qualified Plans, our funding policy consists of
annual contributions at a rate that provides for future plan
benefits and maintains appropriate funded percentages. These
contributions are not less than the minimum required by the
Employee Retirement Income Security Act of 1974, as amended
(ERISA), and subsequent pension legislation
and is not more than the maximum amount deductible for income
tax purposes. Amounts necessary to fund future obligations under
these plans could vary depending on estimated assumptions. The
effect on operating results in the future of pension plan
funding will depend in part on investment performance, funding
decisions and employee demographics.
In fiscal 2007 we made cash contributions to the
U.S. Qualified Plans aggregating $20.9 million which
exceeded the $17.3 million contribution required by ERISA.
In fiscal 2006, there was no minimum contribution to the
U.S. Qualified Plans required by ERISA; however, at
managements discretion, we made cash contributions to the
U.S. Qualified Plans aggregating $20.6 million. Based
on current assumptions, our projected required minimum funding
to the U.S. Qualified Plans is approximately
$23 million in fiscal 2008. However, it is possible that we
may decide to contribute an amount greater than the minimum
required funding. Based on current facts and assumptions, we
anticipate contributing approximately $22 million to the
U.S. Qualified Plans in fiscal 2009.
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial
Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans an Amendment of FASB Statements No. 87,
88, 106 and 132(R) (SFAS 158).
SFAS 158 requires an employer that is a business entity and
sponsors one or more single employer benefit plans to
(1) recognize the funded status of the benefit in its
statement of financial position, (2) recognize as a
component of other comprehensive income, net of tax, the gains
or losses and prior service costs or credits that arise during
the period but are not recognized as components of net periodic
benefit cost, (3) measure defined benefit plan assets and
obligations as of the date of the employers fiscal year
end statement of financial position and (4) disclose in the
notes to consolidated financial statements additional
information about certain effects on net periodic benefit cost
for the next fiscal year that arise from delayed recognition of
the gains or losses, prior service costs on credits, and
transition asset or obligations. We adopted SFAS 158
effective for the fiscal year ended September 30, 2007. The
effect of adopting SFAS 158 was: pension assets are
approximately $3 million lower, pension liabilities are
approximately $20 million higher, deferred tax assets are
approximately $9 million higher, and shareholders
equity is approximately $14 million lower.
New
Accounting Standards
See Note 1. Description of Business and Summary
of Significant Accounting Policies of the Notes to
Consolidated Financial Statements 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.
|
|
Item 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We are exposed to market risk from changes in interest rates,
foreign exchange rates and commodity prices. Our objective is to
identify and understand these risks and then implement
strategies to manage them. When evaluating these strategies, we
evaluate the fundamentals of each market, our sensitivity to
movement in commodity pricing, and underlying accounting and
business implications. To implement these strategies, we
periodically enter into various hedging transactions. The
sensitivity analyses we present below do not consider the effect
of possible adverse changes in the general economy, nor do they
consider additional actions we may take to mitigate our exposure
to such changes. There can be no assurance that we will manage
or continue to manage any risks in the future or that our
efforts will be successful.
33
Derivative
Instruments
We enter into a variety of derivative transactions. We use
interest rate swap agreements to manage the interest rate
characteristics on a portion of our outstanding debt. We
evaluate market conditions and our leverage ratio in order to
determine our tolerance for potential increases in interest
expense that could result from floating interest rates. From
time to time we use forward contracts to limit our exposure to
fluctuations in non-functional foreign currency rates with
respect to our operating units receivables. We also use
commodity swap agreements to limit our exposure to falling sales
prices and rising raw material costs.
Interest
Rates
We are exposed to changes in interest rates, primarily as a
result of our short-term and long-term debt. We use swap
agreements to manage the interest rate characteristics of a
portion of our outstanding debt. Based on the amounts and mix of
our fixed and floating rate debt at September 30, 2007 and
September 30, 2006, if market interest rates increase an
average of 100 basis points, after considering the effects
of our swaps, our interest expense would have increased by
$0.9 million in both years. We determined these amounts by
considering the impact of the hypothetical interest rates on our
borrowing costs and interest rate swap agreements. These
analyses do not consider the effects of changes in the level of
overall economic activity that could exist in such an
environment. In October 2007 we terminated all of our interest
rate swaps. Based on the amounts and mix of our fixed and
floating rate debt at September 30, 2007, adjusted for our
October 2007 terminations, if market interest rates increase an
average of 100 basis points our interest expense would have
increased by $2.9 million.
Market
Risks Impacting Pension Plans
Our pension plans are influenced by trends in the financial
markets and the regulatory environment. Adverse general stock
market trends and falling interest rates increase plan costs and
liabilities. During fiscal 2007 and 2006, the effect of a 0.25%
change in the discount rate would have impacted income from
continuing operations before income taxes by approximately
$1.4 million in both years.
Foreign
Currency
We are exposed to changes in foreign currency rates with respect
to our foreign currency denominated operating revenues and
expenses. Our principal foreign exchange exposure is the
Canadian dollar. The Canadian dollar is the functional currency
of our Canadian operations.
We have transaction gains or losses that result from changes in
our operating units non-functional currency. For example,
we have non-functional currency exposure at our Canadian
operations because they have purchases and sales denominated in
U.S. dollars. We record these gains or losses in foreign
exchange gains and losses in the income statement. From time to
time, we enter into currency forward or option contracts to
mitigate a portion of our foreign currency transaction exposure.
To mitigate potential foreign currency transaction losses, we
may use offsetting internal exposures or forward contracts.
We also have translation gains or losses that result from
translation of the results of operations of an operating
units foreign functional currency into U.S. dollars
for consolidated financial statement purposes. Translated
earnings were $0.2 million higher in fiscal 2007 than if we
had translated the same earnings using fiscal 2006 exchange
rates. Translated earnings were $0.7 million higher in
fiscal 2006 than if we had translated the same earnings using
fiscal 2005 exchange rates.
During fiscal 2007 and 2006, the effect of a one percentage
point change in exchange rates would have impacted accumulated
other comprehensive income by approximately $1.4 million
and $1.2 million, respectively.
Commodities
Fiber
The principal raw material we use in the production of recycled
paperboard and corrugated medium is recycled fiber. Our
purchases of old corrugated containers (OCC)
and double-lined kraft clippings account for our largest fiber
costs and approximately 57% of our fiscal 2007 fiber purchases.
The remaining 43% of our fiber purchases consists of a number of
other grades of recycled paper.
34
From time to time we make use of financial swap agreements to
limit our exposure to changes in OCC prices. With the effect of
our OCC swaps, a hypothetical 10% increase in total fiber prices
would have increased our costs by $11 million and
$8 million in fiscal 2007 and 2006, respectively. In times
of higher fiber prices, we may have the ability to pass a
portion of the increased costs on to our customers in the form
of higher finished product pricing; however, there can be no
assurance that we will be able to do so.
Coated
Unbleached Kraft
We purchase Coated Unbleached Kraft (CUK)
from external sources to use in our folding carton converting
business. A hypothetical 10% increase in CUK prices throughout
each year would have increased our costs by approximately
$9 million during fiscal 2007 and by approximately
$10 million during fiscal 2006. In times of higher CUK
prices, we may have the ability to pass a portion of our
increased costs on to our customers in the form of higher
finished product pricing; however, there can be no assurance
that we will be able to do so.
Linerboard/Corrugated
Medium
We have the capacity to produce approximately 184,000 tons per
year of corrugated medium at our St. Paul, Minnesota operation.
From time to time, we make use of swap agreements to limit our
exposure to falling corrugated medium sales prices at our St.
Paul operation. Taking into account the effect of swaps we had
in place, a hypothetical 10% decrease in selling price
throughout each year would have resulted in lower sales of
approximately $8 million and $7 million during fiscal
2007 and 2006, respectively.
We convert approximately 197,000 tons per year of corrugated
medium and linerboard in our corrugated box converting
operations into corrugated sheet stock. A hypothetical 10%
increase in linerboard and corrugated medium pricing throughout
each year would have resulted in increased costs of
approximately $9 million and $8 million during fiscal
2007 and 2006, respectively. We may have the ability to pass a
portion of our increased costs on to our customers in the form
of higher finished product pricing; however, there can be no
assurance that we will be able to do so.
Energy
Energy is one of the most significant manufacturing costs of our
paperboard operations. We use natural gas, electricity, fuel oil
and coal to generate steam used in the paper making process and
to operate our recycled paperboard machines and we use primarily
electricity for our converting equipment. Our bleached
paperboard mill uses wood by-products for most of its energy. We
generally purchase these products from suppliers at market
rates. Occasionally, we enter into long-term agreements to
purchase natural gas.
We spent approximately $121 million on all energy sources
in fiscal 2007. Natural gas and fuel oil accounted for
approximately 43% (6.2 million MMBtu) of our total
purchases in fiscal 2007. Excluding fixed price natural gas
forward contracts, a hypothetical 10% change in the price of
energy throughout the year would have increased our cost of
energy by $12 million.
We spent approximately $133 million on all energy sources
in fiscal 2006. Natural gas and fuel oil accounted for
approximately 45% (6.5 million MMBtu) of our total
purchases in fiscal 2006. Excluding fixed price natural gas
forward contracts, a hypothetical 10% change in the price of
energy throughout the year would have increased our cost of
energy by $13 million.
Our long-term steam contract at our St. Paul Mill complex
expired June 2007; however, we were supplied steam through
August 2007. The contract will not be renewed because the coal
plant in the area that supplied the steam has closed. As a
result, we will burn an additional three million MMBtu per
year of either natural gas or fuel oil at St. Paul. At current
market prices, we expect our quarterly cost of energy will
increase by approximately $1 million over the rates charged
under the steam contract prior to June 30, 2007.
We may have the ability to pass a portion of our increased costs
on to our customers in the form of higher finished product
pricing; however, there can be no assurance that we will be able
to do so. We periodically evaluate alternative scenarios to
manage these risks.
35
|
|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Index to
Financial Statements
|
|
|
|
|
Description
|
|
|
|
Consolidated Statements of Income
|
|
|
Page 37
|
|
Consolidated Balance Sheets
|
|
|
Page 38
|
|
Consolidated Statements of Shareholders Equity
|
|
|
Page 39
|
|
Consolidated Statements of Cash Flows
|
|
|
Page 40
|
|
Notes to Consolidated Financial Statements
|
|
|
Page 42
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
Page 82
|
|
Report of Independent Registered Public Accounting Firm On
Internal Control Over Financial Reporting
|
|
|
Page 83
|
|
Report of Management on Responsibility for Financial Information
and for Establishing and Maintaining Adequate Internal Control
over Financial Reporting
|
|
|
Page 84
|
|
For supplemental quarterly financial information, please see
Note 20. Financial Results by Quarter
(Unaudited) of the Notes to Consolidated Financial
Statements.
36
ROCK-TENN
COMPANY
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions, except per share data)
|
|
|
Net sales
|
|
$
|
2,315.8
|
|
|
$
|
2,138.1
|
|
|
$
|
1,733.5
|
|
Cost of goods sold
|
|
|
1,870.2
|
|
|
|
1,789.0
|
|
|
|
1,459.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
445.6
|
|
|
|
349.1
|
|
|
|
274.3
|
|
Selling, general and administrative expenses
|
|
|
259.1
|
|
|
|
244.2
|
|
|
|
205.0
|
|
Restructuring and other costs, net
|
|
|
4.7
|
|
|
|
7.8
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
181.8
|
|
|
|
97.1
|
|
|
|
61.8
|
|
Interest expense
|
|
|
(49.8
|
)
|
|
|
(55.6
|
)
|
|
|
(36.6
|
)
|
Interest and other income (expense), net
|
|
|
(1.3
|
)
|
|
|
1.6
|
|
|
|
0.5
|
|
Equity in income (loss) of unconsolidated entities
|
|
|
1.1
|
|
|
|
1.9
|
|
|
|
(1.0
|
)
|
Minority interest in income of consolidated subsidiaries
|
|
|
(4.8
|
)
|
|
|
(6.4
|
)
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
127.0
|
|
|
|
38.6
|
|
|
|
19.9
|
|
Income tax expense
|
|
|
(45.3
|
)
|
|
|
(9.9
|
)
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
81.7
|
|
|
$
|
28.7
|
|
|
$
|
17.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.12
|
|
|
$
|
0.79
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.07
|
|
|
$
|
0.77
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
37
ROCK-TENN
COMPANY
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions, except share and per share data)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10.9
|
|
|
$
|
6.9
|
|
Accounts receivable (net of allowances of $5.4 and $5.2)
|
|
|
230.6
|
|
|
|
230.8
|
|
Inventories
|
|
|
224.4
|
|
|
|
218.9
|
|
Other current assets
|
|
|
26.8
|
|
|
|
25.0
|
|
Assets held for sale
|
|
|
1.8
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
494.5
|
|
|
|
485.6
|
|
Property, plant and equipment at cost:
|
|
|
|
|
|
|
|
|
Land and buildings
|
|
|
274.8
|
|
|
|
266.0
|
|
Machinery and equipment
|
|
|
1,368.6
|
|
|
|
1,299.7
|
|
Transportation equipment
|
|
|
10.8
|
|
|
|
10.8
|
|
Leasehold improvements
|
|
|
5.9
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,660.1
|
|
|
|
1,582.7
|
|
Less accumulated depreciation and amortization
|
|
|
(822.6
|
)
|
|
|
(732.1
|
)
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
837.5
|
|
|
|
850.6
|
|
Goodwill
|
|
|
364.5
|
|
|
|
356.6
|
|
Intangibles, net
|
|
|
67.6
|
|
|
|
55.1
|
|
Investment in unconsolidated entities
|
|
|
28.9
|
|
|
|
21.6
|
|
Other assets
|
|
|
7.7
|
|
|
|
14.5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,800.7
|
|
|
$
|
1,784.0
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of debt
|
|
$
|
46.0
|
|
|
$
|
40.8
|
|
Accounts payable
|
|
|
161.6
|
|
|
|
141.8
|
|
Accrued compensation and benefits
|
|
|
73.8
|
|
|
|
65.7
|
|
Other current liabilities
|
|
|
63.5
|
|
|
|
57.7
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
344.9
|
|
|
|
306.0
|
|
|
|
|
|
|
|
|
|
|
Long-term debt due after one year
|
|
|
667.8
|
|
|
|
754.9
|
|
Hedge adjustments resulting from terminated fair value interest
rate derivatives or swaps
|
|
|
8.5
|
|
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
676.3
|
|
|
|
765.3
|
|
|
|
|
|
|
|
|
|
|
Accrued pension and other long-term benefits
|
|
|
47.3
|
|
|
|
75.9
|
|
Deferred income taxes
|
|
|
125.7
|
|
|
|
99.8
|
|
Other long-term liabilities
|
|
|
7.6
|
|
|
|
9.6
|
|
Commitments and contingencies (Notes 12 and 18)
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
9.9
|
|
|
|
18.8
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 50,000,000 shares
authorized; no shares outstanding
|
|
|
|
|
|
|
|
|
Class A common stock, $0.01 par value;
175,000,000 shares authorized; 37,988,779 and
37,688,522 shares outstanding at September 30, 2007
and September 30, 2006, respectively
|
|
|
0.4
|
|
|
|
0.4
|
|
Capital in excess of par value
|
|
|
222.6
|
|
|
|
179.6
|
|
Retained earnings
|
|
|
357.8
|
|
|
|
341.2
|
|
Accumulated other comprehensive income (loss)
|
|
|
8.2
|
|
|
|
(12.6
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
589.0
|
|
|
|
508.6
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,800.7
|
|
|
$
|
1,784.0
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
38
ROCK-TENN
COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Class A
|
|
|
Capital in
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Excess of
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Par Value
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(In millions, except share and per share data)
|
|
|
Balance at October 1, 2004
|
|
|
35,640,784
|
|
|
$
|
0.4
|
|
|
$
|
155.2
|
|
|
$
|
321.5
|
|
|
$
|
(39.5
|
)
|
|
$
|
437.6
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.6
|
|
|
|
|
|
|
|
17.6
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.8
|
|
|
|
13.8
|
|
Net unrealized gain on derivative instruments (net of $(2.4) tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.6
|
|
|
|
3.6
|
|
Pension liability adjustments (net of $8.2 tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10.5
|
)
|
|
|
(10.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.5
|
|
Income tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
Shares granted under restricted stock plan
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense under restricted stock plan
|
|
|
|
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
1.7
|
|
Restricted Stock grant cancelled
|
|
|
(24,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends $0.36 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12.9
|
)
|
|
|
|
|
|
|
(12.9
|
)
|
Issuance of Class A common stock net of stock received for
tax withholdings
|
|
|
463,713
|
|
|
|
|
|
|
|
5.3
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005
|
|
|
36,280,164
|
|
|
|
0.4
|
|
|
|
162.4
|
|
|
|
326.0
|
|
|
|
(32.6
|
)
|
|
|
456.2
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28.7
|
|
|
|
|
|
|
|
28.7
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
|
|
3.3
|
|
Reclassification of previously terminated hedges to earnings
(net of $1.1 tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.8
|
)
|
|
|
(1.8
|
)
|
Net unrealized gain on derivative instruments (net of $(1.7) tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.8
|
|
|
|
2.8
|
|
Pension liability adjustments (net of $(10.6) tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.7
|
|
|
|
15.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.7
|
|
Income tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
Shares granted under restricted stock plan
|
|
|
469,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense under share based plans
|
|
|
|
|
|
|
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
3.5
|
|
Cash dividends $0.36 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13.2
|
)
|
|
|
|
|
|
|
(13.2
|
)
|
Issuance of Class A common stock net of stock received for
tax withholdings
|
|
|
938,855
|
|
|
|
|
|
|
|
12.7
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
12.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
37,688,522
|
|
|
|
0.4
|
|
|
|
179.6
|
|
|
|
341.2
|
|
|
|
(12.6
|
)
|
|
|
508.6
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81.7
|
|
|
|
|
|
|
|
81.7
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.0
|
|
|
|
14.0
|
|
Reclassification of previously terminated hedges to earnings
(net of $1.5 tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.5
|
)
|
|
|
(2.5
|
)
|
Net unrealized loss on derivative instruments (net of $0.3
tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
Pension liability adjustments (net of $(15.1) tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.0
|
|
|
|
24.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116.8
|
|
Impact of adopting SFAS No. 158 (as hereinafter
defined) (net of $9.0 tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14.3
|
)
|
|
|
(14.3
|
)
|
Income tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
14.1
|
|
|
|
|
|
|
|
|
|
|
|
14.1
|
|
Shares granted under restricted stock plan
|
|
|
165,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense under share based plans
|
|
|
|
|
|
|
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
7.3
|
|
Cash dividends $0.39 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15.4
|
)
|
|
|
|
|
|
|
(15.4
|
)
|
Issuance of Class A common stock net of stock received
for tax withholdings
|
|
|
2,278,460
|
|
|
|
|
|
|
|
33.6
|
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
30.6
|
|
Purchases of Class A common stock
|
|
|
(2,143,700
|
)
|
|
|
|
|
|
|
(12.0
|
)
|
|
|
(46.7
|
)
|
|
|
|
|
|
|
(58.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
37,988,779
|
|
|
$
|
0.4
|
|
|
$
|
222.6
|
|
|
$
|
357.8
|
|
|
$
|
8.2
|
|
|
$
|
589.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
39
ROCK-TENN
COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
81.7
|
|
|
$
|
28.7
|
|
|
$
|
17.6
|
|
Items in income not affecting cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
103.7
|
|
|
|
104.3
|
|
|
|
84.0
|
|
Deferred income tax expense
|
|
|
22.2
|
|
|
|
5.5
|
|
|
|
4.0
|
|
Income tax benefit of employee stock options
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
Share-based compensation expense
|
|
|
7.3
|
|
|
|
3.6
|
|
|
|
1.7
|
|
Gain (loss) on disposal of plant and equipment and other, net
|
|
|
0.9
|
|
|
|
(0.4
|
)
|
|
|
(1.8
|
)
|
Minority interest in income of consolidated subsidiaries
|
|
|
4.8
|
|
|
|
6.4
|
|
|
|
4.8
|
|
Equity in (income) loss of unconsolidated entities
|
|
|
(1.1
|
)
|
|
|
(1.9
|
)
|
|
|
1.0
|
|
Proceeds from (payment on) termination of cash flow interest
rate hedges
|
|
|
(0.7
|
)
|
|
|
14.5
|
|
|
|
|
|
Pension funding (more) less than expense
|
|
|
(7.5
|
)
|
|
|
(4.1
|
)
|
|
|
8.7
|
|
Impairment adjustments and other non-cash items
|
|
|
2.0
|
|
|
|
3.5
|
|
|
|
2.9
|
|
Change in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3.4
|
|
|
|
(30.9
|
)
|
|
|
23.4
|
|
Inventories
|
|
|
(2.6
|
)
|
|
|
(14.1
|
)
|
|
|
9.5
|
|
Other assets
|
|
|
18.8
|
|
|
|
(7.6
|
)
|
|
|
(5.2
|
)
|
Accounts payable
|
|
|
18.7
|
|
|
|
25.1
|
|
|
|
3.2
|
|
Income taxes payable
|
|
|
(4.3
|
)
|
|
|
8.6
|
|
|
|
(3.2
|
)
|
Accrued liabilities
|
|
|
(9.0
|
)
|
|
|
12.3
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
238.3
|
|
|
|
153.5
|
|
|
|
153.3
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(78.0
|
)
|
|
|
(64.6
|
)
|
|
|
(54.3
|
)
|
Purchases of marketable securities
|
|
|
|
|
|
|
|
|
|
|
(195.3
|
)
|
Maturities and sales of marketable securities
|
|
|
|
|
|
|
|
|
|
|
223.5
|
|
Cash paid for purchase of businesses, net of cash received
|
|
|
(32.1
|
)
|
|
|
(7.8
|
)
|
|
|
(552.3
|
)
|
Investment in unconsolidated entities
|
|
|
(9.6
|
)
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
Return of capital from unconsolidated entities
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property, plant and equipment
|
|
|
2.8
|
|
|
|
4.7
|
|
|
|
6.0
|
|
Proceeds from property, plant and equipment insurance settlement
|
|
|
1.3
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(109.1
|
)
|
|
|
(67.0
|
)
|
|
|
(572.5
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to revolving credit facilities
|
|
|
68.1
|
|
|
|
79.5
|
|
|
|
226.0
|
|
Repayments of revolving credit facilities
|
|
|
(91.9
|
)
|
|
|
(210.7
|
)
|
|
|
(10.0
|
)
|
Additions to debt
|
|
|
22.1
|
|
|
|
51.8
|
|
|
|
320.8
|
|
Repayments of debt
|
|
|
(85.1
|
)
|
|
|
(29.7
|
)
|
|
|
(100.5
|
)
|
Payment on termination of fair value interest rate hedges
|
|
|
|
|
|
|
|
|
|
|
(4.3
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(4.0
|
)
|
Issuances of common stock
|
|
|
31.5
|
|
|
|
11.5
|
|
|
|
5.1
|
|
Purchases of common stock
|
|
|
(58.7
|
)
|
|
|
|
|
|
|
|
|
Excess tax benefits from share-based compensation
|
|
|
14.1
|
|
|
|
1.0
|
|
|
|
|
|
Capital contributed to consolidated subsidiary from minority
interest
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
Advances from (repayments to) unconsolidated entity
|
|
|
(5.4
|
)
|
|
|
8.6
|
|
|
|
1.4
|
|
Cash dividends paid to shareholders
|
|
|
(15.4
|
)
|
|
|
(13.2
|
)
|
|
|
(12.9
|
)
|
Cash distributions paid to minority interest
|
|
|
(4.2
|
)
|
|
|
(6.4
|
)
|
|
|
(5.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
(124.9
|
)
|
|
|
(105.8
|
)
|
|
|
416.5
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(0.3
|
)
|
|
|
(0.6
|
)
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
4.0
|
|
|
|
(19.9
|
)
|
|
|
(1.9
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
6.9
|
|
|
|
26.8
|
|
|
|
28.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
10.9
|
|
|
$
|
6.9
|
|
|
$
|
26.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
ROCK-TENN
COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Cash paid (received) during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes, net of refunds
|
|
$
|
13.1
|
|
|
$
|
(4.4
|
)
|
|
$
|
4.2
|
|
Interest, net of amounts capitalized
|
|
|
54.4
|
|
|
|
60.1
|
|
|
|
38.4
|
|
Supplemental schedule of non-cash investing and financing
activities:
In fiscal 2007, we contributed $3.9 million of assets to
our newly formed Display Source Alliance, LLC joint venture. The
assets consisted primarily of equipment and inventory.
The fiscal 2007 and 2006 line item Issuance of common stock
net of stock received for tax withholdings in our consolidated
statements of shareholders equity differs from the fiscal
2007 and 2006 line item Issuance of common stock in our
consolidated statements of cash flows due to $0.9 million
of receivables from the sale of stock being outstanding from
employees at September 30, 2006. These receivables were
collected in fiscal 2007.
The year ended September 30, 2006 includes two Packaging
Products segment acquisitions we funded and certain adjustments
related to our GSPP Acquisition (as hereinafter defined) in
fiscal 2005. Cash paid for the two fiscal 2006 acquisitions
aggregated $7.7 million, which included $3.2 million
of goodwill.
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Fair value of assets acquired including goodwill
|
|
$
|
8.5
|
|
Cash paid
|
|
|
7.8
|
|
|
|
|
|
|
Liabilities assumed
|
|
$
|
0.7
|
|
|
|
|
|
|
See accompanying notes.
41
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1.
|
Description
of Business and Summary of Significant Accounting
Policies
|
Description
of Business
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 and
2005 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.
We are primarily a manufacturer of packaging products,
merchandising displays, and paperboard.
Consolidation
The consolidated financial statements include our accounts and
all of our majority-owned subsidiaries. We account for
subsidiaries owned less than 50% but more than 20% under the
equity method. We have eliminated all significant intercompany
accounts and transactions.
We have determined that Seven Hills is a variable interest
entity as defined in FASB Interpretation 46(R),
Consolidation of Variable Interest Entities.
We are not however its primary beneficiary. Accordingly, we
use the equity method to account for our investment in Seven
Hills. We have consolidated the assets and liabilities of RTS.
We have accounted for our investment in both QPSI and DSA under
the equity method.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting
principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates
and the differences could be material.
The most significant accounting estimates inherent in the
preparation of our consolidated financial statements include
estimates to evaluate the recoverability of goodwill,
intangibles and property, plant and equipment, determine the
useful lives of assets that are amortized or depreciated, and
measure income taxes, self-insured obligations and
restructuring. In addition, significant estimates form the basis
for our reserves with respect to collectibility of accounts
receivable, inventory valuations, pension benefits, and certain
benefits provided to current employees. Various assumptions and
other factors underlie the determination of these significant
estimates. The process of determining significant estimates is
fact specific and takes into account factors such as historical
experience, current and expected economic conditions, product
mix, and in some cases, actuarial techniques. We regularly
re-evaluate these significant factors and make adjustments where
facts and circumstances dictate.
Revenue
Recognition
We recognize revenue when there is persuasive evidence that an
arrangement exists, delivery has occurred or services have been
rendered, our price to the buyer is fixed or determinable and
collectibility is reasonably assured. Delivery is not considered
to have occurred until the customer takes title and assumes the
risks and rewards of ownership. The timing of revenue
recognition is dependent on the location of title transfer which
is normally either on the exit from our plants (i.e., shipping
point) or on arrival at customers plants (i.e.,
destination point). We do not
42
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recognize revenue from transactions where we bill customers but
retain custody and title to these products until the date of
custody and title transfer.
We net, against our gross sales, provisions for discounts,
returns, allowances, customer rebates and other adjustments. We
account for such provisions during the same period in which we
record the related revenues. We include in net sales any amounts
related to shipping and handling that are billed to a customer.
Shipping
and Handling Costs
We classify shipping and handling costs as a component of cost
of goods sold.
Derivatives
We enter into a variety of derivative transactions. We are
exposed to changes in interest rates as a result of our
short-term and long-term debt. We used interest rate swap
instruments to varying degrees from time to time to manage the
interest rate characteristics of a portion of our outstanding
debt. Also, from time to time we use forward contracts to limit
our exposure to fluctuations in Canadian foreign currency rates
with respect to our receivables denominated in Canadian dollars.
We also use commodity swap agreements to limit our exposure to
falling sales prices and rising raw material costs. We terminate
existing swaps and enter into new ones from time to time based
on changes in market conditions and changes in hedging
strategies.
We are exposed to counterparty credit risk for nonperformance
and to market risk for changes in interest rates. We manage
exposure to counterparty credit risk through minimum credit
standards, diversification of counterparties and procedures to
monitor concentrations of credit risk.
For each derivative instrument that is designated and qualifies
as a fair value hedge, we recognize the change in fair value of
the derivative instrument, as well as the offsetting change in
fair value on the hedged item attributable to the hedged risk,
in current earnings. For each derivative instrument that is
designated and qualifies as a cash flow hedge, we report the
effective portion of the change in fair value on the derivative
instrument as a component of accumulated other comprehensive
income or loss and reclassify that portion into earnings in the
same period or periods during which the hedged transaction
affects earnings. We recognize the ineffective portion of the
hedge, if any, in current earnings during the period of change.
Amounts that are reclassified into earnings from accumulated
other comprehensive income and any ineffective portion of a
hedge are reported on the same income statement line item as the
originally hedged item. Cash flows from terminated interest rate
swaps are classified in the same category in the Consolidated
Statement of Cash Flows as the cash flows from the items being
hedged.
We amortize the adjustment to the carrying value of our fixed
rate debt instruments that arose from previously terminated fair
value hedges to interest expense using the effective interest
method over the remaining life of the related debt.
Upon the termination of cash flow hedge swaps, any amounts
related to these swaps, recorded in accumulated other
comprehensive income on the date of termination, are not
normally immediately recognized as income (or expense) but
remain in other comprehensive income/(loss) and are amortized to
earnings, as interest income (or expense,) for interest rate
hedges, or to cost of sales for other hedges, over the remaining
term of the originally hedged item. Any 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.
For derivative instruments not designated as hedging
instruments, we recognize the change in value of the derivative
instrument in current earnings during the period of change.
These instruments act as economic hedges but do not meet the
criteria for treatment as hedges under Statement of Accounting
Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133). The changes in the fair
value of these swaps are reported in cost of sales on the
consolidated statement of income.
43
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We include the fair value of hedges in either short-term or
long-term other liabilities
and/or other
assets on the balance sheet subject to the term of the hedged
item. We base the fair value of our derivative instruments on
market pricing. Fair value represents the net amount required
for us to terminate the position, taking into consideration
market rates and counterparty credit risk.
Cash
Equivalents
We consider all highly liquid investments that mature three
months or less from the date of purchase to be cash equivalents.
The carrying amounts we report in the consolidated balance
sheets for cash and cash equivalents approximate fair market
values. We place our cash and cash equivalents with large credit
worthy banks, which limits the amount of our credit exposure.
Accounts
Receivable and Allowances
We perform periodic evaluations of our customers financial
condition and generally do not require collateral. Receivables
generally are due within 30 days. We serve a diverse
customer base primarily in North America and, therefore, have
limited exposure from credit loss to any particular customer or
industry segment.
We state accounts receivable at the amount owed by the customer,
net of an allowance for estimated uncollectible accounts,
returns and allowances, and cash discounts. We do not discount
accounts receivable because we generally collect accounts
receivable over a very short time. We account for sales and
other taxes that are imposed on and concurrent with individual
revenue-producing transactions between a seller and a customer
on a net basis which excludes the taxes from revenues. We
estimate our allowance for doubtful accounts based on our
historical experience, current economic conditions and the
credit worthiness of our customers. We charge off receivables
when they are determined to be no longer collectible. In fiscal
2007, 2006, and 2005, we recorded bad debt expense of
$1.0 million, $2.0 million, and $0.5 million,
respectively.
Inventories
We value substantially all U.S. inventories at the lower of
cost or market, with cost determined on the
last-in,
first-out (LIFO) basis. We value all other
inventories at lower of cost or market, with cost determined
using methods which approximate cost computed on a
first-in,
first-out (FIFO) basis. These other
inventories represent primarily foreign inventories and spare
parts inventories and aggregate approximately 28.0% and 26.7% of
FIFO cost of all inventory at September 30, 2007 and 2006,
respectively.
Prior to the application of the LIFO method, our
U.S. operating divisions use a variety of methods to
estimate the FIFO cost of their finished goods inventories. One
of our divisions uses a standard cost system. Another division
divides the actual cost of goods manufactured by the tons
produced and multiplies this amount by the tons of inventory on
hand. Other divisions calculate a ratio, on a plant by plant
basis, the numerator of which is the cost of goods sold and the
denominator is net sales. This ratio is applied to the estimated
sales value of the finished goods inventory. Variances and other
unusual items are analyzed to determine whether it is
appropriate to include those items in the value of inventory.
Examples of variances and unusual items are, but are not limited
to, abnormal production levels, freight, handling costs, and
wasted materials (spoilage) to determine the amount of current
period charges. Cost includes raw materials and supplies, direct
labor, indirect labor related to the manufacturing process and
depreciation and other factory overheads.
Property,
Plant and Equipment
We state property, plant and equipment at cost. Cost
includes major expenditures for improvements and replacements
that extend useful lives, increase capacity, increase revenues
or reduce costs. During fiscal 2007, 2006, and 2005, we
capitalized interest of approximately $0.8 million,
$0.8 million, and $0.5 million, respectively.
44
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For financial reporting purposes, we provide depreciation and
amortization primarily on a straight-line method and on the
declining balance method over the estimated useful lives of the
assets as follows:
|
|
|
Buildings and building improvements
|
|
15-40 years
|
Machinery and equipment
|
|
3-20 years
|
Transportation equipment
|
|
3-8 years
|
Leasehold improvements are depreciated over the shorter of the
asset life or the lease term, generally between 3 and
10 years. Depreciation expense for fiscal 2007, 2006, and
2005 was approximately $96.6 million, $96.6 million,
and $79.0 million, respectively.
Goodwill
and Long-Lived Assets
We review the recorded value of our goodwill annually during the
beginning of the fourth quarter of each fiscal year, or sooner
if events or changes in circumstances indicate that the carrying
amount may exceed fair value as set forth in Statement of
Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets
(SFAS 142). We determine
recoverability by comparing the estimated fair value of the
reporting unit to which the goodwill applies to the carrying
value, including goodwill, of that reporting unit.
Reporting units are our operating divisions. The amount of
goodwill allocated to a reporting unit is the excess of the
purchase price of the acquired businesses (or portion thereof)
included in the reporting unit, over the fair value assigned to
the individual assets acquired and liabilities assumed.
The SFAS 142 goodwill impairment model is a two-step
process. In step one, we utilize the present value of expected
net cash flows to determine the estimated fair value of our
reporting units. This present value model requires management to
estimate future net cash flows, the timing of these cash flows,
and a discount rate (based on a weighted average cost of
capital), which represents the time value of money and the
inherent risk and uncertainty of the future cash flows. Factors
that management must estimate when performing this step in the
process include, among other items, sales volume, prices,
inflation, discount rates, exchange rates, tax rates and capital
spending. The assumptions we use to estimate future cash flows
are consistent with the assumptions that the reporting units use
for internal planning purposes, updated to reflect current
expectations. If we determine that the estimated fair value of
the reporting unit exceeds its carrying amount, goodwill of the
reporting unit is not impaired. If we determine that the
carrying amount of the reporting unit exceeds its estimated fair
value, we must complete step two of the impairment analysis.
Step two involves determining the implied fair value of the
reporting units goodwill and comparing it to the carrying
amount of that goodwill. If the carrying amount of the reporting
units goodwill exceeds the implied fair value of that
goodwill, we recognize an impairment loss in an amount equal to
that excess. We completed the annual test of the goodwill
associated with each of our reporting units during fiscal 2007
and concluded the fair values were in excess of the carrying
values of each of the reporting units.
We follow Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets
(SFAS 144) in determining whether
the carrying value of any of our long-lived assets, including
intangibles other than goodwill, is impaired. The SFAS 144
test is a three-step test for assets that are held and
used as that term is defined by SFAS 144. First, we
determine whether indicators of impairment are present.
SFAS 144 requires us to review long-lived assets for
impairment only when events or changes in circumstances indicate
that the carrying amount of the long-lived asset might not be
recoverable. Accordingly, while we do routinely assess whether
impairment indicators are present, we do not routinely perform
tests of recoverability. Second, if we determine that indicators
of impairment are present, we determine whether the estimated
undiscounted cash flows for the potentially impaired assets are
less than the carrying value. This requires management to
estimate future net cash flows. The assumptions we use to
estimate future cash flows are consistent with the assumptions
we use for internal planning purposes, updated to reflect
current expectations. Third, if such estimated undiscounted cash
flows do not exceed the carrying value, we estimate the fair
value of the asset and record an impairment charge if the
carrying value is greater than the fair value of the asset. We
estimate fair value using
45
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
discounted cash flows, prices for similar assets, or other
valuation techniques. We use a similar test for assets
classified as held for sale, except that the assets
are recorded at the lower of their carrying value or fair value
less anticipated cost to sell.
Included in our long-lived assets are certain identifiable
intangible assets. These intangible assets are amortized based
on the estimated pattern in which the economic benefits are
realized over their estimated useful lives ranging from 1 to
40 years and have a weighted average life of approximately
21.3 years. We identify the weighted average lives of our
intangible assets by category in Note 8. Other
Intangible Assets.
Our judgments regarding the existence of impairment indicators
are based on legal factors, market conditions and operational
performance. Future events could cause us to conclude that
impairment indicators exist and that assets associated with a
particular operation are impaired. Evaluating the impairment
also requires us to estimate future operating results and cash
flows, which also require judgment by management. Any resulting
impairment loss could have a material adverse impact on our
financial condition and results of operations.
Health
Insurance
We are self-insured for the majority of our group health
insurance costs, subject to specific retention levels. We
calculate our group insurance reserve based on estimated reserve
rates. We utilize claims lag data provided by our claims
administrators to compute the required estimated reserve rate.
We calculate our average monthly claims paid using the actual
monthly payments during the trailing
12-month
period. At that time, we also calculate our required reserve
using the reserve rates discussed above. While we believe that
our assumptions are appropriate, significant differences in our
actual experience or significant changes in our assumptions may
materially affect our group health insurance costs.
Workers
Compensation
We purchase large risk deductible workers compensation
policies for the majority of our workers compensation
liabilities that are subject to various deductibles to limit our
exposure. We calculate our workers compensation reserves
based on estimated actuarially calculated development factors.
Income
Taxes
We account for income taxes under the liability method, which
requires that we recognize deferred tax assets and liabilities
for the future tax consequences attributable to differences
between the financial statement carrying amount of existing
assets and liabilities and their respective tax bases. We record
a valuation allowance against deferred tax assets when the
weight of available evidence indicates it is more likely than
not that the deferred tax asset will not be realized at its
initially recorded value. We have elected to treat earnings from
certain foreign subsidiaries, from the date we acquired those
subsidiaries, as subject to repatriation, and we provide for
taxes accordingly. However, we consider all earnings of our
other foreign subsidiaries indefinitely reinvested in those
respective operations, other than those earnings we repatriated,
under the American Jobs Creation Act of 2004, as extraordinary
dividends. Other than the extraordinary dividends, we have not
provided for any incremental United States taxes that would be
due upon repatriation of those earnings into the United States.
However, in the event of a distribution of those earnings in the
form of dividends or otherwise, we may be subject to both United
States income taxes, subject to an adjustment for foreign tax
credits, and withholding taxes payable to the various foreign
countries. Determination of the amount of unrecognized deferred
United States income tax liability is not practicable because of
the complexities associated with its hypothetical calculation.
Pension
and Other Post-Retirement Benefits
We account for pensions in accordance with Statement of
Accounting Standards No. 87, Employers
Accounting for Pensions (SFAS 87)
and SFAS No. 158, Employers
Accounting for Defined Benefit Pension
46
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)
(SFAS 158). The determination of our
obligation and expense for pension and other post-retirement
benefits is dependent on our selection of certain assumptions
used by actuaries in calculating such amounts. We describe these
assumptions in Note 14. Retirement Plans,
which include, among others, the discount rate, expected
long-term rate of return on plan assets and rates of increase in
compensation levels. As allowed under SFAS 87, we defer
actual results that differ from our assumptions and amortize the
difference over future periods. Therefore, these differences
generally affect our recognized expense, recorded obligation and
funding requirements in future periods. While we believe that
our assumptions are appropriate, significant differences in our
actual experience or significant changes in our assumptions may
materially affect our pension and other post-retirement benefit
obligations and our future expense.
Stock
Based Compensation
Prior to fiscal 2006, we elected to follow the intrinsic value
method of APB 25 and related interpretations in accounting for
our employee stock options. Under APB 25, because the exercise
price of our employee stock options equaled the market price of
the underlying stock on the date of grant, we recognized no
compensation expense for stock options. We disclose pro forma
information regarding net income and earnings per share in
Note 15. Shareholders Equity.
On October 1, 2005, we adopted the fair value
recognition provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)). The
adoption of SFAS 123(R), and resulting recognition of
compensation related to stock options, did not have a material
effect on our consolidated financial statements.
Pursuant to our 2004 Incentive Stock Plan, we can award shares
of restricted Common Stock to employees and our board of
directors. Sale of the stock awarded is generally restricted for
three to five years from the date of grant, depending on
vesting. Vesting of the stock granted to employees generally
occurs in annual increments of one-third beginning on the third
anniversary of the date of grant. We charge compensation under
the plan to earnings over each increments individual
restriction period. In some instances, accelerated vesting of a
portion of the grant may occur based on our performance. Also,
some restricted stock grants contain market or performance
conditions that must be met in conjunction with the service
requirement for the shares to vest. See
Note 15. Shareholders Equity
for additional information.
Asset
Retirement Obligations
The Company accounts for asset retirement obligations in
accordance with SFAS No. 143, Accounting for
Asset Retirement Obligations
(SFAS 143) and FASB Interpretation
No. 47, Accounting for Conditional Asset
Retirement Obligations
(FIN 47). A liability and an asset are
recorded equal to the present value of the estimated costs
associated with the retirement of long-lived assets where a
legal or contractual obligation exists and the liability can be
reasonably estimated. The liability is accreted over time and
the asset is depreciated over the remaining life of the related
asset. Upon settlement of the liability, we will recognize a
gain or loss for any difference between the settlement amount
and the liability recorded. Asset retirement obligations with
indeterminate settlement dates are not recorded until such dates
can be reasonably estimated. Asset retirement obligations
consist primarily of wastewater lagoon and landfill closure
costs at certain of our paperboard mills. The amount accrued is
not significant.
Repair
and Maintenance Costs
We expense routine repair and maintenance costs as we incur
them. We defer expenses we incur during planned major
maintenance activities and recognize the expenses ratably over
the shorter of the life provided or until replaced by the next
major maintenance activity. Our bleached paperboard mill is the
only facility that currently conducts annual planned major
maintenance activities. This maintenance is generally performed
in our first fiscal quarter and has a material impact on our
results of operations in that period.
47
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Foreign
Currency
We translate the assets and liabilities of our foreign
operations from the functional currency at the rate of exchange
in effect as of the balance sheet date. We translate the
revenues and expenses of our foreign operations at a daily
average rate prevailing for each month during the fiscal year.
We reflect the resulting translation adjustments in
shareholders equity. We include gains or losses from
foreign currency transactions, such as those resulting from the
settlement of foreign receivables or payables, in the
consolidated statements of income. We recorded losses of
$0.9 million, $0.2 million and $0.7 million in
fiscal 2007, 2006, and 2005, respectively.
Environmental
Remediation Costs
We accrue for losses associated with our environmental
remediation obligations when it is probable that we have
incurred a liability and the amount of the loss can be
reasonably estimated. We generally recognize accruals for
estimated losses from our environmental remediation obligations
no later than completion of the remedial feasibility study and
adjust such accruals as further information develops or
circumstances change. We recognize recoveries of our
environmental remediation costs from other parties as assets
when we deem their receipt probable.
New
Accounting Standards Recently Adopted
We adopted SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R) as of the end of our fiscal year ending
September 30, 2007. See Note 14.
Retirement Plans Defined Benefit Pension
Plans.
New
Accounting Standards Recently Issued
In July 2006, the FASB released FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
an Interpretation of FASB Statement 109
(FIN 48). FIN 48 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). Under
FIN 48, the consolidated financial statements will reflect
expected future tax consequences of such positions presuming the
taxing authorities full knowledge of the position and all
relevant facts, but without considering time values. FIN 48
is likely to cause greater volatility in earnings as more items
are recognized discretely within income tax expense. FIN 48
also revises disclosure requirements and introduces a
prescriptive, annual, tabular roll-forward of the unrecognized
tax benefits. FIN 48 is effective as of the beginning of
fiscal years that start after December 15, 2006
(October 1, 2007 for us).
We have analyzed our filing positions in all taxing
jurisdictions where we are required to file income tax returns,
as well as all open tax years in these jurisdictions. We have
also analyzed positions taken to not file income tax returns in
certain jurisdictions. Based on our current analysis, we
anticipate the adoption of FIN 48 will result in a charge
to our beginning balance of retained earnings at the date of
adoption of approximately $1.6 million (unaudited) to
increase our tax reserves. Our estimate is subject to revision
as we complete our analysis.
In September 2006, the FASB released SFAS No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value in 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.
48
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 2.
|
Basic and
Diluted Earnings Per Share
|
The following table sets forth the computation of basic and
diluted earnings per share (in millions, except for earnings per
share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
81.7
|
|
|
$
|
28.7
|
|
|
$
|
17.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share weighted
average shares
|
|
|
38.5
|
|
|
|
36.1
|
|
|
|
35.5
|
|
Effect of dilutive stock options and restricted stock awards
|
|
|
1.0
|
|
|
|
0.9
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share weighted
average shares and assumed conversions
|
|
|
39.5
|
|
|
|
37.0
|
|
|
|
36.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$
|
2.12
|
|
|
$
|
0.79
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
$
|
2.07
|
|
|
$
|
0.77
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 0.1 million, 1.0 million and
1.8 million shares of Common Stock in 2007, 2006, and 2005,
respectively, were not included in the computation of diluted
earnings per share because the effect of including the options
in the computation would have been antidilutive. The dilutive
impact of the remaining options outstanding in each year was
included in the effect of dilutive securities.
|
|
Note 3.
|
Accumulated
Other Comprehensive Income (Loss)
|
Accumulated other comprehensive income (loss) is comprised of
the following, net of taxes, where applicable (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Foreign currency translation gain
|
|
$
|
49.5
|
|
|
$
|
35.5
|
|
Net unrealized gain on derivative instruments, net of tax
|
|
|
1.2
|
|
|
|
4.1
|
|
Pension liability adjustments, net of tax
|
|
|
|
|
|
|
(52.2
|
)
|
Unrecognized pension net loss, net of tax
|
|
|
(40.1
|
)
|
|
|
|
|
Unrecognized pension prior service cost, net of tax
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss)
|
|
$
|
8.2
|
|
|
$
|
(12.6
|
)
|
|
|
|
|
|
|
|
|
|
49
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Finished goods and work in process
|
|
$
|
152.1
|
|
|
$
|
140.0
|
|
Raw materials
|
|
|
71.9
|
|
|
|
70.6
|
|
Supplies and spare parts
|
|
|
34.3
|
|
|
|
35.4
|
|
|
|
|
|
|
|
|
|
|
Inventories at FIFO cost
|
|
|
258.3
|
|
|
|
246.0
|
|
LIFO reserve
|
|
|
(33.9
|
)
|
|
|
(27.1
|
)
|
|
|
|
|
|
|
|
|
|
Net inventories
|
|
$
|
224.4
|
|
|
$
|
218.9
|
|
|
|
|
|
|
|
|
|
|
It is impracticable to segregate the LIFO reserve between raw
materials, finished goods and work in process. In fiscal 2007,
2006, and 2005, we reduced inventory quantities in some of our
LIFO pools. This reduction generally results in a liquidation of
LIFO inventory quantities typically carried at lower costs
prevailing in prior years as compared with the cost of the
purchases in the respective fiscal years, the effect of which
typically decreases cost of goods sold. The impact of the
liquidations in fiscal 2007, 2006, and 2005 was immaterial.
|
|
Note 5.
|
Assets
Held for Sale
|
The assets we recorded as held for sale consisted of property,
plant and equipment from a variety of plant closures and are as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Property, plant and equipment
|
|
$
|
1.8
|
|
|
$
|
4.0
|
|
|
|
|
|
|
|
|
|
|
Folding
Cartons
On January 24, 2007, we acquired for $32.0 million the
remaining 40% minority interest in Fold-Pak, giving us sole
ownership of the company. We acquired our initial 60% interest
in Fold-Pak in connection with the GSPP Acquisition in June
2005. Fold-Pak makes paperboard-based food containers serving a
very broad customer base and is a consumer of board from our
bleached paperboard mill. We have included the results of these
operations in our consolidated financial statements since that
date in our Packaging Products segment. The acquisition included
$18.7 million of intangibles, primarily for
customer relationships, and $3.5 million of goodwill. The
goodwill is deductible for income tax purposes. We are
amortizing the non-goodwill intangibles on a straight-line basis
over a weighted average life of 19.0 years. The pro forma
impact of the acquisition is not material to our financial
results.
Interior
Packaging
On February 27, 2006, our RTS subsidiary completed the
acquisition of the partition business of Caraustar Industries,
Inc. for an aggregate purchase price of $6.1 million. This
acquisition was funded by capital contributions to RTS by us and
our minority interest partner in proportion to each of our
investments in RTS. RTS accounted for this acquisition as a
purchase of a business and we have included these operations in
our consolidated financial statements since that date in our
Packaging Products segment. RTS made the acquisition in order to
gain entrance into the specialty partition market which
manufactures high quality die cut partitions. The acquisition
included $2.4 million of goodwill. The goodwill is
deductible for income tax purposes. The pro forma impact of the
acquisition is not material to our financial results.
50
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GSPP
On June 6, 2005, we acquired from Gulf States Paper
Corporation and certain of its related entities (Gulf
States) substantially all of the assets of Gulf
States Paperboard and Packaging operations
(GSPP) and assumed certain of Gulf
States related liabilities (the GSPP
Acquisition). No debt was assumed. The purchase price
for the GSPP Acquisition in fiscal 2005 was $552.2 million,
net of cash received of $0.7 million, including expenses.
We have included the results of GSPPs operations in our
consolidated financial statements since that date in our
Paperboard segment and Packaging Products segment. We made the
acquisition in order to acquire the bleached paperboard mill and
eleven folding carton plants owned by Gulf States, which serve
primarily food packaging, food service and pharmaceutical and
health and beauty markets. Three of the folding carton plants
are owned by Fold-Pak. As a result of the fiscal 2005 GSPP
Acquisition we recorded goodwill and intangibles. We assigned
the goodwill to our Paperboard and Packaging Products segments
in the amounts of $37.2 million and $13.8 million,
respectively. The $51.0 million of goodwill is deductible
for income tax purposes. We recorded $50.7 million of
customer relationship intangibles acquired in the GSPP
Acquisition and $4.0 million of financing costs incurred to
finance the acquisition. We assigned the customer relationship
intangibles to our Paperboard and Packaging Products segments in
the amounts of $36.4 million and $14.3 million,
respectively. The customer relationship intangibles lives vary
by segment acquired, and we are amortizing them on a
straight-line basis over a weighted average life of
22.3 years.
Included in the GSPP assets and the related liabilities we
assumed from Gulf States is a capital lease obligation totaling
$280 million for certain assets at the bleached paperboard
mill. The lessor is the Industrial Development Board of the City
of Demopolis, Alabama which financed the acquisition and
construction of substantially all of the assets at the
Demopolis, Alabama bleached paperboard mill by issuing a series
of industrial development revenue bonds which were purchased by
Gulf States. Included in the assets acquired from Gulf States
are these bonds. We also assumed Gulf States obligation
under the lease as part of the GSPP Acquisition. The bonds
indicate that the principal and interest can only be satisfied
by payments received from the lessee. Accordingly, we included
the leased assets in property, plant and equipment on our
balance sheet and offset the capital lease obligation and bonds
on our balance sheet since we have effectively repurchased the
lease obligation.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of the GSPP
Acquisition. The opening balance sheet as reported at
September 30, 2005 is as follows (in millions):
|
|
|
|
|
Current assets, net of cash received
|
|
$
|
127.6
|
|
Property, plant, and equipment
|
|
|
357.1
|
|
Goodwill
|
|
|
51.0
|
|
Intangible assets customer relationships
(22.3 year weighted-average useful life)
|
|
|
50.7
|
|
Other long-term assets
|
|
|
0.3
|
|
|
|
|
|
|
Total assets acquired
|
|
|
586.7
|
|
|
|
|
|
|
Current liabilities
|
|
|
24.6
|
|
Minority interest
|
|
|
9.4
|
|
Other long-term liabilities
|
|
|
0.5
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
34.5
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
552.2
|
|
|
|
|
|
|
51
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following unaudited pro forma information reflects our
consolidated results of operations as if the GSPP Acquisition
had taken place on October 1, 2004. The pro forma
information includes primarily adjustments for depreciation
based on the estimated fair value of the property, plant and
equipment we acquired, amortization of acquired intangibles and
interest expense on the debt we incurred to finance the
acquisition. The pro forma information is not necessarily
indicative of the results of operations that we would have
reported had the transaction actually occurred at the beginning
of fiscal 2005 nor is it necessarily indicative of future
results.
(In millions, except per share data)
|
|
|
|
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
|
2005
|
|
|
Net sales
|
|
$
|
2,075.2
|
|
|
|
|
|
|
Net income
|
|
$
|
30.1
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
Note 7.
|
Restructuring
and Other Costs, Net
|
We recorded pre-tax restructuring and other costs, net of
$4.7 million, $7.8 million, and $7.5 million for
fiscal 2007, 2006, and 2005, respectively. Of these costs,
$1.1 million, $3.0 million and $2.0 million were
non-cash for fiscal 2007, 2006, and 2005, respectively. These
amounts are not comparable since the timing and scope of the
individual actions associated with a restructuring can vary. The
following table represents a summary of restructuring and other
charges related to our active restructuring initiatives that we
incurred during the fiscal year, cumulatively since we announced
the initiative, and the total we expect to incur (in millions):
Summary
of Restructuring and Other Costs (Income), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Property,
|
|
|
Employee
|
|
|
Equipment
|
|
|
Facility
|
|
|
|
|
|
|
|
|
|
|
|
Plant and
|
|
|
Related
|
|
|
and Inventory
|
|
|
Carrying
|
|
|
|
|
|
|
|
Segment
|
|
Period
|
|
Equipment(1)
|
|
|
Costs
|
|
|
Relocation
|
|
|
Costs
|
|
|
Other
|
|
|
Total
|
|
|
Packaging
|
|
Fiscal 2007
|
|
$
|
1.1
|
|
|
$
|
1.0
|
|
|
$
|
0.6
|
|
|
$
|
0.3
|
|
|
$
|
1.7
|
|
|
$
|
4.7
|
|
Products(a)
|
|
Fiscal 2006
|
|
|
1.7
|
|
|
|
1.8
|
|
|
|
0.7
|
|
|
|
0.3
|
|
|
|
2.6
|
|
|
|
7.1
|
|
|
|
Fiscal 2005
|
|
|
2.5
|
|
|
|
4.3
|
|
|
|
0.5
|
|
|
|
|
|
|
|
0.1
|
|
|
|
7.4
|
|
|
|
Cumulative
|
|
|
5.3
|
|
|
|
7.1
|
|
|
|
1.8
|
|
|
|
0.6
|
|
|
|
4.4
|
|
|
|
19.2
|
|
|
|
Expected Total
|
|
|
5.3
|
|
|
|
7.3
|
|
|
|
2.1
|
|
|
|
1.1
|
|
|
|
4.5
|
|
|
|
20.3
|
|
Paperboard(b)
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
Fiscal 2005
|
|
|
(1.1
|
)
|
|
|
0.2
|
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
Cumulative
|
|
|
23.3
|
|
|
|
3.2
|
|
|
|
1.0
|
|
|
|
1.3
|
|
|
|
0.4
|
|
|
|
29.2
|
|
|
|
Expected Total
|
|
|
23.3
|
|
|
|
3.2
|
|
|
|
1.0
|
|
|
|
1.3
|
|
|
|
0.4
|
|
|
|
29.2
|
|
Other(c)
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
Fiscal 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
Total
|
|
Fiscal 2007
|
|
$
|
1.1
|
|
|
$
|
1.0
|
|
|
$
|
0.6
|
|
|
$
|
0.3
|
|
|
$
|
1.7
|
|
|
$
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
$
|
1.6
|
|
|
$
|
1.8
|
|
|
$
|
0.8
|
|
|
$
|
0.4
|
|
|
$
|
3.2
|
|
|
$
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005
|
|
$
|
1.4
|
|
|
$
|
4.5
|
|
|
$
|
1.1
|
|
|
$
|
0.7
|
|
|
$
|
(0.2
|
)
|
|
$
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
$
|
28.6
|
|
|
$
|
10.3
|
|
|
$
|
2.8
|
|
|
$
|
1.9
|
|
|
$
|
4.8
|
|
|
$
|
48.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Total
|
|
$
|
28.6
|
|
|
$
|
10.5
|
|
|
$
|
3.1
|
|
|
$
|
2.4
|
|
|
$
|
4.9
|
|
|
$
|
49.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
For this Note 7, 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 Packaging Products segment charges primarily reflect the
following folding carton plant closures recorded: 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), Waco, Texas (announced and closed in fiscal
2005), and St. Paul, Minnesota (announced in fiscal 2004 and
closed in fiscal 2005). 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. Fiscal 2005 also
includes severance and other employee costs related to our
folding carton division restructuring. We believe these actions
have allowed us to more effectively manage the collective
folding assets. |
|
(b) |
|
The Paperboard segment charges primarily reflect the closures of
our Wright City, Missouri laminated paperboard products facility
(announced and closed in fiscal 2005) and our Otsego,
Michigan paperboard mill (announced and closed in fiscal 2004).
We transferred approximately one-third of the production of the
Otsego facility to our remaining mills. 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 a charge 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. |
|
(c) |
|
In fiscal 2005, we acquired certain GSPP assets and assumed
certain of Gulf States related liabilities. We have
expensed as incurred various incremental transition costs to
integrate the operations into our mill and folding carton
operations of $0.5 million in fiscal 2006 and
$0.7 million in fiscal 2005. In fiscal 2005, we recorded a
charge of $0.6 million to expense previously capitalized
patent defense costs and recognized a gain of $1.9 million
when we sold 9.4 acres of real estate adjacent to our
Norcross, Georgia headquarters and received proceeds of
$2.8 million. |
We do not allocate restructuring and other costs to our
segments. If we had done so, we would have charged
$4.7 million, $7.1 million, and $7.4 million to
our Packaging Products segment for fiscal 2007, 2006, and 2005,
respectively; charged $0.5 million to the Paperboard
segment for fiscal 2005; charged $0.1 million to our
Merchandising Displays segment in fiscal 2006; and charged
$0.6 million in fiscal 2006 and recorded a gain of
$0.4 million in fiscal 2005, to our corporate operations.
53
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (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 to Restructuring
and other costs, net included in our consolidated statements
of income for fiscal 2007, 2006, and 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Accrual at beginning of fiscal year
|
|
$
|
2.1
|
|
|
$
|
1.6
|
|
|
$
|
1.2
|
|
Additional accruals
|
|
|
2.6
|
|
|
|
2.5
|
|
|
|
2.6
|
|
Payments
|
|
|
(2.0
|
)
|
|
|
(1.9
|
)
|
|
|
(2.2
|
)
|
Adjustment to accruals
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at September 30,
|
|
$
|
2.4
|
|
|
$
|
2.1
|
|
|
$
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of accruals to restructuring and other
costs, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional accruals and adjustment to accruals (see table above)
|
|
$
|
2.3
|
|
|
$
|
2.4
|
|
|
$
|
2.6
|
|
Severance and other employee costs
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
1.9
|
|
Net property, plant and equipment
|
|
|
1.1
|
|
|
|
1.6
|
|
|
|
1.4
|
|
Equipment relocation
|
|
|
0.6
|
|
|
|
0.8
|
|
|
|
1.1
|
|
Facility carrying costs
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.7
|
|
Other
|
|
|
0.2
|
|
|
|
2.1
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and other costs, net
|
|
$
|
4.7
|
|
|
$
|
7.8
|
|
|
$
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents a summary of incremental
restructuring accruals related to severance and other employee
costs to close the Waco plant that was acquired as part of the
GSPP Acquisition (in millions):
|
|
|
|
|
|
|
2006
|
|
|
Accrual at beginning of fiscal year
|
|
$
|
1.5
|
|
Additional accruals
|
|
|
|
|
Payments
|
|
|
(1.4
|
)
|
Adjustment to accruals
|
|
|
(0.1
|
)
|
|
|
|
|
|
Accrual at September 30,
|
|
$
|
|
|
|
|
|
|
|
|
|
Note 8.
|
Other
Intangible Assets
|
The gross carrying amount and accumulated amortization relating
to intangible assets, excluding goodwill, is as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Weighted
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Avg. Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Customer relationships
|
|
|
21.3
|
|
|
$
|
78.5
|
|
|
$
|
(16.3
|
)
|
|
$
|
65.2
|
|
|
$
|
(11.7
|
)
|
Non-compete agreements
|
|
|
5.2
|
|
|
|
8.3
|
|
|
|
(6.6
|
)
|
|
|
6.5
|
|
|
|
(6.1
|
)
|
Patents
|
|
|
8.0
|
|
|
|
1.5
|
|
|
|
(0.1
|
)
|
|
|
1.2
|
|
|
|
(0.3
|
)
|
Trademark
|
|
|
40.0
|
|
|
|
2.9
|
|
|
|
(0.7
|
)
|
|
|
0.8
|
|
|
|
(0.6
|
)
|
License Costs
|
|
|
5.0
|
|
|
|
0.3
|
|
|
|
(0.2
|
)
|
|
|
0.3
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21.3
|
|
|
$
|
91.5
|
|
|
$
|
(23.9
|
)
|
|
$
|
74.0
|
|
|
$
|
(18.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During fiscal 2007, our net intangible balance increased
$12.5 million primarily due to $18.7 million of
intangibles acquired in the acquisition of the remaining 40% of
Fold-Pak, which was partially offset by amortization of
intangibles. During fiscal 2006, our net intangible balance
decreased $6.8 million primarily due to amortization of
intangibles, and a charge of $1.3 million on a customer
relationship intangible we had previously acquired in an
acquisition, due to discontinuing shipments to certain customers
after we closed the facility. The charge was recorded in the
Restructuring and other costs, net line item of our consolidated
statements of income.
We are amortizing all of our intangibles. None of our
intangibles has significant residual value. Our intangible
assets are amortized based on a straight-line basis or the
estimated pattern in which the economic benefits are realized
over their estimated useful lives ranging from 1 to
40 years and have a weighted average of approximately
21.3 years.
During fiscal 2007, 2006, and 2005, amortization expense was
$7.1 million, $7.7 million, and $5.0 million,
respectively. Estimated amortization expense for the succeeding
five fiscal years is as follows (in millions):
|
|
|
|
|
2008
|
|
$
|
5.9
|
|
2009
|
|
|
5.8
|
|
2010
|
|
|
5.0
|
|
2011
|
|
|
4.7
|
|
2012
|
|
|
4.0
|
|
|
|
Note 9.
|
Unconsolidated
Entities
|
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 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 September 30, 2007,
which would result in a purchase price of less than 60% of our
partners share of the net equity reflected on Seven
Hills September 30, 2007 balance sheet. The partners
of the joint venture have guaranteed funding of any net losses
of Seven Hills in relation to their proportionate share of
ownership. Seven Hills has no third party debt. We have invested
a total of $19.2 million in Seven Hills as of
September 30, 2007, net of distributions. Our investment is
reflected in the assets of our Paperboard segment. Our share of
cumulative pre-tax losses by Seven Hills that we have recognized
as of September 30, 2007 and 2006 were $1.4 million
and $1.7 million, respectively. During fiscal 2007 and
2006, our share of operating income at Seven Hills amounted to
$0.4 million and $1.9 million, respectively. During
fiscal 2005 our share of operating losses incurred at Seven
Hills amounted to $1.0 million. The loss in fiscal 2005
reflected our estimate of our share of the adverse impact of a
preliminary award of arbitration between us and our joint
venture partner, which was recorded in the third quarter of
fiscal 2005. The final settlement notice was agreed to in
December 2005. At that time, we determined that a portion of the
reserve for the expected adverse impact previously recorded no
longer was required and the excess amount of $1.2 million
was released to income in the first quarter of fiscal 2006.
Under the terms of the Seven Hills joint venture arrangement,
our partner is required to purchase all of the saleable gypsum
paperboard liner produced by Seven Hills, for which we receive
fees for tons of gypsum paperboard liner calculated using
formulas in the joint venture agreement. We also provide other
services related to the operation of Seven Hills, for which the
joint venture reimburses our expenses, and lease to Seven Hills
the land and building occupied by the joint venture. Our pre-tax
income from the Seven Hills joint venture, including the fees we
charge the venture and our share of the joint ventures net
income, was $3.0 million, $3.7 million and
$0.7 million, for fiscal 2007, 2006, and 2005,
respectively. We contributed cash of $0.4 million,
$0.2 million, and
55
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$0.1 million for fiscal 2007, 2006, and 2005, respectively.
Our contributions for each of those years were for capital
expenditures.
We collect the receivables and disburse the payables for our
Seven Hills joint venture. Therefore, at each balance sheet date
we have either a liability due to the joint venture or a
receivable from the joint venture. Interest income or expense is
recorded between the two parties on the average outstanding
balance. At September 30, 2007 and 2006 we had a current
liability of $5.6 million and $11.0 million,
respectively, on our consolidated balance sheets. The change in
the liability is reflected in the financing activities section
of our consolidated statements of cash flows on the line item
advances from (repayments to) unconsolidated entity.
In fiscal 2007, we entered into two business ventures accounted
for under the equity method. We acquired 23.96% of Quality
Packaging Specialists International, a business providing
merchandising displays, contract packing, logistics and
distribution solutions, and we acquired 45% of Display Source
Alliance, LLC, a business providing primarily permanent
merchandising displays. Our investment exceeds the underlying
equity in net assets of each of the two investees. The
difference is attributed to our proportional interest in
specific assets of the ventures and is amortized over the useful
lives of the respective assets. The difference at
September 30, 2007 is $5.0 million for QPSI and
$0.7 million for DSA and is being amortized over a weighted
average life of 20.3 years and 7.0 years,
respectively, primarily for the
write-up of
customer list intangibles, fixed assets, and trade names and
trademarks.
56
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following were individual components of debt (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Face value of 5.625% notes due March 2013, net of
unamortized discount of $0.1 and $0.2
|
|
$
|
99.9
|
|
|
$
|
99.8
|
|
Hedge adjustments resulting from terminated interest rate
derivatives or swaps
|
|
|
1.8
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.7
|
|
|
|
101.9
|
|
Face value of 8.20% notes due August 2011, net of
unamortized discount of $0.3 and $0.3
|
|
|
249.7
|
|
|
|
249.7
|
|
Hedge adjustments resulting from terminated interest rate
derivatives or swaps
|
|
|
6.7
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
256.4
|
|
|
|
258.0
|
|
Term loan facility(a)
|
|
|
160.7
|
|
|
|
243.7
|
|
Revolving credit and swing facilities(a)
|
|
|
68.3
|
|
|
|
86.9
|
|
Receivables-backed financing facility(b)
|
|
|
100.0
|
|
|
|
90.0
|
|
Industrial development revenue bonds, bearing interest at
variable rates (4.94% at September 30, 2007, and 5.55% at
September 30, 2006), due through October 2036(c)
|
|
|
23.9
|
|
|
|
23.9
|
|
Other notes
|
|
|
11.3
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
722.3
|
|
|
|
806.1
|
|
Less current portion of debt
|
|
|
46.0
|
|
|
|
40.8
|
|
|
|
|
|
|
|
|
|
|
Long-term debt due after one year
|
|
$
|
676.3
|
|
|
$
|
765.3
|
|
|
|
|
|
|
|
|
|
|
The following were the aggregate components of debt (in
millions):
|
|
|
|
|
Face value of debt instruments, net of unamortized discounts
|
|
$
|
713.8
|
|
|
$
|
795.7
|
|
Hedge adjustments resulting from terminated interest rate
derivatives or swaps
|
|
|
8.5
|
|
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
722.3
|
|
|
$
|
806.1
|
|
|
|
|
|
|
|
|
|
|
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 September 30,
2007 and September 30, 2006 was an amount of
$15.0 million to reflect amounts that we may pay down early
in connection with our routine working capital management.
|
|
|
(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 September 30, 2007 and
2006 there were $46.8 million and $49.8 million in
borrowings to 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 September 30, 2007, the facility
has cumulatively been reduced by $89.3 million. At
September 30, 2007 the Senior Credit Facility had a maximum
principal amount of $610.7 million. The Senior Credit
Facility is pre-payable at any time and is scheduled to expire
on June 6, 2010. At September 30, 2007, we had issued
aggregate outstanding letters of credit under this facility of
approximately $39 million, none of which had been drawn |
57
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
upon. At September 30, 2007, due to the restrictive
covenants on the revolving credit facility, maximum additional
available borrowings under this facility were approximately
$342.7 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
|
|
2007
|
|
|
2006
|
|
|
Applicable margin/percentage for determining:
|
|
|
|
|
|
|
|
|
|
|
U.S. and Canadian Base Rate Loans interest rate(1)
|
|
0.00%-0.75%
|
|
|
0.00
|
%
|
|
|
0.75
|
%
|
Bankers Acceptance and U.S. and Canadian LIBOR Loans
interest rate(1)
|
|
0.875%-1.75%
|
|
|
1.00
|
%
|
|
|
1.75
|
%
|
Facility commitment fee(2)
|
|
0.175%-0.40%
|
|
|
0.20
|
%
|
|
|
0.40
|
%
|
|
|
|
(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. |
|
|
|
|
|
Interest on the U.S. revolving credit facility and term
loan facility are payable in arrears on each applicable payment
date. At our election, we can choose U.S. and Canadian Base
Rate Loans, U.S. and Canadian LIBOR Loans, Bankers
Acceptance Loans or a combination thereof. If we chose
U.S. and Canadian LIBOR Loans or Bankers Acceptance
Loans, the interest rate reset options are 30, 60, 90 or
180 days. The Senior Credit Facility is secured by the real
and personal property of the GSPP business that we acquired in
the GSPP Acquisition and the following property of the Company
and its wholly-owned subsidiaries: inventory and general
intangibles, including, without limitation, specified patents,
patent licenses, trademarks, trademark licenses, copyrights and
copyright licenses. Upon filing this
Form 10-K,
we will have the right to cause the lien to be released due to
our satisfying the requirements to be below a Credit Agreement
Debt/EBITDA ratio of 3.0 times for two sequential quarters. The
agreement documenting the Senior Credit Facility, includes
restrictive covenants regarding the maintenance of financial
ratios, the creation of additional long-term and short-term
debt, the creation or existence of certain liens, the occurrence
of certain mergers, acquisitions or disposals of assets and
certain leasing arrangements, the occurrence of certain
fundamental changes in the primary nature of our consolidated
business, the nature of certain investments, and other matters.
We are in compliance with these restrictions. Under the most
restrictive of these covenants, as of September 30, 2007,
we could pay up to approximately $110 million of dividends
without violating our Minimum Consolidated Net Worth covenant. |
|
(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. Since the
facility is scheduled to mature beyond one year from the balance
sheet date, borrowings from the facility are classified as
non-current at September 30, 2007 and due to similar
circumstances, as non-current at September 30, 2006.
Borrowing availability under this facility is based on the
eligible underlying receivables. At September 30, 2007 and
2006, maximum available borrowings under this facility were
approximately $100.0 million. The borrowing rate, which
consists of the market rate for asset-backed commercial paper
plus a utilization fee, was 5.49% and 5.61% as of
September 30, 2007 and September 30, 2006,
respectively. |
|
(c) |
|
The industrial development revenue bonds are issued by various
municipalities in which we maintain operations or other
facilities. The bonds are fully secured by a pledge of payments
to the municipality by us under a financing agreement. Each
series of bonds is also secured by and payable through a letter
of credit |
58
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
issued in favor of the Trustee to the bonds. We are required to
maintain these letters of credit under the terms of the bond
indenture. The letters of credit are renewable at our request so
long as no default or event of default has occurred under the
Senior Credit Facility. A remarketing agent offers the bonds for
initial sale and uses its best efforts to remarket the bonds
until they mature or are otherwise fully redeemed. The
remarketing agent also periodically determines the interest
rates on the bonds based on prevailing market conditions. The
remarketing agent is paid a fee for this service. Our industrial
development revenue bonds are remarketed on a periodic basis
upon demand of the bondholders. If the remarketing agent is
unable to successfully remarket the bonds, the remarketing agent
will repurchase the bonds by drawing on the letters of credit.
If this were to occur, we would immediately reimburse the
issuing lender with the proceeds of a revolving loan obtained
under the Senior Credit Facility. Accordingly, we have
classified the industrial development revenue bonds as
non-current, except for $2.5 million classified as current
because we expect to redeem the bond during fiscal 2008. |
Interest on our 8.20% notes due August 2011
(August 2011 notes) is payable in arrears
each February and August. Interest on our 5.625% notes due
March 2013 (March 2013 notes) is payable in
arrears each September and March. Our August 2011 notes and
March 2013 notes are unsecured facilities and are not redeemable
prior to maturity and are not subject to any sinking fund
requirements. 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. At September 30, 2007 and 2006, the
fair market value of the August 2011 notes was approximately
$256.6 million and $261.6 million, respectively, based
on quoted market prices. At September 30, 2007 and 2006,
the fair market value of the March 2013 notes was approximately
$93.1 million and $93.3 million, respectively, based
on quoted market prices.
As of September 30, 2007, the aggregate maturities of
long-term debt for the succeeding five fiscal years are as
follows (in millions):
|
|
|
|
|
2008
|
|
$
|
46.0
|
|
2009
|
|
|
165.0
|
|
2010
|
|
|
122.5
|
|
2011
|
|
|
250.3
|
|
2012
|
|
|
0.3
|
|
Thereafter
|
|
|
130.1
|
|
Unamortized hedge adjustments from terminated interest rate
derivatives or swaps
|
|
|
8.5
|
|
Unamortized bond discount
|
|
|
(0.4
|
)
|
|
|
|
|
|
Total long-term debt
|
|
$
|
722.3
|
|
|
|
|
|
|
At September 30, 2007 and 2006 we had interest rate swap
agreements in place with an aggregate notional amount of
$200 million and $350 million, respectively. These
agreements effectively converted a portion of our floating rate
interest rates through September 2010 to fixed rates. We also
had commodity swaps effectively fixing the prices of varying
amounts of fiber sales which at September 30, 2007 and 2006
were 76,500 and 87,100 tons, respectively, through November
2008. In addition, at September 30, 2007, we had a price
collar covering 250,000 MMBtu of natural gas purchases for
the month of October 2007. All of these agreements were
originally designated as cash flow hedges. Also, at
September 30, 2007 and 2006 we had a contract to purchase
7,500 and 25,500 future tons of fiber, respectively, and a swap
contract to convert the variable price of fiber to fixed for
8,000 and 27,200 tons, respectively, which qualify as
derivatives and are being accounted for by recording the change
in fair value of these instruments through earnings.
59
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of the net fair values of both our
financial derivative instruments as well as our physical
contracts that qualify as derivatives under SFAS 133 that
are outstanding as of September 30 (in millions,
asset/(liability)):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Interest rate financial swaps
|
|
$
|
(2.4
|
)
|
|
$
|
(4.4
|
)
|
Commodity financial swaps
|
|
|
(3.3
|
)
|
|
|
(0.1
|
)
|
Commodity physical contracts
|
|
|
0.5
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Net fair value of derivative contracts
|
|
$
|
(5.2
|
)
|
|
$
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
The fair value of our derivative instruments is generally based
on market pricing and represents the net amount estimated to
terminate the position, taking into consideration market rates
and counterparty credit risk. Included in the table above is a
fair value liability of $1.3 million for commodity swaps
that serve as economic hedges but do not qualify as cash flow
hedges in accordance with SFAS 133.
During fiscal 2007 and 2006, we terminated several of our
interest rate swaps that were being accounted for as cash flow
hedges. Amounts related to these terminated swaps remain in
accumulated other comprehensive income and are amortized to
earnings over the original remaining period of the forecasted
transaction hedged, to the extent we believe that it is at least
reasonably possible the related interest payments will be made.
In fiscal 2007, 2006 and 2005, approximately $4.0 million,
$2.9 million and $0.4 million, respectively was
reclassified from other comprehensive income into earnings, as a
reduction of interest expense. We expect to reclassify
approximately $1.5 million to fiscal 2008 pre-tax income
from accumulated other comprehensive income related to various
previously terminated interest rate cash flow hedges. During
fiscal 2006, we concluded it was probable that some of the
forecasted transactions, hedged by some previously terminated
swaps, would not occur and approximately $0.4 million of
pre-tax income was reclassified out of accumulated other
comprehensive income into earnings.
The following is a summary of information related to our cash
flow hedges as of September 30 (in millions, asset/(liability)):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Proceeds from (payment on) termination of cash flow interest
rate hedges
|
|
|
(0.7
|
)
|
|
|
14.5
|
|
Ineffectiveness recorded in the results of operations in the
fiscal year pre-tax
|
|
|
(1.2
|
)
|
|
|
0.1
|
|
Amounts in accumulated other comprehensive income/(loss) related
to active swaps pre-tax
|
|
|
(4.0
|
)
|
|
|
(4.1
|
)
|
Amounts in accumulated other comprehensive income/(loss) related
to terminated swaps pre-tax
|
|
|
6.0
|
|
|
|
10.8
|
|
In October 2007, we paid $3.5 million to terminate all of
our open interest rate swaps, which had been accounted for as
cash flow hedges. Any 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.
Prior to June 2005, we had a series of interest rate swaps which
effectively converted our fixed rate debt to floating rates.
These swaps were accounted for as fair value hedges. The fair
value hedges resulted in amounts that are treated as changes to
the carrying value of the fixed rate debt. The balance remaining
at termination of these swaps is being amortized into income
over the original term of the related debt. In fiscal 2007, 2006
and 2005 $1.9 million, $1.8 million and
$4.1 million, respectively, was amortized into income
resulting in a reduction of interest expense.
We lease certain manufacturing and warehousing facilities and
equipment (primarily transportation equipment) under various
operating leases. Some leases contain escalation clauses and
provisions for lease renewal.
60
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of September 30, 2007, future minimum lease payments
under all noncancelable leases, excluding the Demopolis lease
discussed in Note 6, for the succeeding five fiscal years,
including certain maintenance charges on transportation
equipment, are as follows (in millions):
|
|
|
|
|
2008
|
|
$
|
10.0
|
|
2009
|
|
|
6.0
|
|
2010
|
|
|
3.3
|
|
2011
|
|
|
1.8
|
|
2012
|
|
|
1.2
|
|
Thereafter
|
|
|
1.5
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
23.8
|
|
|
|
|
|
|
Rental expense for the years ended September 30, 2007,
2006, and 2005 was approximately $18.4 million,
$18.4 million and $18.0 million, respectively,
including lease payments under cancelable leases.
The provisions for income taxes consist of the following
components (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
17.0
|
|
|
$
|
1.1
|
|
|
$
|
(3.4
|
)
|
State
|
|
|
3.5
|
|
|
|
(0.8
|
)
|
|
|
0.5
|
|
Foreign
|
|
|
2.6
|
|
|
|
4.1
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
23.1
|
|
|
|
4.4
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
21.4
|
|
|
|
8.1
|
|
|
|
2.9
|
|
State
|
|
|
2.0
|
|
|
|
(2.1
|
)
|
|
|
(0.1
|
)
|
Foreign
|
|
|
(1.2
|
)
|
|
|
(0.5
|
)
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
22.2
|
|
|
|
5.5
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
45.3
|
|
|
$
|
9.9
|
|
|
$
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of deferred tax expense are as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Employee related accruals and allowances
|
|
$
|
0.2
|
|
|
$
|
(2.7
|
)
|
|
$
|
(0.8
|
)
|
Research and development and other federal credit carryforwards,
net of valuation allowances
|
|
|
3.1
|
|
|
|
(3.1
|
)
|
|
|
|
|
State net operating loss carryforwards, net of valuation
allowance
|
|
|
(1.4
|
)
|
|
|
(2.1
|
)
|
|
|
(2.6
|
)
|
State credit carryforwards, net of federal benefit and valuation
allowance
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
0.3
|
|
Property, plant and equipment
|
|
|
7.8
|
|
|
|
9.7
|
|
|
|
15.9
|
|
Deductible intangibles
|
|
|
2.6
|
|
|
|
2.4
|
|
|
|
1.4
|
|
Pension
|
|
|
7.4
|
|
|
|
1.5
|
|
|
|
(4.0
|
)
|
Inventory reserves
|
|
|
1.2
|
|
|
|
(0.3
|
)
|
|
|
(2.3
|
)
|
Other deferred tax assets
|
|
|
(0.4
|
)
|
|
|
(0.6
|
)
|
|
|
0.4
|
|
Other deferred tax liabilities
|
|
|
2.1
|
|
|
|
0.7
|
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense
|
|
$
|
22.2
|
|
|
$
|
5.5
|
|
|
$
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The differences between the statutory federal income tax rate
and our effective income tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statutory federal tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Meals and entertainment expense
|
|
|
0.4
|
|
|
|
0.9
|
|
|
|
2.5
|
|
Adjustment of deferred taxes for changes in state and foreign
tax rates
|
|
|
0.9
|
|
|
|
(5.2
|
)
|
|
|
6.9
|
|
Fixed assets and inventory adjustments
|
|
|
(0.3
|
)
|
|
|
0.2
|
|
|
|
(6.6
|
)
|
Adjustment and resolution of federal and state tax deductions
|
|
|
0.5
|
|
|
|
3.1
|
|
|
|
(20.8
|
)
|
State taxes, net of federal benefit
|
|
|
1.8
|
|
|
|
(1.6
|
)
|
|
|
(3.5
|
)
|
Research and development and other tax credits, net of valuation
allowances
|
|
|
(3.1
|
)
|
|
|
(6.9
|
)
|
|
|
(0.1
|
)
|
Adjustment to deferred taxes restructuring
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
(1.7
|
)
|
Other valuation allowances
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
0.8
|
|
Other, net
|
|
|
0.1
|
|
|
|
0.7
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
35.7
|
%
|
|
|
25.8
|
%
|
|
|
11.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2007, we recorded a tax benefit of $4.0 million
related to federal, state, and foreign research and development
and other tax credits, net of valuation allowances. We recorded
state tax expense of $1.2 million which related to a change
in our state effective tax rate on our domestic operating
entities from approximately 3% to approximately 3.4% primarily
to reflect estimated impact of changes in state tax laws on
deferred taxes. In fiscal 2006, we recorded a state tax benefit
of $2.4 million which related primarily to a change in our
state effective tax rate on our domestic operating entities from
approximately 4% to 3%. We recorded research and development and
other tax credits of $0.8 million, net of valuation
allowances, primarily related to prior years. In fiscal 2005, we
recorded a $4.1 million benefit resulting from the
adjustment and resolution of federal and state tax deductions
that we had previously reserved. This benefit was partially
offset by a $1.4 million expense related to changes in our
state effective rates, net of changes to our Canadian tax rate.
62
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences that give rise to
significant portions of deferred income tax assets and
liabilities consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Accruals and allowances
|
|
$
|
2.8
|
|
|
$
|
3.2
|
|
Employee related accruals and allowances
|
|
|
9.1
|
|
|
|
9.2
|
|
Pension
|
|
|
6.0
|
|
|
|
32.7
|
|
Research and development and other federal credit carryforwards
|
|
|
|
|
|
|
3.1
|
|
State net operating loss carryforwards
|
|
|
8.7
|
|
|
|
6.8
|
|
State credit carryforwards, net of federal benefit
|
|
|
1.3
|
|
|
|
0.9
|
|
Foreign tax credit carryforwards
|
|
|
1.1
|
|
|
|
1.6
|
|
Valuation allowances
|
|
|
(3.5
|
)
|
|
|
(3.5
|
)
|
Other
|
|
|
10.1
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
35.6
|
|
|
|
60.0
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
127.8
|
|
|
|
118.4
|
|
Deductible intangibles
|
|
|
16.8
|
|
|
|
13.9
|
|
Pension
|
|
|
|
|
|
|
11.7
|
|
Inventory reserves
|
|
|
2.9
|
|
|
|
1.7
|
|
Other
|
|
|
10.0
|
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
157.5
|
|
|
|
153.9
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
$
|
121.9
|
|
|
$
|
93.9
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes are recorded as follows in the consolidated
balance sheet:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Current deferred tax asset
|
|
$
|
3.8
|
|
|
$
|
5.9
|
|
Long-term deferred tax liability
|
|
|
125.7
|
|
|
|
99.8
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
$
|
121.9
|
|
|
$
|
93.9
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007 and September 30, 2006, net
operating losses, for state tax reporting purposes, of
approximately $197 million and $144 million,
respectively, were available for carry forward. These loss carry
forwards generally expire within 5 to 20 years. We have
recorded deferred tax assets of $8.7 million and
$6.8 million at September 30, 2007 and 2006,
respectively, as our estimate of the future benefit of these
losses, and we have also recorded valuation allowances of
$2.2 million and $1.6 million at September 30,
2007 and 2006, respectively, against these assets. In addition,
at September 30, 2007 and 2006, certain allowable state tax
credits were available for carry forward. These state carry
forwards generally expire within 5 to 10 years. We have
recorded a deferred tax asset of $1.3 million and
$0.9 million at September 30, 2007 and 2006,
respectively, as our estimate of the future benefit of these
credits, and we have also recorded a valuation allowance of
$0.2 million and $0.2 million at September 30,
2007 and 2006, respectively, against these assets.
As of September 30, 2007, we anticipate being able to
utilize all net operating losses for federal tax reporting
purposes to offset taxable income of the current or prior
periods. At September 30, 2006, net operating losses, for
63
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
federal tax reporting purposes, of approximately
$5.7 million were available for carry back or carry
forward. In addition, as of September 30, 2007, except for
certain foreign tax credits, we anticipate being able to utilize
all federal tax credits to offset federal tax liability of the
current or prior periods. At September 30, 2006,
approximately $1.3 million of certain allowable federal tax
credits were available for carry forward and were recorded as a
deferred tax asset at September 30, 2006. The federal
credit carry forwards generally expire within 8 to 20 years.
The components of income before income taxes are as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
$
|
120.6
|
|
|
$
|
28.4
|
|
|
$
|
13.0
|
|
Foreign
|
|
|
6.4
|
|
|
|
10.2
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
127.0
|
|
|
$
|
38.6
|
|
|
$
|
19.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of fiscal 2006, we repatriated, from
certain of our foreign subsidiaries, $33.3 million in
extraordinary dividends, as allowed under the American Jobs
Creation Act of 2004. This Act created a temporary incentive for
United States corporations to repatriate accumulated income
earned abroad by allowing a deduction from U.S. taxable
income of an amount equal to 85% of certain dividends received
from controlled foreign corporations. As a result of this
repatriation, in fiscal 2007 we owed $1.7 million of United
States taxes before foreign tax credits of $0.9 million.
Net of foreign tax credits, in fiscal year 2007 we paid
$0.8 million in United States taxes.
We have elected to treat earnings from certain foreign
subsidiaries from the date we acquired the operations as subject
to repatriation and we provide for taxes accordingly. We
consider all earnings of our other foreign subsidiaries
indefinitely invested in the respective foreign operations other
than those we repatriated under the American Jobs Creation Act
of 2004 as extraordinary dividends. As of September 30,
2007, we estimate those indefinitely invested earnings to be
approximately $26.2 million. We have not provided for any
incremental United States taxes that would be due upon the
repatriation of those earnings into the United States. However,
in the event of a distribution of those earnings in the form of
dividends or otherwise, we may be subject to both United States
income taxes, subject to an adjustment for foreign tax credits,
and withholding taxes payable to the various foreign countries.
Determination of the amount of unrecognized deferred United
States income tax liability is not practicable.
|
|
Note 14.
|
Retirement
Plans
|
Defined
Benefit Pension Plans
We have five qualified defined benefit pension plans with
approximately 52% of our employees in the United States
currently accruing benefits. 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. Approximately 36% of our
employees are covered by collective bargaining agreements,
including approximately 4% of our employees are covered by
collective bargaining agreements that have expired and another
5% are covered by collective bargaining agreements that expire
within one year. We have a Supplemental Executive Retirement
Plan (SERP) that provides unfunded
supplemental retirement benefits to certain of our executives.
The SERP provides for incremental pension benefits in excess of
those offered in our principal pension plan.
In fiscal 2005, our board of directors approved and adopted
changes to our 401(k) retirement savings plans that cover our
salaried and nonunion hourly employees and to our defined
benefit plans that cover our salaried and nonunion hourly
employees. Effective January 1, 2005, employees hired on or
after January 1, 2005, are not eligible to participate in
our pension plan. We provide an enhanced 401(k) plan match for
such employees: 100% match on the first 3% of eligible pay
contributed by the employee and 50% match on the next 2% of
eligible pay contributed by the employee. In addition, effective
January 1, 2005, then current employees who were less than
35 years old and
64
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
who had less than 5 years of vesting service on
December 31, 2004, were no longer eligible to participate
in our pension plan after December 31, 2004. Effective
March 1, 2005, then current employees who were
35 years old or older or who had 5 years or more of
vesting service on December 31, 2004, were required to
elect one of two options: (1) a reduced future pension
accrual based on a revised benefit formula and the current
401(k) plans match or (2) no future pension accrual
and the enhanced 401(k) plan match.
The benefits under our defined benefit pension plans are based
on either compensation or a combination of years of service and
negotiated benefit levels, depending upon the plan. We allocate
our pension plans assets to several investment management
firms across a variety of investment styles. Our Defined Benefit
Investment Committee meets at least four times a year with an
investment advisor to review each management firms
performance and monitor their compliance with their stated
goals, our investment policy and ERISA standards. Our pension
plans asset allocations at September 30, by asset
category, were as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Equity investment managers
|
|
|
68
|
%
|
|
|
70
|
%
|
Fixed income investment managers
|
|
|
31
|
%
|
|
|
29
|
%
|
Cash and cash equivalents
|
|
|
1
|
%
|
|
|
1
|
%
|
Alternative investment managers
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
In fiscal 2006, the Defined Benefit Investment Committee and our
investment advisor reviewed our investments in the alternative
investment asset class. As a result of this review, we
liquidated our investments in the Hedge Fund of Funds that were
part of the alternative investment asset class. We have
maintained a minimal investment with a venture capital fund in
the alternative investment asset class.
We manage our retirement plans in accordance with the provisions
of ERISA and the regulations pertaining thereto. Our investment
policy focuses on a long-term view in managing the pension
plans assets by following investment theory that assumes
that over long periods of time there is a direct relationship
between the level of risk assumed in an investment program and
the level of return that should be expected. The formation of
judgments and the actions to be taken on those judgments will be
aimed at matching the long-term needs of the pension plans with
the expected, long-term performance patterns of the various
investment markets.
We understand that investment returns are volatile. We believe
that, by investing in a variety of asset classes and utilizing
multiple investment management firms, we can create a portfolio
that yields adequate returns with reduced volatility. After we
consulted with our actuary and investment advisor, we adopted
the following target allocations to produce desired performance:
Target
Allocations
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Equity managers
|
|
|
50-80
|
%
|
|
|
50-80
|
%
|
Fixed income managers
|
|
|
15-45
|
%
|
|
|
15-45
|
%
|
Alternative investments, cash and cash equivalents
|
|
|
0-45
|
%
|
|
|
0-45
|
%
|
These target allocations are guidelines, not limitations, and
occasionally plan fiduciaries will approve allocations above or
below target ranges. We adopted our target allocations based on
a review of our asset allocation with our investment advisor. We
plan on refreshing our asset allocation study every three to
five years. In developing our weighted average expected rate of
return on plan assets, we consulted with our investment advisor
and evaluated criteria primarily based on historical returns by
asset class, and included long-term return expectations by asset
class. We currently expect to contribute approximately
$23 million to our five qualified defined
65
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
benefit plans in fiscal 2008 and expect to contribute
approximately $22 million in fiscal 2009 (unaudited). We
use a September 30 measurement date.
In September 2006, the FASB released SFAS 158 which
requires companies to:
|
|
|
|
|
Recognize the funded status of a benefit plan in its balance
sheet.
|
|
|
|
Recognize as a component of other comprehensive income, net of
tax, the gains or losses and prior service costs or credits that
arise during the period but are not recognized as components of
net periodic benefit cost.
|
|
|
|
Measure defined benefit plan assets and obligations as of the
date of the employers fiscal year-end balance sheet.
|
|
|
|
Provide additional disclosure in the Consolidated Financial
Statements.
|
SFAS 158 does not impact the determination of net periodic
benefit cost recognized in the income statement. We adopted
SFAS 158 effective September 30, 2007. The effect of
adopting SFAS 158 was: pension assets are approximately
$3 million lower, pension liabilities are approximately
$20 million higher, deferred tax assets are approximately
$9 million higher, and accumulated other comprehensive
income is approximately $14 million lower.
The assumptions used to measure the pension plan obligations at
September 30 were:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
|
6.25
|
%
|
|
|
5.875
|
%
|
Our weighted-average assumption for the expected increase in
compensation levels as of September 30, 2007, was 3.0% for
the next four years and 3.5% thereafter. Our weighted-average
assumption for the expected increase in compensation levels as
of September 30, 2006, was 3.0% for the next four years and
3.5% thereafter. Our assumption regarding the increase in
compensation levels is reviewed periodically and the assumption
is based on both our internal planning projections and recent
history of actual compensation increases. We typically review
our expected long-term rate of return on plan assets every 3 to
5 years through an asset allocation study with either our
actuary or investment advisor. Our latest review occurred in
fiscal 2005. The September 30, 2007 and September 30,
2006 discount rate reflects an analysis by our actuary of the
projected benefit cash flows from our two largest defined
benefit plans against discount rates published in the
September 30, 2007 and September 30, 2006 Citigroup
Pension Discount Curve. The benefits paid in each future year
were discounted to the present at the published rate of the
Citigroup Pension Discount Curve for that year. For benefit cash
flows beyond 30 years we used the 30 year rate of the
Citigroup Pension Discount Curve. These present values were
added up and a discount rate for each plan was determined that
would develop the same present value as the sum of the
individual years. At September 30, 2007, to set the assumed
discount rate for all plans, the average of the discount rate
for the two largest plans was rounded to the nearest 0.125%. At
September 30, 2006 the discount rate was rounded up to the
nearest 0.125%. At September 30, 2005, our discount rate
reflected the published yield of the Moodys AA Utility
Bond Index on September 15, 2005, rounded up to the nearest
0.25%. We changed our discount rate methodology in fiscal 2006
because we believed the analysis using the Citigroup Pension
Discount Curve provides a more accurate reflection of our future
benefit obligations than the use of the Moodys AA Utility
Bond Index yield.
On September 30, 2006, we updated the mortality rates used
in our pension expense calculation to reflect those of the 2000
Retired Pensioners Mortality table (RP-2000
table) with collar adjustments for males and females.
Previously, we had used the 1983 Group Annuity Mortality table
(GAM-83 table). We switched to the RP-2000
table with collar adjustments for males and females because it
provides a more accurate representation of the life expectancy
of our work force. For our two plans covering white collar
employees, we used blended blue and white collar rates to
reflect the populations in those plans. For our three plans
covering union employees, we used blue collar rates to reflect
the populations of those plans.
66
ROCK-TENN
COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in benefit obligation (in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Benefit obligation at beginning of year
|
|
$
|
341.5
|
|
|
$
|
343.4
|
|
Service cost
|
|
|
9.6
|
|
|
|
10.0
|
|
Interest cost
|
|
|
19.9
|
|
|
|
18.4
|
|
Amendments
|
|
|
0.3
|
|
|
|
1.0
|
|
Actuarial gain
|
|
|
(11.2
|
)
|
|
|
(18.6
|
)
|
Benefits paid
|
|
|
(12.8
|
)
|
|
|
(12.7
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
347.3
|
|
|
$
|
341.5
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all defined benefit
pension plans was $335.9 million and $331.3 million at
September 30, 2007 and 2006, respectively.
Changes in plan assets (in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
255.6
|
|
|
$
|
226.8
|
|
Actual gain on plan assets
|
|
|
36.3
|
|
|
|
20.8
|
|
Employer contributions
|
|
|
20.9
|
|
|
|
20.7
|
|